Bulletin No. 2020–34

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–34

August 17, 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

REG-111879-20, page 421.

Temporary and proposed regulations provide guidance on

the recapture of excess employment tax credits. Under the

Families First Coronavirus Response Act and Coronavirus

Aid, Relief and Economic Security Act, eligible employers

may claim refundable paid sick and family leave and employee retention credits up to the total allowable amounts

either on their employment tax returns or as an advance

payment that is later reconciled on their employment tax

returns. Any refund of these credits paid to a taxpayer that

exceeds the credit amount the taxpayer is allowed is an erroneous refund. These temporary regulations authorize the

assessment and collection of any erroneous refund of the

credits in the normal course of processing the applicable

employment tax returns. This allows the IRS to efficiently

recover any refund, while preserving administrative protections for taxpayers.

T.D. 9904, page 413.

Temporary and proposed regulations provide guidance on

the recapture of excess employment tax credits. Under the

Families First Coronavirus Response Act and Coronavirus

Aid, Relief and Economic Security Act, eligible employers

may claim refundable paid sick and family leave and employee retention credits up to the total allowable amounts

either on their employment tax returns or as an advance

payment that is later reconciled on their employment tax

returns. Any refund of these credits paid to a taxpayer that

exceeds the credit amount the taxpayer is allowed is an erroneous refund. These temporary regulations authorize the

assessment and collection of any erroneous refund of the

Finding Lists begin on page ii.

credits in the normal course of processing the applicable

employment tax returns. This allows the IRS to efficiently

recover any refund, while preserving administrative protections for taxpayers.

EXCISE TAX

REG-112042-19, page 422.

This document contains proposed regulations relating to the

excise taxes imposed on certain amounts paid for transportation of persons and property by air. Specifically, the proposed regulations relate to the exemption for amounts paid

for certain aircraft management services. The proposed

regulations also amend, revise, redesignate, and remove

provisions of existing regulations that are out-of-date or obsolete and generally update the existing regulations to incorporate statutory changes, case law, and other published

guidance. In addition, the proposed regulations withdraw a

provision that was included in a prior notice of proposed

rulemaking that was never finalized and re-propose it. The

proposed regulations affect persons that provide air transportation of persons and property, and persons that pay for

those services.

INCOME TAX

Notice 2020-58, page 419.

In response to the ongoing Coronavirus Disease 2019

(COVID-19) pandemic, this notice provides temporary relief

from certain requirements under § 47 of the Internal Revenue

Code.

REG-132766-18, page 436.

This document contains proposed regulations to implement

legislative changes to sections 263A, 448, 460, and 471

of the Internal Revenue Code (Code) that simplify the application of those tax accounting provisions for certain businesses having average annual gross receipts that do not

exceed $25 million, adjusted for inflation. This document

also contains proposed regulations regarding certain special

accounting rules for long-term contracts under section 460

to implement legislative changes applicable to corporate taxpayers. The proposed regulations generally affect taxpayers

with average annual gross receipts of not more than $25

million (adjusted for inflation). Additionally, this document

contains a request for comments regarding the application

of section 460 (or other special methods of accounting) to

a contract with income that is accounted for in part under

section 460 (or other special method) and in part under section 451.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

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

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

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

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

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

August 17, 2020 

Bulletin No. 2020–34

Part I

26 CFR 31.3111-6T & 26 CFR 31.3221-5T: Recapture of credits under the Families First Coronavirus

Response Act and the Coronavirus Aid, Relief, and

Economic S

T.D. 9904

DATES: Effective Date: These temporary

regulations are effective on July 29, 2020.

Applicability Date: For date of applicability, see §§31.3111-6T and 31.3221-5T

of these temporary regulations.

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 31

FOR FURTHER INFORMATION CONTACT: Concerning these temporary regulations, NaLee Park at 202-317-6798.

Recapture of Excess

Employment Tax Credits

under the Families First Act

and the CARES Act

Background

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document amends the

regulations under sections 3111 and 3221

of the Internal Revenue Code with the

addition of temporary regulations issued

under the regulatory authority granted by

the Families First Coronavirus Response

Act and the Coronavirus Aid, Relief, and

Economic Security Act to prescribe such

regulations as may be necessary for reconciling advance payments of refundable

employment tax credits provided under

these acts and recapturing the benefit of

the credits when necessary. Consistent

with this authority, these temporary regulations authorize the assessment of any

erroneous refund of the credits paid under

sections 7001 and 7003 of the Families

First Coronavirus Response Act, including any increases in such credits under

section 7005 thereof, and section 2301 of

the Coronavirus Aid, Relief, and Economic Security Act. The text of these temporary regulations also serves as the text of

the proposed regulations (REG-11187920) set forth in the notice of proposed

rulemaking on this subject in the Proposed

Rules section of this issue of the Federal

Register.

1

SUPPLEMENTARY INFORMATION:

I. The Statutes in General: The Families

First Act and the CARES Act

The Families First Coronavirus Response Act (Families First Act), Public

Law 116-127, 134 Stat. 178 (2020), enacted on March 18, 2020, and the Coronavirus Aid, Relief, and Economic Security

Act (CARES Act), Public Law 116-136,

134 Stat. 281 (2020), enacted on March

27, 2020, provide relief to taxpayers from

economic hardships resulting from the

Coronavirus Disease 2019 (COVID-19).

The Families First Act, through the

enactment of the Emergency Paid Sick

Leave Act and the Emergency Family

and Medical Leave Expansion Act, generally requires employers with fewer

than 500 employees to provide paid leave

due to certain circumstances related to

COVID-19.

Division E of the Families First Act,

the Emergency Paid Sick Leave Act

(EPSLA), requires certain employers to

provide employees with up to 80 hours of

paid sick leave if the employee is unable

to work or telework because the employee:

(1) is subject to a Federal, State, or local

quarantine or isolation order related

to COVID-19;

(2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;

(3) is experiencing symptoms of

COVID-19 and seeking a medical diagnosis;

(4) is caring for an individual who is

subject to a Federal, State, or local

quarantine or isolation order related

to COVID-19, or has been advised

by a health care provider to self-quarantine due to concerns related to

COVID-19;

(5) is caring for a son or daughter of such

employee if the school or place of

care of the son or daughter has been

closed, or the child care provider of

such son or daughter is unavailable,

due to COVID-19 precautions; or

(6) is experiencing any other substantially similar condition specified by the

Secretary of Health and Human Services in consultation with the Secretaries of the Treasury and Labor.1

An employee who is unable to work or

telework for reasons related to COVID-19

described in (1), (2), or (3) above is entitled to paid sick leave at the employee’s

regular rate of pay or, if higher, the Federal

minimum wage or any applicable State or

local minimum wage, up to $511 per day

and $5,110 in the aggregate. An employee who is unable to work or telework for

reasons related to COVID-19 described in

(4), (5), or (6) above is entitled to paid sick

leave at two-thirds the employee’s regular

rate of pay or, if higher, the Federal minimum wage or any applicable State or local

minimum wage, up to $200 per day and

$2,000 in the aggregate.

Division C of the Families First Act,

the Emergency Family and Medical Leave

Expansion Act (EFMLEA), amends the

Family and Medical Leave Act of 1993 to

require certain employers to provide expanded paid family and medical leave to

employees who are unable to work or telework for reasons related to COVID-19.

An employee can receive up to 10 weeks

of paid family and medical leave at twothirds the employee’s regular rate of pay,

up to $200 per day and $10,000 in the aggregate if the employee is unable to work

or telework because the employee is caring for a son or daughter whose school or

place of care is closed or whose child care

provider is unavailable for reasons related

to COVID-19.

The U.S. Department of Health and Human Services has not yet specified any other such conditions as of July 29, 2020.

Bulletin No. 2020–34

413

August 17, 2020

Sections 7001 and 7003 of the Families

First Act generally provide that employers

subject to the paid leave requirements under EPSLA and EFMLEA (“eligible employers”) are entitled to fully refundable

tax credits to cover the cost of the leave

required to be paid for those periods of

time during which employees are unable

to work or telework for reasons related to

COVID-19.2

Eligible employers are entitled to receive a refundable credit equal to the

amount of the qualified sick leave wages

and qualified family leave wages (collectively “qualified leave wages”), plus

allocable qualified health plan expenses.

Under the respective provisions, qualified

leave wages are defined to mean wages

(as defined in section 3121(a) of the Internal Revenue Code (Code)) and compensation (as defined in section 3231(e)

of the Code) paid by an employer which

are required to be paid under the EPSLA

and EFMLEA. See section 7001(c) and

7003(c). The credit is allowed against the

taxes imposed on employers by section

3111(a) of the Code (the Old-Age, Survivors, and Disability Insurance tax (social

security tax)), first reduced by any credits

claimed under sections 3111(e) and (f) of

the Code, and section 3221(a) of the Code

(the Railroad Retirement Tax Act Tier 1

tax), on all wages and compensation paid

to all employees. Under section 7005 of

the Families First Act, the qualified leave

wages are not subject to the taxes imposed

on employers by sections 3111(a) and

3221(a) of the Code. In addition, section

7005 provides that the credits under sections 7001 and 7003 of the Families First

Act are increased by the amount of the tax

imposed by section 3111(b) of the Code

(employer’s share of Medicare tax) on

qualified leave wages.3

The CARES Act provides an additional credit for employers experiencing

economic hardship related to COVID-19.

Under section 2301 of the CARES Act,

certain employers who pay qualified wages to their employees are eligible for an

employee retention credit. Employers

eligible for the employee retention credit are employers that carry on a trade or

business during calendar year 2020 and

tax-exempt organizations that either have

a full or partial suspension of operations

during any calendar quarter in 2020 due to

an order from an appropriate governmental authority limiting commerce, travel,

or group meetings (for commercial, social, religious, or other purposes) due to

COVID-19, or experience a significant decline in gross receipts during the calendar

quarter.

Qualified wages are wages (as defined

in section 3121(a) of the Code) and compensation (as defined in section 3231(e)

of the Code) paid by an employer to some

or all employees after March 12, 2020,

and before January 1, 2021, and include

the employer’s qualified health plan expenses that are properly allocable to such

wages or compensation. For employers

that averaged more than 100 full-time

employees during 2019, qualified wages

are wages and compensation (including

allocable qualified health plan expenses), up to $10,000 per employee, paid to

employees that are not providing services

because operations were fully or partially

suspended due to orders from an appropriate governmental authority or due to a

decline in gross receipts. For employers

who averaged 100 full-time employees

or fewer during 2019, qualified wages

are wages and compensation (including

allocable qualified health plan expenses),

up to $10,000 per employee, paid to any

employee during the period operations

were suspended due to orders from an appropriate governmental authority or due to

a decline in gross receipts, regardless of

whether its employees are providing services.

The employee retention credit is a fully

refundable tax credit for employers equal

to 50 percent of qualified wages. Because the maximum amount of qualified

wages taken into account with respect to

each employee is $10,000, the maximum

employee retention credit for an eligible

employer for qualified wages paid to any

employee is $5,000. The credit is allowed

against the taxes imposed on employers

by section 3111(a) of the Code, first reduced by any credits allowed under sections 3111(e) and (f) of the Code and sections 7001 and 7003 of the Families First

Act, and the taxes imposed under section

3221(a) of the Code that are attributable

to the rate in effect under section 3111(a)

of the Code, first reduced by any credits

allowed under sections 7001 and 7003 of

the Families First Act, on all wages and

compensation paid to all employees. The

same wages or compensation cannot be

counted for both the Families First Act

leave credits and the CARES Act employee retention credit.

II. Refundability of Credits

Sections 7001(b)(4) and 7003(b)(3)

of the Families First Act provide that if

the amount of the paid sick and family

leave credits under these sections exceeds

the taxes imposed by section 3111(a)

or 3221(a) of the Code for any calendar

quarter, such excess shall be treated as an

overpayment that shall be refunded under sections 6402(a) and 6413(b) of the

Code. Section 2301(b)(3) of the CARES

Act provides that if the amount of the employee retention credit exceeds the taxes

imposed by section 3111(a) or 3221(a)

(limited to the portion attributable to the

rate in effect under section 3111(a)) of the

Code for any calendar quarter, such excess

shall be treated as an overpayment that

shall be refunded under sections 6402(a)

and 6413(b) of the Code.

Section 6402(a) of the Code provides

that, within the applicable period of limitations, overpayments may be credited

against any liability in respect of an internal revenue tax on the part of the person

who made the overpayment and any remaining balance refunded to such person.

Section 6413(b) provides that if more than

the correct amount of employment tax imposed by sections 3101, 3111, 3201, 3221,

or 3402 is paid or deducted and the overpayment cannot be adjusted under section

2

Under sections 7001(d)(4) and 7003(d)(4) of the Families First Act, these credits do not apply to the government of the United States, the government of any State or political subdivision

thereof, or any agency or instrumentality of any of the foregoing.

3

The credit for the employer’s share of Medicare tax does not apply to eligible employers that are subject to Railroad Retirement Tax Act (RRTA) because under section 7005(a) of the

Families First Act qualified leave wages are not subject to Medicare tax under RRTA due to that section’s reference to section 3221(a) of the Code, which includes both social security tax

and Medicare tax.

August 17, 2020

414

Bulletin No. 2020–34

6413(a)4, the amount of the overpayment

shall be refunded (subject to the applicable statute of limitations) as the Secretary

may prescribe in regulations.

The IRS has revised Form 941, Employer’s Quarterly Federal Tax Return,

and is revising Form 943, Employer’s Annual Federal Tax Return for Agricultural

Employees, Form 944, Employer’s Annual

Federal Tax Return, and Form CT-1, Employer’s Annual Railroad Retirement Tax

Return, so that employers may use these

returns to claim the paid sick and family

leave credits under the Families First Act

and the employee retention credit under

the CARES Act. The revised employment

tax returns will provide for any credits in

excess of the taxes imposed under sections 3111(a) or 3221(a) (for the employee retention credit, only the taxes imposed

under section 3221(a) that are attributable

to the rate in effect under section 3111(a))

to be credited against other employment

taxes and then for any remaining balance

to be refunded to the employer (per section 6402(a) or section 6413(b)).5

III. Advance Payment of Credits and

Erroneous Refunds

Section 3606 of the CARES Act

amends sections 7001(b)(4) and 7003(b)

(3) of the Families First Act to provide

that, in anticipation of the paid sick and

family leave credits under these sections,

including any refundable portions (which

would include any increases in the credits under section 7005), these credits may

be advanced, according to forms and instructions provided by the Secretary, up to

the total allowable amount and subject to

applicable limits for the calendar quarter.

Section 2301(l)(1) of the CARES Act provides that the Secretary shall issue such

forms, instructions, regulations, and guidance as are necessary to allow the advance

payment of the employee retention credit

under section 2301, subject to the limitations provided in section 2301 and based

on such information as the Secretary shall

require.

To implement the advance payment

provisions of the Families First Act and

the CARES Act, the IRS has created Form

7200, Advance Payment of Employer

Credits Due To COVID-19, which employers may use to request an advance of

the paid sick or family leave credits under the Families First Act, the employee

retention credit under the CARES Act, or

two or more of them. Employers are required to reconcile any advance payments

claimed on Form 7200 with total credits

claimed and total taxes due on their employment tax returns. A refund, a credit, or

an advance of any portion of these credits

to a taxpayer in excess of the amount to

which the taxpayer is entitled is an erroneous refund for which the IRS must seek

repayment.

IV. Assessment Authority

Section 6201, in general, authorizes the Secretary to determine and assess

tax liabilities including interest, additional amounts, additions to the tax, and assessable penalties. However, the general

authority to assess tax liabilities under

section 6201(a) does not allow the assessment of any non-rebate6 portion of an

erroneous refund of a refundable credit.

Instead, non-rebate refunds are generally

recovered or recaptured through voluntary

payment or litigation. The government

by appropriate action can bring civil litigation to recover funds which its agents

have wrongfully, erroneously, or illegally

paid, and no statute is necessary to authorize the government to sue in such a case,

since the right to sue is independent of

statute. United States v. Wurts, 303 U.S.

414, 415 (1938), citing United States v.

The Bank of the Metropolis, 40 U.S. 377

(1841). However, the statutory language

of the Families First Act and the CARES

Act provides for the administrative recapture of these non-rebate refunds by autho-

rizing the promulgation of regulations or

other guidance to do so.

