§§ 1.48C-1-1.48C-2 [Reserved]
§ 1.48C-3 Rules relating to the increased credit amount for prevailing wage and apprenticeship.
(a) In general. If any qualifying advanced energy project (as defined in section 48C(c)(1)(A)) satisfies the prevailing wage requirements of section 45(b)(7) and § 1.45-7, the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12, with respect to the re-equipping, expansion, or establishment of a qualifying advanced energy project within the meaning of section 48C, the qualifying advanced energy project credit determined under section 48C(a) for any taxable year with respect to credits allocated pursuant to section 48C(e) is an amount equal to 30 percent of the qualified investment for the taxable year. For purposes of this section, the term re-equipping, expansion, or establishment means those activities described in §§ 1.45-7(d)(3) and 1.45-8(g)(1) that are performed with respect to a qualifying advanced energy project within the meaning of section 48C before such project is placed in service.
(b) Applicability date. This section applies to qualifying advanced energy projects placed in service in taxable years ending after June 25, 2024, and the re-equipping, expansion, or establishment of which begins after June 25, 2024. Taxpayers may apply this section to qualifying advanced energy projects placed in service in taxable years ending on or before June 25, 2024, and qualifying advanced energy projects placed in service in taxable years ending after June 25, 2024, the re-equipping, expansion, or establishment of which begins before June 25, 2024, provided that taxpayers follow this section in its entirety and in a consistent manner.
[T.D. 9998, 89 FR 53272, June 25, 2024]
§ 1.48D-0 Table of contents.
This section lists the table of contents for §§ 1.48D-1 through 1.48D-6.
§ 1.48D-1 Advanced manufacturing investment credit determined.
(a) Overview.
(b) Determination of credit.
(c) Coordination with section 47.
(1) In general.
(2) Example.
(d) Applicability date.
§ 1.48D-2 Definitions.
(a) In general.
(b) Applicable transaction.
(c) Basis.
(1) In general.
(2) Transition rule.
(d) Beginning of construction.
(e) Eligible taxpayer.
(f) Foreign entities.
(1) Foreign entity.
(2) Foreign entity of concern.
(g) Manufacturing of semiconductors.
(h) Manufacturing of semiconductor manufacturing equipment.
(i) Placed in service.
(j) Qualified investment.
(1) In general.
(2) Special rules for certain passthrough entities.
(i) Partnership.
(ii) S corporation.
(iii) Estate or trust.
(3) Qualified progress expenditures election.
(i) In general.
(ii) Special rules for certain passthrough entities.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(k) Section 48D credit.
(l) Section 48D regulations.
(m) Semiconductor.
(n) Semiconductor manufacturing.
(1) Semiconductor wafer production.
(2) Semiconductor fabrication.
(3) Semiconductor packaging.
(4) Assembly.
(5) Testing.
(6) Advanced packaging.
(o) Semiconductor manufacturing equipment.
(p) Statutory references.
(1) Chapter 1.
(2) Code.
(3) Subtitle A.
(q) Applicability date.
§ 1.48D-3 Qualified property.
(a) In general.
(b) Qualified property.
(c) Tangible depreciable property.
(1) In general.
(2) Exception.
(3) Buildings or portions of a building not excluded by section 48D(b)(2)(B)(ii).
(d) Constructed, reconstructed, or erected by the taxpayer.
(e) Original use.
(1) In general.
(2) Treatment of inventory.
(f) Part of an advanced manufacturing facility.
(1) In general.
(2) Property that is not located or co-located at an advanced manufacturing facility or on a contiguous piece of land to the advanced manufacturing facility.
(g) Integral to the operation of an advanced manufacturing facility.
(1) In general.
(2) Vertically integrated manufacturers.
(3) Specific examples of integral property.
(4) Research or storage facilities.
(5) Examples.
(i) Example 1.
(ii) Example 2.
(h) Applicability date.
§ 1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
(a) In general.
(b) Advanced manufacturing facility.
(c) Primary purpose.
(1) In general.
(2) No primary purpose.
(3) Examples.
(i) Example 1: Primary purpose; in general.
(ii) Example 2: Primary purpose; semiconductor wafer production.
(iii) Example 3: Primary purpose; vertically integrated manufacturer.
(iv) Example 4: No primary purpose; vertically integrated manufacturer.
(d) Applicability date.
§ 1.48D-5 Beginning of construction.
(a) Termination of credit.
(1) In general.
(2) Property.
(3) Single advanced manufacturing facility project.
(i) In general.
(ii) Related taxpayers.
(A) Definition.
(B) Related taxpayer rule.
(iii) Example.
(iv) Timing of single advanced manufacturing facility project determination.
(v) Disaggregation.
(vi) Example.
(b) Beginning of construction.
(1) In general.
(2) Continuity requirement.
(c) Physical work test.
(1) In general.
(2) Physical work of significant nature.
(i) In general.
(ii) Exceptions.
(d) Five percent safe harbor.
(1) In general.
(2) Costs.
(3) Cost overruns.
(i) Single advanced manufacturing facility project.
(ii) Example.
(iii) Single property.
(iv) Example.
(e) Continuity requirement.
(1) In general.
(2) Continuous construction.
(3) Continuous efforts.
(4) Excusable disruptions to continuous construction and continuous efforts tests.
(i) In general.
(ii) Effect of excusable disruptions on continuity safe harbor.
(iii) Non-exclusive list of construction disruptions.
(5) Timing of excusable disruption determination.
(6) Continuity safe harbor.
(i) In general.
(ii) Example.
(f) Applicability date.
§ 1.48D-6 Elective payment election.
(a) Elective payment election.
(1) In general.
(2) Partnerships and S corporations.
(3) Irrevocable.
(b) Pre-filing registration required.
(1) In general.
(2) Manner of registration.
(3) Members of a consolidated group.
(4) Timing of pre-filing registration.
(5) Each qualified investment in an advanced manufacturing facility must have its own registration number.
(6) Information required to complete the pre-filing registration process.
(7) Registration number.
(i) In general.
(ii) Registration number is only valid for one year.
(iii) Renewing registration numbers.
(iv) Amendment of previously submitted registration information if a change occurs before the registration number is used.
(v) Registration number is required to be reported on the return for the taxable year of the elective payment election.
(c) Time and manner of election.
(1) In general.
(2) Limitations.
(d) Special rules for partnerships and S corporations.
(1) In general.
(2) Election.
(i) Time and manner of election.
(ii) Effect of election.
(iii) Coordination with sections 705 and 1366.
(iv) Partner's distributive share.
(A) In general.
(B) Interim rule.
(C) Partnership requirements.
(v) S corporation shareholder's pro-rata share.
(vi) Timing of tax exempt income.
(3) Disregarded entity ownership.
(4) Electing partnerships in tiered structures.
(i) In general.
(ii) Electing partnerships in tiered structures; interim rule.
(5) Character of tax exempt income.
(6) Determination of amount of the section 48D credit.
(i) In general.
(ii) Application of section 49 at-risk rules to determination of section 48D credit for partnerships and S corporations.
(iii) Changes in at-risk amounts under section 49 at partner or shareholder level.
(7) Partnerships subject to subchapter C of chapter 63 of the Code.
(8) Example.
(e) Denial of double benefit.
(1) In general.
(2) Application of the denial of double benefit rule.
(3) Use of the section 48D credit for other purposes.
(4) Examples.
(i) Example 1.
(ii) Example 2.
(iii) Example 3.
(iv) Example 4.
(f) Excessive payment.
(1) In general.
(2) Reasonable cause.
(3) Excessive payment defined.
(4) Example.
(g) Basis reduction and recapture.
(1) In general.
(2) Basis adjustment.
(i) In general.
(ii) Basis adjustment by partnership or S corporation.
(iii) Basis adjustment of partners and S corporation shareholders.
(3) Recapture reporting.
(h) Applicability dates.
(1) In general.
(2) Prior taxable years.
[T.D. 10009, 89 FR 84751, Oct. 23, 2024, as amended by T.D. 10009, 89 FR 92793, Nov. 25, 2024]
§ 1.48D-1 Advanced manufacturing investment credit determined.
