Bulletin No. 2020–44

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–44

October 26, 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.

EMPLOYMENT TAX

INCOME TAX

T.D. 9924, page 943.

T.D. 9910, page 915.

These final regulations provide guidance for employers concerning income tax withholding from employees’ wages.

These final regulations concern the amount of Federal income tax employers withhold from employees’ wages, implement changes in the Internal Revenue Code made by the Tax

Cuts and Jobs Act, and reflect the redesigned withholding

allowance certificate (Form W-4) and related IRS publications.

These final regulations affect employers that pay wages subject to Federal income tax withholding and employees who

receive wages subject to Federal income tax withholding.

Finding Lists begin on page ii.

These final regulations provide additional guidance regarding the base erosion and anti-abuse tax imposed on certain

large corporate taxpayers with respect to certain payments

made to foreign related parties. The final regulations affect

corporations with substantial gross receipts that make payments to foreign related parties.

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

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identifying details and information of a confidential nature are

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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.

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monthly indexes are cumulated on a semiannual basis, and are

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

October 26, 2020 

Bulletin No. 2020–44

Part I

26 CFR 1.59A-1-1.59A-10

T.D. 9910

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Base Erosion and AntiAbuse Tax

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that provide guidance regarding the base erosion and anti-abuse

tax imposed on certain large corporate

taxpayers with respect to certain payments

made to foreign related parties. The final

regulations affect corporations with substantial gross receipts that make payments

to foreign related parties.

DATES: Effective Date: The final regulations are effective December 8, 2020.

Applicability Dates: For dates of applicability, see §§ 1.59A-10 and 1.6031(a)-1(f)

(2).

FOR FURTHER INFORMATION CONTACT: Sheila Ramaswamy or Karen

Walny at (202) 317-6938 or Azeka J.

Abramoff at (202) 317-3800 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

The base erosion and anti-abuse tax

(“BEAT”) in section 59A was added to

the Internal Revenue Code (the “Code”)

by the Tax Cuts and Jobs Act, Public Law

115-97 (2017), which was enacted on December 22, 2017. Section 59A imposes on

each applicable taxpayer a tax equal to the

base erosion minimum tax amount for the

taxable year. On December 6, 2019, the

Bulletin No. 2020–44

Department of the Treasury (“Treasury

Department”) and the IRS published final regulations (TD 9885) under sections

59A, 383, 1502, 6038A, and 6655 (the

“2019 final regulations”) in the Federal

Register (84 FR 66968). On December

6, 2019, the Treasury Department and the

IRS also published proposed regulations

(REG-112607-19) under section 59A and

proposed amendments to 26 CFR part 1

under section 6031 of the Code (the “proposed regulations”) in the Federal Register (84 FR 67046). On February 19, 2020,

the Treasury Department and the IRS published a correction to the 2019 final regulations in the Federal Register (85 FR

9369).

No public hearing was requested or

held. The Treasury Department and the

IRS received written comments with respect to the proposed regulations. All

written comments received in response to

the proposed regulations are available at

www.regulations.gov or upon request.

Summary of Comments and

Explanation of Revisions

I. Overview

The final regulations retain the basic

approach and structure of the proposed

regulations, with certain revisions. This

Summary of Comments and Explanation

of Revisions discusses those revisions as

well as comments received in response to

the solicitation of comments in the proposed regulations. Comments outside the

scope of this rulemaking generally are not

addressed but may be considered in connection with future guidance projects.

The final regulations provide guidance under sections 59A, 1502, and 6031

regarding certain aspects of the BEAT.

Part II of this Summary of Comments

and Explanation of Revisions describes

rules relating to the determination of a

taxpayer’s aggregate group for purposes of determining gross receipts and the

base erosion percentage. Part III of this

Summary of Comments and Explanation

of Revisions describes rules relating to an

election to waive deductions for purposes

of the BEAT. Part IV of this Summary of

Comments and Explanation of Revisions

915

describes rules relating to the application

of the BEAT to partnerships. Part V of this

Summary of Comments and Explanation

of Revisions describes rules relating to the

anti-abuse rule provided in § 1.59A-9(b)

(4) with respect to certain basis step-up

transactions. Part VI of this Summary of

Comments and Explanation of Revisions

describes possible future guidance relating to the qualified derivative payment

(“QDP”) reporting requirements in §

1.59A-6 and § 1.6038A-2(b)(7)(ix).

II. Determination of a Taxpayer’s

Aggregate Group

The BEAT applies only to a taxpayer that is an applicable taxpayer. Section

59A(a). Generally, a taxpayer determines

whether it is an applicable taxpayer based

upon its gross receipts and base erosion

percentage. § 1.59A-2(b). When a taxpayer is a member of an aggregate group,

the gross receipts test and base erosion

percentage test are applied on the basis

of its aggregate group. § 1.59A-2(c)(1).

Generally, a taxpayer and its affiliated

corporations are aggregated for purposes

of determining gross receipts and the base

erosion percentage if they are members of

the same controlled group of corporations,

as defined in section 1563(a) with certain

modifications (including by substituting

“more than 50 percent” for “at least 80

percent”). See § 1.59A-1(b)(1).

The proposed regulations provided additional guidance regarding how a taxpayer determines its aggregate group, including rules relating to short taxable years,

members joining and leaving a taxpayer’s

aggregate group, and predecessors. The

preamble to the proposed regulations requested comments on how the aggregate

group rules should apply in various situations. REG-112607-19, 84 FR 67046,

67047-48 (December 6, 2019). Part II.A

of this Summary of Comments and Explanation of Revisions addresses the calculation of gross receipts and the base erosion

percentage when either the taxpayer or a

member of the taxpayer’s aggregate group

has a short taxable year. Part II.B of this

Summary of Comments and Explanation

of Revisions addresses considerations relating to when a member joins or leaves

October 26, 2020

an aggregate group. Part II.C of this Summary of Comments and Explanation of

Revisions addresses the application of the

aggregate group rules to predecessors and

successors.

A. Rules Relating to the Determination

of Gross Receipts and the Base Erosion

Percentage for a Short Taxable Year

Section 1.59A-2(c)(3) provides that a

taxpayer that is a member of an aggregate

group measures the gross receipts and

base erosion percentage of its aggregate

group for a taxable year by reference to

the taxpayer’s gross receipts, base erosion tax benefits, and deductions for the

taxable year, and the gross receipts, base

erosion tax benefits, and deductions of

each member of the aggregate group for

the taxable year of the member that ends

with or within the taxpayer’s taxable year

(the “with-or-within method”). Proposed

§ 1.59A-2(c)(5) required a taxpayer with

a taxable year of fewer than 12 months (a

short taxable year) to annualize its own

gross receipts by multiplying the gross

receipts for the short taxable year by 365

and dividing the result by the number of

days in the short taxable year.

Proposed § 1.59A-2(c)(5) also provided that a taxpayer with a short taxable year

must use a reasonable approach to determine the gross receipts and base erosion

percentage of its aggregate group members

for the short taxable year. The proposed

regulations indicated that, in determining

whether the taxpayer’s aggregate group

satisfies the gross receipts test and base

erosion percentage test for the taxpayer’s

short taxable year, a reasonable approach

would neither over-count nor under-count

the gross receipts, base erosion tax benefits, and deductions of the members of

the taxpayer’s aggregate group, even if

the taxable year of a member or members of the aggregate group does not end

with or within the short period. Proposed

§ 1.59A-2(c)(5). The preamble to the proposed regulations requested comments on

whether more specific guidance was needed, and if so, how the gross receipts and

base erosion percentage of an aggregate

group should be determined when the applicable taxpayer has a short taxable year.

REG-112607-19, 84 FR 67046, 67047

(December 6, 2019).

October 26, 2020

A comment supported the rule in the

proposed regulations allowing a taxpayer to use a reasonable approach to determine the gross receipts and base erosion

percentage of its aggregate group for a

short taxable year and viewed more detailed guidance regarding short taxable

years to be unnecessary. The comment

stated that the operation of the with-orwithin method, in conjunction with a

reasonable approach to taking into account gross receipts, base erosion tax

benefits, and deductions of aggregate

group members, would prevent either

the over-counting or under-counting of

items in situations involving short taxable years. However, this comment also

suggested that a reasonable approach

would exclude the gross receipts, base

erosion tax benefits, and deductions of an

aggregate group member if the member’s

taxable year did not end with or within

a short taxable year of the taxpayer. The

Treasury Department and the IRS agree

that a reasonable approach should prevent over-counting and under-counting.

Therefore, the final regulations retain

the rule in the proposed regulations that

permits the use of a reasonable approach

to determine whether a taxpayer’s aggregate group meets the gross receipts test

and base erosion percentage test with respect to a short taxable year of the taxpayer.

However, the Treasury Department

and the IRS are concerned that when a

member does not have a taxable year that

ends with or within a short taxable year

of a taxpayer, some taxpayers may take

the view (as suggested in the comment

described in the preceding paragraph)

that excluding the gross receipts, base

erosion tax benefits, and deductions of

the member from the taxpayer’s aggregate group is a reasonable approach. The

Treasury Department and the IRS do not

view such exclusions as a reasonable approach. Accordingly, the final regulations

clarify that such a method constitutes an

unreasonable approach. § 1.59A-2(c)(5)

(i)(B). In addition, to provide guidance

for taxpayers in determining whether a

particular approach is reasonable and

does not over-count nor under-count,

the final regulations include examples of

methods that may or may not constitute a

reasonable approach. See id.

916

B. Members Leaving and Joining an

Aggregate Group

1. Close of Taxable Year Rule for

Determining Gross Receipts and Base

Erosion Percentage

a. When the deemed closing of a taxable

year occurs

The proposed regulations provided

guidance clarifying how the gross receipts

and the base erosion percentage of an aggregate group are determined when members join or leave a taxpayer’s aggregate

group, such as through a sale of the stock

of a member to a third party. Proposed §

1.59A-2(c)(4) provided that, in determining the gross receipts and the base erosion percentage of a taxpayer’s aggregate

group, only items of members that occur

during the period that they were members

of the taxpayer’s aggregate group are taken into account. Under this rule, items of

a member that occur before the member

joins the aggregate group of the taxpayer

or after the member leaves the aggregate

group of the taxpayer are not taken into

account in determining the gross receipts

or base erosion percentage of the taxpayer’s aggregate group.

To implement this cut-off rule and determine which items occurred while a corporation was a member of a particular aggregate group, proposed § 1.59A-2(c)(4)

treated a corporation that joins or leaves

an aggregate group (in a transaction that

does not otherwise result in a taxable yearend) as having a deemed taxable yearend. Specifically, proposed § 1.59A-2(c)

(4) provided that this deemed taxable

year-end occurs immediately before the

corporation joins or leaves the aggregate

group (“time-of-transaction rule”). The

proposed regulations permitted a taxpayer to determine items attributable to this

deemed short taxable year by either deeming a close of the corporation’s books or,

in the case of items other than extraordinary items (as defined in § 1.1502-76(b)

(2)(ii)(C)), making a pro-rata allocation

without a closing of the books.

Comments requested that the deemed

taxable year-end occur at the end of the

day, rather than immediately before the

time of the transaction, to better align with

other provisions of the Code and regula-

Bulletin No. 2020–44

tions. Comments noted that an end-of-day

rule would be more consistent with provisions of the Code and regulations such

as section 381 and § 1.1502-76(b). See

section 381 (providing that an acquiring

corporation succeeds to and takes into account certain attributes as of the close of

the day, rather than the time of the acquisition transaction); § 1.1502-76(b) (providing that, when a member joins or leaves a

consolidated group, it has a taxable yearend at the end of the day).

The final regulations adopt this recommendation. Specifically, when a corporation has a deemed taxable year-end

under § 1.59A-2(c)(4), the deemed taxable year-end is treated as occurring at

the end of the day of the transaction. §

1.59A-2(c)(4)(ii). Thus, a new taxable

year is deemed to begin at the beginning

of the day after the transaction. A taxpayer determines items attributable to the

deemed short taxable years ending upon

and beginning the day after the deemed

taxable year-end by either deeming a

close of the corporation’s books or, in

the case of items other than extraordinary

items, making a pro-rata allocation without a closing of the books. § 1.59A-2(c)

(4)(iii). Extraordinary items that occur on

the day of, but after, the transaction that

causes the corporation to join or leave the

aggregate group are treated as occurring

in the deemed taxable year beginning the

next day. For this purpose, the term “extraordinary items” has the meaning provided in § 1.1502-76(b)(2)(ii)(C). This

term is also expanded to include any other payment that is not made in the ordinary course of business and that would be

treated as a base erosion payment.

b. Alternative to deemed year-end

approach

One comment supported the approach

in the proposed regulations to the deemed

year-end rule, which it noted allows taxpayers flexibility to choose between the

pro-rata allocation or closing of the books

methods. However, the comment also expressed support for a simplified “no-cutoff” alternative to the deemed year-end

framework in the proposed regulations,

which could reduce the need for sharing

information between a selling aggregate

group and a purchaser.

Bulletin No. 2020–44

Under the comment’s simplified “nocut-off” alternative, there would be no

deemed year-end upon a corporation’s

entry to or exit from an aggregate group;

rather, the corporation’s full year would be

taken into account by the acquirer’s aggregate group. The comment acknowledged

that this simplified approach would result

in the “departed” aggregate group including no items for the year and the “acquiring” aggregate group taking into account

all of the corporation’s items for the year,

which may be distortionary. The comment

also suggested that it may be appropriate

to backstop this simplified “no-cut-off”

rule with an anti-abuse rule that requires

a deemed year-end if the transaction is

arranged with a principal purpose of enabling a taxpayer to fall below the gross

receipts or base erosion percentage thresholds.

The final regulations do not adopt the

simplified “no-cut-off” alternative. Although that alternative may simplify some

elements of compliance with the aggregate group rules, the Treasury Department

and the IRS have determined that a rule

that determines the gross receipts and base

erosion tax benefits of an aggregate group

should include only the gross receipts,

base erosion tax benefits, and deductions

of entities attributable to the period in

which they were members of the aggregate group. The “no-cut-off” alternative

proposed is inherently less precise and has

the potential for abuse. For example, in

the case of an acquisition near the end of

a taxable year, the “no-cut-off” alternative

could shift nearly a full year’s items from

the seller’s aggregate group to the acquirer’s aggregate group.

In addition, the Treasury Department

and the IRS have determined that the

additional subjectivity that would result

from coupling the rule with an anti-abuse

backstop to address the potential for abuse

identified in the comment would lead to

less certainty with respect to a key threshold in determining whether a taxpayer is

subject to the BEAT.

2. Aggregate Group Members with

Different Taxable Years Leading to Overand-Under-Counting of Gross Receipts

A comment expressed concern that the

deemed close of the taxable year that oc-

917

curs when a member joins or leaves an aggregate group would create the potential

for over-counting of gross receipts, base

erosion tax benefits, and deductions of a

member when applied in conjunction with

the with-or-within method. This situation

can arise when the taxpayer and a member

of the aggregate group have different taxable years.

The comment illustrated this concern

with the following example. A taxpayer

has a calendar taxable year and its aggregate group includes DC, a domestic

corporation with a June 30 year-end. On

November 30, 2020, DC leaves the taxpayer’s aggregate group. The comment

explained that, under the with-or-within

rule of § 1.59A-2(c)(3), the taxpayer is required to not only take into account DC’s

gross receipts for the full taxable year

ended June 30, 2020, (a full 12-month taxable year) but also a second short taxable

year of July 1, 2020, through November

30, 2020 (a 5-month short taxable year).

This result occurs because, from the perspective of the taxpayer, both DC’s full

12-month taxable year and DC’s 5-month

short taxable year end “with or within”

the taxpayer’s calendar taxable year ending on December 31, 2020. As a result,

the taxpayer would include 17 months of

gross receipts from DC in taxpayer’s taxable year ending December 31, 2020.

The comment recommended that an annualization rule or another alternative apply to the gross receipts test so that a taxpayer is not required to take into account

more than 12 months of gross receipts of

an aggregate group member when a member joins or leaves an aggregate group.

The comment also suggested that an

annualization rule may be appropriate

for the base erosion percentage test because an annualization rule would avoid

over-weighting base erosion tax benefits

and deductions. Depending on the taxpayer’s particular facts, the comment noted

that this suggested rule could cause a taxpayer’s aggregate group to satisfy the base

erosion percentage test or to fall below the

relevant threshold established for that test.

The final regulations adopt this comment. Section 1.59A-2(c)(5)(ii)(A) provides that, if a member of a taxpayer’s

aggregate group has more than one taxable year that ends with or within the taxpayer’s taxable year and together those

October 26, 2020

taxable years are comprised of more than

12 months, then the member’s gross receipts, base erosion tax benefits, and deductions for those years are annualized to

12 months for purposes of determining the

gross receipts and base erosion percentage

of the taxpayer’s aggregate group. To annualize, the amount is multiplied by 365

and the result is divided by the total number of days in the year or years.