Sections 7001 and 7003 of the Families

First Act and section 2301 of the CARES

Act grant authority to the Department of

the Treasury (Treasury Department) and

the IRS to issue regulations or other guidance to recapture an erroneous refund of

the credits. Specifically, sections 7001(f)

and 7003(f) of the Families First Act and

section 2301(l) of the CARES Act authorize the Secretary to issue guidance to allow for the administrative reconciliation

and recapture of erroneous refunds. Sections 7001(f) and 7003(f) of the Families

First Act provide, in relevant part, that the

Secretary (or the Secretary’s delegate)

shall provide such regulations or other

guidance as may be necessary to carry

out the purposes of the credit, including

regulations or other guidance: (1) to prevent the avoidance of the purposes of the

limitations under this provision; (2) to

minimize compliance and record-keeping

burdens associated with the credit; (3) to

provide for a waiver of penalties for failure to deposit amounts in anticipation

of the allowance of the credit; (4) to recapture the benefit of the credit in cases

where there is a subsequent adjustment to

the credit; and (5) to ensure that the wages

taken into account for the credit conform

with the paid sick leave and paid family leave required to be provided under

the Families First Act. Similarly, section

2301(l) of the CARES Act provides in

relevant part that the Secretary shall issue

such forms, instructions, regulations, and

guidance as are necessary to provide for

the reconciliation of an advance payment

of the employee retention credit with the

amount advanced at the time of filing the

return of tax for the applicable calendar

quarter or taxable year, and to provide for

the recapture of the credit under section

2301 of the CARES Act if such credit is

allowed to a taxpayer that receives a small

business loan under section 1102 of the

CARES Act during a subsequent quarter.

Section 6413(a) addresses interest-free adjustments of overpayments. The section provides that if more than the correct amount of employment tax imposed by section 3101, 3111, 3201,

3221, or 3402 is paid with respect to any payment of remuneration, proper adjustments with respect to both the tax and the amount to be deducted, shall be made, without interest, in such

manner and at such times as the Secretary may by regulations prescribe.

5

Employment tax returns have also been revised to provide for reporting of any deferral of employment taxes under the CARES Act. Section 2302 of the CARES Act provides that employers

may defer the deposit and payment of the employer’s share of social security tax for the payroll tax deferral period of March 27, 2020 through December 31, 2020. The deferral applies in

addition to the credits claimed on an employment tax return, but the deferral does not reduce the amount of the employer’s share of social security tax against which the credits are applied.

6

”Non-rebate” refers to the portion of any refund of a credit that exceeds the IRS’s determination of the recipient’s tax liability (i.e., the remaining portion of the refund that is paid to the

recipient after the refund has been applied to the recipient’s tax liability).

4

Bulletin No. 2020–34

415

August 17, 2020

Accordingly, this document amends

the Employment Tax Regulations (26

CFR Part 31) by adding temporary regulations under sections 3111 and 3221 of

the Code. Concurrent with the publication

of this Treasury decision, the Treasury

Department and the IRS are publishing in

the Proposed Rules section of this issue of

the Federal Register a notice of proposed

rulemaking (REG-111879-20) on this subject that cross-references the text of these

temporary regulations. See section 7805(e)

(1). Interested persons are directed to the

ADDRESSES and COMMENTS AND

REQUESTS FOR A PUBLIC HEARING

sections of the preamble to REG-11187920 for information on submitting public

comments or requesting a public hearing

on the proposed regulations.

Explanation of Provisions

Sections 7001 and 7003 of the Families First Act and section 2301 of the

CARES Act provide that the credits described in these sections are taken against

the taxes imposed on employers under

sections 3111(a) or 3221(a) of the Code

(for the employee retention credit, only

the taxes imposed under section 3221(a)

that are attributable to the rate in effect

under section 3111(a) of the Code). Additionally, if the amount of the credit exceeds the taxes imposed under sections

3111(a) or 3221(a) of the Code (for the

employee retention credit, only the taxes

imposed under section 3221(a) that are

attributable to the rate in effect under section 3111(a) of the Code) for any calendar

quarter, such excess shall be treated as an

overpayment to be refunded or credited

under sections 6402(a) and 6413(b) of

the Code. Any credits claimed that exceed the amount to which the employer

is entitled and that are actually credited

or paid by the IRS are considered to be

erroneous refunds of the credits. These

temporary regulations provide that erroneous refunds of these credits are treated

as underpayments of the taxes imposed

under sections 3111(a) or 3221(a) of the

Code and authorize the IRS to assess any

portion of the credits erroneously credited, paid, or refunded in excess of the

amount allowed as if those amounts were

tax liabilities under sections 3111(a) and

3221(a) subject to assessment and ad-

August 17, 2020

ministrative collection procedures. This

allows the IRS to efficiently recover the

amounts, while also preserving administrative protections afforded to taxpayers

with respect to contesting their tax liabilities under the Code and avoiding unnecessary costs and burdens associated with

litigation. These assessment and administrative collection procedures will apply

in the normal course in processing employment tax returns that report advances

in excess of claimed credits and in examining returns for excess claimed credits.

Specifically, these temporary regulations provide that any amount of the credits for qualified leave wages under sections

7001 and 7003 of the Families First Act,

plus any amount of credits for qualified

health plan expenses under sections 7001

and 7003, and including any increases in

these credits under section 7005, and any

amount of the employee retention credit

for qualified wages under section 2301

of the CARES Act that are erroneously

refunded or credited to an employer shall

be treated as underpayments of the taxes imposed by section 3111(a) or section

3221(a), as applicable, by the employer

and may be administratively assessed and

collected in the same manner as the taxes.

These temporary regulations provide that

the determination of any amount of credits erroneously refunded must take into

account any credit amounts advanced to

an employer under the process established

by the IRS in accordance with sections

7001(b)(4)(A)(ii) and 7003(b)(3)(B) of

the Families First Act and section 2301(l)

(1) of the CARES Act.

Because in certain situations third party payors claim credits on behalf of their

common law employer clients, these

temporary regulations also provide that

employers against whom an erroneous refund of credits can be assessed as an underpayment include persons treated as the

employer under sections 3401(d), 3504,

and 3511 of the Code, consistent with

their liability for the section 3111(a) and

section 3221(a) taxes against which the

credit applied.

Finally, these temporary regulations

apply to all credit refunds under section

7001 and 7003 of the Families First Act

advanced or paid on or after April 1, 2020,

and all credit refunds under section 2301

of the CARES Act advanced or paid on or

416

after March 13, 2020. These applicability dates correspond to the effective dates

of the statutory sections that provide for

these credits and that authorize guidance

to allow for the administrative reconciliation and recapture of erroneous refunds of

these credits.

Sections 7001(g) and 7003(g) of the

Families First Act provide that sections

7001 and 7003 apply to wages paid with

respect to the period beginning on a date

selected by the Secretary of the Treasury

which is during the 15-day period beginning on the date of the enactment of the

Families First Act (March 18, 2020). In

Notice 2020-21, 2020-16 I.R.B. 660, the

IRS provided that the tax credits for qualified sick leave wages and qualified family

leave wages under sections 7001 and 7003

of the Families First Act apply to wages

paid for the period beginning on April 1,

2020, and ending on December 31, 2020.

Section 2301(m) of the CARES Act provides that section 2301 applies to wages

paid on or after March 13, 2020, and before January 1, 2021.

Pursuant to section 7805(b)(2) of the

Code, these temporary regulations are

permitted to apply before the dates provided under section 7805(b)(1), including

the date on which these temporary regulations are filed with the Federal Register,

because these temporary regulations are

being issued within 18 months of the date

of the enactment of the relevant statutory provisions under the Families First Act

and the CARES Act. Accordingly, these

temporary regulations apply to all credits under sections 7001 and 7003 of the

Families First Act, as modified by section

3606 of the CARES Act, including any increases in the credits under section 7005

of the Families First Act, refunded on or

after April 1, 2020, including advanced refunds, as well as all credits under section

2301 of the CARES Act that are refunded

on or after March 13, 2020, including advanced refunds.

Special Analyses

The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these temporary regulations are not significant and

not subject to review under section 6(b) of

Executive Order 12866.

Bulletin No. 2020–34

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), the Secretary

certifies that these temporary regulations

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

entities because these temporary regulations impose no compliance burden on

any business entities, including small entities. Although these temporary regulations will apply to all employers eligible

for the credits under the Families First

Act and the CARES Act, including small

businesses and tax-exempt organizations

with fewer than 500 employees, and will

therefore be likely to affect a substantial

number of small entities, the economic impact will not be significant. These

temporary regulations do not affect the

employer’s employment tax reporting or

the necessary information to substantiate

entitlement to the credits. Rather, these

temporary regulations merely implement the statutory authority granted under sections 7001(f) and 7003(f) of the

Families First Act and section 2301(l) of

the CARES Act that authorize the IRS to

assess, reconcile, and recapture any portion of the credits erroneously credited,

paid, or refunded in excess of the actual

amount allowed as if the amounts were

tax liabilities under sections 3111(a)

and 3221(a) subject to assessment and

administrative collection procedures.

Notwithstanding this certification, the

Treasury Department and the IRS invite

comments on any impact these temporary

regulations would have on small entities.

Pursuant to section 7805(f), these temporary regulations have been submitted to

the Chief Counsel of the Office of Advocacy of the Small Business Administration

for comment on its impact on small business.

The Treasury Department and the

IRS have determined that good cause

exists under section 553(b)(B) of the

Administrative Procedure Act (APA)

(5 U.S.C. 551 et seq.). Section 553(b)

(B) provides that an agency is not required to publish a notice of proposed

rulemaking in the Federal Register

when the agency, for good cause, finds

that notice and public comment thereon

are impracticable, unnecessary, or contrary to the public interest. Employers

must file Form 941, Employer’s Quarterly Federal Tax Return, for the second

Bulletin No. 2020–34

quarter of calendar year 2020 by July

31, 2020, as required by section 6071 of

the Code and Treas. Reg. § 31.6071(a)1. Employers use Form 941 to claim

qualified leave credits under the Families First Act and the employee retention

credit under the CARES Act, as well as

to report any advance of these credits

they received during the quarter. In filing their second quarter 2020 Form 941,

some employers will report and receive,

or will have already received as an advance, refund amounts in excess of the

refund to which they are entitled. These

temporary regulations authorize the assessment of any such erroneous refunds.

Without these temporary regulations, in

some instances the IRS may not be able

to avoid bringing costly and burdensome

litigation to recover such reported erroneous refunds. Further, comments are

being solicited in the cross-referenced

notice of proposed rulemaking that is

in this issue of the Federal Register, and

any comments will be considered before

final regulations are issued.

Statement of Availability of IRS

Documents

IRS notices and other guidance cited

in this preamble are published in the Internal Revenue Bulletin (or Cumulative

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

20402, or by visiting the IRS website at

http://www.irs.gov.

Drafting Information

The principal author of these temporary regulations is NaLee Park, Office of

the Associate Chief Counsel (Employee

Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Treasury Department and the

IRS participated in the development of

these temporary regulations.

List of Subjects in 26 CFR 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements,

Social security, Unemployment compensation.

417

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR part 31 is amended as follows:

PART 31—EMPLOYMENT TAXES

AND COLLECTION OF INCOME

TAX AT SOURCE

Paragraph 1. The authority citation for

part 31 is amended by adding entries for

§§31.3111-6T and 31.3221-5T in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805.

Section 31.3111-6T also issued under

sec. 7001 and sec. 7003 of the Families

First Coronavirus Response Act of 2020

and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020.

*****

Section 31.3221-5T also issued under

sec. 7001 and sec. 7003 of the Families

First Coronavirus Response Act of 2020

and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020.

*****

Par. 2. Section 31.3111-6T is added to

read as follows:

§31.3111-6T Recapture of credits under

the Families First Coronavirus Response

Act and the Coronavirus Aid, Relief, and

Economic Security Act.

(a) Recapture of erroneously refunded

credits under the Families First Coronavirus Response Act. Any amount of credits

for qualified sick leave wages or qualified

family leave wages under sections 7001

and 7003, respectively, of the Families

First Coronavirus Response Act (Families

First Act), Public Law 116-127, 134 Stat.

178 (2020), as modified by section 3606

of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public

Law 116-136, 134 Stat. 281 (2020), plus

any amount of credits for qualified health

plan expenses under sections 7001 and

7003, and including any increases in those

credits under section 7005 of the Families

First Act, that are treated as overpayments

and refunded or credited to an employer

under section 6402(a) or section 6413(b)

of the Internal Revenue Code (Code) and

to which the employer is not entitled,

resulting in an erroneous refund to the

August 17, 2020

employer, shall be treated as an underpayment of the taxes imposed by section

3111(a) of the Code and may be assessed

and collected by the Secretary in the same

manner as the taxes.

(b) Recapture of erroneously refunded credits under the Coronavirus Aid,

Relief, and Economic Security Act. Any

amount of credits for qualified wages

under section 2301 of the CARES Act

that is treated as an overpayment and refunded or credited to an employer under

section 6402(a) or section 6413(b) of the

Code and to which the employer is not

entitled, resulting in an erroneous refund

to the employer, shall be treated as an

underpayment of the taxes imposed by

section 3111(a) of the Code and may be

assessed and collected by the Secretary

in the same manner as the taxes.

(c) Advance credit amounts erroneously refunded. The determination of any

amount of credits erroneously refunded as

described in paragraphs (a) and (b) of this

section must take into account any amount

of credits advanced to an employer under

the process established by the Internal

Revenue Service in accordance with sections 7001(b)(4)(A)(ii) and 7003(b)(3)(B)

of the Families First Act, as modified by

section 3606 of the CARES Act, and section 2301(l)(1) of the CARES Act.

(d) Third party payors. For purposes of

this section, employers against whom an

erroneous refund of the credits under sections 7001 and 7003 of the Families First

Act (including any increases in those credits under section 7005 of the Families First

Act), as modified by section 3606 of the

CARES Act, and the credits under section

2301 of the CARES Act can be assessed

as an underpayment of the taxes imposed

by section 3111(a) include persons treated

as the employer under sections 3401(d),

3504, and 3511 of the Code, consistent

with their liability for the section 3111(a)

taxes against which the credit applied.

(e) Applicability date. This regulation

applies to all credit refunds under sections

7001 and 7003 of the Families First Act

August 17, 2020

(including any increases in those credits

under section 7005 of the Families First

Act), as modified by section 3606 of the

CARES Act, advanced or paid on or after

April 1, 2020, and all credit refunds under

section 2301 of the CARES Act advanced

or paid on or after March 13, 2020.

Par. 3. Section 31.3221-5T is added to

read as follows:

§31.3221-5T Recapture of credits under

the Families First Coronavirus Response

Act and the Coronavirus Aid, Relief, and

Economic Security Act.

(a) Recapture of erroneously refunded

credits under the Families First Coronavirus Response Act. Any amount of credits

for qualified sick leave wages or qualified

family leave wages under sections 7001

and 7003, respectively, of the Families

First Coronavirus Response Act (Families

First Act), Public Law 116-127, 134 Stat.

178 (2020), as modified by section 3606

of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Public

Law 116-136, 134 Stat. 281 (2020), plus

any amount of credits for qualified health

plan expenses under sections 7001 and

7003, that are treated as overpayments and

refunded or credited to an employer under section 6402(a) or section 6413(b) of

the Internal Revenue Code (Code) and to

which the employer is not entitled, resulting in an erroneous refund to the employer, shall be treated as an underpayment of

the taxes imposed by section 3221(a) of

the Code and may be assessed and collected by the Secretary in the same manner as

the taxes.

(b) Recapture of erroneously refunded

credits under the Coronavirus Aid, Relief,

and Economic Security Act. Any amount

of credits for qualified wages under section 2301 of the CARES Act that is treated

as an overpayment and refunded or credited to an employer under section 6402(a) or

section 6413(b) of the Code and to which

the employer is not entitled, resulting in

an erroneous refund to the employer, shall

418

be treated as an underpayment of the taxes

imposed by section 3221(a) of the Code

and may be assessed and collected by the

Secretary in the same manner as the taxes.

(c) Advance credit amounts erroneously refunded. The determination of any

amount of credits erroneously refunded as

described in paragraphs (a) and (b) of this

section must take into account any amount

of credits advanced to an employer under

the process established by the Internal

Revenue Service in accordance with sections 7001(b)(4)(A)(ii) and 7003(b)(3)(B)

of the Families First Act, as modified by

section 3606 of the CARES Act, and section 2301(l)(1) of the CARES Act.

(d) Third party payors. For purposes

of this section, employers against whom

an erroneous refund of the credits under

sections 7001 and 7003 of the Families

First Act, as modified by section 3606

of the CARES Act, and the credits under

section 2301 of the CARES Act can be

assessed as an underpayment of the taxes imposed by section 3221(a) include

persons treated as the employer under

sections 3401(d), 3504, and 3511 of the

Code, consistent with their liability for

the section 3221(a) taxes against which

the credit applied.

(e) Applicability date. This regulation

applies to all credit refunds under sections 7001 and 7003 of the Families First

Act, as modified by section 3606 of the

CARES Act, advanced or paid on or after

April 1, 2020, and all credit refunds under

section 2301 of the CARES Act advanced

or paid on or after March 13, 2020.