(a) Overview. For purposes of section 46 of the Code, the amount of the advanced manufacturing investment credit under section 48D of the Code determined for any taxable year is the amount determined under section 48D and this section and §§ 1.48D-2 through 1.48D-6 and 1.50-2 (the section 48D regulations) (subject to any applicable provisions of the Code that may limit the amount determined under section 48D), for such taxable year with respect to any advanced manufacturing facility of an eligible taxpayer. Paragraph (b) of this section provides the general rules for determining the amount of a taxpayer's section 48D credit for a taxable year. Paragraph (c) of this section provides rules coordinating the section 48D credit with the rules of section 47 of the Code (relating to the rehabilitation credit). Section 1.48D-2 provides definitions that apply for purposes of section 48D and the section 48D regulations. Section 1.48D-3 provides rules relating to the definition of qualified property for purposes of the section 48D credit. Section 1.48D-4 provides rules relating to the definition of an advanced manufacturing facility of an eligible taxpayer for purposes of the section 48D credit. Section 1.48D-5 provides rules regarding the beginning of construction of property for purposes of the section 48D credit. Section 1.48D-6 provides rules related to the elective payment election of the section 48D credit. See § 1.50-2 for additional rules under section 50(a)(3) and (6) of the Code relating to applicable transactions that result in the recapture of section 48D credits.
(b) Determination of credit. Subject to any applicable sections of the Code that may limit the credit determined under section 48D, the section 48D credit for any taxable year of an eligible taxpayer with respect to any advanced manufacturing facility is an amount equal to 25 percent of the taxpayer's qualified investment for the taxable year with respect to that advanced manufacturing facility. A section 48D credit is available only with respect to qualified property that a taxpayer places in service after December 31, 2022, and, for any qualified property the construction of which began prior to January 1, 2023, only to the extent of the basis of that property attributable to the construction, reconstruction, or erection of that property occurring after August 9, 2022. Under section 48D(e), no section 48D credit is allowed to a taxpayer for placing qualified property in service in any taxable year if the beginning of construction of that qualified property as determined under § 1.48D-5 begins after December 31, 2026 (the date specified in section 48D(e)).
(c) Coordination with section 47—(1) In general. The qualified investment with respect to any advanced manufacturing facility of an eligible taxpayer for any taxable year does not include that portion of the basis of any property that is attributable to qualified rehabilitation expenditures, as defined in section 47(c)(2) and § 1.48-12(c), with respect to a qualified rehabilitated building, as defined in section 47(c)(1) and § 1.48-12(b).
(2) Example: Coordination with section 47. X Corp, a calendar-year C corporation, owns Building A, a certified historic structure. X Corp's adjusted basis in Building A is $100,000. Between August 1, 2024, and October 31, 2024, X Corp incurs $1 million to reconstruct, within the meaning of section 48D(b)(2)(A)(iii)(I) and § 1.48-12(b)(2)(iv), Building A. X Corp places the reconstructed Building A, a qualified rehabilitated building, in service on November 15, 2024. Of the $1 million of capitalized expenditures incurred to reconstruct Building A (all of which would meet the definition of qualified investment), $250,000 also meets the definition of qualified rehabilitation expenditures (QREs). As such, X Corp's qualified investment in Building A is $750,000 ($1 million−$250,000). X Corp's qualified investment in Building A remains $750,000 even if X Corp does not determine a rehabilitation credit with respect to the $250,000 of QREs.
(d) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
[T.D. 10009, 89 FR 84752, Oct. 23, 2024]
§ 1.48D-2 Definitions.
(a) In general. The definitions in paragraphs (b) through (p) of this section apply for purposes of sections 48D and 50 of the Code and § 1.48D-1, this section and §§ 1.48D-3 through 1.48D-6 and 1.50-2 (the section 48D regulations).
(b) Applicable transaction. The term applicable transaction has the meaning provided in section 50(a)(6) and § 1.50-2.
(c) Basis—(1) In general. With respect to any qualified property, the term basis has the same meaning as provided in § 1.46-3(c). Thus, the basis of the qualified property generally is determined in accordance with the general rules of subtitle A for determining the basis of property (see subtitle A, subchapter O, part II of the Code). As such, the basis of qualified property would generally be the cost of that qualified property (see section 1012 of the Code) unreduced by any adjustments to basis and would include all items properly included by the taxpayer in the depreciable basis of the qualified property.
(2) Transition rule. For property the construction of which began prior to January 1, 2023, and is placed in service after December 31, 2022, the portion of the basis of such property attributable to construction, reconstruction, or erection after August 9, 2022, must be allocated using any reasonable method, including by applying the principles of section 461 of the Code. Rules similar to the rules in §§ 1.48-2(b)(2), 1.48-11(b)(5)(i), and 1.48-12(c)(1) are applicable.
(d) Beginning of construction. The term beginning of construction has the meaning provided in § 1.48D-5.
(e) Eligible taxpayer. The term eligible taxpayer means any taxpayer that—
(1) Is not a foreign entity of concern; and
(2) Has not made an applicable transaction during the taxable year.
(f) Foreign entities—(1) Foreign entity. The term foreign entity has the same meaning as provided in 15 CFR 231.103.
(2) Foreign entity of concern. The term foreign entity of concern has the same meaning as provided in 15 CFR 231.104.
(g) Manufacturing of semiconductors. The term manufacturing of semiconductors and the term semiconductor manufacturing are synonymous.
(h) Manufacturing of semiconductor manufacturing equipment. The term manufacturing of semiconductor manufacturing equipment means the physical production (in a manufacturing facility) of semiconductor manufacturing equipment, which is used by an advanced manufacturing facility engaged in the manufacturing of semiconductors as defined in paragraph (g) of this section.
(i) Placed in service. The term placed in service has the same meaning as provided in § 1.46-3(d).
(j) Qualified investment—(1) In general. Except as provided in paragraph (j)(2) and (3) of this section, the term qualified investment with respect to an advanced manufacturing facility means, for any taxable year, the basis of any qualified property that is part of an advanced manufacturing facility and placed in service by the taxpayer during the taxable year.
(2) Special rules for certain passthrough entities. In the case of any qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service by an entity described in paragraphs (j)(2)(i) through (iii) of this section during a taxable year, the rules of this paragraph (j)(2) apply to determine the qualified investment for the taxable year with respect to the advanced manufacturing facility.
(i) Partnership. In the case of a partnership that places in service qualified property that is part of an advanced manufacturing facility of an eligible taxpayer, each partner in the partnership must take into account separately the partner's share of the basis of the qualified property placed in service by the partnership during the taxable year as provided in § 1.46-3(f).
(ii) S corporation. The basis of qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service during the taxable year by an S corporation (as defined in section 1361(a) of the Code) must be apportioned pro rata among the S corporation's shareholders on the last day of the S corporation's taxable year as provided in section 1366.
(iii) Estate or trust. The basis of qualified property that is part of an advanced manufacturing facility of an eligible taxpayer and placed in service during the taxable year by an estate or trust must be apportioned among the estate or trust and its beneficiaries on the basis of the income of the estate or trust allocable to each for that taxable year.
(3) Qualified progress expenditures election—(i) In general. A taxpayer may elect, as provided in § 1.46-5, to increase the qualified investment with respect to any advanced manufacturing facility of an eligible taxpayer for the taxable year, by any qualified progress expenditures made after August 9, 2022.
(ii) Special rules for certain passthrough entities. Notwithstanding the provisions of § 1.46-5, relating to elections of progress expenditure property being constructed by or for a partnership or S corporation, the rules of § 1.46-5(o)(1) and (p) do not apply to prohibit a partnership or S corporation from making a progress expenditure election under § 1.46-5 with respect to qualified property if the partnership or S corporation intends to make an elective payment election under section 48D(d) and § 1.48D-6 with respect to a section 48D credit determined with respect to such qualified property.
(4) Examples. The provisions of this paragraph (j) are illustrated by the following examples.
(i) Example 1: Advanced manufacturing investment credit: qualified investment in general. On November 1, 2024, X, a calendar-year C corporation, places in service qualified property with a basis of $200,000, and on December 1, 2024, X places in service qualified property with a basis of $300,000. X's qualified investment for the taxable year is $500,000 ($200,000 + $300,000).
(ii) Example 2: Advanced manufacturing investment credit: qualified investment for partnerships. A, B, C, and D, all calendar-year C corporations, are partners in the ABCD partnership. Partners A, B, C, and D share partnership profits equally. On November 1, 2024, the ABCD partnership placed in service qualified property with a basis of $1 million. Each partner's share of the basis of the qualified property, as determined in § 1.46-3(f)(2), is $250,000 ($1m × 0.25) and each partner's qualified investment is $250,000.