The final regulations also adopt a corresponding rule to address short taxable

years of members. Specifically, if a member of the taxpayer’s aggregate group

changes its taxable year-end, and as a result the member’s taxable year (or years)

ending with or within the taxpayer’s taxable year is comprised of fewer than 12

months, then for purposes of determining

the gross receipts and base erosion percentage of the taxpayer’s aggregate group,

the member’s gross receipts, base erosion

tax benefits, and deductions for that year

(or years) are annualized to 12 months. §

1.59A-2(c)(5)(ii)(B). This rule does not

apply if the change in the taxable year-end

is a result of the application of § 1.150276(a), which provides that new members

of a consolidated group adopt the common

parent’s taxable year. But see § 1.59A-2(c)

(5)(iii) (providing an anti-abuse rule that

applies to transactions with a principal

purpose of changing the period taken into

account for the gross receipts test or the

base erosion percentage test).

For example, assume that an aggregate

group member and the taxpayer both have

calendar-year taxable years; then, in January of 2021, the aggregate group member

changes its taxable year-end to January

31. Under these facts, the taxpayer’s 2021

calendar year would only include the gross

receipts, base erosion tax benefits, and

deductions of the one-month short year

of the aggregate group member because

that is the only taxable year of the member that ends with or within the taxpayer’s

calendar year taxable year. Gross receipts

would be undercounted, and the member’s

contribution to the aggregate group’s base

erosion percentage would be given insufficient weight in the taxpayer’s 2021

calendar year. This difference would not

resolve itself in subsequent years because,

in the taxpayer’s 2022 taxable year and

each taxable year thereafter, the taxpayer

will take into account only a 12-month pe-

October 26, 2020

riod with respect to the aggregate group

member – the taxable year from February

1 through January 31. Thus, absent this

rule, the equivalent of 11 months of the

member’s contributions to the gross receipts and base erosion percentage would

not be taken into account by the aggregate

group because the taxpayer’s 2021 calendar year computation would only include

one month of aggregate group member

activity. Accordingly, the final regulations

provide that the member’s gross receipts,

base erosion tax benefits, and deductions

for its one-month short-year ending January 31, 2021, are extrapolated and annualized to a full 12-month period solely for

purposes of determining the gross receipts

and base erosion percentage of the taxpayer’s aggregate group when resulting from

a change in taxable year. § 1.59A-2(c)(5)

(ii)(B).

The final regulations also adopt a corresponding anti-abuse rule to address other types of transactions that may achieve a

similar result of excluding gross receipts

or base erosion percentage items of a taxpayer or a member of the taxpayer’s aggregate group that are undertaken with a

principal purpose of avoiding applicable

taxpayer status. See § 1.59A-2(c)(5)(iii).

Assuming a requisite principal purpose,

an example that could implicate this rule

includes a transaction in which a taxpayer

that is close to satisfying the gross receipts

test transfers a portion of its revenue-generating assets to a newly formed domestic

corporation that is a member of the taxpayer’s aggregate group (but not a member of the taxpayer’s consolidated group)

and that has a different taxable year that

does not end with or within the taxpayer’s current taxable year. Another example, also assuming a requisite principal

purpose, includes a transaction in which

the stock of a member of the taxpayer’s

aggregate group is transferred to a consolidated group that is also a member of

the taxpayer’s aggregate group and that

has a different taxable year that does not

end with or within the taxpayer’s current

taxable year.

3. Deferred Deductions

A comment requested that § 1.59A-2(

c)(4) be revised to clarify the treatment of

items that are paid or accrued in a period

918

before a corporation joins a taxpayer’s aggregate group. As an example, the comment described a corporation’s payment

of interest to a foreign related party that

gives rise to a base erosion payment in

the taxable year of the payment, but that

is not a base erosion tax benefit because

the item is not currently deductible due

to the limitations on deducting business

interest expense in section 163(j). The

comment suggested that, if the corporation subsequently becomes a member of

an aggregate group of a different taxpayer

(for example, because the corporation is

sold to an unrelated buyer, and thereafter

becomes a member of the buyer’s aggregate group), the buyer’s aggregate group

should not have to take into account the

base erosion tax benefit in the buyer’s

base erosion percentage when the business interest expense becomes deductible

under section 163(j).

The final regulations do not adopt this

comment. Under the statutory framework of the BEAT, whether a deduction

is a base erosion tax benefit is determined

solely with respect to whether the amount

was a base erosion payment when it was

paid or accrued. Section 59A(c)(2) and §

1.59A-3(c)(1) do not retest the base erosion payment to determine whether the

payee continues to be a foreign related

party of the taxpayer when the taxpayer

claims the deduction.

C. Predecessors and Successors

Proposed § 1.59A-2(c)(6)(i) provided

that, in determining gross receipts, any

reference to a taxpayer includes a reference to any predecessor of the taxpayer,

including the distributor or transferor

corporation in a transaction described

in section 381(a) in which the taxpayer is the acquiring corporation. To prevent over-counting, the proposed regulations provided that, if the taxpayer

or any member of its aggregate group

is also a predecessor of the taxpayer or

any member of its aggregate group, the

gross receipts, base erosion tax benefits,

and deductions of each member are taken into account only once. Proposed §

1.59A-2(c)(6)(ii).

A comment recommended taking into

account gross receipts of foreign predecessor corporations only to the extent

Bulletin No. 2020–44

the gross receipts are taken into account

in determining income that is effectively

connected with the conduct of a U.S. trade

or business (“ECI”) of the foreign predecessor corporation, which would be consistent with the ECI rule for gross receipts

of foreign corporations in § 1.59A-2(d).

The final regulations adopt this comment.

Section 1.59A-2(c)(6)(i) clarifies that the

operating rules set forth in § 1.59A-2(c)

(aggregation rules) and § 1.59A-2(d)

(gross receipts test) apply to the same extent in the context of the predecessor rule.

Thus, the ECI limitation on gross receipts

in § 1.59A-2(d)(3) continues to apply to

the successor.

III. Election to Waive Allowable

Deductions

For purposes of determining a taxpayer’s base erosion tax benefits and the

base erosion percentage, the proposed

regulations provided that all deductions

that could be properly claimed by a taxpayer are treated as allowed deductions.

Proposed § 1.59A-3(c)(5). However,

if a taxpayer elected to forego a deduction and followed specified procedures

(the “BEAT waiver election”), the proposed regulations provided that the foregone deduction would not be treated as

a base erosion tax benefit. Proposed §

1.59A-3(c)(6). Generally, under the proposed regulations, any deduction waived

pursuant to the BEAT waiver election is

waived for all U.S. federal income tax

purposes. Proposed § 1.59A-3(c)(6)(ii)

(A). The proposed regulations permitted a taxpayer to make the BEAT waiver

election on its original filed Federal income tax return, on an amended return,

or during the course of an examination of

the taxpayer’s income tax return for the

relevant taxable year pursuant to procedures prescribed by the Commissioner.

Proposed § 1.59A-3(c)(6)(iii).

Part III.A of this Summary of Comments and Explanation of Revisions addresses when a taxpayer is eligible to

make the BEAT waiver election. Part III.B

of this Summary of Comments and Explanation of Revisions addresses whether

deductions waived pursuant to the BEAT

waiver election should be included in

the denominator of the base erosion percentage. Part III.C of this Summary of

Bulletin No. 2020–44

Comments and Explanation of Revisions

addresses comments on the decrease

of deductions waived. Part III.D of this

Summary of Comments and Explanation

of Revisions addresses comments on the

inclusion of reinsurance premiums paid

in the BEAT waiver election. Part III.E of

this Summary of Comments and Explanation of Revisions addresses comments

relating to revoking certain elections and

making late elections to allow taxpayers

to take into account the BEAT waiver

election. Part III.F of this Summary of

Comments and Explanation of Revisions

addresses comments relating to procedural aspects of the BEAT waiver election.

Part III.G of this Summary of Comments

and Explanation of Revisions addresses

comments relating to the application of

the BEAT waiver election to partnerships.

Part III.H of this Summary of Comments

and Explanation of Revisions addresses

the application of the BEAT waiver election to consolidated groups. Part III.I of

this Summary of Comments and Explanation of Revisions addresses the interaction

of the BEAT waiver election with other

regulations.

A. Eligibility for the BEAT Waiver

Election

Proposed § 1.59A-3(c)(5) provided

that the BEAT waiver election is the sole

method by which a deduction that could

be properly claimed by taxpayer for the

taxable year is not taken into account for

BEAT purposes (the “primacy rule”). Proposed § 1.59A-3(c)(6)(i) provided that,

“[s]olely for purposes of paragraph (c)(1)

of this section” (the definition of a base

erosion tax benefit), the amount of allowed

deductions is reduced by the amount of

deductions that are properly waived. A

comment suggested that the phrase “solely

for purposes of” in proposed § 1.59A-3(c)

(6)(i) is unclear. The comment interpreted the proposed regulations as providing

that a taxpayer can make the BEAT waiver

election only if the waiver of a deduction,

when taken together with any waivers by

other members of the taxpayer’s aggregate

group, would lower the taxpayer’s base

erosion percentage below the base erosion

percentage threshold applicable to the taxpayer. The comment also recommended

that the Treasury Department and the IRS

919

clarify that the primacy rule and the BEAT

waiver election do not affect a taxpayer’s

ability to not claim allowable deductions

for tax purposes other than section 59A.

The final regulations explicitly clarify that, in order to make or increase the

BEAT waiver election under § 1.59A-3(c)

(6), the taxpayer must determine that the

taxpayer could be an applicable taxpayer for BEAT purposes but for the BEAT

waiver election. § 1.59A-3(c)(6)(i). Thus,

for example, a controlled foreign corporation that does not have income that is effectively connected with the conduct of a

trade or business in the United States cannot make a BEAT waiver election because

the controlled foreign corporation cannot

be an applicable taxpayer.

In addition, when a taxpayer does not

make a BEAT waiver election (or when

this waiver is not permitted), § 1.59A-3(c)

(5) and § 1.59A-3(c)(6)(i) have no bearing

on whether or how a taxpayer’s failure to

claim an allowable deduction, or to otherwise “waive” a deduction, is respected

or taken into account for tax purposes

other than section 59A. See generally §

1.59A-3(c)(5). In other words, the BEAT

waiver election should not affect any existing law addressing “waiver” outside of

the specific situation covered by the BEAT

waiver (electing not to claim a deduction

in order to avoid applicable taxpayer status).

B. Effect of the BEAT Waiver Election on

the Base Erosion Percentage

Proposed § 1.59A-2(e)(3)(ii)(G) provided that any deduction not allowed in

determining taxable income for the taxable year is not taken into account when

determining the denominator of the base

erosion percentage. See also proposed §

1.59A-3(c)(6)(ii)(A)(1) (generally providing that a waived deduction is treated as

having been waived for all purposes of the

Code and regulations). A comment asserted that a waived deduction should nonetheless be included in the denominator of

the base erosion percentage.

The final regulations do not adopt this

comment. This recommendation is inconsistent with § 1.59A-2(e)(3)(ii)(G), which

provides that the denominator of the base

erosion percentage does not include any

deduction that is not allowed in determin-

October 26, 2020

ing taxable income for the taxable year.1 A

waived deduction is not allowed in determining taxable income for the year. See §

1.59A-3(c)(6)(i). By providing that the denominator to the base erosion percentage

includes only items allowed in determining taxable income for the taxable year,

the denominator operates symmetrically

with the numerator because the numerator — base erosion tax benefits – includes

only those deductions and other items “allowed by [Chapter 1 of the Code].” See

section 59A(c)(2)(A)(i).

C. Reduction of Waived Deductions

During Audit or on an Amended Return

The proposed regulations provided that

a taxpayer may make or increase a BEAT

waiver election on an amended Federal income tax return or during the course of an

examination of the taxpayer’s income tax

return. See proposed § 1.59A-3(c)(6)(iii).

However, a taxpayer could not decrease

the amount of deductions waived under

the BEAT waiver election or revoke that

election on any amended Federal income

tax return or during an examination. See

proposed § 1.59A-3(c)(6)(iii).

Comments requested that the final

regulations permit taxpayers to decrease

the amount of deductions that are waived

either by filing an amended Federal income tax return or during an examination.

Some comments suggested that no policy concerns existed that should prevent

taxpayers from being able to reduce the

amount of a previously waived deduction.

Comments also noted that, given that the

proposed regulations permit taxpayers to

increase waived amounts on an amended return or during an audit, permitting

taxpayers to reduce any waived amounts

would not create any additional administrative burden for the IRS.

The final regulations do not adopt this

comment. The BEAT waiver election was

proposed, in part, in response to comments

to prior proposed regulations recommending that the Treasury Department and the

IRS clarify whether a deduction that is

not claimed is not taken into account for

BEAT purposes. The proposed regulations

also included the waiver election, in part,

to address taxpayer concerns that, due to

the cliff effect of applicable taxpayer status, a marginal amount of base erosion

tax benefits could have a greater effect on

overall tax liability. The ability to decrease

waived amounts does not further the policy goal of addressing the cliff effect of

applicable taxpayer status. The proposed

regulations provided taxpayers significant

flexibility through the BEAT waiver election, which permits taxpayers to choose

deductions to waive based on tax optimization and to elect to increase waived deductions at various points after filing their

original return, including during an examination. See proposed § 1.59A-3(c)(6)(iii).

The Treasury Department and the IRS are

concerned that expanding taxpayer electivity to permit the reduction of waived

amounts will increase uncertainty to the

IRS as it assesses tax return positions. The

Treasury Department and the IRS are concerned that this uncertainty about taxpayers’ return positions will negatively affect

the ability of the IRS to efficiently conduct

and close examinations.

D. Waiver of Life and Non-Life

Reinsurance Premiums

The BEAT waiver election in the proposed regulations specifically referenced

deductions. Proposed § 1.59A-3(c)(6).

Comments noted that the term “base

erosion tax benefits” includes certain reductions to gross income related to reinsurance that may be treated as reductions

to gross receipts, not deductions. See §

1.59A-3(b)(1)(iii) (defining a base erosion payment to include “[a]ny premium

or other consideration paid or accrued

by the taxpayer to a foreign related party

of the taxpayer for any reinsurance payments that are taken into account under

section 803(a)(1)(B) or 832(b)(4)(A)”; §

1.59A-3(c)(1)(iii) (defining a base erosion

tax benefit with respect to a base erosion

payment described in § 1.59A-3(b)(1)(iii)

as “any reduction under section 803(a)

(1)(B) in the gross amount of premiums

and other consideration on insurance and

annuity contracts for premiums and other

consideration arising out of indemnity reinsurance, or any deduction under section

832(b)(4)(A) from the amount of gross

premiums written on insurance contracts

during the taxable year for premiums paid

for reinsurance.”). Because premiums

that are reductions to gross income do

not technically fit within the terminology

used in the waiver provisions, comments

requested that final regulations permit a

waiver for those items.

The Treasury Department and the IRS

have determined that the policy rationale

for providing the BEAT waiver election

applies to insurance-related base erosion

payments, and therefore the BEAT waiver

election should be available with respect

to base erosion tax benefits described in §

1.59A-3(b)(1)(iii). The final regulations include a provision for the waiver of amounts

treated as reductions to gross premiums

and other consideration that would otherwise be base erosion tax benefits within the

definition of section 59A(c)(2)(A)(iii) and

provide that similar operational and procedural rules apply to this waiver, such as the

rule providing that the waiver applies for all

purposes of the Code and regulations. See §

1.59A-3(c)(5). The BEAT waiver election

affects the base erosion tax benefits of the

taxpayer, not the amount of premium that

the taxpayer pays to a foreign insurer or

reinsurer (or the amount received by that

foreign insurer or reinsurer); therefore, for

example, the waiver of reduction to gross

premiums and other consideration (or of

premium payments that are deductions for

federal income tax purposes) does not reduce the amount of any insurance premium

payments that are subject to insurance excise tax under section 4371.

E. Revoking Elections and Retroactive

Elections in Connection with Bonus

Depreciation and Research and

Experimentation Capitalization and

Amortization

Comments asserted that certain taxpayers filed elections in connection with their

See REG-104259-18, 83 FR 65958 (December 21, 2018) (The preamble to the 2018 proposed regulations provided “[t]he numerator of the base erosion percentage only takes into account

base erosion tax benefits, which generally are base erosion payments for which a deduction is allowed under the Code for a taxable year. … Similarly, the proposed regulations ensure that

the denominator of the base erosion percentage only takes into account deductions allowed under the Code by providing that the denominator of the base erosion percentage does not include

deductions that are not allowed in determining taxable income for the taxable year.”).