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

Approved: July 14, 2020.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on July

24, 2020, 4:15 p.m., and published in the issue of the

Federal Register for July 29, 2020, 85 F.R. 45514)

Bulletin No. 2020–34

Part III

Notice 2020-58

I. PURPOSE

On March 13, 2020, the President of

the United States issued an emergency

declaration under the Robert T. Stafford

Disaster Relief and Emergency Assistance

Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The emergency declaration instructed

the Secretary of the Treasury “to provide

relief from tax deadlines to Americans

who have been adversely affected by the

COVID-19 emergency, as appropriate,

pursuant to 26 U.S.C. 7508A(a).” Section III of this notice describes the relief

provided pursuant to § 7508A(a) of the

Internal Revenue Code (Code) for certain

requirements of the rehabilitation credit

under § 47 of the Code.

II. BACKGROUND

Section 38(b)(1) of the Code provides

that the current year general business

credit includes the investment credit determined under § 46 of the Code. The

investment credit under § 46 includes the

rehabilitation credit under § 47.

On December 22, 2017, former § 47

was amended by section 13402 of Public

Law No. 115-97, 131 Stat. 2054 (2017),

commonly referred to as the Tax Cuts and

Jobs Act (TCJA). Prior to the TCJA, former § 47(a) provided for the purposes of

§ 46 a two-tier credit for qualified rehabilitation expenditures (QREs) incurred

in connection with the rehabilitation of

a qualified rehabilitated building (QRB).

Former § 47(a)(2) allowed a 20-percent

credit for QREs with respect to a certified

historic structure, and former § 47(a)(1)

allowed a 10-percent credit for QREs with

respect to a QRB other than a certified historic structure (for certain buildings first

placed in service before 1936 (pre-1936

buildings)). Under former § 47, both the

20-percent and 10-percent credits were

fully allowed in the taxable year the QRB

was placed in service.

Section 13402(a) of the TCJA repealed

the 10-percent credit for pre-1936 build-

Bulletin No. 2020–34

ings and modified the rules for claiming

the 20-percent credit for certified historic

structures. Section 13402(b) of the TCJA

amended § 47(c), in part, by redesignating

former § 47(c)(1)(C) and (D) as § 47(c)

(1)(B) and (C). Section 13402(c)(1) of the

TCJA provides that the amendments made

by section 13402(a) and (b) are generally

applicable to QRE amounts paid or incurred after December 31, 2017, subject

to a statutory transition rule provided in

section 13402(c)(2) of the TCJA (TCJA

transition rule).

Section 47(a)(1) provides for the purposes of § 46, for any taxable year during

the 5-year period beginning in the taxable

year in which a QRB is placed in service,

the rehabilitation credit for such year is an

amount equal to the ratable share for such

year.

Section 47(a)(2) defines the ratable

share for any taxable year during the

5-year period described in § 47(a)(1) as an

amount equal to 20 percent of the QREs

with respect to the QRB, as allocated ratably to each year during the 5-year period.

Section 47(b) provides that QREs with

respect to any QRB are taken into account

for the taxable year in which the QRB is

placed in service.

Under § 47(c)(1)(A)(i), a QRB must

be a building that has been substantially rehabilitated. Under § 47(c)(1)(B)(i),

a building is treated as substantially rehabilitated only if the QREs during the

24-month period selected by the taxpayer

ending with or within the taxable year exceed the greater of the taxpayer’s adjusted basis in the building (and its structural

components) or $5,000. For certain rehabilitations expected to be completed in

phases set forth in architectural plans and

specifications completed before the rehabilitation begins as described in § 47(c)(1)

(B)(ii) (phased rehabilitation), the taxpayer selects a 60-month period rather than a

24-month period.

Section 1.48-12(b)(2)(i) of the Income

Tax Regulations defines “substantial rehabilitation test” and provides that a building is treated as having been substantially rehabilitated for a taxable year only if

the QREs incurred during any 24-month

period selected by the taxpayer ending

419

with or within the taxable year exceed the

greater of (A) the adjusted basis of the

building (and its structural components),

or (B) $5,000. Section 1.48-12(b)(2)(v)

describes special rules for phased rehabilitation and provides that § 1.48-12(b)(2)

(i) is applied by substituting “60-month

period” for “24-month period.”

The TCJA transition rule provides that

in the case of QREs (for either a certified

historic structure eligible for a 20-percent

credit or a pre-1936 building eligible for

a 10-percent credit prior to December 31,

2017), with respect to any building owned

or leased by the taxpayer at all times on

and after January 1, 2018, the 24-month

period selected by the taxpayer under

§ 47(c)(1)(B)(i), or the 60-month period

selected by the taxpayer under the rule for

phased rehabilitation under § 47(c)(1)(B)

(ii), is to begin no later than the end of the

180-day period beginning on December

22, 2017, and the amendments made by

section 13402 of the TCJA apply to such

QREs paid or incurred after the end of

the taxable year in which such 24-month

or 60-month period ends. For taxpayers

selecting a 24-month period, the requirement to begin the period within 180 days

from December 22, 2017, means that the

latest day that such a 24-month period

can end under the TCJA transition rule is

June 20, 2020. For taxpayers permitted to

select a 60-month period for phased rehabilitation, the requirement to begin the period within 180 days from December 22,

2017, means that the latest day that such a

60-month period can end under the TCJA

transition rule is June 20, 2023.

Section 7508A provides the Secretary

of the Treasury or his delegate (Secretary)

with authority to postpone the time for

performing certain acts under the internal

revenue laws for a taxpayer determined by

the Secretary to be affected by a Federally declared disaster as defined in § 165(i)

(5)(A). Pursuant to § 7508A(a), a period

of up to one year may be disregarded in

determining whether the performance of

certain acts is timely under the internal

revenue laws.

On April 9, 2020, the Department of

the Treasury and the Internal Revenue

Service (IRS) issued Notice 2020-23,

August 17, 2020

2020-18 I.R.B. 742, which pursuant to

§ 7508A provided certain relief to affected taxpayers and postponed due

dates until July 15, 2020, with respect to

certain tax filings and payments, certain

time-sensitive government actions, and

all time-sensitive actions listed in Rev.

Proc. 2018-58, 2018-50 I.R.B. 990 (Dec.

10, 2018), that were due to be performed

on or after April 1, 2020, and before July

15, 2020. See Notice 2020-23 and Rev.

Proc. 2018-58. Among the relief granted,

Notice 2020-23 (referencing Rev. Proc.

2018-58) postponed until July 15, 2020,

the time to perform certain time-sensitive actions for purposes of § 47 that

were due to be performed on or after

April 1, 2020, and before July 15, 2020,

including the time period for satisfying

the substantial rehabilitation test described in former § 47(c)(1)(C) (redesignated as § 47(c)(1)(B) by the TCJA) and

§ 1.48-12(b)(2).

III. GRANT OF RELIEF UNDER

SECTION 47 PURSUANT TO

SECTION 7508A

The Secretary has determined that persons with deadlines under § 47 that are described in sections III.A and B of this notice are persons affected by the COVID-19

emergency for the purposes of the relief

provided under § 7508A(a) as described

in sections III.A and B of this notice.

August 17, 2020

A. MEASURING PERIOD

UNDER THE SUBSTANTIAL

REHABILITATION TEST

For purposes of §§ 47(c)(1)(B) and 1.4812(b)(2), if the 24- or 60-month measuring

period in which the requisite amount of

QREs have to be paid or incurred in order

to satisfy the substantial rehabilitation test

for a building originally ends on or after

April 1, 2020, and before March 31, 2021,

the last day of the 24- or 60-month measuring period for a taxpayer to incur the requisite QREs with respect to the building is

postponed to March 31, 2021. This means

that a taxpayer may have a measuring period that is longer than 24 or 60 months.

B. DEADLINE FOR TCJA

TRANSITION RULE

For purposes of taxpayers subject to

the TCJA transition rule, if the 24- or

60-month measuring period in which the

requisite amount of QREs have to be paid

or incurred in order to satisfy the substantial rehabilitation test for a building

originally ends on or after April 1, 2020,

and before March 31, 2021, the last day

of the 24- or 60-month measuring period

for a taxpayer to pay or incur the requisite QREs with respect to the building is

postponed to March 31, 2021. Thus, if

the requisite QREs described in the preceding sentence are paid or incurred by

420

March 31, 2021, the TCJA transition rule

allows the rules of former § 47 allowing

the 10-percent and 20-percent credits in a

single year to apply to QREs paid or incurred with respect to such building in the

taxable year in which the 24- or 60-month

measuring period (the last day of which

is postponed by this notice) ends. In addition, the amendments made by section

13402(a) and (b) of the TCJA, under

which only the 20-percent credit is allowed over five years, apply to QREs paid

or incurred with respect to such building

in succeeding taxable years.

C. OTHER REQUIREMENTS

Except as expressly provided in this

notice, all other rules and requirements of

§ 47 continue to apply.

IV. EFFECT ON OTHER DOCUMENTS

Notice 2020-23 is amplified.

V. DRAFTING INFORMATION

The principal authors of this notice are

Barbara J. Campbell and Michael J. Torruella Costa, Office of the Associate Chief

Counsel (Passthroughs and Special Industries). For further information regarding

this notice, contact Barbara J. Campbell or

Michael J. Torruella Costa at (202) 3174137 (not a toll-free number).

Bulletin No. 2020–34

Part IV

Notice of Proposed

Rulemaking by Crossreference to Temporary

Regulations

Recapture of Excess

Employment Tax Credits

under the Families First Act

and the CARES Act

REG-111879-20

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of Proposed Rulemaking by cross-reference to temporary regulations.

SUMMARY: In the Rules and Regulations section of this issue of the Federal

Register, the IRS is issuing temporary

regulations pursuant to the regulatory authority granted under the Families First

Coronavirus Response Act and the Coronavirus Aid, Relief, and Economic Security Act to prescribe such regulations as

may be necessary for reconciling advance

payments of refundable employment tax

credits provided under these acts and recapturing the benefit of the credits when

necessary. These proposed regulations affect businesses and tax-exempt organizations that claim certain credits under the

Families First Coronavirus Response Act

for qualifying sick and family leave wages

and that claim certain employee retention

credits under the Coronavirus Aid, Relief,

and Economic Security Act. The text of

those temporary regulations serves as the

text of these proposed regulations.

DATES: Written or electronic comments

and requests for a public hearing must be

received by September 28, 2020. Requests

for a public hearing must be submitted as

prescribed in the “Comments and Requests for a Public Hearing” section.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

Bulletin No. 2020–34

electronically. Submit electronic submissions via the Federal eRulemaking Portal

at www.regulations.gov (indicate IRS and

REG-111879-20) by following the online

instructions for submitting comments.

Once submitted to the Federal eRulemaking Portal, comments cannot be edited or

withdrawn. The IRS expects to have limited personnel available to process public

comments that are submitted on paper

through the mail. Until further notice,

any comments submitted on paper will

be considered to the extent practicable.

The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment

submitted electronically, and to the extent

practicable on paper, to its public docket.

Send paper submissions to: CC:PA:LPD:PR (REG-111879-20), room 5203, Internal Revenue Service, PO Box 7604,

Ben Franklin Station, Washington, D.C.

20044.

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

regulations, NaLee Park at (202) 3176879; concerning submissions of comments and/or requests for a public hearing,

Regina Johnson, (202) 317-5177 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of

Provisions

Temporary regulations in the Rules

and Regulations section of this issue of

the Federal Register amend the Employment Taxes and Collection of Income at

the Source Regulations (26 CFR part 31)

relating to sections 3111 and 3221 of the

Internal Revenue Code (Code) pursuant to

the regulatory authority granted under the

Families First Coronavirus Response Act

(Families First Act) and the Coronavirus

Aid, Relief, and Economic Security Act

(CARES Act) to prescribe such regulations as may be necessary for reconciling

advance payments of refundable employment tax credits provided under these acts

and recapturing the benefit of the credits

when necessary. Consistent with this au-

421

thority, these proposed regulations authorize the assessment of erroneous refunds

of the credits paid under sections 7001 and

7003 of the Families First Act and section

2301 of the CARES Act. The text of those

temporary regulations also serves as the

text of these proposed regulations. The

preamble to the temporary regulations explains the amendments.

Special Analyses

The Office of Management and Budget’s Office of Information and Regulatory Analysis has determined that these regulations are not significant and not subject

to review under section 6(b) of Executive

Order 12866.

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), the Secretary certifies that these proposed regulations will

not have a significant economic impact on

a substantial number of small entities because these proposed regulations impose

no compliance burden on any business entities, including small entities. Although

these proposed regulations will apply to

all employers eligible for the credits under the Families First Act and the CARES

Act, including small businesses and

tax-exempt organizations with fewer than

500 employees, and will therefore be likely to affect a substantial number of small

entities, the economic impact will not be

significant. These proposed regulations

do not affect the employer’s employment

tax reporting or the necessary information

to substantiate entitlement to the credits.

Rather, these proposed regulations merely

implement the statutory authority granted

under sections 7001(f) and 7003(f) of the

Families First Act and section 2301(l) of

the CARES Act that authorize the Service

to assess, reconcile, and recapture any

portion of the credits erroneously paid or

refunded in excess of the actual amount

allowed as if such amounts were tax liabilities under sections 3111(a) and 3221(a)

subject to assessment and administrative

collection procedures. Notwithstanding

this certification, the Treasury Department and the IRS invite comments on any

impact these regulations would have on

small entities.

August 17, 2020

Pursuant to section 7805(f), this notice

of proposed rulemaking has been submitted to the Chief Counsel of the Office of

Advocacy of the Small Business Administration for comment on its impact on small

business.

Comments and Requests for Public

Hearing

Before these proposed regulations are

adopted as final regulations, consideration

will be given to any comments that are

timely submitted to the IRS as prescribed

in the preamble under the “ADDRESSES” section. The Treasury Department

and the IRS request comments on all aspects of these proposed regulations. Any

electronic comments submitted, and to the

extent practicable any paper comments

submitted, will be made available at www.

regulations.gov or upon request.

A public hearing will be scheduled if

requested in writing by any person who

timely submits electronic or written comments. Requests for a hearing are strongly

encouraged to be submitted electronically.

If a public hearing is scheduled, notice of

the date and time for the public hearing

will be published in the Federal Register. Announcement 2020-4, 2020-17 IRB

1, provides that until further notice, public hearings conducted by the IRS will be

held telephonically. Any telephonic hearing will be made accessible to people with

disabilities.

Statement of Availability of IRS

Documents

IRS notices and other guidance cited

in this preamble are published in the Internal Revenue Bulletin (or Cumulative

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

20402, or by visiting the IRS website at

http://www.irs.gov.

Drafting Information

The principal author of these regulations is NaLee Park, Office of the Associate Chief Counsel (Employee Benefits,

Exempt Organizations, and Employment

Taxes). However, other personnel from

the Treasury Department and the IRS par-

August 17, 2020

ticipated in the development of these regulations.

List of Subjects in 26 CFR 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements,

Social security, Unemployment compensation.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31—EMPLOYMENT TAXES

AND COLLECTION OF INCOME

TAX AT SOURCE

Paragraph 1. The authority citation for

part 31 is amended by adding entries for

§§ 31.3111-6T and 31.3221-5T in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805.

Section 31.3111-6T also issued under

sec. 7001 and sec. 7003 of the Families

First Coronavirus Response Act of 2020

and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020

*****

Section 31.3221-5T also issued under

sec. 7001 and sec. 7003 of the Families

First Coronavirus Response Act of 2020

and sec. 2301 of the Coronavirus Aid, Relief, and Economic Security Act of 2020

*****

Par. 2. Section 31.3111-6 is added to

read as follows:

§31.3111-6 Recapture of credits under

the Families First Coronavirus Response

Act and the Coronavirus Aid, Relief, and

Economic Security Act

[The text of proposed §31.3111-6 is the

same as the text of §31.3111-6T published

elsewhere in this issue of the Federal

Register].

Par. 3. Section 31.3221-5 is added to

read as follows:

§31.3221-5 Recapture of credits under

the Families First Coronavirus Response

Act and the Coronavirus Aid, Relief, and

Economic Security Act

[The text of proposed §31.3221-5 is the

same as the text of §31.3221-5T published

422

elsewhere in this issue of the Federal

Register].

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

(Filed by the Office of the Federal Register on July

24, 2020, 4:15 p.m., and published in the issue of the

Federal Register for July 29, 2020, 85 F.R. 45551)

Notice of Proposed

Rulemaking and Partial

Withdrawal of Notice of

Proposed Rulemaking

Excise Taxes;

Transportation of Persons

by Air; Transportation of

Property by Air; Aircraft

Management Services

REG-112042-19

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking

and partial withdrawal of notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the excise

taxes imposed on certain amounts paid for

transportation of persons and property by

air. Specifically, the proposed regulations

relate to the exemption for amounts paid

for certain aircraft management services.