(k) Section 48D credit. The term section 48D credit means the advanced manufacturing investment credit determined under section 48D and the section 48D regulations.
(l) Section 48D regulations. The term section 48D regulations means §§ 1.48D-1 through 1.48D-6 and 1.50-2.
(m) Semiconductor. The term semiconductor means, consistent with 15 CFR 231.115, an integrated electronic device or system most commonly manufactured using materials such as, but not limited to, silicon, silicon carbide, or III-V compounds, and processes such as, but not limited to, lithography, deposition, and etching. Such devices and systems include, but are not limited to, analog and digital electronics, power electronics, and photonics, for memory, processing, sensing, actuation, and communications applications.
(n) Semiconductor manufacturing. The term semiconductor manufacturing and the term manufacturing of semiconductors are synonymous and mean, consistent with 15 CFR 231.116, semiconductor wafer production, semiconductor fabrication, or semiconductor packaging. The following terms have the following meanings in connection with semiconductor wafer production, semiconductor fabrication, and semiconductor packaging for purposes of section 48D and the section 48D regulations:
(1) Semiconductor wafer production includes the processes of growing single-crystal ingots and boules, wafer slicing, etching and polishing, bonding, cleaning, epitaxial deposition, and metrology.
(2) Semiconductor fabrication includes the process of forming devices such as transistors, poly capacitors, non-metal resistors, and diodes, as well as interconnects between such devices, on a wafer of semiconductor material.
(3) Semiconductor packaging means the process of enclosing a semiconductor in a protective container (package) and providing external power and signal connectivity for the assembled integrated circuit and includes the process of assembly and testing of semiconductors and advanced packaging of semiconductors.
(4) Assembly includes, but is not limited to, wafer-dicing, die-bonding, wire bonding, solder bumping, and encapsulation.
(5) Testing includes, but is not limited to, probing, screening, and burn-in work.
(6) Advanced packaging means a subset of packaging technologies that uses novel techniques and materials to increase the performance, power, modularity, and/or durability of an integrated circuit. Advanced packaging technologies include flip-chip, 2D, 2.5D, and 3D stacking, fan-out and fan-in, and embedded die/system-in-package (SiP).
(o) Semiconductor manufacturing equipment. The term semiconductor manufacturing equipment means the highly engineered and specialized equipment used in the manufacturing of semiconductors as defined in paragraph (g) of this section and the subsystems that enable or are incorporated into the manufacturing equipment. Specific examples of semiconductor manufacturing equipment and subsystems that enable semiconductor manufacturing equipment include but are not limited to:
(1) Deposition equipment, including, Chemical Vapor Deposition (CVD), Physical Vapor Deposition (PVD), Electrodeposition, and Atomic Layer Deposition (ALD);
(2) Etching equipment (wet etch, dry etch);
(3) Equipment for epitaxial growth of transistor features;
(4) Chemical-mechanical polishing equipment to planarize layers through the semiconductor fabrication process;
(5) Lithography equipment (steppers and scanners of various light wavelengths, such as deep UV, extreme ultraviolet (EUV), photoresist coating, and developer tracks);
(6) Equipment for producing ingots and boules, wafer growth equipment, wafer slicing equipment, wafer dicing equipment, and wire bonders;
(7) Inspection and measuring equipment, including scanning electron microscopes, atomic force microscopes, optical inspection systems, wafer probes and optical scatterometer, EDS (Energy Dispersive Spectroscopy);
(8) Certain metrology and inspection systems to measure critical dimensions of the integrated circuit features throughout the fabrication process, detection and measurement of defects on the wafers during the fabrication process;
(9) Ion implantation and diffusion/oxidation furnaces;
(10) Specialty glass components including EUV mirrors and optical pathways, lenses and mirrors used in inspection equipment and other fabrication processes, and lens assemblies for wafer defect inspection;
(11) Electrostatic chucks;
(12) High performance pumps;
(13) High purity quartz devices;
(14) Ultra-high vacuum chamber components; and
(15) Photomasks and light sources used in photolithography.
(p) Statutory references—(1) Chapter 1. The term chapter 1 means chapter 1 of the Code.
(2) Code. The term Code means the Internal Revenue Code.
(3) Subtitle A. The term subtitle A means subtitle A of the Code.
(q) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
[T.D. 10009, 89 FR 84752, Oct. 23, 2024, as amended by T.D. 10009, 89 FR 92793, Nov. 25, 2024]
§ 1.48D-3 Qualified property.
(a) In general. This section provides definitions and rules relating to qualified property for purposes of section 48D of the Code and the section 48D regulations.
(b) Qualified property. The term qualified property means tangible depreciable property that is part of, and integral to, the operation of an advanced manufacturing facility and that is either—
(1) Constructed, reconstructed, or erected by the taxpayer; or
(2) Acquired by the taxpayer if the original use of such property commences with the taxpayer.
(c) Tangible depreciable property—(1) In general. The term tangible depreciable property means tangible personal property (as defined in § 1.48-1(c)), other tangible property (as defined in § 1.48-1(d)), and building and structural components (as defined in § 1.48-1(e), except as provided in paragraphs (c)(2) and (3) of this section) with respect to which depreciation (or amortization in lieu of depreciation) is allowable. The law of a State or local jurisdiction is not controlling for purposes of determining whether property is tangible property for purposes of section 48D or the section 48D regulations.
(2) Exception. Pursuant to section 48D(b)(2)(B)(ii), except as provided in paragraph (c)(3) of this section, the term tangible depreciable property does not include a building and its structural components, or a portion thereof, used for—
(i) Offices;
(ii) Administrative services such as human resources or personnel services, payroll services, legal and accounting services, and procurement services;
(iii) Sales or distribution functions;
(iv) Security services (not including cybersecurity operations); or
(v) Any other functions unrelated to manufacturing of semiconductors or semiconductor manufacturing equipment.
(3) Buildings or portions of a building not excluded by section 48D(b)(2)(B)(ii). Buildings or portions of a building not treated as offices and that are considered related to manufacturing of semiconductors or semiconductor manufacturing equipment include buildings or portions of a building used for:
(i) Gowning to enter to and from a cleanroom environment;
(ii) Monitoring operations and remote access of equipment;
(iii) Functions performed by unit process engineers including developing, monitoring, updating and overseeing individual process recipes running on every tool in the facility to manufacture, measure and test wafers including access to relevant data, data analysis, modifications and updates to the process recipes on the tools;
(iv) Functions performed by equipment engineers including overseeing tools to ensure proper operation by accessing data about the tool health and performance remotely adjusting the tool at workstations, and issuing work orders to the equipment and maintenance technicians from the workstations;
(v) Functions performed by test engineers including monitoring the electrical test data being collected from the wafers at certain points in their processing;
(vi) Functions performed by yield and defect engineers including reviewing inspection data collected from wafers;
(vii) Functions performed by metrology engineers including reviewing physical measurement data collected from the wafers;
(viii) Functions performed by integration engineers that are responsible for the technology node and the end-to-end wafer process;
(ix) Functions performed by facilities engineers including monitoring and controlling facilities systems; and
(x) Functions related to central utilities buildings, material handling and ultrapure water generation facilities, and computing (data center).
(d) Constructed, reconstructed, or erected by the taxpayer. Property is considered constructed, reconstructed, or erected by the taxpayer if the work is done for the benefit of the taxpayer in accordance with the taxpayer's specifications.
(e) Original use—(1) In general. Except as provided in paragraph (e)(2) of this section, the term original use means with respect to any property the first use to which the property is put by any taxpayer in connection with a trade or business or for the production of income. Additional capital expenditures paid or incurred by a taxpayer to recondition or rebuild property acquired or owned by the taxpayer satisfy the original use requirement to the extent of the expenditures paid or incurred by a taxpayer. However, a taxpayer's cost to acquire property reconditioned or rebuilt by another taxpayer does not satisfy the original use requirement. Whether property is reconditioned or rebuilt property will be determined based on the facts and circumstances.