1

October 26, 2020

920

Bulletin No. 2020–44

2018 tax returns to either (i) elect under

section 59(e)(4) to capitalize and amortize

over a 10-year period certain research and

experimentation (“R&E”) expenditures

that would otherwise be deductible in the

year incurred, or (ii) elect not to claim an

additional allowance for depreciation under section 168(k) (“bonus depreciation”)

before the issuance of the proposed regulations that provided taxpayers with the

option of the BEAT waiver election. The

section 59(e)(4) and bonus depreciation

elections are revocable only with the consent of the Secretary. The comments implied that, if taxpayers had known about

the BEAT waiver election when they filed

their returns, the taxpayers would not have

made the elections under section 59(e)(4)

or section 168(k)(7) because the BEAT

waiver election would have been a better

tax planning technique. The comments

recommended that the Treasury Department and the IRS provide automatic relief

for taxpayers that seek to revoke their prior elections under section 59(e)(4) or section 168(k)(7) in light of the BEAT waiver

election.

Another comment recommended that

the Treasury Department and the IRS

also permit taxpayers to make retroactive

elections to capitalize and amortize costs

under section 59A(e)(4) or to not claim

bonus depreciation under section 168(k)

to provide relief from “permanent BEAT

consequences.” The comment cited an example where the taxpayer is entitled to additional deductions or has less regular taxable income in a taxable year as a result of

an audit; consequently, the taxpayer had

an “unintended” tax liability under section 59A. The comment proposed that the

Treasury Department and the IRS permit a

taxpayer to retroactively elect to capitalize

costs that were previously reported as deductible in the taxable year.

The final regulations do not adopt the

recommendations to provide guidance

permitting taxpayers to automatically revoke prior capitalization elections under

sections 59(e)(4) and 168(k) or make late

elections. In both cases, the recommendations would expressly permit taxpayers

to use hindsight to change their elections

to reduce or eliminate BEAT liability or

regular income tax. The use of hindsight

in elections involves tax policy considerations broader than the interaction of

Bulletin No. 2020–44

the BEAT and the elections under section 59(e)(4) and section 168(k). Because

these recommendations involve tax policy

considerations that are not just limited to

the application of the BEAT, the decision

to permit revoking or making a late election is beyond the scope of the final regulations.

F. Procedures for Making the BEAT

Waiver Election

1. Documentation Requirements

Proposed § 1.59A-3(c)(6)(i) required

taxpayers to report certain information to

make the BEAT waiver election. Under

the proposed regulations, a taxpayer was

required to provide, among other information, a detailed description of the item or

property to which the deduction relates,

including sufficient information to identify that item or property on the taxpayer’s

books and records. Proposed § 1.59A-3(c)

(6)(i)(A).

A comment suggested that the final

regulations eliminate the information required by § 1.59A-3(c)(6)(i)(A) through

(C) (the detailed description, the date or

period of the payment or accrual; and the

citation for the deduction). The comment

stated that the final regulations should

eliminate § 1.59A-3(c)(6)(i)(A) because

a streamlined disclosure that included

only the amount deducted (proposed §

1.59A-3(c)(6)(i)(D)), amount waived

(proposed § 1.59A-3(c)(6)(i)(E)), tax return line item (proposed § 1.59A-3(c)(6)

(i)(F)), and foreign recipient (proposed §

1.59A-3(c)(6)(i)(G)) would provide sufficient information for the IRS to determine

the validity of the election without creating an undue burden on taxpayers. While

the comment characterized the information reporting requirements as “onerous,”

it did not explicitly describe how or why

this requirement is onerous.

The final regulations retain the requirements of proposed § 1.59A-3(c)(6)(i)(A)

through (C). See § 1.59A-3(c)(6)(ii)(B)(1)

through (3). In administering the BEAT

waiver election, the IRS has an interest

in obtaining information regarding the

deductions being waived and the item or

property to which the deduction relates,

including sufficient information to identify the item on the taxpayer’s books and

921

records and to have information about

the Code section under which the deduction arises. However, the Treasury Department and the IRS acknowledge that

requiring a “detailed” description of the

item or property to which the deduction

relates is not necessary for this purpose,

particularly given that § 1.59A-3(c)(6)(ii)

(B)(1) requires sufficient information to

identify the item or property on the taxpayer’s books. Accordingly, § 1.59A-3(c)

(6)(ii)(B)(1) of the final regulations omits

the requirement to provide a “detailed”

description. Section 1.59A-3(c)(6)(ii)(B)

(6) and (7) is also revised to make certain

non-substantive, clarifying changes.

2. Partial Waivers

Proposed § 1.59A-3(c)(6)(ii)(B) provided that, if a taxpayer makes the election

to waive a deduction, in whole or in part,

the election is disregarded for certain purposes. A comment observed that the

proposed regulations do not expressly

provide that the BEAT waiver election

permits a partial waiver of a deduction.

The comment also suggested that procedural forms should be clear in this regard.

The final regulations have been revised to

state more explicitly that a deduction may

be waived in part. See § 1.59A-3(c)(6)(i);

see also §§ 1.59A-3(c)(6)(ii)(B)(4) and

(5), and 1.59A-3(c)(6)(iii)(B). Additionally, the IRS plans to revise Form 8991, Tax

on Base Erosion Payments of Taxpayers

with Substantial Gross Receipts, to incorporate reporting requirements relating to

the reporting of deductions that taxpayers

have partially waived.

3. Procedures for BEAT Waiver During

the Course of an Examination

Proposed § 1.59A-3(c)(6)(iii) generally provided that a taxpayer may make the

BEAT waiver election on its original filed

Federal income tax return, on an amended

return, or during the course of an examination pursuant to procedures prescribed

by the Commissioner. The preamble to

the proposed regulations indicated that,

unless the Commissioner prescribes specific procedures with respect to waiving

deductions during the course of an examination, the same procedures that generally apply to affirmative tax return changes

October 26, 2020

during an examination would apply. REG112607-19, 84 FR 67046, 67048 (December 06, 2019). The current procedures for

submitting affirmative tax return changes

during an examination, which are set forth

in the Internal Revenue Manual (IRM),

apply together with the provisions in section 6402 and the regulations thereunder

(§§301.6402-1 through 301.6402-7).

A comment argued that the final regulations should expand upon the procedures of the IRM and permit a taxpayer

to make the BEAT waiver election at any

time during the course of an examination,

including after all other adjustments have

been agreed upon. Additionally, the comment recommended that the IRS consider providing a streamlined procedure for

taxpayers to make the BEAT waiver election in connection with examinations that

would not require the filing of an amended return because filing an amended return

could be burdensome.

The final regulations do not adopt

these recommendations because the IRM

already provides a procedure that permits

taxpayers to submit informal claims, including the BEAT waiver election, during

the course of an examination. See IRM

section 4.46.3.7. The Treasury Department and the IRS view this IRM procedure as serving an important tax administration function—preserving the IRS’s

ability to conduct an audit efficiently and

ensuring that the IRS has sufficient time to

evaluate the merits of the claims. In addition, the Treasury Department and the IRS

have determined that it is in the interest of

sound tax administration to address procedures regarding claims in the Internal

Revenue Manual rather than in the regulations. Further, the Code, regulations, and

the IRM are clear that the taxpayer retains

a statutory right to submit an amended return that can include a waiver election or

increase the waived deductions.

G. Application of the BEAT Waiver

Election to Partnerships

Comments recommended generally that the BEAT waiver election be expanded to expressly permit a waiver in

connection with deductions that are allocated from a partnership. Some comments

recommended that the final regulations

clarify that the BEAT waiver election is

October 26, 2020

made by the partner, rather than by the

partnership. These comments suggested

certain corresponding changes necessary

to coordinate the tax treatment of partners

and partnerships. Specifically, a comment

recommended that the waived deductions

be treated as non-deductible expenditures

under section 705(a)(2)(B) – thereby reducing the adjusted basis of a partner’s interest in a partnership – to prevent a corporate partner from subsequently benefitting

from waived partnership deductions when

disposing of its interest in the partnership.

The final regulations generally adopt

these comments and, subject to certain

special rules in connection with the centralized partnership audit regime enacted

in the Bipartisan Budget Act of 2015 (the

“BBA”), explicitly permit a corporate

partner in a partnership to make a BEAT

waiver election with respect to partnership

items. § 1.59A-3(c)(6)(iv)(A). The final

regulations also clarify that a partnership

may not make a BEAT waiver election.

§ 1.59A-3(c)(6)(iv)(A). In addition, the

final regulations provide that waived deductions are treated as non-deductible

expenditures under section 705(a)(2)(B).

See § 1.59A-3(c)(6)(iv)(B).

Further, the final regulations provide

rules to conform the partner-level waiver with section 163(j). See § 1.59A-3(c)

(6)(iv)(C). Specifically, the final regulations clarify that, when a partner waives

a deduction that was taken into account

by the partnership to reduce the partnership’s adjusted taxable income for purposes of determining the partnership-level

section 163(j) limitation, the increase in

the partner’s income resulting from the

waiver is treated as a partner basis item

(as defined in § 1.163(j)-6(b)(2)) for the

partner, but not the partnership. Thus, the

increase in the partner’s income resulting

from the waiver is added to the partner’s

section 163(j) limitation computation. §

1.59A-3(c)(6)(iv)(C). The partnership’s

section 163(j) computations are not impacted by the partner’s waiver.

Another comment recommended that,

if waiver of partnership deductions is permitted, the effect of the waiver should be

reconciled with the centralized partnership audit regime enacted by the BBA in

sections 6221 through 6241 (the “BBA

audit procedures”). Under the BBA audit

procedures, adjustments must be made at

922

the partnership level. Generally, the partnership is liable for an imputed underpayment computed on the adjustments unless

the partnership elects to “push out” the

adjustments to the partners from the year

to which the adjustments relate (reviewed

year partners). Sections 6221, 6225, 6226,

and 6227.

The final regulations clarify that a partner may make the BEAT waiver election

with respect to an increase in a deduction

that is attributable to an adjustment made

under the BBA audit procedures, but only

if the partner is taking into account the

partnership adjustments either because

the partnership elects to have the partners

take into account the adjustments under

sections 6226 or 6227, or because the

partner takes into account the adjustments

as part of an amended return filed pursuant to section 6225(c)(2)(A). § 1.59A-3(c)

(6)(iv)(D). If the partner makes the BEAT

waiver election, the partner will compute its additional reporting year tax (as

described in §301.6226-3) or the amount

due under §301.6225-2(d)(2)(ii)(A), treating the waived amount as provided in §

1.59A-3(c)(6). The final regulations do not

address the interaction of the BBA audit

procedures and the BEAT more generally.

As the BBA audit procedures continue to

be implemented, the Treasury Department

and the IRS will review the implementation and determine whether future BBA

audit procedure guidance is required with

respect to BEAT.

A comment observed that section 6222

generally requires a partner to treat a

partnership item on its return consistently with the treatment of the item on the

partnership return or otherwise to notify the IRS of this inconsistent treatment.

This comment recommended that the final

regulations coordinate and streamline the

notification procedure under section 6222

and §301.6222-1 with the information required under proposed § 1.59A-3(c)(6)(i)

(A) through (G).

The final regulations do not reflect this

comment because the reporting by a partner of the partnership item that is waived

pursuant to the procedures set forth in §

1.59A-3(c)(6)(ii)(B) is consistent with the

reporting of the item for purposes of section 6222. After the election is made, the

partnership-related item is being reported

properly at the partner level, after taking

Bulletin No. 2020–44

into account the partner’s facts and circumstances and application of the Code

and regulations to that item (that is, the

waiver). The fact that an item is waived

pursuant to § 1.59A-3(c)(6) does not constitute inconsistent reporting for purposes

of section 6222 but is merely applying

the Code and regulations to determine the

taxability of that item. See §301.6222-1(a)

(requiring a partner to treat partnership-related items “consistent with the treatment

of such items on the partnership return in

all respects, including the amount, timing,

and characterization of such items”); see

generally § 1.59A-3(c)(6)(ii)(B) (requiring a taxpayer to report certain information in connection with waived items,

including the amount waived and the

amount claimed).

H. Application of the BEAT Waiver

Election to Consolidated Groups

A comment recommended that the final

regulations clarify that waived deductions

attributable to a consolidated group member are treated as noncapital, nondeductible expenses that decrease the tax basis

in the member’s stock for purposes of the

stock basis rules in § 1.1502-32 to prevent

the shareholder from subsequently benefitting from a waived deduction when disposing of the member’s stock. The final

regulations adopt this clarifying comment.

See § 1.59A-3(c)(6)(iii)(A)(4).

I. Interaction of Waived Deductions with

Other Regulations

The proposed regulations included specific references to provisions of the Code

and regulations that are not affected by

the BEAT waiver election in proposed §

1.59A-3(c)(6)(iii)(B). The proposed regulations also provided that waived deductions are taken into account as necessary to

prevent a taxpayer from receiving the benefit of a waived deduction. § 1.59A-3(c)

(6)(iii)(B)(7). No comments addressed

this aspect of the proposed regulations.

The final regulations retain these rules,

which may apply when other deductible

expenses are taken into account for other specific purposes of the Code because

the item was an expense (rather than because the item was deducted), such as the

fact that waived deductions are still taken

Bulletin No. 2020–44

into account for purposes of determining

the amount of the taxpayer’s earnings and

profits under § 1.59A-3(c)(6)(iii)(B)(6).

IV. Application of the BEAT to

Partnerships

The 2019 final regulations set forth

operating rules for applying the BEAT to

partnerships. In general, the final regulations provide that a partnership is treated

as an aggregate of its partners and, accordingly, deem certain transactions to have

occurred at the partner level for BEAT

purposes even though they may be treated as having occurred at the partnership

level for other tax purposes. See generally

§ 1.59A-7.

A. Effectively Connected Income

Generally, the 2019 final regulations

provide an exception (the “ECI exception”) whereby a base erosion payment

does not result from amounts paid or accrued to a foreign related party that are

subject to tax as ECI. § 1.59A-3(b)(3)

(iii). To qualify for the ECI exception, the

taxpayer must receive a withholding certificate on which the foreign related party

claims an exemption from withholding

under section 1441 or 1442 because the

amounts are ECI. The 2019 final regulations do not set out specific rules for applying the ECI exception to transactions

involving partnerships. The preamble to

the proposed regulations stated that the

Treasury Department and the IRS are considering additional guidance to address (i)

the treatment of a contribution by a foreign person to a partnership engaged in

a U.S. trade or business, (ii) transfers of

partnership interests by a foreign person

and (iii) transfers of property by the partnership with a foreign person as a partner

to a related U.S. person. REG-112607-19,

84 FR 67046, 67049 (December 6, 2019).

A comment generally supported applying an ECI exception to partnership transactions where the taxpayer is treated as

making a base erosion payment as a result

of a deemed transaction with a foreign related party, and where the foreign related

party is subject to U.S. federal income tax

on allocations of income from the partnership. The Treasury Department and the

IRS generally agree with this comment

923

and have revised the final regulations in

§ 1.59A-3(b)(3)(iii)(C) to expand the ECI

exception to apply to certain partnership

transactions. The expanded ECI exception in § 1.59A-3(b)(3)(iii)(C) applies if

the exception in § 1.59A-3(b)(3)(iii)(A)

or (B) would have applied to the payment or accrual as characterized under §

1.59A-7(b) and (c) for purposes of section

59A (assuming any necessary withholding

certificate were obtained).

Thus, for example, if a U.S. taxpayer

purchases an interest in a partnership from

a foreign related party, then under the general BEAT partnership rules for transfers

of a partnership interest, this transaction is

treated as a transfer by the foreign related

party of a portion of the partnership assets

to the U.S. taxpayer. See § 1.59A-7(c)(3).

To the extent that these partnership assets

are used or held for use in connection with

the conduct of a trade or business within

the United States, this situation is similar

to a situation where the foreign related

party directly holds the assets that produce ECI (for example, in a U.S. branch).

In that analogous situation, an acquisition

of those assets by the U.S. taxpayer from

the foreign related party would have been

eligible for the ECI exception reflected in

§ 1.59A-3(b)(3)(iii).

The ECI exception reflected in §

1.59A-3(b)(3)(iii)(C) also may apply in

other situations, such as when (i) a U.S.

taxpayer contributes cash and a foreign

related party of the U.S. taxpayer contributes depreciable property to the partnership (see § 1.59A-7(c)(3)(iii)), (ii) a

partnership with a partner that is a foreign

related party of the taxpayer partner engages in a transaction with the taxpayer

(see § 1.59A-7(c)(1)), or (iii) a partnership

engages in a transaction with a foreign related party of a partner in the partnership

(id.).

The general ECI exception reflected in

§ 1.59A-3(b)(3)(iii)(A) would not apply

if a U.S. person purchased depreciable

or amortizable property from a foreign

related party and that property was not

held in connection with a U.S. trade or

business. Similarly, when a U.S. person

is treated as purchasing the same depreciable or amortizable property from a

foreign related party under § 1.59A-7(c)

(3)(iii) because the foreign related party

contributes that property to a partnership,

October 26, 2020

the ECI exception does not apply even

though the property becomes a partnership asset after the transaction and the

partnership uses the property in its U.S.

trade or business.