The proposed regulations also amend, revise, redesignate, and remove provisions

of existing regulations that are out-of-date

or obsolete and generally update the existing regulations to incorporate statutory

changes, case law, and other published

guidance. In addition, the proposed regulations withdraw a provision that was

included in a prior notice of proposed

rulemaking that was never finalized and

re-propose it. The proposed regulations

affect persons that provide air transportation of persons and property, and persons

that pay for those services.

Bulletin No. 2020–34

DATES: Written or electronic comments

and requests for a public hearing must

be received by September 29, 2020. Requests for a public hearing must be submitted as prescribed in the “Comments

and Requests for a Public Hearing”

section.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking

Portal at www.regulations.gov (indicate

IRS and REG-112042-19) by following the online instructions for submitting comments. Once submitted to the

Federal eRulemaking Portal, comments

cannot be edited or withdrawn. The IRS

expects to have limited personnel available to process public comments that are

submitted on paper through mail. Until

further notice, any comments submitted

on paper will be considered to the extent

practicable. The Department of the Treasury (Treasury Department) and the IRS

will publish for public availability any

comment submitted electronically, and

to the extent practicable on paper, to its

public docket.

Send paper submissions to: CC:PA:LPD:PR (REG-112042-19), room 5203, Internal Revenue Service, PO Box 7604,

Ben Franklin Station, Washington, D.C.

20044.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Michael H. Beker or Rachel S.

Smith at (202) 317-6855; concerning submissions of comments and/or requests for

a public hearing, Regina Johnson, (202)

317-5177 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Facilities and Services

Excise Tax Regulations (26 CFR part 49)

under sections 4261, 4262, 4263, 4264,

4271, 4281, and 4282 of the Internal Revenue Code (Code). This document also

contains proposed amendments to the Excise Tax Procedural Regulations (26 CFR

part 40).

Bulletin No. 2020–34

Section 4261 imposes an excise tax on

certain amounts paid for transportation

of persons by air. Section 4271 imposes

an excise tax on certain amounts paid for

transportation of property by air. The excise taxes imposed by sections 4261 and

4271 (collectively, air transportation excise tax), as well as certain Federal fuel

taxes, are deposited into the Airport and

Airway Trust Fund, which funds the Federal Aviation Administration’s (FAA) operations, air transportation infrastructure,

and other aviation-related programs. See

section 9502 of the Code.

Section 13822 of Public Law 115-97,

131 Stat. 2054, 2182 (2017), commonly

referred to as the Tax Cuts and Jobs Act

(TCJA), amended the Code by adding

paragraph (e)(5) to section 4261. The new

provision provides that no tax shall be

imposed by section 4261 or 4271 on any

amount paid by an aircraft owner for aircraft management services related to: (1)

maintenance and support of the aircraft

owner’s aircraft, or (2) flights on the aircraft owner’s aircraft.

Section 4261(e)(5)(B) defines the term

“aircraft management services” to include

assisting an aircraft owner with: (1) administrative and support services, such

as scheduling, flight planning, and weather forecasting; (2) obtaining insurance;

(3) maintenance, storage, and fueling of

aircraft; (4) hiring, training, and provision of pilots and crew; (5) establishing

and complying with safety standards; and

(6) such other services as are necessary

to support flights operated by an aircraft

owner.

Section 4261(e)(5)(C)(i) provides that

the term “aircraft owner” includes a person who leases an aircraft other than under a “disqualified lease.” Section 4261(e)

(5)(C)(ii) defines the term “disqualified

lease” for purposes of section 4261(e)(5)

(C)(i) as a lease from a person providing

aircraft management services with respect

to the aircraft (or a related person (within

the meaning of section 465(b)(3)(C)) to

the person providing such services), if the

lease is for a term of 31 days or less.

Finally, section 4261(e)(5)(D) provides

that in the case of amounts paid to any person which (but for section 4261(e)(5)) are

subject to air transportation excise tax, a

portion of which consists of amounts described in section 4261(e)(5)(A), section

423

4261(e)(5) shall apply on a pro rata basis only to the portion which consists of

amounts described in section 4261(e)(5)

(A).

The Conference Report accompanying the TCJA, H.R. Rep. No. 115-466, at

536 (2017) (Conference Report), explains

that section 4261(e)(5) “exempts certain

payments related to the management of

private aircraft from the excise taxes imposed on taxable transportation of persons

by air.” The Conference Report further

explains that certain arrangements that do

not qualify a person as an ‘‘aircraft owner’’ for purposes of section 4261(e)(5)

include ownership of stock in a commercial airline and participation in a fractional ownership aircraft program. Id. at 536

n.1190.

With regard to commercial airlines,

the Conference Report specifically states

that ownership of stock in a commercial

airline cannot qualify an individual as an

‘‘aircraft owner’’ of a commercial airline’s

aircraft, and amounts paid for transportation on such flights remain subject to air

transportation excise tax. Id.

The Conference Report further states

that participation in a fractional ownership aircraft program does not constitute

‘‘aircraft ownership’’ for purposes of section 4261(e)(5). Id. Amounts paid to a

fractional ownership aircraft program for

transportation under such a program are

already exempt from air transportation excise tax pursuant to section 4261(j) if certain requirements provided in section 4043

of the Code are satisfied, including that

the aircraft is operated under subpart K of

part 91 of Title 14 of the Code of Federal

Regulations (subpart K). Id. Flights under

a fractional ownership aircraft program

are subject to both the fuel tax levied on

noncommercial aviation and an additional

fuel surtax imposed by section 4043 (fuel

surtax). Id. As a result, the Conference Report explains that “a business arrangement

seeking to circumvent the fuel surtax by

operating outside of subpart K, allowing

an aircraft owner the right to use any of

a fleet of aircraft, be it through an aircraft

interchange agreement, through holding

nominal shares in a fleet of aircraft, or any

other arrangement that does not reflect

true tax ownership of the aircraft being

flown upon, is not considered ownership

for purposes of [section 4261(e)(5)].” Id.

August 17, 2020

With regard to the pro rata allocation

rule in section 4261(e)(5)(D), the Conference Report states that in the event that a

payment made to an aircraft management

company is allocated in part to exempt

services and flights on the aircraft owner’s

aircraft, and in part to flights on aircraft

other than that of the aircraft owner, air

transportation excise tax must be collected

on that portion of the payment attributable

to flights on aircraft not owned by the aircraft owner. Id. at 536.

Section 4007 of the Coronavirus

Aid, Relief, and Economic Security Act

(CARES Act), Pub. L. 116-136, 134 Stat.

181 (2020), created an excise tax holiday

on certain aviation taxes by suspending air

transportation excise tax and certain fuel

excise taxes from March 28, 2020, through

December 31, 2020. Nothing in these proposed regulations should be construed as

affecting the excise tax holiday created by

the CARES Act. In addition, except with

regard to the provisions in 26 CFR part 40,

the Treasury decision adopting these proposed regulations as final regulations will

apply no sooner than January 1, 2021.

Explanation of Provisions

1.Aircraft Management Services

The proposed regulations provide rules

related to the exemption from air transportation excise tax for amounts paid by

an aircraft owner for aircraft management

services pursuant to section 4261(e)(5).

During the development of these

proposed regulations, the Treasury Department and the IRS received various

requests for guidance from stakeholders

(referred to herein as “commenters”) related to the first five issues discussed in

part 1 of this Explanation of Provisions.

a. Applicability of Possession, Command,

and Control Test

Commenters requested clarification on

the applicability of the possession, command, and control test in existing guidance

to amounts paid for aircraft management

services in light of section 4261(e)(5). The

possession, command, and control test is a

facts-and-circumstances analytical framework that is used to determine whether a

person is providing taxable transportation

August 17, 2020

to another person in cases where each of

the parties contribute some, but not all, of

the elements necessary for complete air

transportation services. See e.g., Rev. Rul.

60-311 (1960-2 C.B. 341), Rev. Rul. 70325 (1970-1 C.B. 231), and Rev. Rul. 76394 (1976-2 C.B. 355). Section 4261(e)

(5) directly addresses a situation that, but

for section 4261(e)(5), would be analyzed

using the possession, command, and control test. As a result, in situations to which

the section 4261(e)(5) exemption applies,

the possession, command, and control test

is not relevant.

b. Related-Party Payments

The second issue for which commenters requested guidance relates to the treatment of payments for aircraft management services made by a person who has

a close relationship to the aircraft owner,

but is not itself the owner of the aircraft.

The commenters suggested that payments

that are made by certain parties related to

the aircraft owner should be considered as

though made by the aircraft owner.

First, the commenters suggested that

the proposed regulations should treat payments made by one member of an affiliated group (as that term is used in section

4282) on behalf of an aircraft owner that is

a member of the same affiliated group as

being made by the aircraft owner.

Second, the commenters suggested that

payments made by an owner of a special

purpose entity should be treated as being

made by the aircraft owner if the special

purpose entity owns the aircraft. For example, individuals and corporations often

create a single member limited liability

company (SMLLC) to own an aircraft in

order to comply with FAA regulations or

limit liability exposure. In such cases, the

owner of the SMLLC often makes payments for aircraft management services

on behalf of the SMLLC.

Finally, the commenters suggested that

payments made by an aircraft owner’s

family members, as well as other persons

and entities (for example, trusts, as well

as the trust’s fiduciaries and beneficiaries) closely related to an aircraft owner

be treated as being made by the aircraft

owner. For this purpose, the commenters

suggested that the proposed regulations

should treat payments for aircraft man-

424

agement services made on behalf of the

aircraft owner by a family member of the

aircraft owner and by persons and entities

bearing relationships to the aircraft owner

described in sections 267(b) and 707(b) of

the Code as amounts paid by the aircraft

owner.

The Treasury Department and the IRS

understand that it is common practice in

the private aviation sector for persons that

bear certain close relationships to an aircraft owner to make payments for aircraft

management services on behalf of the aircraft owner. However, exceptions to tax,

like deductions, are matters of legislative

grace, and such provisions are construed

narrowly. See Comm’r v. Nat’l Alfalfa Dehydrating & Milling Co., 417 U.S. 134,

148-9 (1974) (“The propriety of a deduction […] depends upon legislative grace;

and only as there is clear provision therefor

can any particular deduction be allowed.”

(citations omitted)); Shami v. Comm’r,

741 F.3d 560, 567 (5th Cir. 2014) (“Tax

credits are a matter of legislative grace,

are only allowed as clearly provided for

by statute, and are narrowly construed.”

(citation omitted)); Lettie Pate Whitehead

Found., Inc. v. U.S., 606 F.2d 534, 539

(5th Cir. 1979) (“Deductions are matters

of legislative grace and must be narrowly construed.” (citation omitted)); Chrysler Corp. v. Comm’r, 436 F.3d 644, 654

(6th Cir. 2006) (“While statutes imposing

a tax are generally construed liberally in

favor of the taxpayer, those granting a

deduction are matters of legislative grace

and are strictly construed in favor of the

government.” (citations omitted)). Section

4261(e)(5) specifically states that the exemption applies to “amounts paid by an

aircraft owner” and makes no reference

to any other entity or arrangement. The

Treasury Department and the IRS are concerned that if the regulations were to treat

payments for aircraft management services made on behalf of an aircraft owner

(other than in a principal-agent scenario in

which the aircraft owner is the principal)

as being made by the aircraft owner itself,

the regulations would effectively expand

the exemption in a manner not authorized

by Congress.

Additionally, a qualified subchapter S

subsidiary (QSub) (as defined in section

1361(b)(3)(B)) that is generally not treated as a separate corporation from its S cor-

Bulletin No. 2020–34

poration owner under section 1361(b)(3)

(A), and a non-corporate, wholly-owned

business entity, such as a SMLLC, that

is disregarded as an entity separate from

its owner for Federal income tax purposes

(under §§301.7701-1 through 301.77013 of the Procedure and Administration

Regulations), are each treated as an entity

separate from its owner for certain Federal excise tax purposes. See §1.1361-4(a)

(8) of the Income Tax Regulations and

§301.7701-2(c)(2)(v). The rules under

§§1.1361-4(a)(8) and 301.7701-2(c)(2)(v)

were adopted because difficulties arose

from the interaction of the rules in section

1361(b)(3)(A) and §§301.7701-1 through

301.7701-3 with the Federal excise tax

rules. It would be contrary to the existing

rules in §§1.1361-4(a)(8) and 301.77012(c)(2)(v) to treat a person or entity that

is separate from the aircraft owner as the

aircraft owner for purposes of the exemption from air transportation excise tax in

section 4261(e)(5). For these reasons, the

proposed regulations do not adopt the

commenters’ suggestion to provide a related-party rule.

c. Choice of Flight Rules

The third issue for which commenters

requested guidance relates to whether an

aircraft owner’s decision to operate its

aircraft under certain parts of the Federal

Aviation Regulations (FARs) promulgated by the FAA affects the application of

section 4261(e)(5). Part 91 of the FARs

governs general aviation. However, some

aircraft owners choose to operate their

aircraft under Part 135 of the FARs (governing on-demand and commuter flights),

which imposes additional FAA regulatory

requirements related to operational safety

and enhanced liability protection. Commenters suggested that the proposed regulations provide that if an aircraft owner

elects to conduct flights on its own aircraft

under Part 135 of the FARs (rather than

under Part 91 of the FARs), then payments made by the aircraft owner for aircraft management services related to those

flights qualify for the exemption provided

in section 4261(e)(5) in the same manner

as a flight conducted under Part 91 of the

FARs.

It has long been the position of the

Treasury Department and the IRS that

Bulletin No. 2020–34

rules promulgated by the FAA, including

the FARs, do not control for Federal excise

tax purposes. See Rev. Rul. 78-75 (19781 C.B. 340). Further, section 4261(e)(5)

makes no reference to the FARs; under

the plain language of section 4261(e)(5),

its application does not depend upon the

FAR flight rules under which an aircraft

is operated. The Treasury Department and

the IRS agree with the commenters’ suggestion. Accordingly, the proposed regulations provide that whether an aircraft

owner operates its aircraft pursuant to the

rules under FARs Part 91 or pursuant to

the rules under FARs Part 135 does not affect the application of section 4261(e)(5).

d. Charters

The fourth issue for which commenters

requested guidance relates to situations

in which an aircraft owner permits an air

charter operator (which may or may not be

the same person as the person or persons

providing aircraft management services to

the aircraft owner) to use the aircraft owner’s aircraft to provide charter flights. It is

common for an aircraft owner to permit an

air charter operator to use the aircraft owner’s aircraft for a fee (in cash or in kind)

when the aircraft would otherwise sit idle

or when the aircraft is being repositioned

and would otherwise not carry any passengers. In such instances, amounts paid

for charter flights operated on the aircraft

owner’s aircraft are subject to air transportation excise tax, unless otherwise exempt

from the taxes (for example, in the case of

an aircraft used as an air ambulance dedicated to acute care emergency medical

services under section 4261(g)(2)). See

§49.4261-7(h) for the rules regarding the

taxation of charter flights.

The commenters suggested that the

proposed regulations clarify that the application of section 4261(e)(5) is not affected by an aircraft owner permitting a

charter operator to use the aircraft owner’s aircraft for charter flights. The Treasury Department and the IRS agree with

the commenters that, in general, the application of section 4261(e)(5) should not be

affected by an aircraft owner permitting

an aircraft management services provider

or other person to use the aircraft owner’s

aircraft for for-hire flights (such as charter flights, air taxi flights, and flightseeing

425

flights). Accordingly, the proposed regulations provide that whether an aircraft

owner permits its aircraft to be used for

for-hire flights does not affect the application of section 4261(e)(5) to amounts paid

by the aircraft owner for aircraft management services.

The proposed regulations also clarify that to the extent such for-hire flights

are subject to the tax imposed by section

4261 or 4271, taxable fuel (as defined in

section 4083(a) of the Code) or any other

liquid taxable under section 4041(c) of the

Code that is used as fuel on such flights is

used in commercial aviation, as that term

is defined in section 4083(b). See sections

4081(a)(2) and 4041(c) for the applicable

fuel tax rates.

e. Payment Arrangements

The fifth issue for which commenters

requested guidance relates to business

decisions made by a person providing aircraft management services regarding how

to charge, invoice, or bill (referred to collectively herein as “bill” or “billed”) aircraft owners for their services. An aircraft

owner may be billed for aircraft management services in a variety of ways. For example, an aircraft owner may be charged

a monthly fee for aircraft management

services and an hourly fee for each hour

of flight time. Alternatively, an aircraft

owner may be billed for specific costs related to the operation of the aircraft, plus

a mark-up to compensate the aircraft management services provider. In addition to

these two examples, there are many other

possible arrangements that may be used to

bill an aircraft owner based on the particular agreement between an aircraft owner

and the aircraft management services provider. The commenters suggested that the

proposed regulations should clarify that

the manner in which an aircraft owner is

billed for aircraft management services

should not control whether the exemption

from air transportation excise tax provided

in section 4261(e)(5) applies to amounts

paid for those services.