(2) Treatment of inventory. For purposes of paragraph (e)(1) of this section, if a taxpayer initially acquires new property and holds the property primarily for sale to customers in the ordinary course of the taxpayer's trade or business and subsequently withdraws the property from inventory and uses the property primarily in the taxpayer's trade or business or primarily for the taxpayer's production of income, the taxpayer is considered the original user of the property. If a person initially acquires new property and holds the property primarily for sale to customers in the ordinary course of the person's business and a taxpayer subsequently acquires the property from the person for use primarily in the taxpayer's trade or business or primarily for the taxpayer's production of income, the taxpayer is considered the original user of the property. For purposes of this paragraph (e), the original use of the property by the taxpayer commences on the date on which the taxpayer first uses the property primarily in the taxpayer's trade or business or primarily for the taxpayer's production of income.
(f) Part of an advanced manufacturing facility—(1) In general. To qualify for the section 48D credit, property must be part of the advanced manufacturing facility, as provided in this paragraph (f). Property is part of an advanced manufacturing facility if the property is physically located or co-located either at the advanced manufacturing facility, or on a contiguous piece of land to the advanced manufacturing facility. Parcels or tracts of land will be considered contiguous if they possess common boundaries, and would be contiguous but for the interposition of a road, street, railroad, public utility, stream or similar property.
(2) Property that is not located or co-located at an advanced manufacturing facility or on a contiguous piece of land to the advanced manufacturing facility. Property that is not located or co-located at an advanced manufacturing facility or on a contiguous piece of land to the advanced manufacturing facility may be considered part of the advanced manufacturing facility if the property is owned by the same taxpayer as the entire advanced manufacturing facility, connected to the advanced manufacturing facility (e.g., via pipeline) and the sole purpose, function, and output of the property is dedicated to the operation of the advanced manufacturing facility.
(g) Integral to the operation of an advanced manufacturing facility—(1) In general. To qualify for the section 48D credit, property must be integral to the operation of manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment, both as provided in § 1.48D-2. Property is integral to the operation of manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment if such property is used directly in the manufacturing operation, is essential to the completeness of the manufacturing operation, and is not transformed in any material way as a result of the manufacturing operation. Materials, supplies, and other inventoriable items of property that are transformed during the manufacturing of semiconductors or into a unit of semiconductor manufacturing equipment are not considered property integral to the operation of an advanced manufacturing facility. For this purpose, the term transform does not include the normal degradation of components of semiconductor manufacturing equipment. In addition, property such as pavements, parking areas, inherently permanent advertising displays, or inherently permanent outdoor lighting facilities, although used in the operation of a business, ordinarily are not integral to the operation of an advanced manufacturing facility. Thus, for example, all property used by the taxpayer to acquire or transport materials or supplies to the point where the actual manufacturing activity commences (such as docks, railroad tracks, and bridges), or all property (other than materials or supplies) used by the taxpayer during the manufacturing of semiconductors or during the manufacturing of semiconductor manufacturing equipment within the meaning of § 1.48D-2, would be considered property integral to the operation of an advanced manufacturing facility of an eligible taxpayer. Property is considered integral to the operation of an advanced manufacturing facility of an eligible taxpayer if so used either by the owner of the property or by a lessee of the property.
(2) Vertically integrated manufacturers. If an advanced manufacturing facility that is engaged in the manufacturing of semiconductors within the meaning of § 1.48D-2 also conducts vertically integrated activities (for example, producing raw materials and manufacturing, ingots, wafers, and semiconductors), then property integral to the operation of such an advanced manufacturing facility includes only the property used in the manufacturing of semiconductors within the meaning of § 1.48D-2.
(3) Specific examples of integral property. Specific examples of property that normally would be integral to the operation of the advanced manufacturing facility of an eligible taxpayer are:
(i) Equipment and tools used in the processes of Chemical Vapor Deposition (CVD), and Physical Vapor Deposition (PVD), Atomic Layer deposition (ALD), oxidation, annealing, and epitaxy. Such equipment includes Deposition and thin-film growth equipment, etching equipment, and lithography equipment (including Extreme Ultraviolet Lithography (EUV));
(ii) Wet process tools, analytical tools, E-Beam operation tools (to repair masks), mask manufacturing equipment, chemical mechanical polishing equipment, reticle handlers, and stockers;
(iii) Inspection and metrology equipment, including scanning electron microscopes, atomic force microscopes, ion milling tools, optical inspection systems, wafer probes and optical scatterometer;
(iv) Clean room facilities, including locker and gowning rooms, specialized lighting systems, automated material systems for wafer handling, specialized recirculating air handlers, to maintain the cleanroom free from particles, control temperature and humidity levels, and specialized ceilings comprised of HEPA filters;
(v) Cleanroom equipment (including jogs, hand tools, calibration equipment, and temperature pollution monitoring tools) and specialty cleaning equipment;
(vi) Electrical power facilities, cooling facilities, chemical supply systems, and wastewater and wastewater treatment systems, including water management, water conservation, and water treatment equipment, materials and technologies;
(vii) Electricity distribution equipment including connectors, capacitors, meters and sockets, switchgear, surge arresters and transformers;
(viii) Sub-fab levels containing pumps, transformers, abatement systems, ultrapure water systems, uninterruptible power supply, and boilers, pipes, storage systems, wafer routing systems and databases, backup systems, quality assurance equipment, and computer data centers;
(ix) Utility level equipment including chillers, systems to handle nitrogen, argon, and other gases, compressor systems, and pipes;
(x) Industrial automation and control equipment (including, but not limited to, programmable logic controllers, process controllers, distributed control systems, human machine interface and motor controls and accessories);
(xi) Industrial automation communications devices, networks, and software for industrial automation control products and systems including automated material handling systems (AMHS) and advance wafer routing software systems and databases;
(xii) Tooling equipment;
(xiii) Back-end manufacturing equipment related to assembly, testing, and packaging;
(xiv) Photolithography tools;
(xv) Photomasks, reticles, pellicle, steppers, scanners, and photoresist related equipment;
(xvi) Emulation tools;
(xvii) Rapid thermal processing tools (annealing tubs and vacuum ovens), melting laser annealing (MLA) equipment, wafer bonding equipment, physical removal processing tools (flycutter DieSaw and backgrind), and edge seal dispense;
(xviii) Site infrastructure including but limited to energy, water, natural gas, backup power generators, transformers, stormwater management and fire protection;
(xix) Equipment and installation (wipe-film evaporators);
(xx) Chemical and gas delivery systems (piping, storage, and waste systems including hazardous waste);
(xxi) Bulk chemical purification systems (Liquid N2, Ar, H2, etc.);
(xxii) HVAC air conditioning and air handling systems, critical cooling water systems and heating systems;
(xxiii) Wafer stockers with temperature and air quality control;
(xxiv) Temperature control systems;
(xxv) Security and monitoring system and devices;
(xxvi) Failure analysis labs and equipment;
(xxvii) Quality assurance equipment including incoming goods, in-process inspection, and finished-good inspection;
(xxviii) Transportation, trolleys and carts that are used to transport wafers or overhead conveyer systems to move the carts;
(xxxix) Lighting products;
(xxx) Industrial gas generation and/or handling systems, such as air separation units, including any associated backup and storage equipment;
(xxxi) Input shaping tooling;
(xxxii) Crystal formation and coating equipment;
(xxxiii) Mechanical equipment; and
(xxxiv) Polishing equipment.
(4) Research or storage facilities. If property, including a building and its structural components, constitutes a research or storage facility and is used in connection with the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment, the property may qualify as integral to the operation of the advanced manufacturing facility under section 48D(b)(2)(A)(iv). Specific examples of research facilities include research facilities that manufacture semiconductors in connection with research, such as pre-pilot production lines and prototypes, including semiconductor packaging. Specific examples of storage facilities are mineral or chemical storage equipment, gas storage tanks, including high pressure cylinders or specially designed tanks and drums, wastewater storage, and inventory and finished goods warehouses. A research facility that does not manufacture any type of semiconductor, as provided in § 1.48D-2(m), or semiconductor manufacturing equipment, as provided in § 1.48D-2(o), does not qualify.
(5) Examples. The following examples illustrate the rules of this paragraph (g):
(i) Example 1. X Corp, a calendar-year C corporation, is a manufacturer of air separation units that are designed to supply on demand nitrogen to an advanced manufacturing facility. In January 2025, X Corp places in service an air separation unit that is co-located at an advanced manufacturing facility on a contiguous piece of land to the advanced manufacturing facility. The air separation unit produces nitrogen on demand, and the nitrogen is used directly in the manufacturing of semiconductors. The air separation unit is part of the advanced manufacturing facility within the meaning of paragraph (f) of this section because the air separation unit is located on a contiguous piece of land to the advanced manufacturing facility. The air separation unit is property integral to the operation of an advanced manufacturing facility under this paragraph (g) because it is used directly in, and is essential to, the completeness of the semiconductor manufacturing operation, and is not transformed in any material way as a result of the semiconductor manufacturing operation.