To implement this addition, the final

regulations include modified certification

procedures similar to those set forth in §

1.59A-3(b)(3)(iii)(A) in order for the taxpayer to qualify for this exception. Specifically, the final regulations require a taxpayer to obtain a written statement from

a foreign related party that is comparable

to a withholding certification provided

under § 1.59A-3(b)(3)(iii)(A), but which

takes into account that the transaction is a

deemed transaction under § 1.59A-7(b) or

(c) rather than a transaction for which the

foreign related party is required to report

ECI. The taxpayer may rely on the written

statement unless it has reason to know or

actual knowledge that the statement is incorrect.

B. Treatment of Curative Allocations

The proposed regulations provided

that if a partnership adopts the curative

method of making section 704(c) allocations under § 1.704-3(c), the allocation of

income to the contributing partner in lieu

of a deduction allocation to the non-contributing partner is treated as a deduction

for purposes of section 59A. Proposed §

1.59A-7(c)(5)(v). A comment expressed

support for the rule and recommended

that the Treasury Department and the IRS

also clarify that base erosion tax benefits

include curative allocations of an item of

deduction attributable to a base erosion

payment. The Treasury Department and

the IRS believe that the proposed regulations were already clear in this regard.

Therefore, the final regulations retain §

1.59A-7(c)(5)(v) along with an example

that illustrates when curative allocations

are treated as base erosion tax benefits; the

final regulations also clarify that curative

allocations that arise under section 704(c)

as a result of a revaluation are treated in a

similar manner.

C. Partnership Anti-Abuse Rules Derivatives Involving Partnerships

Section 1.59A-3(b)(3)(ii) provides an

exception from base erosion payment

October 26, 2020

status for qualified derivative payments.

Section 1.59A-6(d)(1) defines a derivative for purposes of the QDP rules as a

contract whose value is determined by

reference to one or more of the following:

(1) any shares of stock in a corporation,

(2) any evidence of indebtedness, (3)

any actively traded commodity, (4) any

currency, or (5) any rate, price, amount,

index, formula, or algorithm. Proposed

§ 1.59A-9(b)(5) provides an anti-abuse

rule relating to derivatives on partnership

interests and partnership assets. Under

this proposed rule, if a taxpayer acquires

a derivative on a partnership interest or

partnership assets with a principal purpose of eliminating or reducing a base

erosion payment, then the taxpayer is

treated as having a direct interest in the

partnership interest or partnership asset

(instead of a derivative interest) for purposes of applying section 59A.

A comment recommended that the

regulations clarify the interaction of the

anti-abuse rule relating to derivatives on

partnership assets with the QDP exception

that applies with respect to certain derivatives. The final regulations adopt this

comment and provide that the partnership

anti-abuse rule for derivatives does not

apply when a payment with respect to a

derivative on a partnership asset qualifies

for the QDP exception. § 1.59A-9(b)(5).

D. Other Issues

Proposed § 1.6031(a)-1(b)(7) stated:

If a foreign partnership is not required

to file a partnership return and the foreign partnership has made a payment

or accrual that is treated as a base erosion payment of a partner as provided

in § 1.59A-7(b)(2), a person required

to file a Form 8991 (or successor) who

is a partner in the partnership must

provide the information necessary to

report any base erosion payments on

Form 8991 (or successor) or the related instructions. This paragraph does

not apply to any partner described in §

1.59A-7(b)(4).

The cross-references contained in

this regulation, § 1.59A-7(b)(2) and §

1.59A-7(b)(4), do not exist. The final regulations clarify which partners are intended to be excluded from the application

of proposed § 1.6031(a)-1(b)(7). See §

924

1.6031(a)-1(b)(7). Section 1.6031(a)-1(b)

(7) is also revised to make certain clarifying changes.

Finally, § 1.59A-9(b)(6) is revised to

make certain clarifying changes.

V. Anti-abuse Rules of § 1.59A-9 for

Basis Step-up Transactions

Section 59A(d)(2) generally defines

a base erosion payment to include an

amount paid or accrued to a foreign related party in connection with the acquisition

of depreciable or amortizable property.

However, § 1.59A-3(b)(3)(viii) provides

an exception to the definition of a base

erosion payment for certain amounts

transferred to or exchanged with a foreign

related party in a transaction described

in sections 332, 351, 355, and 368 (the

“specified nonrecognition transaction exception”).

The specified nonrecognition transaction exception was adopted in the 2019

final regulations in response to comments

to proposed regulations issued in 2018

that argued that the depreciable or amortizable assets acquired by a domestic

corporation in a nonrecognition transaction should not be taken into account for

purposes of the BEAT because nonrecognition transactions generally result in

carryover tax basis to the acquiring corporation. TD 9885, 84 FR 66968, 66977.

These comments also stated that if that

recommendation were to be adopted, an

anti-abuse rule also could be adopted to

prevent taxpayers from undermining this

policy rationale for the specified nonrecognition transaction exception by engaging in basis step-up transactions immediately before an inbound nonrecognition

transaction. The 2019 final regulations

generally adopted the approach recommended by comments, including adopting a specific targeted anti-abuse rule in

§ 1.59A-9(b)(4). That rule provides that

if a transaction, plan, or arrangement has

a principal purpose of increasing the adjusted basis of property that a taxpayer

acquires in a specified nonrecognition

transaction, the nonrecognition exception of § 1.59A-3(b)(3)(viii)(A) will not

apply to the nonrecognition transaction.

Additionally, § 1.59A-9(b)(4) contains

an irrebuttable presumption that a transaction, plan, or arrangement between re-

Bulletin No. 2020–44

lated parties that increases the adjusted

basis of property within the six-month

period before the taxpayer acquires the

property in a specified nonrecognition

transaction has a principal purpose of

increasing the adjusted basis of property

that a taxpayer acquires in a nonrecognition transaction.

Taxpayers have expressed concern

about the breadth of the anti-abuse rule.

A comment stated that the anti-abuse rule

can create a “cliff effect” whereby a minimal amount of pre-transaction basis stepup could disqualify an entire transaction

that would have otherwise qualified for

the specified nonrecognition transaction

exception. The comment recommended

that the anti-abuse rule exclude transactions with a relatively small amount of

basis step-up or provide taxpayers with an

election to forego the basis step-up.

Section 1.59A-9(b)(4) has been revised to adopt this comment. First, the anti-abuse rule now provides that when the

rule applies, its effect is to turn off the application of the specified nonrecognition

transaction exception only to the extent

of the basis step-up amount. This revision

addresses the comment’s concern regarding the cliff effect of the rule.

Second, § 1.59A-9(b)(4) has been

revised to clarify that the transaction,

plan, or arrangement with a principal

purpose of increasing the adjusted basis

of property must also have a connection

to the acquisition of the property by the

taxpayer in a specified nonrecognition

transaction. This change is made because

the Treasury Department and the IRS understand that some taxpayers interpreted

the prior version of the rule to potentially apply to certain basis step-up transactions (for example, a qualified stock

purchase for which an election is made

under section 338(g)), even if that basis

step-up transaction had no factual connection with a later specified nonrecognition transaction (for example, the section

338(g) transaction occurred many years

before the BEAT was enacted, but the

property still has a stepped-up basis that

is being depreciated or amortized when

the subsequent specified nonrecognition

transaction occurs). Sections 1.59A-9(c)

(11) (Example 10) and 1.59A-9(c)(12)

(Example 11) have also been revised to

reflect these changes.

Bulletin No. 2020–44

VI. Possible Future Guidance

Concerning the QDP Reporting

Requirements

The preamble to the proposed regulations indicated that comments to the

proposed regulations were required to

be received by February 4, 2020. REG112607-19, 84 FR 67046 (December 6,

2019). A comment was submitted after

this date that recommended that the Treasury Department address the interaction

of the QDP exception, the BEAT netting

rule in § 1.59A-2(e)(3)(iv) (with respect

to positions for which a taxpayer applies a

mark-to-market method of accounting for

U.S. federal income tax purposes), and the

QDP reporting requirements in § 1.59A6 and § 1.6038A-2(b)(7)(ix) – each in the

2019 final regulations. The comment recommended that the asserted ambiguities

be addressed in revised final regulations,

a revenue procedure or another type of

written authoritative guidance. The Treasury Department and the IRS are studying

this submission and considering whether

future guidance may be appropriate.

Applicability Date

These final regulations generally apply

to taxable years beginning on or after October 9, 2020. The rules in §§ 1.59A-7(c)

(5)(v) and (g)(2)(x), and 1.59A-9(b)(5)

and (6) apply to taxable years ending on

or after December 2, 2019.

Taxpayers may apply these final regulations in their entirety for taxable years

beginning after December 31, 2017, and

before their applicability date, provided

that, once applied, taxpayers must continue to apply these regulations in their

entirety for all subsequent taxable years.

See section 7805(b)(7). Alternatively, taxpayers may apply only § 1.59A-3(c)(5)

and (6) for taxable years beginning after

December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply §

1.59A-3(c)(5) and (6) in their entirety for

all subsequent taxable years. Taxpayers

may also rely on §§ 1.59A-2(c)(2)(ii) and

(c)(4) through (6), and 1.59A-3(c)(5) and

(c)(6) of the proposed regulations in their

entirety for taxable years beginning after

December 31, 2017, and before October

9, 2020.

925

Special Analyses

I. Regulatory Planning and Review –

Economic Analysis

Executive Orders 13771, 13563, and

12866 direct agencies to assess costs and

benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize

net benefits (including potential economic, environmental, public health and safety

effects, distributive impacts, and equity).

Executive Order 13563 emphasizes the

importance of quantifying both costs and

benefits, of reducing costs, of harmonizing rules, and of promoting flexibility. The

Executive Order 13771 designation for

this regulation is regulatory.

These final regulations have been designated as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018)

(MOA) between the Treasury Department

and the Office of Management and Budget

(OMB) regarding review of tax regulations. The Office of Information and Regulatory Affairs has designated these regulations as economically significant under

section 1(c) of the MOA. Accordingly, the

OMB has reviewed these regulations.

A. Background

The Tax Cuts and Jobs Act of 2017

(the “Act”) added new section 59A, which

imposes a Base Erosion and Anti-Abuse

Tax (“BEAT”) on certain deductions paid

or accrued to foreign related parties. By

taxing such payments, the BEAT “aims to

level the playing field between U.S. and

foreign-owned multinational corporations

in an administrable way.” Senate Committee on Finance, Explanation of the Bill, S.

Prt. 115-20, at 391 (November 22, 2017).

The tax is levied only on corporations

with substantial gross receipts (a determination referred to as the “gross receipts

test”) and for which the relevant deductions are three percent or higher (two percent or higher in the case of certain banks

or registered securities dealers) of the corporation’s total deductions (with certain

exceptions), a determination referred to

as the “base erosion percentage test.” The

applicable percentage in the base erosion

percentage test is referred to in these Spe-

October 26, 2020

cial Analyses as the base erosion threshold.

A taxpayer that satisfies both the gross

receipts test and the base erosion percentage test is referred to as an applicable taxpayer. A taxpayer is not an applicable taxpayer, and thus does not have any BEAT

liability, if its base erosion percentage is

less than the base erosion threshold.

Additional features of the BEAT also

enter its calculation. The BEAT operates

as a minimum tax, so an applicable taxpayer is only subject to additional tax under the BEAT if the tax at the BEAT rate

multiplied by the taxpayer’s modified

taxable income exceeds the taxpayer’s

regular tax liability, reduced by certain

credits. Because of this latter provision,

the BEAT formula has the effect of imposing the BEAT on the amount of those tax

credits. In general, tax credits are subject

to the BEAT except the research credit under section 41 and a portion of low income

housing credits, renewable electricity production credits under section 45, and certain investment tax credits under section

46. Notably, this means that the foreign

tax credit is currently subject to the BEAT.

In taxable years beginning after December

31, 2025, all tax credits are subject to the

BEAT.

On December 6, 2019, the Treasury

Department and the IRS published final regulations under sections 59A, 383,

1502, 6038A, and 6655 (the “2019 final

regulations”) and also published proposed

regulations (“proposed regulations”),

which are being finalized here.

B. Need for the final regulations

Section 59A does not explicitly state

whether an amount that is permitted as a

deduction under the Code or regulations

but that is not claimed as a deduction on

a taxpayer’s tax return is potentially a

base erosion tax benefit for purposes of

the BEAT and the base erosion percentage

test. Comments recommended that the

Treasury Department and the IRS clarify

the treatment of amounts that are allowable as a deduction but not claimed as a

deduction on a taxpayer’s tax return. Regulations are needed to respond to these

comments and to clarify the treatment of

these amounts under section 59A, including with respect to partnership items and

October 26, 2020

reinsurance payments. Regulations are

also needed to clarify certain aspects of

the rules set forth in the 2019 final regulations relating to how a taxpayer determines its aggregate group for purposes of

determining gross receipts and the base

erosion percentage, and how the BEAT

applies to partnerships.

C. Overview

These final regulations (“these regulations” or “the regulations”) provide taxpayers an election to waive deductions

that would otherwise be taken into account in determining whether the taxpayer is an applicable taxpayer subject to the

BEAT. The regulations also permit waiver

of some reinsurance items that are also

subject to the BEAT. These provisions are

analyzed in part D of these Special Analyses.

These regulations also include modifications to the rules set forth in the 2019

final regulations relating to how a taxpayer determines its aggregate group for

purposes of determining gross receipts

and the base erosion percentage, and how

the BEAT applies to partnerships. The

regulations further address, in response

to comments, technical issues that apply

when a partner in a partnership elects to

waive deductions, and when reinsurance

items are waived – issues that were not

addressed in the proposed regulations.

These provisions are not expected to

result in any meaningful changes in taxpayer behavior relative to the no-action

baseline or alternative regulatory approaches and are not assessed in these

Special Analyses.

The proposed regulations solicited

comments on the economic effects of the

election to waive deductions and more

generally of the proposed regulations. No

such comments were received.

D. Economic Analysis

1. Baseline

In this analysis, the Treasury Department and the IRS assess the benefits and

costs of these final regulations compared

to a no-action baseline that reflects anticipated Federal income tax-related behavior

in the absence of these regulations.

926

2. Economic Effects of the Election to

Waive Deductions

a. Background and Alternatives

Considered

Section 59A does not explicitly state

whether an amount that is permitted as a

deduction under the Code or regulations

but that is not claimed as a deduction on

the taxpayer’s tax return is potentially a

base erosion tax benefit for the purposes

of the base erosion percentage test. A taxpayer may find waiving certain deductions

advantageous if the waived deductions

lower the taxpayer’s base erosion percentage below the base erosion threshold,

thus making section 59A inapplicable to

the taxpayer. Comments to prior proposed

regulations recommended that the Treasury Department and the IRS clarify the

treatment of allowable amounts that are

not claimed as a deduction on the taxpayer’s tax return for purposes of section 59A.

To address concerns about the treatment of these amounts permitted as deductions under law, the Treasury Department

and the IRS considered two alternatives:

(1) provide that all deductions that could

be properly claimed by a taxpayer for the

taxable year are taken into account for

purposes of the base erosion percentage

test (and for other purposes of the BEAT)

even if a deduction is not claimed on the

taxpayer’s tax return (the “alternative regulatory approach”); or (2) provide that an

allowable deduction that a taxpayer does

not claim on its tax return is not taken into

account in the base erosion percentage test

or for other purposes of the BEAT, provided that certain procedural steps are followed. These regulations adopt the latter

approach.

Under the alternative regulatory approach, base erosion payments allowable

as deductions but not claimed by a taxpayer would nonetheless be taken into

account in the base erosion percentage.

Thus, a taxpayer could not avoid satisfying the base erosion percentage test by not

claiming certain deductions. Under these

regulations, base erosion payments allowable as deductions but waived by a taxpayer are not taken into account in the base

erosion percentage test, assuming certain

procedural steps are followed. The waived

deductions are waived for all U.S. federal

Bulletin No. 2020–44

income tax purposes (with certain exceptions listed in the regulations) and thus,

for example, the deductions are also not

allowed for regular income tax purposes.

If the taxpayer is not an applicable taxpayer because the taxpayer waives deductions

so as not to satisfy the base erosion percentage test, the taxpayer may continue

to claim deductions for base erosion payments that are not waived, provided these

deductions would otherwise be allowed.

b. Example

Consider a U.S.-parented multinational

enterprise that satisfies the gross receipts

test and that is not a bank or registered securities dealer. The U.S. corporation has

gross income from domestic sources of

$1000x and also has a net global intangible low-taxed income (“GILTI”) inclusion

of $500x.2 The taxpayer has $870x of deductions pertinent to this example that are

not base erosion tax benefits and $30x of

deductions that are base erosion tax benefits. It is also assumed that the amount of

foreign tax credits permitted under section

904(a) is $105x. This taxpayer’s regular

U.S. taxable income is $600x ($1000x +

$500x - $870x - $30x), its regular U.S.

tax rate is 21.0 percent, and its regular

U.S. tax liability is $21x ($600x X 21%

= $126x, less foreign tax credits of $105x

($126x - $105x)).