The Treasury Department and the IRS

agree with the commenters that the manner in which an aircraft owner is billed for

aircraft management services is a business

decision that providers of aircraft management services and aircraft owners should

August 17, 2020

be free to make with each other in order to

satisfy their particular needs. Accordingly,

the proposed regulations provide that the

method or manner by which an aircraft

owner is billed for aircraft management

services does not affect whether the exemption from air transportation excise tax

provided in section 4261(e)(5) applies to

amounts paid for those services.

While the proposed regulations acknowledge that the manner in which an

aircraft owner is billed for aircraft management services is a business decision,

the proposed regulations require both the

aircraft owner and the aircraft management services provider to maintain adequate records to show that amounts paid

by the aircraft owner to the aircraft management services provider relate to aircraft management services specifically for

the aircraft owner’s aircraft or for flights

on the aircraft owner’s aircraft.

f. Other Proposed Aircraft Management

Services Rules

The proposed regulations clarify that

the exemption from air transportation excise tax in section 4261(e)(5) is limited to

private aviation. Section 49.4261-10(b)

(6) of the proposed regulations defines

“private aviation” as the use of an aircraft

for civilian flights except scheduled passenger service. This rule is consistent with

the Conference Report, which explicitly

states that section 4261(e)(5) “exempts

certain payments related to the management of private aircraft from the excise

taxes imposed on taxable transportation

by air.” Conference Report at 536.

The proposed regulations also clarify

the application of section 4261(e)(5)(D),

which requires a pro rata allocation of the

amounts paid for aircraft management

services between services that relate to

flights taken by an aircraft owner on the

aircraft owner’s aircraft and services that

relate to flights taken by an aircraft owner

on an aircraft that is not owned by the aircraft owner. An aircraft that is not owned

by the aircraft owner is referred to in the

proposed regulations as a “substitute aircraft.” Section 4261(e)(5)(D) limits the

section 4261(e)(5) exemption to amounts

paid for aircraft management services related to flights taken by an aircraft owner

on the aircraft owner’s aircraft. Therefore,

August 17, 2020

the section 4261(e)(5) exemption does not

extend to those amounts paid for aircraft

management services that relate to flights

taken by an aircraft owner on a substitute

aircraft (that is, an aircraft not owned by

the aircraft owner). The proposed regulations provide that the pro rata allocation is

calculated by applying to the amount paid

by the aircraft owner for aircraft management services the ratio of flight hours

provided on substitute aircraft during the

calendar quarter over the total flight hours

flown by the aircraft owner on both the

aircraft owner’s aircraft and substitute

aircraft during the calendar quarter. The

Treasury Department and the IRS request

comments regarding whether the proposed

flight hour ratio allocation method is fair

and practicable or whether a different allocation method should be required (and

if so, what exactly such required method

should be).

In addition, the proposed regulations

clarify that taxable fuel (as defined in

section 4083(a)) or any other liquid taxable under section 4041(c) that is used as

fuel on a flight for which amounts paid

are exempt from the taxes imposed by

sections 4261 and 4271 by reason of section 4261(e)(5) is not fuel used in commercial aviation, as that term is defined

in section 4083(b). See sections 4081(a)

(2) and 4041(c) for the applicable fuel tax

rates.

Finally, the section 4043 fuel surtax

applies to fuel used in fractional program

aircraft operated under FARs Part 91K

(14 CFR part 91K) but not to fuel used

on flights for which amounts paid are

exempt by reason of section 4261(e)(5).

The Treasury Department and the IRS are

concerned that this creates an incentive

for persons to operate flights that would

otherwise be subject to the section 4043

fuel surtax outside of FARs Part 91K in

order to avoid the surtax. In these instances, such persons would likely also argue

that amounts paid for aircraft management

services related to the fractional program

aircraft are exempt from air transportation

excise tax under section 4261(e)(5).

To address this issue, the proposed regulations include an anti-abuse rule providing that the section 4261(e)(5) exemption

does not apply to any amount paid for

aircraft management services by a participant in any transaction or arrangement, or

426

through other means, that seeks to circumvent the surtax imposed by section 4043.

In addition, the proposed regulations clarify that the section 4261(e)(5) exemption

does not apply to amounts paid for aircraft

management services related to flights on

fractional program aircraft operated (or

required to be operated) under FARs Part

91K. The proposed regulations also provide that if an amount paid qualifies for

both the exemption provided in section

4261(e)(5) and the exemption provided

in section 4261(j), the section 4261(j) exemption applies to the amount paid and the

surtax imposed by section 4043 applies to

any liquid used in the fractional program

aircraft as fuel. See sections 4261(j) and

4043. This provision is consistent with the

Conference Report and the definition of

“aircraft owner” in §49.4261-10(b)(3)(B)

in the proposed regulations.

2. Additional Proposed Changes to the

Regulations

a. Changes to Part 40

The privilege to file consolidated returns under section 1501 applies only to

income tax returns and not to excise tax

returns. The proposed regulations add

§40.0-1(d) to note this rule and also reflect the rules of §§1.1361-4(a)(8) and

301.7701-2(c)(2)(v) that treat QSubs and

certain business entities as entities separate from their owners for Federal excise

tax purposes. See also Revenue Ruling

2008-18 (2008-1 C.B. 674). Thus, proposed §40.0-1(d) treats each business unit

that has, or is required to have, a separate

Employer Identification Number as a separate person. In the context of air transportation excise tax, this rule applies with

respect to both the person required to pay

the tax under proposed §49.4261-1(b) and

the person required to collect and pay over

the tax under §40.6011(a)-1(a)(3) and section 4291 of the Code.

Proposed §40.0-1(d) was originally

proposed on July 29, 2008, in a notice of

proposed rulemaking (REG-155087-05)

published in the Federal Register (73

FR 43890), but the rules in that regulation

project have not been finalized. Because

of the length of time that has passed since

it was originally proposed, this document withdraws proposed §40.0-1(d) and

Bulletin No. 2020–34

re-proposes the provision as part of these

proposed regulations.

Existing §40.6071(a)-3 provides excise tax return filing rules that apply only

to the quarterly return required under

§40.6011(a)-1(a) for the third calendar

quarter of 2001. The proposed regulations

remove §40.6071(a)-3 in its entirety because it is obsolete.

b. Changes to Part 49

The existing regulations under section

4261 have not been revised since 1962.

The proposed regulations remove existing

language relating to taxes on transportation by rail, motor vehicle, and water,

which have been repealed, and otherwise

update the existing regulations to conform

to current law. The proposed regulations

also remove references to exemptions

that were repealed in 1970. More specifically, the proposed regulations update

§49.4261-1 to reflect: (i) the enactment

of the international travel facilities tax in

1970 (Airport and Airway Development

Act of 1970 (AADA), Pub. L. No. 91258, 84 Stat. 236 (1970)); (ii) the enactment of the domestic segment tax in 1997

(Taxpayer Relief Act of 1997, Pub. L. No.

105-34, 111 Stat. 788 (1997)), and (iii) the

current statutory exemptions from tax under sections 4261(e)(5), 4261(f), 4261(g),

4261(h), 4261(j), 4281, 4282, and 4293 of

the Code.

Section 49.4261-1(b)(1) of the proposed regulations incorporates the payment and collection rules in sections

4261(d) and 4291.

Section 49.4261-1(b)(2) of the proposed regulations reflects the statutory

change to section 4263(c) under section

1031 of the Taxpayer Relief Act of 1997,

and case law interpreting that revision.

Under prior law, section 4263(c) provided that where any tax imposed by section

4261 was not paid at the time payment for

transportation was made, the tax was paid

by the person paying for the transportation

or by the person using the transportation.

In other words, the prior law placed no

payment obligation on the air carrier. The

current version of section 4263(c) provides

that where any tax imposed by section

4261 is not paid at the time the payment

for transportation is made, the air carrier

providing the initial segment of transpor-

Bulletin No. 2020–34

tation that begins and ends in the United

States is liable for the tax. Several courts

have rejected arguments that current section 4263(c) imposes only secondary liability for the applicable section 4261 tax

on the air carrier if the tax is not otherwise

collected. See Sundance Helicopters, Inc.

v. U.S., 104 Fed. Cl. 1, 11 (2012) (“The

plain language of IRC [section] 4263(c)

provides that the air carrier is to pay the

tax if it is not otherwise collected. There is

no mention of primary versus secondary

liability in the text of the statute […] The

language of IRC [section] 4263(c) clearly imposes a payment obligation on the

air carrier.”); Temsco Helicopters, Inc. v.

U.S., 409 F.App’x. 64, 67 (9th Cir. 2010)

(“nothing in [section] 4263(c) requires

that the government first attempt to collect

the [air transportation excise tax] from the

purchasers…”); Papillon Airways, Inc. v.

U.S., 105 Fed. Cl. 154, 163 (2012) (IRC

4263(c) makes “the carrier’s liability conditional on whether the tax was collected

at the time payment for transportation was

made, not whether the government is unsuccessful at collecting the tax.” (emphasis in original)).

Section 49.4261-1(d) of the proposed

regulations generally incorporates the

holdings of Revenue Ruling 71-126

(1971-1 C.B. 363) regarding the general

applicability of the section 4261 taxes to

the transportation of persons on all types

of aircraft, and Revenue Ruling 67-414

(1967-2 C.B. 382) regarding the inapplicability of the section 4261 taxes to the

transportation of persons on hovercraft.

Section 49.4261-2 of the proposed

regulations generally updates the existing

regulations to reflect the statutory additions of the domestic segment tax and the

international travel facilities tax to section 4261. This section also incorporates

the holdings in Revenue Ruling 72-309

(1972-1 C.B. 348) and Revenue Ruling

2002-34 (2002-1 C.B. 1150) regarding the

computation of the domestic segment tax

and the international travel facilities tax.

Section 49.4261-9(a) of the proposed

regulations reflects the rule in section

4261(e)(3)(A) regarding the tax treatment

of mileage awards. The Treasury Department and the IRS are currently considering whether to exercise their authority

under section 4261(e)(3)(C) to prescribe

rules for excluding from the tax base

427

amounts attributable to mileage awards

that are used other than for transportation of persons by air. See Notice 201576 (2015-46 I.R.B. 669). Nothing in these

proposed regulations can be construed as

an exercise of that authority. The proposed

regulations reserve §49.4261-9(b) for the

possible future exercise of the authority

granted to the Secretary of the Treasury or

his delegate under section 4261(e)(3)(C).

The regulations under sections 4262

and 4263 also have generally not been revised since the 1960s. Amendments to the

Code since then, including the repeal of

the seats and berths tax, a change to the

definition of “uninterrupted international

air transportation” under section 4262(c)

(3), and a change to the rules in section

4263(c), have rendered certain provisions

in the existing regulations obsolete. The

proposed regulations remove obsolete

provisions and generally update the existing regulations to conform to current law.

Section 4264 of the Code was redesignated as section 4263 in 1970 by Title

II, section 205(c)(2), of the AADA. However, the regulations under section 4264

were not similarly redesignated. The proposed regulations redesignate the current

section 4264 regulations as section 4263

regulations, remove obsolete provisions,

and generally update the existing regulations to conform to current law.

The proposed regulations update the

rule in §49.4263-5 (which the proposed

regulations redesignate as §49.4281-1)

relating to small aircraft on nonestablished lines to reflect statutory changes to

the exemption. Specifically, the current

regulation provides, in relevant part, that

amounts paid to transport a person on a

small aircraft are “exempt from the tax

imposed under section 4261 provided the

aircraft: (1) has a gross take-off weight of

less than 12,500 pounds […] and (2) has

a passenger seating capacity of less than

10 adult passengers, including the pilot.”

In 1970, the permissible aircraft weight

to qualify for the exemption for small aircraft on nonestablished lines was reduced

to a maximum certificated take-off weight

of 6,000 pounds or less and the maximum

passenger seating capacity rule was eliminated. AADA, Title II, section 205(a)(1).

In 2005, Congress amended section 4281

to clarify that flights for which the sole

purpose is sightseeing are not considered

August 17, 2020

to be operated on an established line. Safe,

Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, Pub. L. No. 109-59, section 11124(a),

119 Stat 1144 (2005). In 2012, Congress

amended section 4281 to exclude jet aircraft from the exemption. FAA Modernization and Reform Act of 2012, Pub. L.

No. 112-95, section 1107(a), 126 Stat 11

(2012). The proposed regulations incorporate the changes to the exemption for

small aircraft on nonestablished lines as

described above.

Section 4282 provides an exemption

from the taxes imposed by section 4261

and 4271 for certain transportation by air

for members of an affiliated group. The

Treasury Department and the IRS have

not issued regulations regarding this provision. The proposed regulations reserve

§49.4282-1 for future rules regarding the

affiliated group exemption under section

4282.

The updates to part 49 in these proposed regulations are not comprehensive

and do not fully update every provision

and example that require modernization.

The updates are intended to address only

the most straightforward and well-settled issues; they are not intended to introduce new rules or address issues that

may require a more nuanced approach.

The Treasury Department and the IRS

believe that these updates will help reduce the burden on taxpayers, collectors,

and revenue agents by providing much

needed basic updates to the part 49 regulations.

Effect on Other Documents

Revenue Ruling 67-414 (1967-2 C.B.

382), Revenue Ruling 72-309 (1972-1

C.B. 348), and Revenue Ruling 2002-34

(2002-1 C.B. 1150) will be obsoleted on

the date these regulations are published

as final regulations in the Federal Register.

Partial Withdrawal of Proposed

Regulations

Under the authority of 26 U.S.C. 7805,

§40.0-1(d) of the notice of proposed

rulemaking (REG-155087-05) published

in the Federal Register on July 29, 2008

(73 FR 43890) is withdrawn.

August 17, 2020

Proposed Applicability Date

The regulations, other than §40.0-1(d),

generally are proposed to apply on and after the later of the date of publication of a

Treasury decision adopting these rules as

final regulations in the Federal Register

or January 1, 2021. Section 40.0-1(d) of

the regulations is proposed to apply on

and after the date of publication of a Treasury decision adopting these rules as final

regulations in the Federal Register.

Special Analyses

This regulation is not subject to review

under section 6(b) of Executive Order

12866 pursuant to the Memorandum of

Agreement (April 11, 2018) between the

Department of the Treasury and the Office

of Management and Budget regarding review of tax regulations.

Because the regulation does not impose

a collection of information on small entities a Regulatory Flexibility Act (5 U.S.C.

chapter 6) analysis is not required.

Pursuant to section 7805(f) of the Code

these regulations have been submitted to

the Chief Counsel for Advocacy of the

Small Business Administration for comment on their impact on small business.

any paper comments submitted, will be

made available at www.regulations.gov or

upon request.

A public hearing will be scheduled if

requested in writing by any person who

timely submits electronic or written comments. Requests for a public hearing are

also encouraged to be made electronically.

If a public hearing is scheduled, notice of

the date and time for the public hearing

will be published in the Federal Register.

Announcement 2020-4 (2020-17 I.R.B.

1) provides that until further notice, public hearings conducted by the IRS will be

held telephonically. Any telephonic hearing will be made accessible to people with

disabilities.

Drafting Information

The principal authors of these regulations are Michael H. Beker and Rachel

S. Smith, Office of the Associate Chief

Counsel (Passthroughs and Special Industries). However, other personnel from the

Treasury Department and the IRS participated in their development.

List of Subjects

26 CFR Part 40

Statement of Availability of IRS

Documents

Excise taxes, Reporting and recordkeeping requirements.

IRS Revenue Procedures, Revenue

Rulings, Notices and other guidance cited

in this document are published in the Internal Revenue Bulletin and are available

from the Superintendent of Documents,

U.S. Government Publishing Office,

Washington, DC 20402, or by visiting the

IRS website at http://www.irs.gov.

26 CFR Part 49

Comments and Requests for a Public

Hearing

Accordingly, 26 CFR parts 40 and 49

are proposed to be amended as follows:

Before these proposed amendments

to the regulations are adopted as final

regulations, consideration will be given

to comments that are submitted timely

to the IRS as prescribed in the preamble

under the “ADDRESSES” section. The

Treasury Department and the IRS request

comments on all aspects of the proposed

regulations. Any electronic comments

submitted, and to the extent practicable

PART 40—EXCISE TAX

PROCEDURAL REGULATIONS

428

Excise taxes, Reporting and recordkeeping requirements, Telephone, Transportation.

Proposed Amendments to the

Regulations

Paragraph 1. The authority citation for

part 40 is amended by removing the entry

for §40.6071(a)-3 to read in part as follows:

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

Par. 2. Section 40.0-1 is amended by

redesignating paragraph (d) as paragraph

Bulletin No. 2020–34

(e), adding a new paragraph (d), and revising newly redesignated paragraph (e)

to read as follows:

§40.0-1 Introduction.