(ii) Example 2. Y Corp, a calendar-year C corporation, is a manufacturer of specialty chemicals that are used in the manufacturing of semiconductors. In 2025, Y Corp places in service equipment at its facility that manufactures the specialty chemicals. The equipment is located five miles from the advanced manufacturing facility, but is not part of the advanced manufacturing facility within the meaning of paragraph (f) of this section because it is not located or co-located at the advanced manufacturing facility, or on a contiguous piece of land to the advanced manufacturing facility, and it is not connected to the advanced manufacturing facility. Also in 2025, Y Corp places in service chemical storage tanks that are part of the advanced manufacturing facility within the meaning of paragraph (f) of this section because the property is located on a contiguous piece of land to the advanced manufacturing facility. The chemical storage tanks are property integral to the operation of the advanced manufacturing facility pursuant to paragraph (g) of this section.
(h) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
[T.D. 10009, 89 FR 84752, Oct. 23, 2024]
§ 1.48D-4 Advanced manufacturing facility of an eligible taxpayer.
(a) In general. This section provides definitions and rules relating to advanced manufacturing facilities of eligible taxpayers for purposes of section 48D of the Code and the section 48D regulations.
(b) Advanced manufacturing facility. For purposes of section 48D(b)(3) and this section, the term advanced manufacturing facility means a facility of an eligible taxpayer for which the primary purpose, as determined under paragraph (c)(1) of this section, is the manufacturing of semiconductors or the manufacturing of semiconductor manufacturing equipment within the meaning of § 1.48D-2.
(c) Primary purpose—(1) In general. The determination of the primary purpose of a facility will be made based on all the facts and circumstances surrounding the construction, reconstruction, or erection of the advanced manufacturing facility of an eligible taxpayer. Facts that may indicate a facility has a primary purpose of manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment include plans or other documents for the facility that demonstrate that the facility is designed for the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment within the meaning of § 1.48D-2. Facts may also include the possession of permits or licenses needed for the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment; and executed contracts to a customer to supply such semiconductors or executed contracts to an advanced manufacturing facility as defined in paragraph (b) of this section to supply such semiconductor manufacturing equipment in place either before or within 6 months after the facility is placed in service. A facility has the primary purpose of manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment if more than 50 percent of its potential output, as measured by cost to produce, revenue received in an arm's length transaction, or units produced, constitutes manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment within the meaning of § 1.48D-2. However, property placed in service in a taxable year must still meet the definition of qualified property under section 48D(b)(2) and § 1.48D-3 for its basis to be included as part of the qualified investment in the advanced manufacturing facility eligible for the section 48D credit. For example, property that is not integral to the operation of an advanced manufacturing facility as provided in § 1.48D-3(g) may not be included as a qualified investment in an advanced manufacturing facility.
(2) No primary purpose. A facility for which the primary purpose is the manufacturing, producing, growing, or extracting of materials or chemicals that are supplied to an advanced manufacturing facility is not a facility for which the primary purpose is the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment. Thus, for example, facilities that exclusively produce semiconductor-grade polysilicon, or produce gases, or that manufacture components or parts, to supply to an advanced manufacturing facility engaged in the manufacturing of semiconductors or manufacturing of semiconductor manufacturing equipment are not facilities for which the primary purpose is the manufacturing of semiconductors or the manufacturing of semiconductor manufacturing equipment.
(3) Examples. The following examples illustrate the rules of this paragraph (c):
(i) Example 1: Primary purpose; in general. In January 2025, X Corp, a calendar-year C corporation, begins construction of a facility that will manufacture semiconductor manufacturing equipment that could be used in a facility that will engage in semiconductor fabrication (semiconductor fabrication facility). A portion of the equipment produced, however, could be used for manufacturing operations of a facility that is not engaged in semiconductor manufacturing. X Corp enters into a contract with Y Corp, which is building a semiconductor fabrication facility to be placed in service in July 2026, to supply Y Corp with equipment that is integral to semiconductor fabrication. Such equipment represents more than 50 percent of the potential output of X Corp's facility (by cost to produce such equipment) of X Corp's facility for the first year of operations. X Corp's facility will be considered as having a primary purpose of manufacturing of semiconductor manufacturing equipment for the first year of its operations.
(ii) Example 2: Primary purpose; semiconductor wafer production. X Corp, a calendar-year C corporation, is engaged in the production of solar wafers (that is, X Corp is engaged in semiconductor wafer production). In January 2025, X Corp receives the necessary permits to begin construction of a facility designed for semiconductor wafer production within the meaning of § 1.48D-2. X Corp enters into a contract to supply such wafers to an unrelated person. Such contract represents more than 50 percent of X Corp's potential output (by revenue received) for the tax year that the facility is placed in service. Because the contract to sell wafers represents more than 50 percent of X Corp's potential output (by revenue received), X Corp's facility will be considered as having a primary purpose of semiconductor wafer production within the meaning of paragraph (c)(1) of this section.
(iii) Example 3: Primary purpose; vertically integrated manufacturer. Z Corp, a C corporation, is a vertically integrated manufacturer. In January 2025, Z Corp begins construction of a facility that will produce raw materials and other consumables for use in the manufacturing of semiconductors and such facility will also engage in semiconductor wafer production and semiconductor fabrication. Z Corp enters into separate sales contracts to sell units produced from the semiconductor fabrication with a variety of unrelated companies that are engaged in semiconductor packaging. Z Corp also enters into a sales contract with A Corp to sell raw materials that it produces at the facility to A Corp. Z Corp's production of units from its semiconductor fabrication sold to companies engaged in semiconductor packaging represents more than 50 percent of the potential output (by cost) of Z Corp's facility for the first year of operations; therefore, Z Corp's facility will be considered as having a primary purpose of manufacturing of semiconductors.
(iv) Example 4: No primary purpose; vertically integrated manufacturer. Assume the same facts as in paragraph (c)(3)(iii) of this section (Example 3), except that Z Corp's production of such raw materials represents more than 50 percent of the potential output of Z Corp's facility for the first year of operations. Z Corp's facility will not be considered as having a primary purpose of manufacturing of semiconductors.
(d) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or October 23, 2024.
[T.D. 10009, 89 FR 84752, Oct. 23, 2024]
§ 1.48D-5 Beginning of construction.
(a) Termination of credit—(1) In general. The credit allowed under section 48D of the Code and the section 48D regulations does not apply to property that is part of an advanced manufacturing facility of an eligible taxpayer if the beginning of construction of the property, as defined in paragraph (a)(2) of this section, begins after December 31, 2026 (the date specified in section 48D(e)).
(2) Property. For purposes of determining beginning of construction of property under this section, the unit of property is—
(i) A single advanced manufacturing facility project as described in paragraph (a)(3) of this section; or
(ii) An item of qualified property (as defined in § 1.48D-3(b)).
(3) Single advanced manufacturing facility project—(i) In general. Solely for purposes of determining whether construction of a qualified property has begun for purposes of section 48D and the section 48D regulations, multiple items of qualified property or advanced manufacturing facilities that are operated as part of a single advanced manufacturing facility project (along with any items of property, such as clean rooms, chemical delivery systems, chemical storage facilities, temperature control systems, robotic handling systems, semiconductor manufacturing equipment, and tooling equipment (such as for deposition and etching) that are integral to the operation of the single advanced manufacturing facility project) will be treated as a single item of qualified property. Multiple qualified properties or advanced manufacturing facilities will be treated as operated as part of a single advanced manufacturing facility project, if at any point during construction of the multiple qualified properties or advanced manufacturing facilities, they are owned by a single taxpayer (subject to the related taxpayer rule provided in paragraph (a)(3)(ii) of this section) and any two or more of the following factors are present—
(A) The properties or facilities are owned by a single legal entity;
(B) The properties or facilities are constructed on contiguous pieces of land;
(C) The properties or facilities are described in a common supply contract or other type of relevant contract;
(D) The properties or facilities share a common electricity and/or water supply;
(E) The properties or facilities are described in one or more common environmental or other regulatory permits;
(F) The properties or facilities were constructed pursuant to a single master construction contract; or
(G) The construction of the properties or facilities was financed pursuant to the same loan agreement or other financing arrangement.