Under the alternative regulatory approach, the taxpayer is an applicable taxpayer because its base erosion percentage

is 3.33 percent ($30x / $900x), which is

greater than the three percent base erosion

threshold. Because the taxpayer is subject

to the BEAT, it must further compute its

modified taxable income, which is $630x

— its regular U.S. taxable income ($600x)

plus its base erosion tax benefits ($30x).

The taxpayer determines its base erosion minimum tax amount as the excess

of the BEAT rate (10 percent) multiplied

by its modified taxable income ($630,

thus yielding a base erosion minimum tax

amount of $63x = $630x X 10%) over its

regular U.S. tax liability of $21x, which is

equal to $42x ($63x - $21x). In this example the total U.S. tax bill is $63x ($21x of

regular tax and $42x of BEAT).

Under these regulations, this taxpayer would have the option to waive all or

part of its deductions that are base erosion

payments; this is potentially advantageous

to the taxpayer if it allows the taxpayer’s

base erosion percentage to fall below the

base erosion threshold. Specifically, the

taxpayer could waive $3.10x of its deductions that are base erosion payments,

yielding a base erosion percentage below

the three percent base erosion threshold (base erosion tax benefits = $26.90x

($30x - $3.10x); base erosion percentage

= $26.90x/($870x + $26.90x) = 2.99%).

After taking into account this waiver, the

taxpayer’s regular taxable income would

increase to $603.10x ($1000x + $500x $870x - $26.90x), and its regular tax liability would increase to $21.65x ($603.10x

X 21% = $126.65, less foreign tax credits

of $105x = $21.65x).3 The waiver is valuable to this taxpayer because its tax bill in

this simple example is lower by $41.35x

($63x - $21.65x).

This example shows the difference in

tax liability caused by allowing deductions to be waived and thus, the difference

in tax liability between these regulations

and the alternative regulatory approach.

Part D.2.c of these Special Analyses discusses the behavioral incentives and economic effects that can result from this tax

treatment.

c. Economic Effects of the Election to

Waive Deductions

These regulations effectively allow a

taxpayer to make payments that would be

base erosion payments without becoming

an applicable taxpayer and thus subject to

the BEAT. Thus, this provision reduces

the effective tax on base erosion payments

for some taxpayers, relative to the alternative regulatory approach. Because of this

reduction, these regulations may lead to a

higher amount of base erosion payments

than under the alternative regulatory approach.

The Treasury Department projects,

based on a standard economic model, that

any such higher amount of base erosion

payments under these regulations would

come from those taxpayers who, under the

alternative regulatory approach, would

not be applicable taxpayers but would be

close to being applicable taxpayers; that

is, the taxpayers who would potentially

change behavior would be those taxpayers who, under the alternative regulatory

approach, would have a base erosion percentage that was close to but below the

base erosion threshold. No additional base

erosion payments are projected under this

model to come from taxpayers that would

be applicable taxpayers under the alternative regulatory approach.4

To see the logic behind this claim,

consider an applicable taxpayer under the

alternative regulatory approach with base

erosion payments of $Y. If this taxpayer

were to increase its base erosion payments

by $10 and reduce its non-base erosion

payments by $10 (that is, it has substituted

base erosion payments for non-base erosion payments), its tax bill would generally increase by $1. The fact that this taxpayer chose base erosion payments of $Y

rather than $Y+10 suggests that this substitution would be worth less than $1 to

the taxpayer. The substitution is not worth

the increased tax. Next consider this taxpayer under these regulations. If it elects

to waive sufficient deductions such that

it is not an applicable taxpayer, then the

marginal increase in its tax bill from the

hypothesized substitution is $2.10. Thus,

if this increase in base erosion payments

(and substitution away from non-base erosion payments) is not worthwhile to the

taxpayer under the alternative regulatory

approach, it will not be worthwhile under

these regulations. This example suggests

that to the extent that there is any increase

in base erosion payments under these regulations (and substitution away from non-

For simplification of this example, the $500x GILTI income is presented as the net of the global intangible low-tax income amount of the domestic corporation under section 951A, plus

the section 78 gross up amount for foreign taxes, less the GILTI deduction under section 250(a)(1)(B). The deduction under section 250(a)(1)(B) is not taken into account in determining the

base erosion percentage. See section 59A(c)(4)(B)(i).

3

Although the waiver increases the taxpayer’s regular taxable income, the taxpayer’s gross income (in the context of this example) is unchanged. Thus, only the tax liability needs to be

compared across the regulatory approaches to determine whether the taxpayer would benefit from waiving deductions.

4

To the extent that this model does not capture all possible taxpayer circumstances, the Treasury Department recognizes that there may be some additional base erosion payments that come

from taxpayers that would be applicable taxpayers under the alternative regulatory approach.

2

Bulletin No. 2020–44

927

October 26, 2020

base erosion payments), it generally will

not come from taxpayers that would be

applicable taxpayers under the alternative

regulatory approach.

The example further suggests that any

change in behavior will instead generally

come from those taxpayers that would not

be applicable taxpayers under the alternative regulatory approach. These taxpayers

would be able, under these regulations, to

take on activities that increase their base

erosion payments but, by waiving all or

part of the deduction for these activities,

avoid crossing the base erosion threshold. The Treasury Department projects

that this is the set of taxpayers that will

be the primary source of any economic

effects arising from these regulations. To

the extent that this model does not capture all possible taxpayer circumstances,

the Treasury Department recognizes that

there may be some additional base erosion

payments that come from taxpayers that

would be applicable taxpayers under the

alternative regulatory approach.

As a result of the ability to waive deductions in these regulations, these taxpayers may change business behavior in two

possible ways relative to the alternative

regulatory approach. First, these businesses may expand economic activities in the

United States even if those activities result

in payments to foreign related parties (i.e.,

base erosion payments). For example, under the alternative regulatory approach a

multinational enterprise may decide not

to open an office or manufacturing plant

in the United States if that incremental

activity also resulted in incremental base

erosion payments that would cause the

taxpayer to become an applicable taxpayer. Under these regulations, this business

can expand its activities in the U.S. and

avoid becoming an applicable taxpayer

provided it waived sufficient deductions

to stay below the base erosion threshold.

These activities would be accompanied by

an increase in base erosion payments.

Second, businesses already operating in the United States may structure a

greater proportion of their transactions as

base erosion payments under these regulations relative to the alternative regulatory

approach. Under the alternative regulatory approach, a business might conduct

5

its transactions through unrelated parties

rather than with a foreign related party

so that its base erosion percentage would

remain below the base erosion threshold.

Under these regulations, this business

could instead use a foreign related party

(thus, the transaction would generally be a

base erosion payment) rather than an unrelated party for these transactions, without paying the BEAT, again provided it

waived sufficient deductions to stay below

the base erosion threshold.

In each of these cases, under the standard economic model a business adopting

these strategies would be presumed to

accrue a non-tax, economic benefit from

using a foreign related party rather than an

unrelated party to conduct this aspect of

its business. Under these final regulations,

there would be no U.S. tax-related benefit

associated with transacting with a foreign

related party and thus any decisions made

by a business to make a base erosion payment would occur because of the economic advantage it provides to the business,

rather than that payment being avoided,

diverted or otherwise distorted because it

would result in the taxpayer becoming an

applicable taxpayer subject to the BEAT.

This economic advantage might arise, for

example, because the business has a closer

relationship with the foreign related party

and its transactions with the foreign related party provide enhanced managerial

control. In these circumstances, these activities would generally be beneficial to

the U.S. economy.

Although the standard economic model

projects an increase in base erosion payments and a benefit to the U.S. economy

under these regulations relative to the alternative regulatory approach, it does not

yield clear implications for the economic

value of these payments. An inference

about the marginal value of a base erosion

payment depends on the marginal tax incurred by base erosion payments near the

base erosion threshold, which in turn depends on (i) how close the taxpayer would

be to the threshold; (ii) the quantity of its

base erosion payments that are below the

base erosion threshold and subject to tax

if the base erosion threshold is exceeded;

and (iii) other factors affecting the potential BEAT liability such as the additional

BEAT tax liability relative to non-BEAT

tax liability in situations when significant

tax credits are also subject to BEAT (see

generally, part I.A of this Special Analyses

section).

Because of these factors, the difference

in the non-tax value to businesses of a

marginal base erosion payment between

these regulations and alternative regulatory approach is complex and cannot be

readily inferred.

In summary, for taxpayers who elect to

waive deductions under these regulations,

the Treasury Department and the IRS expect that relative to the alternative regulatory approach, these regulations would

tend to:

• Reduce tax costs of additional economic activity in the United States by

those taxpayers in the situation where

additional economic activity in the

United States would tend to increase

base erosion payments;

• Reduce tax-related incentives for

otherwise economically inefficient

business, contractual or accounting

changes designed to avoid the taxpayer being an applicable taxpayer;

• Continue to fulfill the general intent

and purpose of the statute by not

providing tax incentives for certain

large corporations to make deductible

payments to foreign related parties in

excess of 3 percent of the taxpayer’s

deductions; and

• Reduce the number of taxpayers that

are applicable taxpayers and the overall amount of BEAT collected. This

revenue effect is likely to be offset

to some degree by the fact that some

taxpayers are likely to elect to waive

allowable deductions.

The Treasury Department and the IRS

project that the final regulations will have

economic effects greater than $100 million per year ($2020) relative to the no-action baseline. This determination is based

on the substantial size of the businesses

potentially affected by these regulations

(3-year average annual gross receipts of

$500 million or above) and the general

responsiveness of business activity to effective tax rates,5 one component of which

is the deductibility of base erosion payments. Based on these two magnitudes,

See E. Zwick and J. Mahon, “Tax Policy and Heterogeneous Investment Behavior,” at American Economic Review 2017, 107(1): 217-48 and articles cited therein.

October 26, 2020

928

Bulletin No. 2020–44

even modest changes in the deductibility

of base erosion tax benefits (and in the

certainty of that deductibility) provided by

the final regulations, relative to the no-action baseline, can be expected to have

annual effects greater than $100 million

($2020). The Treasury Department and

the IRS have not produced a more precise

estimate of the economic consequences of

these regulations relative to the alternative

regulatory approach. The economic effects of these regulations depend on (i) the

number of taxpayers that would be close

to and below the base erosion threshold

under the alternative regulatory approach;

(ii) the increase in the quantity of base

erosion payments they would have under

these regulations relative to the alternative

regulatory approach; and (iii) the economic consequences of those increased base

erosion payments. Items (ii) and (iii) are

particularly difficult to estimate with any

reasonable precision in part because they

involve economic activities, including potential new economic activity in the United States, that cannot be readily inferred

from existing data or models available to

the Treasury Department and the IRS.

The Treasury Department recognizes that taxpayers may incur compliance

costs related to deciding whether to waive

deductions and ensuring that procedural

rules are followed but projects that any

such compliance costs will likely be small

because the accounting required for the

relevant deductions is essentially the same

under both these regulations and the alternative regulatory approach. Under both

these regulations and the alternative regulatory approach, an applicable taxpayer

would have to calculate its BEAT liability. The only additional step a taxpayer

that otherwise would be an applicable

taxpayer may choose to take under these

regulations is to calculate its tax liability with the waiver of certain deductions

(all of which the taxpayer would already

have documented) in order to avoid being an applicable taxpayer. The taxpayer

would make this additional calculation to

consider whether waiver of those deductions would result in a lower tax liability.

Because these costs are likely to be relatively small, the Treasury Department and

the IRS have not estimated the change in

compliance costs of this waiver relative to

the alternative regulatory approach.

Bulletin No. 2020–44

d. Waiver of Reinsurance Payments

e. Number of Affected Taxpayers

The BEAT waiver election in the proposed regulations generally allowed the

waiver of deductions but did not include

the waiver of other base erosion tax benefits

that were not technically deductions. The

term “base erosion tax benefits” includes

certain reinsurance payments that are treated under the Code as reductions to gross

income rather than deductions and thus,

under the proposed regulations, would not

be eligible for a waiver. Because a reduction to income is generally economically

similar to a deduction, in response to comments, the Treasury Department and the

IRS have determined that the policy rationale for providing the BEAT waiver election also applies to insurance-related base

erosion payments. Thus, these regulations

further provide for the waiver of amounts

treated as reductions to gross premiums

and related payments that would otherwise

be base erosion tax benefits within the definition of section 59A(c)(2)(A)(iii).

This provision will generally lead to

an increase in reinsurance payments that

are base erosion payments, relative to the

alternative regulatory approach. The Treasury Department projects that because

these payments are economically similar to other payments that are allowed a

waiver, this provision will treat similar

income similarly and thereby improve the

performance of the U.S. economy relative

to a regulatory approach of not allowing a

waiver for certain reinsurance items while

allowing such a waiver for other deductions.

The Treasury Department and the IRS

have not estimated the increase in reinsurance payments that are base erosion payments that is likely to result under these

regulations, relative to the alternative regulatory approach, because currently available tax data include only (net) premiums

and do not separately record reinsurance

transactions. The Treasury Department

and the IRS further have not estimated

the economic consequences of taxpayers

substituting reinsurance payments that

are base erosion payments for reinsurance

payments that would not be base erosion

payments because the Treasury Department and the IRS do not have readily

available models that could assess this

value.

These regulations affect all corporate

taxpayers that satisfy the gross receipts

test and base erosion percentage test and

have base erosion payments. The Treasury Department and the IRS project that

approximately 2,200 taxpayers are affected by these regulations. This estimate

is based on the number of returns in the

IRS’s Statistics of Income (SOI) corporate sample as of July 28, 2020, that are

recorded as having Form 8991, Tax on

Base Erosion Payments of Taxpayers With

Substantial Gross Receipts, attached and

that reported gross receipts of $500 million or above in tax year 2018. These attachments have not yet been verified and

could include blanks, duplicates, or forms

that do not properly contain information

related to the BEAT. Because this sample

is preliminary, these returns have not yet

been weighted for the extent to which they

represent the population of corporate tax

returns. This count includes paper returns.

These data show that 5,911 returns have

Form 8991 attached. Of these, 2,222 tax

returns show gross receipts of $500 million or more and 3,689 have gross receipts

below $500 million in 2018. Although the

BEAT test for applicable taxpayer status

depends on the average of gross receipts

over a three-year period, these tax data

have not yet been linked to previous years’

data and thus do not reflect the 3-year average of gross receipts. Of these 5,911 tax

returns, 393 returns paid the BEAT tax.

929

II. Paperwork Reduction Act

The collections of information in these

final regulations with respect to section 59A are in §§ 1.59A-3(b)(3)(iii)(C),

1.59A-3(c)(6), and 1.6031(a)-1(b)(7).

These final regulations retain the collections of information in the proposed regulations, with the addition of the collection

of information in § 1.59A-3(b)(3)(iii)(C).

The collection of information in §

1.59A-3(b)(3)(iii)(C) permits an amount

paid or accrued by a taxpayer to a partnership to be eligible for the base erosion

payment exception with respect to effectively connected income. This exception

applies to any amount treated as paid or

accrued to a foreign related party under §

1.59A-7(b) or (c) to the extent that the ex-

October 26, 2020

ception for effectively connected income

provided in § 1.59A-3(b)(3)(iii)(A) would

have applied if the amount paid or accrued

had been made directly by the taxpayer to

the foreign related party. To be eligible

for this exception, a foreign related party

or partnership must certify to the taxpayer that a payment to a partnership would

have been effectively connected income if

paid directly to the foreign related party.

Section 1.59A-3(b)(3)(iii)(C) was added

in response to comments. The collection

of information associated with this addi-

tion allows a taxpayer to verify that the

recipient of an amount paid or accrued

to a foreign related party is eligible for

the exception in § 1.59A-3(b)(3)(iii)(C).

The IRS may use this information to ensure compliance with § 1.59A-3(b)(3)(iii)

(C). For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d))

(“PRA”), the reporting burden associated

with § 1.59A-3(b)(iii)(C) will be reflected in the PRA submission associated with

Form 8991 (see chart at the end of this part

II of this Special Analyses section for the

status of the PRA submission for Form

8991). The estimated number of respondents for the reporting burden associated

with § 1.59A-3(b)(3)(iii)(C) is based on

the number of taxpayers who filed a Form

1120-F with Line Y(1) (“Did a partnership

allocate to the corporation a distributive

share of income from a directly owned

partnership interest, any of which is ECI

or treated as ECI by the partnership or the

partner?”) checked “yes”. As provided

below, the IRS estimates the number of

affected filers to be approximately 6,000.