*****

(d) Person. For purposes of this part,

each business unit that has, or is required

to have, a separate employer identification number is treated as a separate person. Thus, business units (for example,

a parent corporation and a subsidiary

corporation, a partner and the partner’s

partnership, or the various members of a

consolidated group), each of which has,

or is required to have, a different employer identification number, are separate

persons.

(e) Applicability date—(1) Paragraphs

(a), (b), and (c). Paragraphs (a), (b), and

(c) of this section apply to returns that relate to periods beginning after March 31,

2013. For rules that apply before that date,

see 26 CFR part 40, revised as of April 1,

2013.

(2) Paragraph (d). Paragraph (d) of

this section applies to returns that relate to

periods beginning on or after [date these

regulations are published as final regulations in the Federal Register]. For rules

that apply before that date, see 26 CFR

part 40, revised as of April 1, 2020.

§40.6071(a)-3 [Removed]

Par. 3. Section 40.6071(a)-3 is removed.

PART 49—FACILITIES AND

SERVICES EXCISE TAX

REGULATIONS

Par. 4. The authority citation for part 49

continues to read in part as follows:

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

Par. 5. Section 49.4261-1 is revised to

read as follows:

§49.4261-1 Imposition of tax; in general.

(a) In general. Section 4261 of the

Internal Revenue Code (Code) imposes

three separate taxes on amounts paid for

certain transportation of persons by air.

Tax attaches at the time of payment for

any transportation taxable under section

4261. The applicability of each section

Bulletin No. 2020–34

4261 tax is generally determined on a

flight-by-flight basis.

(1) Percentage tax. Section 4261(a)

imposes a 7.5 percent tax on the amount

paid for the taxable transportation of any

person. See section 4262(a) of the Code

and §49.4262-1(a) for the definition of the

term taxable transportation.

(2) Domestic segment tax. Section

4261(b)(1) imposes a $3 tax (indexed

annually for inflation pursuant to section

4261(e)(4)) on the amount paid for each

domestic segment of taxable transportation. See section 4261(b)(2) for the definition of the term domestic segment. The

domestic segment tax does not apply to

a domestic segment beginning or ending

at an airport that is a rural airport for the

calendar year in which the segment begins

or ends (as the case may be). See section

4261(e)(1)(B) for the definition of the

term rural airport.

(3) International travel facilities tax.

Section 4261(c) imposes a $12 tax (indexed annually for inflation pursuant to

section 4261(e)(4)) on any amount paid

(whether within or without the United

States) for any transportation by air that

begins or ends in the United States. The

international travel facilities tax does not

apply to any transportation that is entirely taxable under section 4261(a) (determined without regard to sections 4281 and

4282). See section 4261(c)(2). A special

rule applies to Alaska and Hawaii flights.

See section 4261(c)(3).

(b) Payment and collection obligations—(1) In general. The taxes imposed

by section 4261 are collected taxes. In

general, the person making the payment

subject to tax is the taxpayer. See section 4261(d). The person receiving the

payment is the collector (also commonly

referred to as the collecting agent). See

section 4291 of the Code. The collector

must collect the applicable tax from the

taxpayer, report the tax on Form 720,

Quarterly Federal Excise Tax Return, and

remit the tax to the Internal Revenue Service. See sections 4291, 6011, and 7501

of the Code. See §40.6011(a)-1 of this

chapter and §49.4291‑1. The collector

must also make semimonthly deposits of

the taxes imposed by section 4261. See

section 6302(e) of the Code. See §§40.01(c), 40.6302(c)-1, and 40.6302(c)‑3 of

this chapter. See section 4263(a) and (c) of

429

the Code for special rules relating to the

payment and collection of tax.

(2) Failure to collect tax. Where any

tax imposed by section 4261 is not paid

at the time payment for transportation is

made, then, to the extent the tax is not

collected under any other provision of

subchapter C of chapter 33 of the Code,

the tax must be paid by the carrier providing the initial segment of transportation that begins or ends in the United States. See section 4263(c). In other

words, if an amount paid for transportation is subject to tax under section 4261

and the applicable tax is not collected

at the time the payment is made, the

carrier providing the initial segment of

transportation that begins or ends in the

United States is liable for the tax. See

section 6672 of the Code for rules relating to the application of the trust fund

recovery penalty.

(c) Type of aircraft. The taxes imposed

by section 4261 generally apply regardless of the type of aircraft on which the

transportation is provided, provided all of

the other conditions for liability are present and no specific statutory exemption

applies. See paragraph (f) of this section

for a list of statutory exemptions from

tax. Amounts paid for the transportation

of persons by air cushion vehicles, also

known as hovercraft, are not subject to the

taxes imposed by section 4261.

(d) Purpose of transportation. The purpose of the transportation (for example,

business or pleasure) is not a factor in determining taxability under section 4261.

(e) Routes. Amounts paid for transportation may be taxable even if the transportation is not between two definite points.

Unless otherwise exempt, a payment for

continuous transportation that begins and

ends at the same point is subject to tax. See

section 4281 of the Code and §49.42821 for the exemption for small aircraft on

nonestablished lines.

(f) Exemptions from tax; cross-references—(1) Aircraft management services.

For the exemption for certain aircraft

management services, see section 4261(e)

(5) of the Code and §49.4261-10.

(2) Hard minerals, oil, and gas. For

the exemption for certain uses related to

the exploration, development, or removal

of hard minerals, oil, or gas, see section

4261(f)(1).

August 17, 2020

(3) Trees and logging operations. For

the exemption for certain uses related to

trees and logging operations, see section

4261(f)(2).

(4) Air ambulances. For the exemption for air ambulances providing certain

emergency medical transportation, see

section 4261(g).

(5) Skydiving. For the exemption

for certain skydiving uses, see section

4261(h).

(6) Seaplanes. For the exemption for

certain seaplane segments, see section

4261(i).

(7) Fractionally-owned aircraft. For

the exemption for certain aircraft in fractional ownership aircraft programs, see

section 4261(j).

(8) Small aircraft on nonestablished

lines. For the exemption for certain small

aircraft on nonestablished lines, see section 4281 of the Code and §49.4281-1.

(9) Affiliated groups. For the exemption for certain transportation of members

of an affiliated group, see section 4282.

(10) United States and territories. For

exemptions authorized by the Secretary of

the Treasury or his delegate for the exclusive use of the United States, see section

4293.

(g) Applicability date. This section applies on and after the later of [date these

regulations are published as final regulations in the Federal Register] or January

1, 2021. For rules that apply before that

date, see 26 CFR part 49, revised as of

April 1, 2020.

Par. 6. Section 49.4261-2 is amended

by:

1. Revising paragraphs (a) and (b).

2. Adding paragraph (d).

The revisions and addition read as follows:

whether the payment is made as a single

lump sum or is made individually for each

passenger. In the case of charter flights for

which a fixed amount is paid, the section

4261(b) and (c) taxes are computed by

multiplying the applicable rate of tax by

the number of passengers transported on

the aircraft.

*****

(d) Applicability date. Paragraphs (a)

and (b) of this section apply on and after

the later of [date these regulations are published as final regulations in the Federal

Register] or January 1, 2021. For rules

that apply before that date, see 26 CFR

part 49, revised as of April 1, 2020.

Par. 7. Section 49.4261-3 is amended

by:

1. Removing “§49.4262(c)-1” wherever it appears and adding “§49.4262-3” in

its place.

2. In the first sentence of paragraph (a),

removing “The tax imposed by section

4261(a)” and adding “The taxes imposed

by section 4261(a) and (b) of the Internal

Revenue Code (Code)” in its place.

3. In the second sentence of paragraph

(a), adding “under section 4261(a) and

(b)” at the end of the sentence.

4. Removing (b) introductory text and

(b)(1) and redesignating paragraph (b)(2)

as paragraph (b).

5. Revising newly redesignated paragraph (b).

6. Revising paragraph (c).

7. In paragraph (d), removing “section 4262(b) and §49.4262(b)-1” and

adding “section 4262(b) of the Code and

§49.4262-2” in its place.

8. Adding paragraph (e).

The revisions and additions read as follows:

§49.4261-2 Application of tax.

§49.4261-3 Payments made within the

United States.

(a) Tax on total amount paid. The tax

imposed by section 4261(a) of the Internal

Revenue Code (Code) is measured by the

total amount paid for taxable transportation, whether paid in cash or in kind.

(b) Tax on transportation of each

person. The taxes imposed by section

4261(b) and (c) of the Code are head taxes

and, therefore, apply on a per-passenger

basis. The taxes apply to each passenger

for whom an amount is paid, regardless of

*****

(b) Other transportation. In the case of

transportation, other than that described

in paragraph (a) of this section, for which

payment is made in the United States, the

taxes imposed by section 4261(a) and (b)

apply with respect to the amount paid for

that portion of such transportation by air

which is directly or indirectly from one

port or station in the United States to another port or station in the United States,

August 17, 2020

430

but only if such portion is not a part of uninterrupted international air transportation

within the meaning of section 4262(c)(3)

of the Code and §49.4262-3(c). Transportation that:

(1) Begins in the United States or the

225–mile zone and ends outside such area,

(2) Begins outside the United States or

the 225–mile zone and ends inside such

area, or

(3) Begins outside the United States and

ends outside such area, is taxable only with

respect to such portion of the transportation

by air which is directly or indirectly from

one port or station in the United States to

another port or station in the United States,

but only if such portion is not a part of “uninterrupted international air transportation”

within the meaning of section 4262(c)(3)

and §49.4262-3(c). Thus, on a trip by air

from Chicago to London, England, with a

stopover at New York, for which payment

is made in the United States, if the portion

from Chicago to New York is not a part of

“uninterrupted international air transportation” within the meaning of section 4262(c)

(3) and §49.4262-3(c), the taxes would apply to the part of the payment which is applicable to the transportation from Chicago

to New York. However, if the portion from

Chicago to New York is a part of “uninterrupted international air transportation”

within the meaning of section 4262(c)(3)

and §49.4262-3(c), the taxes would not apply.

(c) Method of computing tax on taxable portion. Where a payment is made

for transportation which is partially taxable under paragraph (b) of this section,

the tax imposed by section 4261(a) may

be computed on that proportion of the total amount paid which the mileage of the

taxable portion of the transportation bears

to the mileage of the entire trip.

*****

(e) Applicability date. This section

applies on and after the later of [the date

these regulations are published as final

regulations in the Federal Register] or

January 1, 2021. For rules that apply before that date, see 26 CFR part 49, revised

as of April 1, 2020.

§49.4261-4 [Amended]

Par. 8. Section 49.4261-4 is amended

by:

Bulletin No. 2020–34

1. In paragraph (a), removing the first

“4261(a)” and add “4261 of the Internal

Revenue Code (Code)” in its place.

2. In paragraph (a), removing “section

4261(a) (see section 4264(d))” and adding

“section 4261 (see section 4263(d) of the

Code)” in its place.

3. In paragraph (b), removing

“§49.4262(c)-1” and adding “§49.42623” in its place.

4. In the first sentence of paragraph (d),

removing “§49.4262(c)-1” and adding

“§49.4262-3” in its place.

5. In the first sentence of paragraph

(d), removing “six-hour” and adding “12hour” in its place.

by such other persons. In such case, no

tax will be due on the amount paid by the

charterer for the charter of the aircraft but

it shall be the duty of the owner of the aircraft to advise the charterer of the charterer’s obligation for collecting, accounting

for, and paying over the tax to the Internal

Revenue Service.

*****

(k) Applicability date. Paragraph (h) of

this section applies on and after the later

of [the date these regulations are published as final regulations in the Federal

Register] or January 1, 2021. For rules

that apply before that date, see 26 CFR

part 49, revised as of April 1, 2020.

§49.4261-5 [Amended]

§49.4261-8 [Amended]

Par. 9. Section 49.4261-5 is amended

as follows:

1. In paragraph (a), remove “4261(b)”

wherever it appears and add “4261(a) and

(b)” in its place.

2. In paragraph (c), remove

“§49.4262(b)-1” and add “§49.4262-2” in

its place.

Par. 10. Section 49.4261-7 is amended

by:

1. In the introductory paragraph, removing “4263, 4292, 4293, or 4294” and

adding “4261, 4281, 4282 or 4293 of the

Internal Revenue Code” in its place.

2. Removing and reserving paragraphs

(b), (d), (e), and (g).

3. Revising paragraph (h).

4. In paragraph (i), remove “paragraph

(c) of §49.4261-2 and paragraph (f)(4) of

§49.4261-8” and add “§§49.4261-2(c) and

49.4261-8(f)(4)” in its place.

5. Adding paragraph (k).

The revision and addition read as follows:

Par. 11. Section 49.4261-8 is amended

as follows:

1. In the introductory paragraph, remove “4263, 4292, 4293, or 4294” and

add “4261, 4281, 4282 or 4293 of the Internal Revenue Code” in its place.

2. Paragraphs (f)(2), (3), and (5) are removed and reserved.

Par. 12. Section 49.4261-9 is revised to

read as follows:

§49.4261-7 Examples of payments

subject to tax.

*****

(h) Aircraft charters—(1) When no

charge is made by the charterer of an

aircraft to the persons transported, the

amount paid by the charterer for the charter of the aircraft is subject to tax.

(2) The charterer of an aircraft who

sells transportation to other persons must

collect and account for the tax with respect to all amounts paid to the charterer

Bulletin No. 2020–34

§49.4261-9 Mileage awards.

(a) Tax imposed. Any amount paid (and

the value of any other benefit provided) to

an air carrier (or any related person) for

the right to provide mileage awards for or

other reductions in the cost of any transportation of persons by air is an amount

paid for taxable transportation and is

therefore subject to the tax imposed by

section 4261(a) of the Internal Revenue

Code. See section 4261(e)(3)(A).

(b) [Reserved]

(c) Applicability date. This section applies on and after the later of [date these

regulations are published as final regulations in the Federal Register] or January

1, 2021.

Par. 13. Section 49.4261-10 is revised

to read as follows:

§49.4261-10 Aircraft management

services.

(a) In general—(1) Overview. This

section prescribes rules relating to the

exemption from tax for amounts paid (in

431

cash or in kind) by an aircraft owner to

an aircraft management services provider

for certain aircraft management services.

Pursuant to section 4261(e)(5) of the Internal Revenue Code (Code), the taxes

imposed by sections 4261 and 4271 of the

Code do not apply to amounts paid by an

aircraft owner to an aircraft management

services provider for aircraft management

services related to maintenance and support of the aircraft owner’s aircraft; or

related to flights (flight services) on the

aircraft owner’s aircraft. The exemption

in section 4261(e)(5) applies to amounts

paid by an aircraft owner to an aircraft

management services provider for flight

services on the aircraft owner’s aircraft,

even if the aircraft owner is not on the

flight. The exemption in section 4261(e)

(5) does not apply to amounts paid to an

aircraft management services provider on

behalf of an aircraft owner (other than in

a principal-agent scenario in which the

aircraft owner is the principal). For example, amounts paid for aircraft management

services by one member of an affiliated

group (as that term is defined in section

4282 of the Code) for flights on an aircraft

owned by another member of the affiliated group are not treated as amounts paid

by the aircraft owner. See paragraph (b) of

this section for definitions of terms used

in this section.

(2) Private aviation. The exemption

in section 4261(e)(5) is limited to aircraft

management services related to aircraft

used in private aviation.

(3) Adequate records required. In order to qualify for the exemption in section

4261(e)(5), an aircraft owner and aircraft

management services provider must maintain adequate records to show that the

amounts paid by the aircraft owner to the

aircraft management services provider relate to aircraft management services specifically for the aircraft owner’s aircraft or

for flights on the aircraft owner’s aircraft.

(b) Definitions. This paragraph provides definitions applicable to this section.

(1) Aircraft management services.

The term aircraft management services

means—

(i) Statutory services. The services listed in section 4261(e)(5)(B); and

(ii) Other services. Any service (including, but not limited to, purchasing

fuel, purchasing aircraft parts, and arrang-

August 17, 2020

ing for the fueling of an aircraft owner’s

aircraft) provided directly or indirectly by

an aircraft management services provider to an aircraft owner, that is necessary

to keep the aircraft owner’s aircraft in an

airworthy state or to provide air transportation to the aircraft owner on the aircraft

owner’s aircraft at a level and quality of

service required under the agreement between the aircraft owner and the aircraft

management services provider.

(2) Aircraft management services provider. The term aircraft management services provider means a person that provides aircraft management services, as

defined in paragraph (b)(1) of this section,

to an aircraft owner, as defined in paragraph (b)(3) of this section.

(3) Aircraft owner—(i) In general. The

term aircraft owner means an individual

or entity that leases or owns (that is, holds

title to or substantial incidents of ownership in) an aircraft managed by an aircraft

management services provider (commonly referred to as a managed aircraft). The

term aircraft owner does not include a

lessee of an aircraft under a disqualified

lease, as defined in paragraph (b)(4) of

this section. A person that owns stock in a

commercial airline does not qualify as an

aircraft owner of that commercial airline’s

aircraft.