(ii) Related taxpayers—(A) Definition. For purposes of this section, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).
(B) Related taxpayer rule. For purposes of this section, related taxpayers are treated as one taxpayer in determining whether multiple qualified properties or advanced manufacturing facilities will be treated as operated as part of a single advanced manufacturing facility project.
(iii) Example. A single taxpayer is developing Project C, a project that will consist of 3 advanced manufacturing facilities constructed on the same campus. Project C will share a common electricity supply, and semiconductors manufactured by Project C will be sold to Buyer through a single supply contract. In 2023, for 1 of the 3 advanced manufacturing facilities, the taxpayer installs deposition equipment. Thereafter, the taxpayer completes the construction of all 3 advanced manufacturing facilities pursuant to a continuous program of construction. For purposes of the section 48D credit, Project C is a single advanced manufacturing facility project that will be treated as a single property, and the taxpayer performed physical work of a significant nature that constitutes the beginning of construction of Project C in 2023.
(iv) Timing of single advanced manufacturing facility project determination. Whether multiple properties or advanced manufacturing facilities are operated as part of a single advanced manufacturing facility project and are treated as a single item of property for purposes of the beginning of construction requirement of section 48D and the section 48D regulations is determined in the taxable year during which the last of the multiple properties or facilities is placed in service.
(v) Disaggregation. Multiple properties or advanced manufacturing facilities that are operated as part of a single advanced manufacturing facility project and treated as a single item of qualified property under this paragraph (a)(3) for purposes of determining whether construction of a qualified property or advanced manufacturing facility has begun may be disaggregated and treated as separate items of qualified property for purposes of determining whether a separate advanced manufacturing facility or item of qualified property satisfies the continuity safe harbor (as defined in paragraph (e) of this section). Those disaggregated separate advanced manufacturing facilities or items of qualified property that are placed in service prior to the continuity safe harbor deadline will be eligible for the continuity safe harbor. The remaining disaggregated separate items of property or facilities may satisfy the continuity requirement under a facts and circumstances determination.
(vi) Example. A single taxpayer is developing Project D, a project that will consist of 4 separate properties. Project D will use the same water supply and each property within Project D will be constructed pursuant to a single master construction contract. Under the single project rule provided in this paragraph (a)(3), Project D is a single project that will be treated as a single property. In 2024, for 3 of the 4 separate properties, the taxpayer installs property integral to the operation of the advanced manufacturing facility. Accordingly, the taxpayer has performed physical work of a significant nature that constitutes the beginning of construction of Project D for purposes of section 48D(e). Thereafter, on the last day of the 10-year continuity safe harbor period, the taxpayer places in service only 3 of the 4 separate properties within Project D. The taxpayer disaggregates Project D under paragraph (a)(3)(v) of this section and accordingly, only 3 of the 4 separate properties satisfy the continuity safe harbor. For the remaining 1 separate property, the taxpayer may demonstrate that it satisfies the continuity requirement provided in paragraph (e) of this section based on the facts and circumstances, to enable the taxpayer to claim the section 48D credit.
(b) Beginning of construction—(1) In general. For purposes of section 48D, the section 48D regulations, and section 107(f)(1) of the CHIPS Act of 2022, Public Law 117-167, div. A, 136 Stat. 1366, 1399 (August 9, 2022), a taxpayer may establish that construction of an item of property (as defined in paragraph (a)(2) of this section) of the taxpayer begins under either:
(i) The physical work test of paragraph (c) of this section; or
(ii) The five percent safe harbor of paragraph (d) of this section.
(2) Continuity requirement. See paragraph (e) of this section for the continuity requirement applicable for purposes of the physical work test and the five percent safe harbor, which must be demonstrated either by maintaining continuous construction (as defined in paragraph (e)(2) of this section) or continuous efforts (as defined in paragraph (e)(3) of this section).
(c) Physical work test—(1) In general. Under the physical work test, construction of an item of property begins when physical work of a significant nature begins, provided thereafter that the taxpayer maintains continuous construction or continuous efforts. This test focuses on the nature of the work performed, not the amount of the costs. Assuming the work performed is of a significant nature, there is no fixed minimum amount of work, monetary or percentage threshold required to satisfy the physical work test.
(2) Physical work of significant nature—(i) In general. Work performed by the taxpayer and work performed for the taxpayer by other persons under a binding written contract that is entered into prior to the manufacture, construction, or production of the property for use by the taxpayer in the taxpayer's trade or business of manufacturing semiconductors or semiconductor manufacturing equipment is taken into account in determining whether physical work of a significant nature has begun. Both on-site and off-site work (performed either by the taxpayer or by another person under a binding written contract) may be taken into account for purposes of demonstrating that physical work of a significant nature has begun. A written contract is binding only if it is enforceable under local law against the taxpayer or a predecessor and does not limit damages to a specified amount (for example, by use of a liquidated damages provision). For this purpose, a contractual provision that limits damages to an amount equal to at least five percent of the total contract price will not be treated as limiting damages to a specified amount. For additional guidance regarding the definition of a binding written contract, see § 1.168(k)-1(b)(4)(ii)(A) through (D). Specific examples of on-site physical work of a significant nature include the excavation for the foundation and the pouring of the concrete pads of the foundation. Specific examples of off-site physical work of a significant nature include the manufacture of semiconductor manufacturing equipment but only if the manufacturer's work is done pursuant to a binding written contract and the semiconductor manufacturing equipment is not held in the manufacturer's inventory.
(ii) Exceptions. Physical work of significant nature does not include preliminary activities, including but not limited to planning or designing, securing financing, exploring, researching, obtaining permits, licensing, conducting surveys, environmental and engineering studies, or clearing a site, even if the cost of those preliminary activities is properly included in the depreciable basis of the property. Physical work of a significant nature also does not include work (performed either by the taxpayer or by another person under a binding written contract) to produce property that is either in existing inventory or is normally held in inventory by a vendor.
(d) Five percent safe harbor—(1) In general. Construction of a property will be considered as having begun if:
(i) A taxpayer pays or incurs (within the meaning of § 1.461-1(a)(1) and (2)) five percent or more of the total cost of the property; and
(ii) Thereafter, the taxpayer maintains continuous construction or continuous efforts.
(2) Costs. All costs properly included in the basis of the property are taken into account to determine whether the five percent safe harbor has been met. For property that is manufactured, constructed, or produced for the taxpayer by another person under a binding written contract with the taxpayer, costs incurred with respect to the property by the other person before the property is provided to the taxpayer are deemed incurred by the taxpayer when the costs are incurred by the other person under the principles of section 461 of the Code.
(3) Cost overruns—(i) Single advanced manufacturing facility project. If the total cost of a property that is a single advanced manufacturing facility project comprised of multiple properties (as described in paragraph (a)(3) of this section) exceeds its anticipated total cost such that the amount the taxpayer actually paid or incurred with respect to the single advanced manufacturing facility project to establish the beginning of its construction under paragraph (b)(1)(ii) of this section is less than five percent of the total cost at the time it is placed in service, the five percent safe harbor is not fully satisfied. However, the five percent safe harbor will be satisfied with respect to some, but not all, of the separate properties or facilities (as described in paragraph (a)(3) of this section) comprising the single advanced manufacturing facility project, as long as the total aggregate cost of those properties is not more than twenty times greater than the amount the taxpayer paid or incurred.
(ii) Example. In 2023, taxpayer incurs $300,000 in costs to construct Project A, comprised of six advanced manufacturing facilities that will be operated as a single project. Taxpayer anticipates that each advanced manufacturing facility will cost $1,000,000 for a total cost for Project A of $6,000,000. Thereafter, the taxpayer makes continuous efforts to advance towards completion of Project A. The taxpayer timely places Project A in service in 2025. In 2025, the actual total cost of Project A amounts to $7,500,000, with each advanced manufacturing facility costing $1,250,000. Although the taxpayer did not pay or incur five percent of the actual total cost of Project A in 2023, the taxpayer will be treated as satisfying the Five Percent Safe Harbor in 2023 with respect to four of the advanced manufacturing facilities, as their actual total cost of $5,000,000 is not more than twenty times greater than the $300,000 in costs incurred by the taxpayer. The taxpayer will not be treated as satisfying the five percent safe harbor in 2023 with respect to two of the properties. Thus, the taxpayer may claim the section 48D credit based on $5,000,000, the cost of four of the properties.