New

Revision of existing form

Number of respondents (estimate based on tax filings for

taxable years 2018)

Y

N

6,000

As explained in the preamble to the

proposed regulations, the collection of

information in § 1.59A-3(c)(6) relates to

an election to waive deductions allowed

under the Code. The election to waive

deductions is made by a taxpayer on its

original or amended income tax return. A

taxpayer makes the election on an annual basis by completing Form 8991, or as

provided in applicable instructions. The

instructions for Form 8991 currently describe how a taxpayer may make this election. The Form 8991 for the 2020 taxable

year will incorporate this election.

As explained in the preamble to the

proposed regulations, the collection of information in § 1.6031(a)-1(b)(7) requires

a partner in a foreign partnership that: (1)

is not required to file a partnership return

and (2) has made a payment or accrual

that is treated as a base erosion payment

of a partner under § 1.59A-7(c), to provide

the information necessary to report any

base erosion payments on Form 8991. The

IRS intends that this information will be

collected by completing Form 8991.

Form

Form 8991

Type of Filer

The IRS is contemplating making revisions to Form 1065, Schedule K, and

Schedule K-1 to take these final regulations into account, including through the

proposed draft Schedules K-2 and K-3. In

connection with the release of draft forms,

the IRS invited comments from affected

stakeholders.

For purposes of the Paperwork Reduction Act, the reporting burden associated

with the collections of information with

respect to section 59A will be reflected in

the Paperwork Reduction Act Submission

associated with Form 8991 (OMB control

number 1545-0123).

The current status of the Paperwork

Reduction Act submissions related to

the BEAT is provided in the following

table. The BEAT provisions are included in aggregated burden estimates for

the OMB control numbers listed below

which, in the case of 1545-0123, represents a total estimated burden time,

including all other related forms and

schedules for corporations, of 3.344

billion hours and total estimated monOMB Number(s)

etized costs of $61.558 billion ($2019).

The burden estimates provided in the

OMB control numbers below are aggregate amounts that relate to the entire package of forms associated with

the OMB control number, and will in

the future include but not isolate the

estimated burden of only the BEAT requirements. These numbers are therefore unrelated to the future calculations

needed to assess the burden imposed by

the final regulations. The Treasury Department and IRS urge readers to recognize that these numbers are duplicates

and to guard against overcounting the

burden that international tax provisions

imposed prior to the Act. No burden estimates specific to the final regulations

are currently available. The Treasury

Department has not estimated the burden, including that of any new information collections, related to the requirements under the final regulations. In

addition, when available, drafts of IRS

forms are posted for comment at www.

irs.gov/draftforms.

Status

Business (NEW

1545-0123

Approved by OIRA through 1/31/2021.

Model)

Link: https://www.govinfo.gov/content/pkg/FR-2019-12-19/pdf/2019-27297.pdf#page=1

October 26, 2020

930

Bulletin No. 2020–44

Related New or Revised Tax Forms

New

Form 8991

The number of respondents in the Related New or Revised Tax Forms table

was estimated by Treasury’s Office of Tax

Analysis based on the number of returns

in the IRS’s Statistics of Income (SOI)

corporate sample as of July 28, 2020,

that are recorded as having Form 8991 attached and that reported gross receipts of

$500 million or above in tax year 2018.

Only certain large corporate taxpayers

with gross receipts of at least $500 million

are expected to file this form.

III. Regulatory Flexibility Act

It is hereby certified that these regulations will not have a significant economic

impact on a substantial number of small

entities within the meaning of section

601(6) of the Regulatory Flexibility Act

(5 U.S.C. chapter 6). This certification is

based on the fact that the BEAT and these

regulations affect only aggregate groups of

corporations with average annual gross receipts of at least $500 million and that also

make payments to foreign related parties in

excess of the base erosion percentage test

(that is, 3 percent or more of their deductible payments are to foreign related parties).

Generally, only large businesses both have

substantial gross receipts and make a significant portion of their deductible payments

to foreign related parties. The $500 million

threshold for the gross receipts test is greater than any Small Business Administration

size standard that is based on annual gross

receipts. See generally 13 CFR part 121.

Pursuant to section 7805(f), the proposed

regulations preceding these final regulations

were submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small

business. No comments were received.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 (UMRA) requires

Bulletin No. 2020–44

Revision of existing form

Y

Number of respondents

(2018, estimated)

6,000

that agencies assess anticipated costs and

benefits and take certain other actions before issuing a final rule that includes any

Federal mandate that may result in expenditures in any one year by a state, local,

or tribal government, in the aggregate, or

by the private sector, of $100 million in

1995 dollars, updated annually for inflation. This rule does not include any Federal mandate that may result in expenditures by state, local, or tribal governments,

or by the private sector in excess of that

threshold.

V. Executive Order 13132: Federalism

Executive Order 13132 (entitled

“Federalism”) prohibits an agency from

publishing any rule that has federalism

implications if the rule either imposes

substantial, direct compliance costs on

state and local governments, and is not

required by statute, or preempts state law,

unless the agency meets the consultation

and funding requirements of section 6 of

the Executive order. This final rule does

not have federalism implications and does

not impose substantial direct compliance

costs on state and local governments or

preempt state law within the meaning of

the Executive order.

VI. Congressional Review Act

The Administrator of the Office of Information and Regulatory Affairs of the

OMB has determined that this Treasury

decision is a major rule for purposes of the

Congressional Review Act (5 U.S.C. 801

et seq.) (“CRA”). Under section 801(3)

of the CRA, a major rule generally takes

effect 60 days after the rule is published

in the Federal Register. Accordingly, the

Treasury Department and IRS are adopting these final regulations with the delayed effective date generally prescribed

under the CRA.

931

Drafting Information

The principal authors of these final regulations are Sheila Ramaswamy, Karen

Walny, and Azeka Abramoff of the Office

of Associate Chief Counsel (International). However, other personnel from the

Treasury Department and the IRS participated in their development.

*****

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 1.59A-0 is revised to

read as follows:

§ 1.59A-0 Table of contents.

This section contains a listing of the

headings for §§ 1.59A-1, 1.59A-2, 1.59A3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7,

1.59A-8, 1.59A-9, and 1.59A-10.

§ 1.59A-1 Base erosion and

anti-abuse tax.

(a) Purpose.

(b) Definitions.

(1) Aggregate group.

(2) Applicable section 38 credits.

(3) Applicable taxpayer.

(4) Bank.

(5) Base erosion and anti-abuse tax

rate.

(6) Business interest expense.

(7) Deduction.

(8) Disallowed business interest expense carryforward.

(9) Domestic related business interest

expense.

(10) Foreign person.

(11) Foreign related business interest

expense.

(12) Foreign related party.

October 26, 2020

(13) Gross receipts.

(14) Member of an aggregate group.

(15) Registered securities dealer.

(16) Regular tax liability.

(17) Related party.

(i) In general.

(ii) 25-percent owner.

(iii) Application of section 318.

(18) TLAC long-term debt required

amount.

(19) TLAC securities amount.

(20) TLAC security.

(21) Unrelated business interest expense.

§ 1.59A-2 Applicable taxpayer.

(a) Scope.

(b) Applicable taxpayer.

(c) Aggregation rules.

(1) In general.

(2) Aggregate group determined with

respect to each taxpayer.

(i) In general.

(ii) Change in the composition of an

aggregate group.

(3) Taxable year of members of an aggregate group.

(4) Periods before and after a corporation is a member of an aggregate group.

(i) In general.

(ii) Deemed taxable year-end.

(iii) Items allocable to deemed taxable

years before and after deemed taxable

year-end.

(5) Short taxable year.

(i) Short period of the taxpayer.

(A) In general.

(B) Determining the gross receipts and

base erosion percentage of the aggregate

group of a taxpayer for a short period.

(ii) Short period of a member of the

taxpayer’s aggregate group.

(A) Multiple taxable years of a member

of the taxpayer’s aggregate group comprised of more than 12 months.

(B) Short period or periods of a member of the taxpayer’s aggregate group

comprised of fewer than 12 months from

change in taxable year.

(iii) Anti-abuse rule.

(6) Treatment of predecessors.

(i) In general.

(ii) No duplication.

(7) Partnerships.

(8) Transition rule for aggregate group

members with different taxable years.

October 26, 2020

(9) Consolidated groups.

(d) Gross receipts test.

(1) Amount of gross receipts.

(2) Taxpayer not in existence for entire

three-year period.

(3) Gross receipts of foreign corporations.

(4) Gross receipts of an insurance company.

(5) Reductions in gross receipts.

(e) Base erosion percentage test.

(1) In general.

(2) Base erosion percentage test for

banks and registered securities dealers.

(i) In general.

(ii) Aggregate groups.

(iii) De minimis exception for banking

and registered securities dealer activities.

(3) Computation of base erosion percentage.

(i) In general.

(ii) Certain items not taken into account in denominator.

(iii) Effect of treaties on base erosion

percentage determination.

(iv) Amounts paid or accrued between

members of a consolidated group.

(v) Deductions and base erosion tax

benefits from partnerships.

(vi) Mark-to-market positions.

(vii) Reinsurance losses incurred and

claims payments.

(viii) Certain payments that qualify

for the effectively connected income exception and another base erosion payment

exception.

(f) Examples.

(1) Example 1: Mark-to-market.

(i) Facts.

(ii) Analysis.

(2) Example 2: Member leaving an aggregate group.

(i) Facts.

(ii) Analysis.

§ 1.59A-3 Base erosion payments and

base erosion tax benefits.

(a) Scope.

(b) Base erosion payments.

(1) In general.

(2) Operating rules.

(i) In general.

(ii) Amounts paid or accrued in cash

and other consideration.

(iii) Transactions providing for net

payments.

932

(iv) Amounts paid or accrued with respect to mark-to-market position.

(v) Coordination among categories of

base erosion payments.

(vi) Certain domestic passthrough entities.

(A) In general.

(B) Amount of base erosion payment.

(C) Specified domestic passthrough.

(D) Specified foreign related party.

(vii) Transfers of property to related

taxpayers.

(viii) Reductions to determine gross

income.

(ix) Losses recognized on the sale or

transfer of property.

(3) Exceptions to base erosion payment.

(i) Certain services cost method

amounts.

(A) In general.

(B) Eligibility for the services cost

method exception.

(C) Adequate books and records.

(D) Total services cost.

(ii) Qualified derivative payments.

(iii) Effectively connected income.

(A) In general.

(B) Application to certain treaty residents.

(C) Application to partnerships.

(iv) Exchange loss on a section 988

transaction.

(v) Amounts paid or accrued with respect to TLAC securities and foreign

TLAC securities.

(A) In general.

(B) Limitation on exclusion for TLAC

securities.

(C) Scaling ratio.

(D) Average domestic TLAC securities

amount.

(E) Average TLAC long-term debt required amount.

(F) Limitation on exclusion for foreign

TLAC securities.

(1) In general.

(2) Foreign TLAC long-term debt required amount.

(3) No specified minimum provided by

local law.

(4) Foreign TLAC security.

(vi) Amounts paid or accrued in taxable

years beginning before January 1, 2018.

(vii) Business interest carried forward

from taxable years beginning before January 1, 2018.

Bulletin No. 2020–44

(viii) Specified nonrecognition transactions.

(A) In general.

(B) Other property transferred to a foreign related party in a specified nonrecognition transaction.

(C) Other property received from a foreign related party in certain specified nonrecognition transactions.

(D) Definition of other property

(E) Allocation of other property.

(ix) Reinsurance losses incurred and

claims payments.

(A) In general.

(B) Regulated foreign insurance company.

(4) Rules for determining the amount

of certain base erosion payments.

(i) Interest expense allocable to a foreign corporation’s effectively connected

income.

(A) Methods described in § 1.882-5.

(B) U.S.-booked liabilities determination.

(C) U.S.-booked liabilities in excess of

U.S.-connected liabilities.

(D) Election to use financial statements.

(E) Coordination with certain tax treaties.

(1) In general.

(2) Hypothetical § 1.882-5 interest expense defined.

(3) Consistency requirement.

(F) Coordination with exception for

foreign TLAC securities.

(ii) Other deductions allowed with respect to effectively connected income.

(iii) Depreciable property.

(iv) Coordination with ECI exception.

(v) Coordination with certain tax treaties.

(A) Allocable expenses.

(B) Internal dealings under certain income tax treaties.

(vi) Business interest expense arising

in taxable years beginning after December

31, 2017.

(c) Base erosion tax benefit.

(1) In general.

(2) Exception to base erosion tax benefit.

(i) In general.

(ii) Branch-level interest tax.

(3) Effect of treaty on base erosion tax

benefit.

(4) Application of section 163(j) to

base erosion payments.

Bulletin No. 2020–44

(i) Classification of payments or accruals of business interest expense based on

the payee.

(A) Classification of payments or accruals of business interest expense of a

corporation.

(B) Classification of payments or accruals of business interest expense by a

partnership.

(C) Classification of payments or accruals of business interest expense paid or

accrued to a foreign related party that is

subject to an exception.

(1) ECI exception.

(2) TLAC interest and interest subject

to withholding tax.

(ii) Ordering rules for business interest expense that is limited under section

163(j)(1) to determine which classifications of business interest expense are deducted and which classifications of business interest expense are carried forward.

(A) In general.

(B) Ordering rules for treating business

interest expense deduction and disallowed

business interest expense carryforwards

as foreign related business interest expense, domestic related business interest

expense, and unrelated business interest

expense. (1) General ordering rule for allocating business interest expense deduction between classifications.

(2) Ordering of business interest expense incurred by a corporation.

(3) Ordering of business interest expense incurred by a partnership and allocated to a corporate partner.

(5) Allowed deduction.

(6) Election to waive allowed deductions.

(i) In general.

(ii) Time and manner for election to

waive deduction.

(A) In general.

(B) Information required to make the

election to waive allowed deductions.

(iii) Effect of election to waive deduction.

(A) In general.

(1) Consistent treatment.

(2) No allocation and apportionment of

waived deductions.

(3) Effect of waiver of deductions described in §§ 1.861-10 and 1.861-10T.

(4) Effect of the election to waive deductions on the stock basis of a consolidated group member.

933

(B) Effect of the election to waive deductions disregarded for certain purposes.

(C) Not a method of accounting.

(D) Effect of the election in determining section 481(a) adjustments.

(iv) Rules applicable to partners and

partnerships.

(A) In general.

(B) Rule for determining the adjusted

basis of a partner’s interest in a partnership.

(C) Rule for applying section 163(j).

(D) Limited application of election to

waive deductions with respect to adjustments made pursuant to audit procedures

under sections 6221 through 6241.

(v) Rule applicable to premium and

other consideration paid or accrued by the

taxpayer for any reinsurance payments

that are taken into account under section

803(a)(1)(B) or 832(b)(4)(A).

(d) Examples.

(1) Example 1: Determining a base erosion payment.

(i) Facts.

(ii) Analysis.

(2) Example 2: Interest allocable under

§ 1.882-5.

(i) Facts.

(ii) Analysis.

(3) Example 3: Interaction with section

163(j).

(i) Facts.

(ii) Analysis.

(A) Classification of business interest.

(B) Ordering rules for disallowed business interest expense carryforward.

(4) Example 4: Interaction with section

163(j); carryforward.

(i) Facts.

(ii) Analysis.

(A) Classification of business interest.

(B) Ordering rules for disallowed business interest expense carryforward.

(5) Example 5: Interaction with section

163(j); carryforward.

(i) Facts.

(ii) Analysis.

(6) Example 6: Interaction with section

163(j); partnership.

(i) Facts.

(ii) Partnership level analysis.

(iii) Partner level allocations analysis.

(iv) Partner level allocations for determining base erosion tax benefits.

(v) Computation of modified taxable

income.

October 26, 2020

(7) Example 7: Transfers of property to

related taxpayers.

(i) Facts.

(ii) Analysis.

(A) Year 1.

(B) Year 2.

(8) Example 8: Effect of election to

waive deduction on method of accounting.

(i) Facts.

(ii) Analysis.

(9) Example 9: Change of accounting

method when taxpayer has waived a deduction.

(i) Facts.

(ii) Analysis.

(A) Computation of the section 481(a)

adjustment.

(B) Computation of basis adjustments.

§ 1.59A-4 Modified taxable income.

(a) Scope.

(b) Computation of modified taxable

income.

(1) In general.

(2) Modifications to taxable income.

(i) Base erosion tax benefits.

(ii) Certain net operating loss deductions.

(3) Rule for holders of a residual interest in a REMIC.

(c) Examples.

(1) Example 1: Current year loss.

(i) Facts.

(ii) Analysis.

(2) Example 2: Net operating loss deduction.

(i) Facts.

(ii) Analysis.

§ 1.59A-5 Base erosion minimum tax

amount.

(a) Scope.

(b) Base erosion minimum tax amount.

(1) In general.

(2) Calculation of base erosion minimum tax amount.

(3) Credits that do not reduce regular

tax liability.

(i) Taxable years beginning on or before December 31, 2025.

(ii) Taxable years beginning after December 31, 2025.