(ii) Fractional aircraft ownership and

similar arrangements. A participant in a

fractional aircraft ownership program, as

defined in section 4043(c)(2) of the Code,

does not qualify as an aircraft owner of the

program’s managed aircraft if the amount

paid for such person’s participation is

exempt from the taxes imposed by sections 4261 and 4271 by reason of section

4261(j). Similarly, a participant in a business arrangement seeking to circumvent

the surtax imposed by section 4043 by operating outside of subpart K of 14 CFR part

91, that allows an aircraft owner the right

to use any of a fleet of aircraft (through an

aircraft interchange agreement, through

holding nominal shares in a fleet of aircraft, or any other similar arrangement), is

not an aircraft owner with respect to any

of the aircraft owned or leased as part of

that business arrangement.

(4) Disqualified lease. The term disqualified lease has the meaning given

to it by section 4261(e)(5)(C)(ii). A disqualified lease also includes any arrange-

August 17, 2020

ment that seeks to circumvent the rule in

section 4261(e)(5)(C)(ii) by providing

a lease term that is greater than 31 days

but does not provide the lessee with exclusive and uninterrupted access and use

of the leased aircraft, as identified by the

aircraft’s airframe serial number and tail

number. For purposes of the preceding

sentence, the fact that a lease permits

the lessee to use the aircraft for for-hire

flights, as defined in paragraph (b)(5) of

this section, when the lessee is otherwise

not using the aircraft does not, because of

this fact alone, cause a lease with a term

that is greater than 31 days to be a disqualified lease.

(5) For-hire flight. The term for-hire

flight means the use of an aircraft to transport passengers for compensation that is

paid in cash or in kind. The term includes,

but is not limited to, charter flights, air taxi

flights, and sightseeing flights (commonly

referred to as flightseeing flights).

(6) Private aviation. The term private

aviation means the use of an aircraft for

civilian flights except scheduled passenger service.

(7) Substitute aircraft. The term substitute aircraft means an aircraft, other than

the aircraft owner’s aircraft, that is provided by an aircraft management services

provider to the aircraft owner when the

aircraft owner’s aircraft is not available,

regardless of the reason for the unavailability.

(c) Substitute Aircraft—(1) Allocation

required. If an aircraft management services provider provides flight services to

an aircraft owner on a substitute aircraft

during a calendar quarter, the taxes imposed by section 4261 (including the taxes imposed by section 4261(b) or (c), as

appropriate, on each passenger transported) or 4271, as the case may be, apply to

that portion of the amounts paid by the

aircraft owner to the aircraft management

services provider, determined on a pro

rata basis, as described in paragraph (c)

(2) of this section, that are related to the

flight services provided on the substitute

aircraft.

(2) How calculated. The allocation

described in paragraph (c)(1) of this section is calculated by applying to the total

amount paid by an aircraft owner to an

aircraft management services provider

during the calendar quarter the ratio of—

432

(i) Substitute aircraft hours. The total

flight hours provided on substitute aircraft

during the calendar quarter; over

(ii) Total hours. The sum of—

(A) The total flight hours made on the

aircraft owner’s aircraft during the calendar quarter; and

(B) The total flight hours provided to

the aircraft owner on substitute aircraft

during the calendar quarter.

(d) Choice of flight rules. Whether a

flight on an aircraft owner’s aircraft operates pursuant to the rules under Federal

Aviation Regulations prescribed by the

Federal Aviation Administration (FARs)

Part 91 (14 CFR part 91) or pursuant to

the rules under FARs Part 135 (14 CFR

part 135) does not affect the application of

section 4261(e)(5).

(e) Aircraft available for hire—(1) In

general. Whether an aircraft owner permits an aircraft management services provider or other person to use its aircraft to

provide for-hire flights (for example, when

the aircraft is not being used by the aircraft

owner or when the aircraft is being moved

in deadhead service) does not affect the

application of section 4261(e)(5). However, an amount paid for for-hire flights

on the aircraft owner’s aircraft does not

qualify for the section 4261(e)(5) exemption. Therefore, an amount paid for a forhire flight on an aircraft owner’s aircraft

is subject to the tax imposed by section

4261 or 4271, as the case may be, unless

the amount paid is otherwise exempt from

the tax imposed by section 4261 or 4271

other than by reason of section 4261(e)(5).

See §49.4261-7(h) for rules relating to the

application of the tax imposed by section

4261 on amounts paid for charter flights.

(2) Fuel used on for-hire flights. To the

extent amounts paid for for-hire flights

are subject to the tax imposed by section

4261 or 4271, taxable fuel (as defined in

section 4083(a) of the Code) or any liquid taxable under section 4041(c) of the

Code that is used as fuel on such flights is

used in commercial aviation, as that term

is defined in section 4083(b). See sections

4081(a)(2) and 4041(c) for the applicable

fuel tax rates.

(f) Billing methods. Except as provided

in paragraph (a)(3) of this section (relating

to adequate records), the method an aircraft management services provider bills,

invoices, or otherwise charges an aircraft

Bulletin No. 2020–34

owner for aircraft management services,

whether by specific itemization of costs,

flat monthly or hourly fee, or otherwise,

does not affect the application section

4261(e)(5).

(g) Coordination with fuel tax provisions. Taxable fuel (as defined in section

4083(a)) or any liquid taxable under section 4041(c) that is used as fuel on a flight

for which amounts paid are exempt from

the taxes imposed by sections 4261 and

4271 by reason of section 4261(e)(5) is

not fuel used in commercial aviation, as

that term is defined in section 4083(b).

See sections 4081(a)(2) and 4041(c) for

the applicable fuel tax rates.

(h) Multiple aircraft management services providers not disqualifying. Whether an aircraft owner pays amounts to more

than one aircraft management services

provider for aircraft management services

does not affect the application of section

4261(e)(5).

(i) Coordination with exemption for

aircraft in fractional ownership aircraft

programs and fuel surtax; no choice of

exemption; anti-abuse rule. The exemption in section 4261(e)(5) does not apply

to any amount paid for aircraft management services by a participant in any

transaction or arrangement, or through

other means, that seeks to circumvent the

surtax imposed by section 4043. Further,

the exemption in section 4261(e)(5) does

not apply to any amounts paid for aircraft

management services related to flights that

are (or are required to be) operated under

FARs Part 91K (14 CFR part 91K). As a

result, if an amount paid qualifies for both

the exemption provided in section 4261(e)

(5) and the exemption provided in section

4261(j), the exemption provided in section

4261(j) applies to the amount paid and the

surtax imposed by section 4043 applies to

any liquid used in the managed aircraft as

fuel. See sections 4261(j) and 4043.

(j) Examples. The following examples

illustrate the provisions of this section.

(1) Example 1—(i) Facts. An aircraft owner,

which is organized as corporation under state law,

pays a monthly fee of $1,000 to an aircraft management services provider for the provision of a pilot

for flights on the aircraft owner’s aircraft to transport

employees of the aircraft owner’s business to business meetings. The flights constitute taxable transportation, as that term is defined in section 4262(a),

and no exemptions (other than section 4261(e)(5))

apply. During the first calendar quarter of 2020, the

pilot provides 200 flight hours of service on the air-

Bulletin No. 2020–34

craft owner’s aircraft and 50 hours of service on a

substitute aircraft.

(ii) Analysis. The tax imposed by section 4261(a)

applies on a pro rata basis to the pilot’s flight hours

on a substitute aircraft. The allocation is calculated by applying to the $3,000 total amount paid (3

months x $1,000 monthly fee) by the aircraft owner

to the aircraft management services provider during

the calendar quarter the ratio of: 50 (the total pilot

flight hours provided on substitute aircraft during the

calendar quarter) over 250 (the sum of the total pilot

flight hours on the aircraft owner’s aircraft during

the calendar quarter and the total pilot flight hours

provided on substitute aircraft during the calendar

quarter). The computation is as follows: $3,000 x

(50/250) = $600 (amount subject to tax). The portion

of the amount paid that is exempt from the section

4261 taxes by application of section 4261(e)(5) is

$2,400. The portion of the amount paid that is subject to the tax imposed by section 4261(a) is $600.

The tax imposed by section 4261(b) also applies to

amounts paid for flights on substitute aircraft on a

per-passenger basis. See §49.4261-2(b) for rules regarding the application of the tax imposed by section

4261(b).

(2) Example 2—(i) Facts. An aircraft owner pays

a monthly fee to an aircraft management services

provider for aircraft management services related to

the aircraft owner’s aircraft. When the aircraft is not

being used by the owner, the owner sometimes permits a charter company to use the aircraft for charter

flights. At other times when the aircraft is not being

used by the owner, the owner permits a tour operator

to use the aircraft for flightseeing tours. All charter

and flightseeing flights on the aircraft constitute

taxable transportation, as that term is defined in section 4262(a), and no exemptions (other than section

4261(e)(5)) apply. The aircraft’s maximum certificated takeoff weight is 7,000 pounds and the aircraft

uses kerosene as fuel.

(ii) Analysis. Amounts paid by the aircraft owner to the aircraft management services provider for

aircraft management services related to the aircraft owner’s own aircraft are exempt under section 4261(e)(5). Amounts paid by the charterer or

passengers for the charter flights are subject to tax

under section 4261(a) and (b). See §49.4261-7(h)

for rules relating to the application of the tax imposed by section 4261 on amounts paid for charter

flights. See §49.4261-2(b) for rules regarding the

application of the tax imposed by section 4261(b).

Amounts paid by flightseeing customers for flightseeing tours are also subject to tax under section

4261(a) and (b). If a payment for a flightseeing tour

includes charges for nontransportation services, the

charges for the nontransportation services may be

excluded in computing the tax payable provided

the payments are separable and provided in exact

amounts. See §49.4261-2(c). The kerosene used as

fuel on the charter flights and the flightseeing flights

is subject to the tax imposed by section 4081(a) at

the commercial rate.

(k) Applicability date. This section applies on and after the later of [date these

regulations are published as final regulations in the Federal Register] or January

1, 2021.

433

§49.4262(a)-1 [Redesignated]

Par. 14. Section 49.4262(a)-1 is redesignated as §49.4262-1.

Par. 15. Newly redesignated §49.42621 is amended by:

1. In paragraph (a) introductory

text, removing “section 4262(b) (see

§49.4262(b)-1)” and adding “section

4262(b) of the Internal Revenue Code

(Code) (see §49.4262-2)” in its place.

2. In the first sentence of paragraph (a)

(1), removing “Transportation” and adding “Transportation by air” in its place.

3. In the first sentence of paragraph (a)

(1), removing “(the “225-mile zone”)”

and adding “(225-mile zone)” in its place.

4. Revising paragraphs (a)(2) and (b)

(2).

5. In paragraph (b), removing “subparagraphs (1) and (5) of this paragraph”

and adding “paragraph (b)(1) and (5) of

this section” in its place.

6. In paragraph (b), removing “subject

to the tax” and adding “subject to the taxes

imposed by section 4261(a) and (b)” in its

place.

7. Removing and reserving paragraph

(c).

8. Revising introductory paragraph (d);

designating Example (1) as paragraph (d)

(1) and revising new paragraph (d)(1) Example 1.

9. In paragraph (d), designating Example (2) as (d)(2) and removing and reserving newly designated paragraph (d)(2)

Example 2.

10. In paragraph (d), designating Example (3) as paragraph (d)(3) and removing

“6 hours” wherever it appears and adding

“12 hours” in its place and also removing

“subject to tax” wherever it appears and

adding “subject to the taxes imposed by

section 4261(a) and (b)” in its place.

11. In paragraph (d), designating Example (4) as paragraph (d)(4), and removing “six hours” wherever it appears

and adding “12 hours” in its place and

also removing “subject to tax” wherever

it appears and adding “subject to the taxes

imposed by section 4261(a) and (b)” in its

place.

12. Revising paragraph (e).

13. Adding paragraph (f).

The revisions and addition read as follows:

August 17, 2020

§49.4262-1 Taxable transportation.

(a) * * *

(2) In the case of any other transportation by air, that portion of such transportation that is directly or indirectly from one

port or station in the United States to another port or station in the United States,

but only if such transportation is not part of

uninterrupted international air transportation within the meaning of section 4262(c)

(3) of the Code and §49.4262-3(c). Transportation from one port or station in the

United States occurs whenever a carrier, after leaving any port or station in the United

States, makes a regularly scheduled stop at

another port or station in the United States

irrespective of whether stopovers are permitted or whether passengers disembark.

*****

(b) * * *

(2) New York to Vancouver, Canada,

with a stop at Toronto, Canada;

*****

(d) Examples. The following examples illustrate the application of section

4262(a)(2) and the taxes imposed by section 4261(a) and (b) of the Code:

(1) Example (i). A purchases in New York a ticket for air transportation from New York to Nassau,

Bahamas, with a scheduled stopover of 14 hours

in Miami. The part of the transportation from New

York to Miami is taxable transportation as defined in

section 4262(a) because such transportation is from

one station in the United States to another station in

the United States and the trip is not uninterrupted international air transportation (because the scheduled

stopover interval in Miami is greater than 12 hours).

Therefore, the amount paid for the transportation

from New York to Miami is subject to the taxes imposed by section 4261(a) and (b).

*****

(e) Examples of transportation that is

not taxable transportation. The following

examples illustrate transportation that is

not taxable transportation:

(1) New York to Trinidad with no intervening stops;

(2) Minneapolis to Edmonton, Canada,

with a stop at Winnipeg, Canada;

(3) Los Angeles to Mexico City, Mexico, with stops at Tijuana and Guadalajara,

Mexico;

(4) New York to Whitehorse, Yukon

Territory, Canada, by air with a scheduled stopover in Chicago of five hours.

Amounts paid for the transportation referred to in examples set forth in paragraphs (e)(1), (2), and (3) of this section

are not subject to the tax regardless of

where payment is made, since none of the

trips:

(i) Begin in the United States or in

the 225–mile zone and end in the United

States or in the 225–mile zone, nor

(ii) Contain a portion of transportation

which is directly or indirectly from one

port or station in the United States to another port or station in the United States.

The amount paid within the United States

for the transportation referred to in the

example set forth in paragraph (4) of this

section is not subject to tax since the entire trip (including the domestic portion

thereof) is “uninterrupted international

air transportation” within the meaning of

section 4262(c)(3) and paragraph (c) of

§49.4262-3. In the event the transportation is paid for outside the United States,

no tax is due since the transportation does

not begin and end in the United States.

*****

(f) Applicability date. This section applies on and after the later of [date these

regulations are published as final regulations in the Federal Register] or January

1, 2021. For rules that apply before that

date, see 26 CFR part 49, revised as of

April 1, 2020.

§49.4262(b)-1 [Redesignated]

Par. 16. Section 49.4262(b)-1 is redesignated as §49.4262-2.

§49.4262-2 [Amended]

Par. 17. Newly redesignated §49.42622 is amended as follows:

1. In paragraph (a), “section 4262(b)”

is removed and “section 4262(b) of the

Internal Revenue Code” is added in its

place.

2. In paragraph (b)(2), Example (2) is

removed and reserved.

3. Revise paragraph (d). “Illustration”

and add “Example” in its place.

The revisions and additions reads as

follows:

§49.4262-2 Exclusion of certain travel.

*****

(d) Example. The application of paragraph (c) of this section may be illustrated

by the following example: A purchases in

San Francisco a ticket for transportation

by air to Honolulu, Hawaii. The portion

of the transportation which is outside the

continental United States and is outside

Hawaii is excluded from taxable transportation. The tax applies to that part of the

payment made by A which is applicable

to the portion of the transportation between the airport in San Francisco and the

three-mile limit off the coast of California

(a distance of 15 miles) and between the

three-mile limit off the coast of Hawaii

and the airport in Honolulu (a distance of

5 miles). The part of the payment made by

A which is applicable to the taxable portion of his transportation and the tax due

thereon are computed in accordance with

paragraph (c)(1) as follows:

Mileage of entire trip (San Francisco airport to Honolulu airport) (miles)………………………………………

Mileage in continental United States (miles)…………………..

Mileage in Hawaii (miles)………………………………………...

Fare from San Francisco to Honolulu…………………………..

Payment for taxable portion (20/2400 x $168)………………...

Tax due (7.5% (rate in effect on date of payment) x $1.40)…

August 17, 2020

434

2,400

15

5

20

$168.00

$1.40

$0.11

Bulletin No. 2020–34

(All distances and fares assumed for

purposes of this example. This example

only addresses the computation of the tax

imposed by section 4261(a). It does not

address the computation of any other tax

imposed by section 4261 that may apply

to these facts.)

§49.4262(c)-1 [Redesignated]

Par. 18. Section 49.4262(c)-1 is redesignated as §49.4262-3.