(iii) Single property. If the total cost of a single property, which is not part of a single advanced manufacturing facility project comprised of multiple properties or facilities (as described in paragraph (a)(3) of this section) and cannot be separated into multiple properties or facilities, exceeds its anticipated total cost so that the amount a taxpayer actually paid or incurred with respect to the single property as of an earlier year is less than five percent of the total cost of the single property at the time it is placed in service, then the taxpayer will not satisfy the five percent safe harbor with respect to any portion of the single property in such earlier year.
(iv) Example. In 2023, a taxpayer incurs $250,000 in costs to construct Project B, a single property. The taxpayer anticipates that the total cost of Project B will be $5,000,000. Thereafter, the taxpayer makes continuous efforts to advance towards completion of Project B. The taxpayer places Project B in service in a later year. At that time, its actual total cost amounts to $6,000,000. Because Project B is a single property that is not a single project comprised of multiple properties, the taxpayer will not satisfy the five percent safe harbor as of 2023. However, if the construction of Project B satisfies the requirements of the physical work test by also beginning physical work of a significant nature in 2024, the taxpayer may be able to demonstrate that construction began in 2024.
(e) Continuity requirement—(1) In general. For purposes of the physical work test and five percent safe harbor, taxpayers must satisfy the continuity requirement by demonstrating either continuous construction or continuous efforts regardless of whether the physical work test or the five percent safe harbor was used to establish the beginning of construction. Whether a taxpayer meets the continuity requirement under either test is determined by the relevant facts and circumstances. The Commissioner will closely scrutinize a property and may determine that the beginning of construction is not satisfied with respect to a property if a taxpayer does not meet the continuity requirement.
(2) Continuous construction. The term continuous construction means a continuous program of construction that involves continuing physical work of a significant nature. Whether a taxpayer maintains a continuous program of construction to satisfy the continuity requirement will be determined based on all the relevant facts and circumstances.
(3) Continuous efforts. The term continuous efforts means continuous efforts to advance towards completion of a property to satisfy the continuity requirement. Whether a taxpayer makes continuous efforts to advance towards completion of a property will be determined by the relevant facts and circumstances. Facts and circumstances indicating continuous efforts to advance towards completion of a property may include:
(i) Paying or incurring additional amounts included in the total cost of the property. A taxpayer is considered to meet this factor for a taxable year in which it pays or incurs (within the meaning of § 1.461-1(a)(1) and (2)) five percent or more of the total cost of the property each calendar year after the calendar year during which construction of the property began for purposes of section 48D and the section 48D regulations;
(ii) Entering into binding written contracts for the manufacture, construction, or production of the property or for future work to construct the property;
(iii) Obtaining necessary permits; and
(iv) Performing physical work of a significant nature.
(4) Excusable disruptions to continuous construction and continuous efforts tests—(i) In general. Certain disruptions in a taxpayer's continuous construction or continuous efforts to advance towards completion of a property that are beyond the taxpayer's control will not be considered as indicating that a taxpayer has failed to satisfy the continuity requirement.
(ii) Effect of excusable disruptions on continuity safe harbor. The excusable disruptions provided in this paragraph (e)(4) will not extend the continuity safe harbor deadline that is provided in paragraph (e)(6) of this section.
(iii) Non-exclusive list of construction disruptions. This paragraph (e)(4)(iii) provides a non-exclusive list of construction disruptions that will not be considered as indicating that a taxpayer has failed to satisfy the continuity requirement:
(A) Delays due to severe weather conditions.
(B) Delays due to natural disasters.
(C) Delays in obtaining permits or licenses from Federal, Indian Tribal, State, territorial, or local governments. Such delays include delays in obtaining air emissions, water discharge, or hazardous waste management permits or chemical handling licenses from the Environmental Protection Agency (EPA) or another environmental protection authority. Such delays also include delays as a result of the review process under State, Tribal, local, or Federal environmental laws, for example, a review under the National Environmental Policy Act, as well as delays in obtaining construction permits.
(D) Delays at the written request of a Federal, State, local, or Indian Tribal government regarding matters of public health, public safety, security, or similar concerns, including hazardous chemical transport.
(E) Delays related to electrical or water supply, such as those relating to the completion of construction on a distribution line or water supply line that may be associated with a project's electrical and water needs, whether constructed by the eligible taxpayer that is the owner of the advanced manufacturing facility, a governmental entity, or another person.
(F) Delays in the manufacture of custom components or equipment.
(G) Delays due to the inability to obtain specialized equipment of limited availability.
(H) Delays due to supply shortages.
(I) Delays due to the presence of endangered species.
(J) Financing delays.
(K) Delays due to specialized labor shortages or labor stoppages.
(5) Timing of excusable disruption determination. In the case of a single advanced manufacturing facility project comprised of a single property, whether an excusable disruption has occurred for purposes of the beginning of construction requirement of section 48D and the section 48D regulations must be determined in the taxable year during which the property is placed in service. In the case of a single advanced manufacturing facility project comprised of multiple properties or facilities, whether an excusable disruption has occurred for purposes of the beginning of construction requirement of section 48D and the section 48D regulations must be determined in the taxable year during which the last of multiple properties or facilities is placed in service.
(6) Continuity safe harbor—(i) In general. A taxpayer will be deemed to satisfy the continuity requirement provided the property is placed in service no more than 10 calendar years after the calendar year during which construction of the property began for purposes of section 48D and the section 48D regulations.
(ii) Example. If construction begins on a property on January 15, 2023, and the property is placed in service by December 31, 2033, the property will be considered to satisfy the continuity safe harbor. If the property is not placed in service before January 1, 2034, whether the continuity requirement was satisfied will be determined based on all the relevant facts and circumstances.
(f) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
[T.D. 10009, 89 FR 84752, Oct. 23, 2024, as amended by T.D. 10009, 89 FR 92793, Nov. 25, 2024]
§ 1.48D-6 Elective payment election.
(a) Elective payment election—(1) In general. A taxpayer, after successfully completing the pre-filing registration requirements under paragraph (b) of this section, may make an elective payment election with respect to any section 48D credit determined with respect to such taxpayer in accordance with section 48D(d)(1) of the Internal Revenue Code (Code) and this section. A taxpayer, other than a partnership or S corporation, that makes an elective payment election in the manner provided in paragraph (c) of this section will be treated as making a payment against the Federal income taxes imposed by subtitle A of the Code (subtitle A) for the taxable year with respect to which a section 48D credit is determined equal to the amount of the section 48D credit with respect to any qualified property otherwise allowable to the taxpayer (determined without regard to section 38(c) of the Code). The payment described in section 48D(d)(1), and this paragraph (a)(1) will be treated as made on the later of the due date (determined without regard to extensions) of the return of tax imposed by subtitle A for the taxable year or the date on which such return is filed.
(2) Partnerships and S corporations. See paragraph (d) of this section for special rules regarding elective payment elections under section 48D(d) applicable to partnerships and S corporations.
(3) Irrevocable. Any election under section 48D(d)(1) and this section, once made, will be irrevocable and, except as otherwise provided, will apply with respect to any amount of section 48D credit for the taxable year for which the election is made.
(b) Pre-filing registration required—(1) In general. Pre-filing registration by any taxpayer (including a partnership or an S corporation) in accordance with this paragraph (b) is a condition that must be successfully completed prior to making an elective payment election under section 48D(d)(1) and this section with respect to qualified property placed in service by the taxpayer as part of an advanced manufacturing facility of an eligible taxpayer. An elective payment election will not be effective with respect to the section 48D credit determined with respect to any such qualified property placed in service by any taxpayer unless the taxpayer received a valid registration number for the taxpayer's qualified investment in the advanced manufacturing facility of an eligible taxpayer in accordance with this paragraph (b) and provided the registration number for each qualified investment in each advanced manufacturing facility on its Form 3800, General Business Credit (or its successor), and on any required completed source form(s) with respect to the qualified investment, attached to the tax return in accordance with guidance. For purposes of this section, the term guidance means guidance published in the Federal Register or Internal Revenue Bulletin, as well as administrative guidance such as forms, instructions, publications, or other guidance on the IRS.gov website. See §§ 601.601 and 601.602 of this chapter. However, completion of the pre-filing registration requirements and receipt of a registration number does not, by itself, mean the taxpayer is eligible to receive a payment with respect to any section 48D credit determined with respect to the qualified property.