(c) Base erosion and anti-abuse tax

rate.

October 26, 2020

(1) In general.

(i) Calendar year 2018.

(ii) Calendar years 2019 through 2025.

(iii) Calendar years after 2025.

(2) Increased rate for banks and registered securities dealers.

(i) In general.

(ii) De minimis exception to increased

rate for banks and registered securities

dealers.

(3) Application of section 15 to tax

rates in section 59A.

(i) New tax.

(ii) Change in tax rate pursuant to section 59A(b)(1)(A).

(iii) Change in rate pursuant to section

59A(b)(2).

§ 1.59A-6 Qualified derivative payment.

(a) Scope.

(b) Qualified derivative payment.

(1) In general.

(2) Reporting requirements.

(i) In general.

(ii) Failure to satisfy the reporting requirement.

(iii) Reporting of aggregate amount of

qualified derivative payments.

(iv) Transition period for qualified derivative payment reporting.

(3) Amount of any qualified derivative

payment.

(i) In general.

(ii) Net qualified derivative payment

that includes a payment that is a base erosion payment.

(c) Exceptions for payments otherwise

treated as base erosion payments.

(d) Derivative defined.

(1) In general.

(2) Exceptions.

(i) Direct interest.

(ii) Insurance contracts.

(iii) Securities lending and sale-repurchase transactions.

(A) Multi-step transactions treated as

financing.

(B) Special rule for payments associated with the cash collateral provided in a

securities lending transaction or substantially similar transaction.

(C) Anti-abuse exception for certain

transactions that are the economic equivalent of substantially unsecured cash borrowing.

934

(3) American depository receipts.

(e) Examples.

(1) Example 1: Notional principal contract as QDP.

(i) Facts.

(ii) Analysis.

(2) Example 2: Securities lending anti-abuse rule.

(i) Facts.

(ii) Analysis.

§ 1.59A-7 Application of base erosion

and anti-abuse tax to partnerships.

(a) Scope.

(b) Application of section 59A to partnerships.

(c) Base erosion payment.

(1) Payments made by or to a partnership.

(2) Transfers of certain property.

(3) Transfers of a partnership interest.

(i) In general.

(ii) Transfers of a partnership interest

by a partner.

(iii) Certain issuances of a partnership

interest by a partnership.

(iv) Partnership interest transfers defined.

(4) Increased basis from a distribution.

(5) Operating rules applicable to base

erosion payments.

(i) Single payment characterized as

separate transactions.

(ii) Ordering rule with respect to transfers of a partnership interest.

(iii) Consideration for base erosion

payment or property resulting in base erosion tax benefits.

(iv) Non-cash consideration.

(v) Allocations of income in lieu of deductions.

(d) Base erosion tax benefit for partners.

(1) In general.

(2) Exception for base erosion tax benefits of certain small partners.

(i) In general.

(ii) Attribution.

(e) Other rules for applying section

59A to partnerships.

(1) Partner’s distributive share.

(2) Gross receipts.

(i) In general.

(ii) Foreign corporation.

(3) Registered securities dealers.

Bulletin No. 2020–44

(4) Application of sections 163(j) and

59A(c)(3) to partners.

(5) Tiered partnerships.

(f) Foreign related party.

(g) Examples.

(1) Facts.

(2) Examples.

(i) Example 1: Contributions to a partnership on partnership formation.

(A) Facts.

(B) Analysis.

(ii) Example 2: Section 704(c) and remedial allocations.

(A) Facts.

(B) Analysis.

(iii) Example 3: Sale of a partnership

interest without a section 754 election.

(A) Facts.

(B) Analysis.

(iv) Example 4: Sale of a partnership

interest with section 754 election.

(A) Facts.

(B) Analysis.

(v) Example 5: Purchase of depreciable

property from a partnership.

(A) Facts.

(B) Analysis.

(vi) Example 6: Sale of a partnership

interest to a second partnership.

(A) Facts.

(B) Analysis.

(vii) Example 7: Distribution of cash

by a partnership to a foreign related party.

(A) Facts.

(B) Analysis.

(viii) Example 8: Distribution of property by a partnership to a taxpayer.

(A) Facts.

(B) Analysis.

(ix) Example 9: Distribution of property by a partnership in liquidation of a

foreign related party’s interest.

(A) Facts.

(B) Analysis.

(x) Example 10: Section 704(c) and curative allocations.

(A) Facts.

(B) Analysis.

Paragraph

(b)(6)

(b)(8)

Par. 4. Section 1.59A-2 is amended by:

1. In paragraph (c)(1), adding a sentence to the end of the paragraph.

Bulletin No. 2020–44

§ 1.59A-8 [Reserved].

§ 1.59A-9 Anti-abuse and

recharacterization rules.

(a) Scope.

(b) Anti-abuse rules.

(1) Transactions involving unrelated

persons, conduits, or intermediaries.

(2) Transactions to increase the amount

of deductions taken into account in the denominator of the base erosion percentage

computation.

(3) Transactions to avoid the application of rules applicable to banks and registered securities dealers.

(4) Nonrecognition transactions.

(5) Transactions involving derivatives

on a partnership interest.

(6) Allocations to eliminate or reduce a

base erosion payment.

(c) Examples.

(1) Facts.

(2) Example 1: Substitution of payments that are not base erosion payments

for payments that otherwise would be

base erosion payments through a conduit

or intermediary.

(i) Facts.

(ii) Analysis.

(3) Example 2: Alternative transaction

to base erosion payment.

(i) Facts.

(ii) Analysis.

(4) Example 3: Alternative financing

source.

(i) Facts.

(ii) Analysis.

(5) Example 4: Alternative financing

source that is a conduit.

(i) Facts.

(ii) Analysis.

(6) Example 5: Intermediary acquisition.

(i) Facts.

(ii) Analysis.

(7) Example 6: Offsetting transactions

to increase the amount of deductions takRemove

§ 1.163(j)-1(b)(2)

§ 1.163(j)-1(b)(9)

§ 1.59A-10 Applicability date.

(a) General applicability date.

(b) Exception.

§ 1.59A-1 [Amended]

Par. 3. Section 1.59A-1 is amended by

removing the language in the “Remove”

column from wherever it appears and adding in its place the language in the “Add”

column for each paragraph listed in the table, as set forth below.

Add

§ 1.163(j)-1(b)(3)

§ 1.163(j)-1(b)(11)

2. Adding paragraphs (c)(2)(ii), (c)(4)

through (6), and (c)(9).

935

en into account in the denominator of the

base erosion percentage computation.

(i) Facts.

(ii) Analysis.

(8) Example 7: Ordinary course transactions that increase the amount of deductions taken into account in the denominator of the base erosion percentage

computation.

(i) Facts.

(ii) Analysis.

(9) Example 8: Transactions to avoid

the application of rules applicable to

banks and registered securities dealers.

(i) Facts.

(ii) Analysis.

(10) Example 9: Transactions that do

not avoid the application of rules applicable to banks and registered securities

dealers.

(i) Facts.

(ii) Analysis.

(11) Example 10: Acquisition of depreciable property in a nonrecognition transaction.

(i) Facts.

(ii) Analysis.

(12) Example 11: Transactions between

related parties with a principal purpose of

increasing the adjusted basis of property.

(i) Facts.

(ii) Analysis.

3. In paragraph (f)(1), revising the

paragraph heading.

4. Adding paragraph (f)(2).

October 26, 2020

The additions and revisions read as follows:

§ 1.59A-2 Applicable taxpayer.

*****

(c) * * *

(1) * * * For purposes of this paragraph

(c)(1), each payment or accrual is treated

as a separate transaction.

(2) * * *

(ii) Change in the composition of an

aggregate group. A change in ownership

of the taxpayer (for example, a sale of the

taxpayer to a third party) does not cause

the taxpayer to leave its own aggregate

group. Instead, any members of the taxpayer’s aggregate group before the change

in ownership that are no longer members

following the change in ownership are

treated as having left the taxpayer’s aggregate group, and any new members

that become members of the taxpayer’s

aggregate group following the change in

ownership are treated as having joined the

taxpayer’s aggregate group. A change in

ownership of another member of the aggregate group of the taxpayer (for example, a sale of the member to a third party)

may result in the member joining or leaving the aggregate group of the taxpayer.

See paragraph (c)(4) of this section for the

treatment of members joining or leaving

the aggregate group of a taxpayer.

*****

(4) Periods before and after a corporation is a member of an aggregate group—

(i) In general. Solely for purposes of this

section, to determine the gross receipts

and the base erosion percentage of the aggregate group of a taxpayer, the taxpayer takes into account only the portion of

another corporation’s taxable year during

which the corporation is a member of the

aggregate group of the taxpayer. The gross

receipts, base erosion tax benefits, and deductions of a corporation that are properly included in the gross receipts and base

erosion percentage of the aggregate group

of a taxpayer are not reduced as a result of

the member leaving the aggregate group

of the taxpayer.

(ii) Deemed taxable year-end. Solely for purposes of this paragraph (c), if a

corporation leaves or joins the aggregate

group of a taxpayer, the corporation is

treated as ceasing to be a member of the

October 26, 2020

aggregate group at the time of its taxable

year-end, or becoming a member of the

aggregate group immediately after the

time of its taxable year-end, resulting from

the transaction. For purposes of this paragraph (c), if a corporation joins or leaves

an aggregate group in a transaction that

does not result in the corporation having a

taxable year-end, the corporation is treated as having a taxable year-end (“deemed

taxable year-end”) at the end of the day on

which the transaction occurs.

(iii) Items allocable to deemed taxable years before and after deemed taxable year-end. Solely for purposes of

this paragraph (c), a corporation that has

a deemed taxable year-end determines

gross receipts, base erosion tax benefits,

and deductions attributable to the deemed

taxable year ending upon, or beginning

immediately after, the deemed taxable

year-end by either treating the corporation’s books as closing (“deemed closing

of the books”) at the deemed taxable yearend or, in the case of items other than extraordinary items, allocating those items

on a pro-rata basis without a closing of

the books. Extraordinary items are allocated to the deemed taxable year ending

upon, or beginning immediately after, the

deemed taxable year-end based on the

day that they are taken into account. For

purposes of applying this paragraph (c)(4)

(iii), extraordinary items that are attributable to a transaction that occurs during the

portion of the corporation’s day after the

event resulting in the corporation joining

or leaving the aggregate group are treated

as taken into account at the beginning of

the following day. Additionally, for purposes of applying this paragraph (c)(4)

(iii), “extraordinary items” include the

items enumerated in § 1.1502-76(b)(2)

(ii)(C) as well as any other payment not

made in the ordinary course of business

that would be treated as a base erosion

payment.

(5) Short taxable year—(i) Short period of the taxpayer—(A) In general. Solely

for purposes of this section, if a taxpayer

has a taxable year of fewer than 12 months

(a short period), the gross receipts, base

erosion tax benefits, and deductions of the

taxpayer are annualized by multiplying

the total amount for the short period by

365 and dividing the result by the number

of days in the short period.

936

(B) Determining the gross receipts and

base erosion percentage of the aggregate

group of a taxpayer for a short period.

When a taxpayer has a taxable year that

is a short period and a member of the taxpayer’s aggregate group does not have

a taxable year that ends with or within

the taxpayer’s taxable year as a result of

the taxpayer’s short period, the taxpayer

must use a reasonable approach to determine the gross receipts and base erosion

percentage of its aggregate group for

the short period. A reasonable approach

should neither over-count nor under-count

the gross receipts, base erosion tax benefits, and deductions of the aggregate group

of the taxpayer. A reasonable approach

does not include an approach that does not

take into account the gross receipts, base

erosion tax benefits, or deductions of the

member. The taxpayer must consistently

apply the reasonable approach. Examples

of a reasonable approach may include

an approach that takes into account 12

months of gross receipts, base erosion tax

benefits, and deductions of the member by

reference to—

(1) The 12-month period ending on the

last day of the short period;

(2) The member’s taxable year that

ends nearest to the last day of the short period or that begins nearest to the first day

of the short period; or

(3) An average of the two taxable years

of the member ending before and after the

short period.

(ii) Short period of a member of the

taxpayer’s aggregate group—(A) Multiple taxable years of a member of the

taxpayer’s aggregate group comprised of

more than 12 months. If a member of a

taxpayer’s aggregate group has more than

one taxable year ending with or within

the taxpayer’s taxable year, and the member’s taxable years ending with or within

the taxpayer’s taxable year are comprised

of more than 12 months in total, then the

aggregate group member’s gross receipts,

base erosion tax benefits, and deductions

are annualized for purposes of determining the gross receipts and base erosion

percentage of the taxpayer’s aggregate

group. The aggregate group member’s

gross receipts, base erosion tax benefits,

and deductions are annualized by multiplying the total amount for the member’s

taxable years by 365 and dividing the

Bulletin No. 2020–44

result by the total number of days in the

multiple taxable years.

(B) Short period or periods of a member of the taxpayer’s aggregate group

comprised of fewer than 12 months from

change in taxable year. If, as a result of a

member of a taxpayer’s aggregate group

changing its taxable year-end (other than

as a result of the application of § 1.150276(a)), the member’s taxable year or years

ending with or within the taxpayer’s taxable year are comprised of fewer than 12

months in total, then the aggregate group

member’s gross receipts, base erosion tax

benefits, and deductions are annualized for

purposes of determining the gross receipts

and base erosion percentage of the taxpayer’s aggregate group. The aggregate group

member’s gross receipts, base erosion tax

benefits, and deductions are annualized by

multiplying the total amount for the member’s taxable year or years by 365 and

dividing the result by the total number of

days in the taxable year or years.

(iii) Anti-abuse rule. If a taxpayer or a

member of a taxpayer’s aggregate group

enters into a transaction (or series of transactions), plan, or arrangement with another corporation that is a member of the

aggregate group or a foreign related party

that has a principal purpose of changing

the period taken into account under the

gross receipts test or the base erosion percentage test to avoid applicable taxpayer

status under paragraph (b) of this section,

then the gross receipts test or base erosion

percentage test, respectively, applies as if

that transaction (or series of transactions),

plan, or arrangement had not occurred.

(6) Treatment of predecessors—(i) In

general. Solely for purposes of this section, in determining gross receipts under

paragraph (d) of this section, any reference to a taxpayer includes a reference to

any predecessor of the taxpayer. For this

purpose, a predecessor is the distributor

or transferor corporation in a transaction

described in section 381(a) in which the

taxpayer is the acquiring corporation. For

purposes of determining the gross receipts

of a predecessor that are taken into account

by a taxpayer, the operating rules set forth

in this paragraph (c) and in paragraph (d)

of this section are applied to the same extent they were applied to the predecessor.

(ii) No duplication. If the taxpayer

or any member of its aggregate group is

Bulletin No. 2020–44

also a predecessor of the taxpayer or any

member of its aggregate group, the gross

receipts of each member are taken into account only once.

*****

(9) Consolidated groups. For the treatment of consolidated groups for purposes of determining gross receipts and base

erosion tax benefits, see § 1.1502-59A(b).

*****

(f) * * *

(1) Example 1: Mark-to market*

**

(2) Example 2: Member leaving an aggregate group—(i) Facts. Parent Corporation wholly owns Corporation 1 and Corporation 2. Each corporation is a domestic

corporation and a calendar-year taxpayer

that does not file a consolidated return.

The aggregate group of Corporation 1

includes Parent Corporation and Corporation 2. At noon on June 30, Year 1, Parent

Corporation sells the stock of Corporation

2 to Corporation 3, an unrelated domestic

corporation, in exchange for cash consideration. Before the acquisition, Corporation 3 was not a member of an aggregate

group. Corporation 2 and Corporation 3

do not file a consolidated return.

(ii) Analysis. (A) For purposes of section 59A, to determine the gross receipts

and base erosion percentage of the aggregate group of Corporation 1 for calendar

Year 1, Corporation 2 is treated as having

a taxable year-end at the end of the day

on June 30, Year 1, as a result of the sale.

Corporation 2 leaves the aggregate group

of Corporation 1 and Parent Corporation

at the end of the day on June 30, Year 1.

The aggregate group of Corporation 1

takes into account only the gross receipts,

base erosion tax benefits, and deductions

of Corporation 2 allocable to the period

from January 1 to the end of the day on

June 30, Year 1, in accordance with paragraph (c)(4)(ii) and (iii) of this section.

The same results apply to the aggregate

group of Parent Corporation for calendar

Year 1. See paragraph (d)(1) and (2) of

this section for the periods taken into account in determining whether the taxpayer

or its aggregate group satisfies the gross

receipts test.