Par. 19. Newly redesignated §49.42623 is amended as follows:

1. In the first sentence of paragraph (a),

remove “includes only the 48 States existing on July 25, 1956 (the date of the enactment of the Act of July 25, 1956 (Pub.

L. 796, 84th Cong., 70 Stat. 644) and the

District of Columbia” and add “means the

District of Columbia and the States other

than Alaska and Hawaii” in its place.

2. In paragraph (a), the last sentence is

removed.

3. In paragraph (c), remove “six hours”

wherever it appears and add “12 hours” in

its place.

4. In paragraph (c), remove “6 hours”

wherever it appears and add “12 hours” in

its place.

5. In paragraph (c), remove “six-hour”

wherever it appears and add “12-hour” in

its place.

6. In paragraph (c)(2), remove “paragraph (a)(2) of §49.4264(c)-1” and add

“§49.4263-3(a)(2)” in its place.

7. Adding paragraphs (d) and (e).

The additions read as follows:

§49.4262-3 Definitions.

*****

(d) Transportation. For purposes of the

regulations in this subpart, the term transportation includes layover or waiting time and

movement of the aircraft in deadhead service.

(e) Applicability date. This section applies on and after the later of [date these regulations are published as final regulations in

the Federal Register] or January 1, 2021.

For rules that apply before that date, see 26

CFR part 49, revised as of April 1, 2020.

§49.4263-5 [Redesignated]

Par. 20. Section 49.4263-5 is redesignated as §49.4281-1.

Bulletin No. 2020–34

Par. 21. Newly redesignated §49.42811 is amended by:

1. Revising paragraphs (a) and (b).

2. In paragraph (c), adding a sentence

at the end of the paragraph.

3. Adding paragraphs (d) and (e).

The revisions and additions read as follows:

§49.4281-1 Small aircraft on

nonestablished lines.

(a) In general. Amounts paid for the

transportation of persons on a small aircraft of the type sometimes referred to as

air taxis shall be exempt from the tax imposed under section 4261 of the Internal

Revenue Code provided the aircraft has

a maximum certificated takeoff weight

of 6,000 pounds or less determined as

provided in paragraph (b) of this section.

The exemption does not apply, however,

when the aircraft is operated on an established line or when the aircraft is a jet

aircraft.

(b) Maximum certificated takeoff

weight. The term maximum certificated

takeoff weight means the maximum certificated takeoff weight shown in the type

certificate or airworthiness certificate issued by the Federal Aviation Administration.

(c) * * * An aircraft is not considered as

operated on an established line at any time

during which the aircraft is being operated on a flight the sole purpose of which is

sightseeing.

(d) Jet aircraft. For purposes of this

section, the term jet aircraft does not include any aircraft which is a rotorcraft

(such as a helicopter) or propeller aircraft.

(e) Applicability date. This section applies on and after the later of [date these

regulations are published as final regulations in the Federal Register] or January

1, 2021. For rules that apply before that

date, see 26 CFR part 49, revised as of

April 1, 2020.

§49.4264(a)-1 [Redesignated]

Par. 22. Section 49.4264(a)-1 is redesignated as §49.4263-1.

Par. 23. Newly redesignated §49.42631 is revised to read as follows:

435

§49.4263-1 Duty to collect the tax;

payments made outside the United States.

Where payment upon which tax is

imposed by section 4261 of the Internal

Revenue Code is made outside the United

States for a prepaid order, exchange order, or similar order, the person furnishing

the initial transportation pursuant to such

order shall collect the applicable tax. See

section 4291 and the regulations thereunder for cases where persons receiving payment must collect the tax.

§49.4264(b)-1 [Redesignated]

Par. 24. Section 49.4264(b)-1 is redesignated as §49.4263-2.

§49.4263-2 [Amended]

Par. 25. Newly redesignated §49.42632 is amended as follows:

1. In the first sentence of paragraph

(a), remove “4264(b)” and add “4263(b)

of the Internal Revenue Code (Code)” in

its place.

2. In the last sentence of paragraph (a),

remove “office of the district director for

the district in which the person making the

report is located,” and add “Commissioner” in its place.

3. In paragraph (b), add “of the Code”

at the end of the paragraph.

4. In paragraph (c), remove “Illustration.” and add “Example.” in its place.

5. In the last sentence of paragraph (c),

remove “office of the district director of

internal revenue for the district in which

the carrier is located,” and add in its place

“Commissioner”.

§49.4264(c)-1 [Redesignated]

Par. 26. Section 49.4264(c)-1 is redesignated as §49.4263-3.

Par. 27. Newly redesignated §49.42633 is amended by:

1. Removing “a district director” wherever it appears and adding “Commissioner” in its place.

2. Revising paragraph (a).

3. In paragraph (b), removing the second sentence.

4. In paragraph (b), removing “4264”

wherever it appears and adding “4263” in

its place.

August 17, 2020

5. In paragraph (b), add “of the Code”

after “4291”.

6. Removing and reserving paragraph

(c).

The revisions read as follows:

§49.4263-3 Special rule for the payment

of tax.

(a) In general—(1) For the rules applicable under section 4263(c) of the Internal

Revenue Code, see §49.4261-1(b).

*****

§49.4264(d)-1 [Redesignated]

Par. 28. Section 49.4264(d)-1 is redesignated as §49.4263-4.

§49.4263-4 [Amended]

Par. 29. Newly redesignated §49.42634 is amended by removing “4264(d)” and

adding “4263(d)” in its place.

§49.4264(e)-1 [Redesignated]

Par. 30. Section 49.4264(e)-1 is redesignated as §49.4263-5.

§49.4264(f)-1 [Redesignated]

Par. 31. Section 49.4264(f)-1 is redesignated as §49.4263-6.

§49.4263-6 [Amended]

Par. 32. Newly redesignated §49.42636 is amended by removing and reserving

paragraph (b).

Par. 33. In § 49.4271-1, revise paragraphs (a) and (b) to read as follows:

§49.4271-1 Tax on transportation of

property by air.

(a) Purpose of this section. Section

4271 of the Internal Revenue Code

(Code) imposes a 6.25% tax on amounts

paid within or without the United States

for the taxable transportation of property (as defined in section 4272). This

section sets forth rules as to the general applicability of the tax. This section

also sets forth rules authorized by sec-

August 17, 2020

tion 4272(b)(2) of the Code which exempt from tax payments for the transportation of property by air in the course

of exportation (including shipment to a

possession of the United States) by continuous movement, and in due course so

exported.

(b) Imposition of tax. (1) The tax imposed by section 4271 applies only to

amounts paid to persons engaged in the

business of transporting property by air

for hire.

(2) The tax imposed by section 4271

does not apply to amounts paid for the

transportation of property by air if such

transportation is furnished on an aircraft having a maximum certificated

takeoff weight (as defined in section

4281(b) of the Code) of 6,000 pounds

or less, unless such aircraft is operated

on an established line or when such aircraft is a jet aircraft. The tax imposed

by section 4271 also does not apply to

any payment made by one member of

an affiliated group (as defined in section

4282(b) of the Code) to another member of such group for services furnished

in connection with the use of an aircraft

if such aircraft is owned or leased by a

member of the affiliated group and is not

available for hire by persons who are not

members of such group.

*****

Par. 34. Section 49.4271-2 is added to

read as follows:

§49.4271-2 Aircraft management

services.

For rules regarding the exemption for

certain amounts paid by aircraft owners

for aircraft management services, see

§49.4261-10.

§49.4282-1 [Reserved]

Par. 35. Add and reserve §49.4282-1.

Sunita Lough,

Deputy Commissioner for Services

and Enforcement.

(Filed by the Office of the Federal Register on July

29, 2005, 11:15 a.m., and published in the issue of the

Federal Register for July 31, 2020, 85 F.R. 46032)

436

Notice of Proposed

Rulemaking

Small Business Taxpayer

Exceptions Under Sections

263A, 448, 460 and 471

REG-132766-18

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations to implement legislative changes to sections 263A, 448, 460,

and 471 of the Internal Revenue Code

(Code) that simplify the application of

those tax accounting provisions for certain

businesses having average annual gross

receipts that do not exceed $25,000,000,

adjusted for inflation. This document also

contains proposed regulations regarding

certain special accounting rules for longterm contracts under section 460 to implement legislative changes applicable to

corporate taxpayers. The proposed regulations generally affect taxpayers with average annual gross receipts of not more than

$25 million (adjusted for inflation). Additionally, this document contains a request

for comments regarding the application of

section 460 (or other special methods of

accounting) to a contract with income that

is accounted for in part under section 460

(or other special method) and in part under

section 451.

DATES: Written or electronic comments

or a request for a public hearing must be

received by September 14, 2020.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically. Submit electronic submissions via the Federal eRulemaking Portal

at www.regulations.gov (indicate IRS and

REG-132766-18) by following the online

instructions for submitting comments.

Once submitted to the Federal eRulemaking Portal, comments cannot be edited

Bulletin No. 2020–34

or withdrawn. The IRS expects to have

limited personnel available to process

public comments that are submitted on

paper through mail. Until further notice,

any comments submitted on paper will be

considered to the extent practicable. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comment submitted electronically, and to the extent practicable on paper, to its public docket.

Send paper submissions to: CC:PA:LPD:PR (REG-132766-18), room 5203, Internal Revenue Service, PO Box 7604,

Ben Franklin Station, Washington, D.C.

20044.

FOR FURTHER INFORMATION

CONTACT:

Concerning

proposed

§§1.460-1 through 1.460-6, Innessa

Glazman, (202) 317-7006; concerning all

other proposed regulations in this document, Anna Gleysteen, (202) 317-7007;

concerning submission of comments and/

or requests for a public hearing, Regina

Johnson, (202) 317-5177 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed

amendments to the Income Tax Regulations (26 CFR part 1) to implement

statutory amendments to sections 263A,

448, 460, and 471 of the Code made by

section 13102 of Public Law No. 115-97

(131 Stat. 2054), commonly referred to as

the Tax Cuts and Jobs Act (TCJA). These

statutory amendments generally simplify

the application of the method of accounting rules under those provisions to certain

businesses (other than tax shelters) with

average annual gross receipts that do not

exceed $25,000,000, adjusted for inflation.

This document also contains proposed

amendments to the existing regulations

under section 460 regarding the special

accounting rules for long-term contracts

to implement amendments to the Code

applicable to corporate taxpayers made by

TCJA sections 12001 (repealing the corporate alternative minimum tax imposed

by section 55) and 14401 (adding the base

Bulletin No. 2020–34

erosion anti-abuse tax imposed by new

section 59A).

On August 20, 2018, the Treasury

Department and the IRS issued Revenue

Procedure 2018-40 (2018-34 I.R.B. 320),

which provided administrative procedures

for a taxpayer (other than a tax shelter

under section 448(d)(3)) meeting the requirements of section 448(c) to obtain

consent to change the taxpayer’s method

of accounting to a method of accounting

permitted by section 263A, 448, 460, or

471, as amended by the TCJA under the

automatic change procedures of Revenue

Procedure 2015-13 (2015-5 I.R.B. 419),

as clarified and modified by Revenue Procedure 2015-33 (2015-24 I.R.B. 1067), as

modified by Revenue Procedure 2016-1

(2016-1 I.R.B. 1), and Revenue Procedure 2017-59 (2017-48 I.R.B. 543). The

revenue procedure also invited comments

for future guidance regarding the implementation of the TCJA modifications to

sections 263A, 448, 460, and 471. Two

comments were received in response to

Revenue Procedure 2018-40 and are discussed in the Explanation of Provisions.

Finally, part 5 of the Explanation of

Provisions requests comments regarding

the effects of section 451(b) on the application of section 460, 467, or another

special method of accounting, within the

meaning of section 451(b)(2). On September 9, 2019, the Treasury Department and

the IRS published proposed regulations

under section 451(b) (REG-104870-18)

in the Federal Register (84 FR 47191)

in which comments were requested on the

allocation of the transaction price for contracts that include items of income subject

to section 451 and items of income that are

attributable to long-term contract activities

subject to section 460. One comment was

received in response to this request, but

was outside the scope of the rulemaking as

it was received after the expiration of the

comment period for REG-104870-18. As

discussed in part 5 of the Explanation of

Provisions, the Treasury Department and

the IRS have considered that comment in

requesting additional comments regarding

the application of sections 451(b)(2) and

451(b)(4) to a contract with income that

is accounted for in part under section 451

and in part under section 460, 467, or another special method of accounting.

437

Explanation of Provisions

These proposed regulations provide

guidance under sections 263A, 448, 460,

and 471 to implement the TCJA’s amendments to those provisions. These proposed

regulations also modify §§1.381(c)(5)1 and 1.446-1 to reflect these statutory

amendments.

1. Section 263A Small Business Taxpayer

Exemption

The uniform capitalization (UNICAP)

rules of section 263A provide that, in general, the direct costs and the properly allocable share of the indirect costs of real

or tangible personal property produced, or

real or personal property described in section 1221(a)(1) acquired for resale, cannot

be deducted but must either be capitalized

into the basis of the property or included

in inventory costs, as applicable. Certain

property is exempted from the capitalization requirements of section 263A. For

example, section 263(A)(c)(4) provides

an exemption to the capitalization requirements of section 263A for any property

produced by a taxpayer pursuant to a longterm contract.

In addition, certain taxpayers are exempt from the capitalization requirements.

Prior to the enactment of the TCJA, section 263A(b)(2)(B) and §1.263A-3(b)(1)

provided that resellers with average annual gross receipts of $10,000,000 or less

were not subject to the capitalization requirements (Section 263A small business

reseller exemption). Section 13102(b) of

the TCJA replaced the Section 263A small

reseller exemption with a new general

exemption from section 263A under new

section 263A(i) for small business taxpayers (Section 263A small business taxpayer

exemption). The Section 263A small business taxpayer exemption applies to any

taxpayer (other than a tax shelter under

section 448(a)(3)), meeting the gross receipts test of section 448(c), as amended

by section 13102(a) of the TCJA and explained in greater detail in part 2 of this

Explanation of Provisions (Section 448(c)

gross receipts test).

The proposed regulations remove

the now obsolete Section 263A small

reseller exemption provided in exist-

August 17, 2020

ing §1.263A-3(a)(2)(ii) and (b). These

proposed regulations also modify existing §§1.263A-1, 1.263A-2, 1.263A-3,

1.263A-4, 1.263A-7, and 1.263A-8 to incorporate the Section 263A small business

taxpayer exemption.

A. Application of Section 448(c) Gross

Receipts Test to Taxpayers That Are Not

Corporations or Partnerships

For purposes of the Section 263A

small business taxpayer exemption, section 263A(i)(2) provides that the Section

448(c) gross receipts test is applied in

the same manner as if each trade or business of the taxpayer were a corporation

or partnership. Proposed §1.263A-1(j)

(2)(ii) provides that in the case of a taxpayer other than a corporation or partnership, the Section 448(c) gross receipts

test is applied by taking into account the

amount of gross receipts derived from

all trades or businesses of that taxpayer.

Under the proposed regulations, amounts

not related to a trade or business of that

taxpayer, such as inherently personal

amounts of an individual taxpayer, are

generally excluded from gross receipts.

Such excluded amounts include, in the

case of an individual, items such as Social Security benefits, personal injury

awards and settlements, disability benefits, and wages received as an employee that are reported on Form W-2. The

exclusion for wages does not extend to

guaranteed payments, which are not generally equivalent to salaries and wages.

See Revenue Ruling 69-184 (1969-1 CB

45). These proposed regulations implementing the Section 263A small business

taxpayer exemption are consistent with

the proposed regulations implementing

the Section 460 small business taxpayer

exemption and Section 471 small business taxpayer exemption discussed later

in this Explanation of Provisions, which

incorporate statutory language similar to

that in section 263A(i).

A commenter responding to Revenue

Procedure 2018-40 requested clarification on the application of the Section

448(c) gross receipts test to individuals,

noting that it was unclear whether the

individual owner is required to include

the owner’s share of gross receipts from

pass-through entities in the individual’s

August 17, 2020

gross receipts. The commenter noted that

including such amounts in the individual’s gross receipts would be distortive to

the individual’s other trades or business

reported on Schedules C, Profit or Loss

From Business, Schedule E, Supplemental Income and Loss, and Schedule

F, Profit or Loss From Farming, of the

Form 1040, U.S. Individual Income Tax

Return.

The Treasury Department and the

IRS note that section 263A(i) refers to

section 448(c), and section 448(c)(2) expressly requires the aggregation rules of

sections 52(a) or (b) and 414(m) or (o) to

apply. Thus, the aggregation rules under

section 52(a) or (b) or section 414(m) or

(o) will always apply in connection with

applying section 263A(i)(2). Under section 52, an individual taxpayer with two

or more trades or businesses reported on

the individual’s Schedule C or Schedule E of the individual’s Form 1040 is

required to aggregate the gross receipts

of those trades or businesses. Proposed

§1.263A-1(j)(2)(ii) is con

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