(B) For purposes of section 59A, to

determine the gross receipts and base erosion percentage of the aggregate group of

Corporation 2 for calendar Year 1, each of

937

Parent Corporation, Corporation 1, and

Corporation 3 are treated as having a taxable year-end at the end of the day on June

30, Year 1. Because Corporation 2 does

not have a short taxable year, paragraph

(c)(5)(i) of this section does not apply. The

aggregate group of Corporation 2 takes

into account the gross receipts, base erosion tax benefits, and deductions of Parent

Corporation and Corporation 1 allocable

to the period from January 1 to the end of

the day on June 30, Year 1, and the gross

receipts, base erosion tax benefits, and deductions of Corporation 3 allocable to the

period from July 1 to December 31, Year

1 in accordance with paragraph (c)(4)(ii)

and (iii) of this section. See paragraph (d)

(1) and (2) of this section for the periods

taken into account in determining whether

the taxpayer or its aggregate group satisfies the gross receipts test.

Par. 5. Section 1.59A-3 is amended

by adding paragraphs (b)(3)(iii)(C), (c)

(5) and (6), and (d)(8) and (9) to read as

follows:

§ 1.59A-3 Base erosion payments and

base erosion tax benefits.

*****

(b) * * *

(3) * * *

(iii) * * *

(C) Application to partnerships. To the

extent that paragraph (b)(3)(iii)(A) or (B)

of this section would apply to a payment

or accrual made directly by a taxpayer to

a foreign related party, paragraph (b)(3)

(iii)(A) or (B) of this section apply to an

amount treated as paid or accrued by a

taxpayer to a foreign related party under

§ 1.59A-7(b) or (c) (generally applying

aggregate principles to treat partnership

transactions as partner-level transactions

for purposes of section 59A). The certification requirement in paragraph (b)(3)(iii)

(A) of this section is met if the taxpayer

receives a written statement from the foreign related party that is comparable to

the certification provided in paragraph (b)

(3)(iii)(A) of this section but based on the

deemed transaction under § 1.59A-7(b)

or (c) and the extent to which paragraph

(b)(3)(iii)(A) or (B) of this section would

have applied to that deemed transaction.

The taxpayer may rely on the written

statement unless it has reason to know or

October 26, 2020

actual knowledge that the statement is incorrect.

*****

(c) * * *

(5) Allowed deduction. Solely for purposes of paragraph (c)(1) of this section,

all deductions (and any premium or other consideration paid or accrued by the

taxpayer for any reinsurance payments

that are taken into account under section

803(a)(1)(B) or 832(b)(4)(A)) that could

be properly claimed by a taxpayer for the

taxable year (determined after giving effect to the taxpayer’s permissible method

of accounting and to any election, such as

the election under section 173 to capitalize circulation expenditures or the election

under section 168(g)(7) to use the alternative depreciation system of depreciation)

are treated as allowed deductions under

chapter 1 of subtitle A of the Internal Revenue Code.

(6) Election to waive allowed deductions—(i) In general. If a taxpayer elects

to waive certain deductions, in whole or in

part, pursuant to this paragraph (c)(6)(i),

the amount of allowed deductions as described in paragraph (c)(5) of this section

is reduced by the amounts that are properly waived. In order to make the election

or increase the amount of the deduction

waived, the taxpayer must determine

that it could satisfy the requirements of §

1.59A-2(b) absent the election to waive

certain deductions. For rules applicable

to partners and partnerships, see paragraph (c)(6)(iv) of this section. For rules

addressing waiver of premium or other

consideration paid or accrued by a taxpayer for any reinsurance payments that are

taken into account under section 803(a)(1)

(B) or 832(b)(4)(A), see paragraph (c)(6)

(v) of this section.

(ii) Time and manner for election to

waive deduction—(A) In general. A taxpayer may make the election described in

paragraph (c)(6)(i) of this section on its

original filed Federal income tax return.

In addition, a taxpayer may elect to waive

deductions or increase the amount of deductions waived pursuant to the election

described in paragraph (c)(6)(i) of this

section on an amended Federal income tax

return filed within the later of three years

from the date the original return was filed,

taking into account section 6501(b)(1), for

the taxable year for which the election is

October 26, 2020

made or the period described in section

6501(c)(4), or during the course of an examination of the taxpayer’s income tax

return for the relevant taxable year pursuant to procedures prescribed by the Commissioner. However, a taxpayer may not

decrease the amount of deductions waived

by the election, or otherwise revoke the

election that is described in paragraph (c)

(6)(i) of this section on any amended Federal income tax return or during the course

of an examination. To make the election,

a taxpayer must complete the appropriate

part of Form 8991, Tax on Base Erosion

Payments of Taxpayers With Substantial

Gross Receipts (or successor), including

the information described in paragraph

(c)(6)(ii)(B) of this section and any other

information required by the form or instructions. A taxpayer makes the election

described in paragraph (c)(6)(i) of this

section on an annual basis, and the taxpayer does not need the consent of the Commissioner if the taxpayer chooses not to

make the election for a subsequent taxable

year. The election described in paragraph

(c)(6)(i) of this section may not be made

in any other manner than as described in

this paragraph (c)(6)(ii) (for example, by

filing an application for a change in accounting method).

(B) Information required to make the

election to waive allowed deductions. To

make this election, a taxpayer must maintain contemporaneous documentation and

provide information related to each deduction waived as required by applicable

forms and instructions issued by the Commissioner, including—

(1) A description of the item or property to which the deduction relates, including sufficient information to identify that

item or property on the taxpayer’s books

and records;

(2) The date on which, or period in

which, the waived deduction was paid or

accrued;

(3) The provision of the Internal Revenue Code (and regulations, as applicable)

that allows the deduction for the item or

property to which the election relates;

(4) The amount of the deduction that is

claimed for the taxable year with respect

to the item or property;

(5) The amount of the deduction being

waived for the taxable year with respect to

the item or property;

938

(6) A description of where the deduction is reflected (or would have been reflected) on the Federal income tax return

(such as a line number); and

(7) The name, Taxpayer Identification

Number (or, if the foreign person does not

have a Taxpayer Identification Number,

the foreign equivalent), and country of organization of the foreign related party that

is or will be the recipient of the payment

that generates the deduction.

(iii) Effect of election to waive deduction—(A) In general—(1) Consistent

treatment. Except as otherwise provided

in this paragraph (c)(6)(iii), any deduction

waived under paragraph (c)(6)(i) of this

section is treated as having been waived

for all purposes of the Internal Revenue

Code and regulations.

(2) No allocation and apportionment of

waived deductions. The waiver of deductions described in paragraph (c)(6)(i) of

this section is treated as occurring before

the allocation and apportionment of deductions under §§ 1.861-8 through 1.86114T and 1.861-17 (such as for purposes of

section 904).

(3) Effect of waiver of deductions described in §§ 1.861-10 and 1.861-10T. To

the extent that any waived deduction is

interest expense that would have been directly allocated under the rules of § 1.86110 or 1.861-10T and would have resulted

in the reduction of value of any assets for

purposes of allocating other interest expense under §§ 1.861-9 and 1.861-9T, the

value of the assets is reduced to the same

extent as if the taxpayer had not elected to

waive the deduction.

(4) Effect of the election to waive deductions on the stock basis of a consolidated group member. For purposes of §

1.1502-32, any deduction waived under

paragraph (c)(6)(i) of this section is a noncapital, nondeductible expense under §

1.1502-32(b)(2)(iii).

(B) Effect of the election to waive deductions disregarded for certain purposes.

If a taxpayer makes the election to waive a

deduction, in whole or in part, under paragraph (c)(6)(i) of this section, the election

is disregarded for determining—

(1) The taxpayer’s overall method of

accounting, or the taxpayer’s method of

accounting for any item, under section 446;

(2) Whether a change in the taxpayer’s overall plan of accounting or the tax-

Bulletin No. 2020–44

payer’s treatment of a material item is a

change in method of accounting under

section 446(e) and § 1.446-1(e);

(3) The amount allowable under subtitle A of the Internal Revenue Code for depreciation or amortization for purposes of

section 167(c) and section 1016(a)(2) or

section 1016(a)(3) and any other adjustment to basis under section 1016(a);

(4) For purposes of applying the exclusive apportionment rule in § 1.861-17(b),

the geographic source where the research

and experimental activities which account

for more than fifty percent of the amount

of the deduction for research and experimentation was performed;

(5) The application of section 482;

(6) The amount of the taxpayer’s earnings and profits; and

(7) Any other item as necessary to prevent a taxpayer from receiving the benefit

of a waived deduction.

(C) Not a method of accounting. The

election described in paragraph (c)(6)(i)

of this section is not a method of accounting under section 446.

(D) Effect of the election in determining section 481(a) adjustments. A taxpayer

making the election described in paragraph

(c)(6)(i) of this section agrees that if the

method of accounting for a waived deduction is changed, the amount of adjustment

taken into account under section 481(a)(2)

is determined without regard to the election

described in paragraph (c)(6)(i) of this section. As a result, a waived deduction has no

effect on the amount of a section 481(a) adjustment compared to what the adjustment

would have been if the deduction had not

been waived. See paragraph (d)(9) of this

section (Example 9).

(iv) Rules applicable to partners and

partnerships—(A) In general. Except as

provided in paragraph (c)(6)(iv)(D) of this

section, deductions allocated to a corporate partner by a partnership may only be

waived by the partner and not by the partnership, and then only to the extent the partner otherwise qualifies for the waiver under

paragraph (c)(6) of this section. For purposes of complying with the documentation requirements in paragraph (c)(6)(ii)(B)

of this section, the partner is not required to

report the information in paragraphs (c)(6)

(ii)(B)(2) and (3) of this section, and in lieu

of reporting the information in paragraphs

(c)(6)(ii)(B)(1) of this section, the partner

Bulletin No. 2020–44

is required to report the partnership from

which the item is allocated.

(B) Rule for determining the adjusted

basis of a partner’s interest in a partnership. If a partner elects to waive a deduction or increases the amount of deduction

waived with respect to deductions allocated to it by a partnership, the partner treats

the waived amount as a nondeductible expenditure under section 705(a)(2)(B).

(C) Rule for applying section 163(j). If

a partner waives a deduction pursuant to

paragraph (c)(6)(iv)(A) of this section that

was taken into account by the partnership

in determining the partnership’s adjusted taxable income for purposes of section

163(j), then the increase in the partner’s

income resulting from the waiver is treated

by the partner (but not the partnership) as a

partner basis item (as defined in § 1.163(j)6(b)(2)) for purposes of section 163(j).

(D) Limited application of election to

waive deductions with respect to adjustments made pursuant to audit procedures

under sections 6221 through 6241. Except

as provided in this paragraph (c)(6)(iv)(D),

a partner is not permitted to waive any adjustment by the Secretary to any partnership-related items that is made pursuant to

subchapter C of chapter 63. A partner in

a partnership subject to subchapter C of

chapter 63 may only make an election to

waive any increase in a deduction due to

an adjustment made under subchapter C

of chapter 63 that the partner takes into account under section 6225(c)(2)(A), 6226,

or 6227 in a manner consistent with paragraph (c)(6) of this section. If the partner

makes an election under paragraph (c)(6)

(i) of this section, the partner will compute its additional reporting year tax (as

described in § 301.6226-3 of this chapter)

or amount due under § 301.6225-2(d)(2)

(ii)(A) of this chapter taking into account

the rules in paragraph (c)(6) of this section

with respect to the increase in the deduction that is waived.

(v) Rule applicable to premium and

other consideration paid or accrued by

the taxpayer for any reinsurance payments

that are taken into account under section

803(a)(1)(B) or 832(b)(4)(A). For purposes of paragraph (c)(6)(i) of this section, a

taxpayer may elect to waive (or increase

the amount waived of) any premium or

other consideration paid or accrued by the

taxpayer for any reinsurance payments

939

that are taken into account under section

803(a)(1)(B) or 832(b)(4)(A) that would

be a base erosion tax benefit within the

meaning of section 59A(c)(2)(A)(iii), in

accordance with the rules and principles

of this paragraph (c)(6).

(d) * * *

(8) Example 8: Effect of election to

waive deduction on method of accounting—(i) Facts. DC, a domestic corporation, purchased and placed in service a

depreciable asset (Asset A) from a foreign

related party on the first day of its taxable year 1 for $100x. DC elects to use

the alternative depreciation system under

section 168(g) to depreciate all properties

placed in service during taxable year 1.

Asset A is not eligible for the additional

first year depreciation deduction. Beginning in taxable year 1, DC depreciates

Asset A under the alternative depreciation

system using the straight-line depreciation

method, a 5-year recovery period, and the

half-year convention. This depreciation

method, recovery period, and convention

are permissible for Asset A under section

168(g). On its timely filed original Federal

income tax return for taxable year 1, DC

does not elect to waive any deductions and

DC claims a depreciation deduction of

$10x for Asset A. On its timely filed original Federal income tax return for taxable

year 2, DC does not elect to waive any

deductions and DC claims a depreciation

deduction of $20x for Asset A. During

taxable year 3, DC files an amended return for taxable year 1 to elect to waive the

depreciation deduction for Asset A and reports in accordance with paragraph (c)(6)

(ii) of this section with its amended return

for taxable year 1 that the amount of the

waived depreciation deduction for Asset

A is $10x and the amount of the claimed

depreciation deduction is $0x.

(ii) Analysis. Pursuant to paragraph (c)

(6)(iii)(B)(1) of this section, DC’s election

to waive the depreciation deduction for

Asset A for taxable year 1 is disregarded

for determining DC’s method of accounting for Asset A. Accordingly, after DC’s

election to waive the depreciation deduction for Asset A for taxable year 1, DC’s

method of accounting for depreciation for

Asset A continues to be the straight-line

depreciation method, a 5-year recovery

period, and the half-year convention. Pursuant to paragraph (c)(6)(iii)(C) of this

October 26, 2020

section, the election made by DC in taxable year 3 on its amended return for taxable year 1 is not a method of accounting.

(9) Example 9: Change of accounting

method when taxpayer has waived a deduction—(i) Facts. DC, a domestic corporation, purchased and placed in service a

depreciable asset (Asset B) from a foreign

related party on the first day of its taxable

year 1 for $100x. DC elects to use the alternative depreciation system under section

168(g) to depreciate all properties placed

in service during taxable year 1. Asset B

is not eligible for the additional first year

depreciation deduction. Beginning in taxable year 1, DC depreciates Asset B under

the alternative depreciation system using

the straight-line depreciation method, a

10-year recovery period, and the half-year

convention. Under this method of accounting, the depreciation deductions for Asset

B are $5x for taxable year 1 and $10x for

taxable year 2. However, for taxable years

1 and 2, DC elects to waive $3x and $6x,

respectively, of the depreciation deductions

for Asset B and reports the information

required under paragraph (c)(6)(ii) of this

section with its returns. In taxable year 3,

DC realizes that the correct recovery period for Asset B is 5 years. If DC had used

the correct recovery period for Asset B, the

depreciation deductions for Asset B would

have been $10x for taxable year 1 and $20x

for taxable year 2. DC timely files a Form

3115 to change its method of accounting

for Asset B from a 10-year recovery period

to a 5-year recovery period, beginning with

taxable year 3. DC was not under examination as of the date on which it timely filed

this Form 3115.

(ii) Analysis—(A) Computation of the

section 481(a) adjustment. In determining

the net negative section 481(a) adjustment

for this method change, DC compares the

depreciation deductions under its present

method of accounting to the depreciation

deductions under its proposed method of

accounting. Pursuant to paragraph (c)(6)

(iii)(D) of this section, DC agreed that, by

making the election to waive depreciation

deductions for Asset B, DC will not take

into account the fact that depreciation deductions for Asset B were waived under

paragraph (c)(6)(i) of this section. Accordingly, DC’s net negative section 481(a) adjustment for this method change is $15x,

which is calculated by determining the

difference between the depreciation deductions for Asset B for taxable years 1 and 2

under DC’s present method of accounting

($15x) and the depreciation deductions that

would have been allowable for Asset B for

taxable years 1 and 2 under DC’s proposed

method of accounting ($30x).

(B) Computation of basis adjustments.

Pursuant to paragraph (c)(6)(iii)(B)(3) of

this section, DC’s elections to waive the

depreciation deductions for Asset B for

taxable years 1 and 2 are disregarded for

determining the amount allowable for depreciation for purposes of section 1016(a)

(2). The amount allowable for depreciation of Asset B is determined based on

the proper method of computing depreciation for Asset B. Accordingly, Asset B’s

adjusted basis at the end of taxable year 1

is $90x ($100x - $10x) and at the end of

taxable year 2 is $70x ($90x - $20x).

Par. 6. Section 1.59A-7 is amended by:

1. Adding paragraph (c)(5)(v).

2. In paragraph (e)(2)(ii), removing

the language “§ 1.59A-2(d)(2)” and adding the language “§ 1.59A-2(d)(3)” in its

place.

3. Adding paragraph (g)(2)(x).

The additions read as follows:

§ 1.59A-7 Application of base erosion

and anti-abuse tax to partnerships.

*****

(c) * * *

(5) * * *

(v) Allocations of income in lieu of deductions. If a partnership adopts the curative method of making section 704(c)

allocations under § 1.704-3(c),

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