(2) Manner of registration. Unless otherwise provided in guidance, a taxpayer must complete the pre-filing registration process electronically through the IRS electronic portal and in accordance with the instructions provided therein.
(3) Members of a consolidated group. A member of a consolidated group is required to complete pre-filing registration as a condition of, and prior to, making an elective payment election. See § 1.1502-77 (providing rules regarding the status of the common parent as agent for its members).
(4) Timing of pre-filing registration. A taxpayer must satisfy the pre-filing registration requirements of this paragraph (b) and receive a registration number under paragraph (b)(7) of this section prior to making any elective payment election under this section on the taxpayer's tax return for the taxable year at issue.
(5) Each qualified investment in an advanced manufacturing facility must have its own registration number. A taxpayer must obtain a registration number for each qualified investment in an advanced manufacturing facility of an eligible taxpayer with respect to which an elective payment election is made.
(6) Information required to complete the pre-filing registration process. Unless modified in future guidance, a taxpayer must provide the following information to the IRS to complete the pre-filing registration process:
(i) The taxpayer's general information, including its name, address, taxpayer identification number, and type of legal entity;
(ii) Any additional information required by the IRS electronic portal;
(iii) The taxpayer's taxable year, as determined under section 441 of the Code;
(iv) The type of annual return(s) normally filed by the taxpayer with the IRS;
(v) A list of each qualified investment in an advanced manufacturing facility that the taxpayer intends to use to determine a section 48D credit for which the taxpayer intends to make an elective payment election;
(vi) For each qualified investment in an advanced manufacturing facility listed in paragraph (b)(6)(v) of this section, any further information required by the IRS electronic portal, such as:
(A) The type of qualified investment in the advanced manufacturing facility;
(B) Physical location (that is, address and coordinates (longitude and latitude) of the advanced manufacturing facility);
(C) Supporting documentation relating to the construction, reconstruction or acquisition of the advanced manufacturing facility (such as, State and local government permits to operate the advanced manufacturing facility, certifications, and evidence of ownership that ties to the land deed, lease, or other documented right to use and access any land upon which the advanced manufacturing facility is constructed or housed);
(D) The beginning of construction date and the placed in service date of any qualified property that is part of the advanced manufacturing facility, or the date of the last progress expenditure made during the taxable year;
(E) The source of funds the taxpayer used to acquire the qualified property with respect to which the qualified investment was made; and
(F) Any other information that the taxpayer or entity believes will help the IRS evaluate the registration request;
(vii) The name of a contact person for the taxpayer. The contact person is the person whom the IRS may contact if there is an issue with the registration. The contact person must either:
(A) Possess legal authority to bind the taxpayer; or
(B) Must provide a properly executed power of attorney on Form 2848, Power of Attorney and Declaration of Representative;
(viii) A penalties of perjury statement, effective for all information submitted as a complete application, and signed by a person with personal knowledge of the relevant facts that is authorized to bind the registrant; and
(ix) Any other information the IRS deems necessary for purposes of preventing duplication, fraud, improper payments, or excessive payments under this section that is provided in guidance.
(7) Registration number—(i) In general. The IRS will review the information provided and will issue a separate registration number for each qualified investment in an advanced manufacturing facility of an eligible taxpayer for which the taxpayer making the registration provided sufficient verifiable information.
(ii) Registration number is only valid for one year. A registration number is valid only with respect to the taxpayer that obtained the registration number under this section and only for the taxable year for which it is obtained.
(iii) Renewing registration numbers. If an elective payment election will be made with respect to any section 48D credit determined with respect to a qualified investment in an advanced manufacturing facility for a taxable year after a registration number under this section has been obtained, the taxpayer must renew the registration for that subsequent year in accordance with applicable guidance, including attesting that all the facts previously provided are still correct or updating any facts.
(iv) Amendment of previously submitted registration information if a change occurs before the registration number is used. As provided in instructions to the pre-filing registration portal, if specified changes occur with respect to a qualified investment in an advanced manufacturing facility for which a registration number has been previously obtained, a taxpayer must amend the registration (or may need to submit a new registration) to reflect these new facts. For example, if an eligible taxpayer that is the owner of an advanced manufacturing facility previously registered qualified investments in the advanced manufacturing facility or the advanced manufacturing facility, and the advanced manufacturing facility undergoes a change of ownership (incident to a corporate reorganization or an asset sale) such that the new owner has a different employer identification number (EIN) than the owner who obtained the original registration, the original owner of the advanced manufacturing facility must amend the original registration to disassociate its EIN from the advanced manufacturing facility and the new owner must submit separately an original registration (or if the new owner previously registered other qualified investments or advanced manufacturing facilities, must amend its original registration) to associate the new owner's EIN with the previously registered advanced manufacturing facility.
(v) Registration number is required to be reported on the return for the taxable year of the elective payment election. The taxpayer must include the registration number of the qualified investment in the advanced manufacturing facility on the taxpayer's return as provided in this paragraph (b) for the taxable year. The IRS will treat an elective payment election as ineffective with respect to a section 48D credit determined with respect to a qualified investment in an advanced manufacturing facility for which the taxpayer does not include a valid registration number that was assigned to that particular taxpayer during the pre-registration process on the annual return.
(c) Time and manner of election—(1) In general. Any elective payment election under section 48D(d)(1) and this section with respect to any section 48D credit determined with respect to a taxpayer's qualified investment must—
(i) Be made on the taxpayer's original return of tax (including a superseding return) filed not later than the due date (including extensions of time) for the taxable year for which the section 48D credit is determined and the election is made in the manner prescribed by the IRS in guidance;
(ii) Include any required completed source credit form(s), a completed Form 3800, and any additional information required in instructions, including supporting calculations;
(iii) Provide on the completed Form 3800 and on any required source credit form(s) a valid registration number for the qualified investment that is placed in service as part of an advanced manufacturing facility of an eligible taxpayer;
(iv) Include a statement attesting under the penalties of perjury that—
(A) The taxpayer claiming to be an eligible taxpayer is not a foreign entity of concern within the meaning of regulations under section 48D and has not made an applicable transaction as defined under regulations under section 50 during the taxable year that the qualified property is placed in service; andThe taxpayer claiming to be an eligible taxpayer is not a foreign entity of concern within the meaning of regulations under section 48D and has not made an applicable transaction as defined under regulations under section 50 during the taxable year that the qualified property is placed in service; and
(B) The taxpayer will not claim a double benefit (within the meaning of section 48D(d)(3) and paragraphs (d)(2)(ii)(B) and (C) and (e) of this section) with respect to any elective payment election made by the taxpayer; and
(v) Be made not later than the due date (including extensions of time) for the taxable year for which the election is made, but in no event earlier than May 8, 2023.
(2) Limitations. No elective payment election may be made for the first time on an amended return, withdrawn on an amended return, or made or withdrawn by filing an administrative adjustment request under section 6227 of the Code, although a numerical error with respect to a properly claimed elective payment election may be corrected on an amended return or by filing an administrative adjustment request under section 6227 if necessary. There is no relief available under § 301.9100-1 or § 301.9100-3 of this chapter for an elective payment election that is not timely filed; however, relief under § 301.9100-2(b) may apply.
(d) Special rules for partnerships and S corporations—(1) In general. If a partnership or S corporation directly holds any property for which an advanced manufacturing investment credit is determined, any election under this section must be made by the partnership or S corporation. No election under section 48D(d) and this section by any partner or shareholder is allowed.
(2) Election—(i) Time and manner of election. An elective payment election by a partnership or S corporation is made at the same time and in the same manner, and subject to the pre-filing registration and other requirements for the election to be effective, as provided in paragraphs (b) and (c) of this section.
(ii) Effect of election. If a partnership or S corporation makes an elective payment election with respect to a section 48D credit, the following rules will apply:
(A) The Internal Revenue Service will make a payment to such partnership or S corporation equal to the amount of such credit, determined in accordance with paragraph (d)(6) of this section (unless the partnership or S corporation owes a Federal tax liability, in which case the payment may be reduced by such tax liability);
(B) Before determining any partner's distributive share, or S corporation shareholder's pro rata share, of such credit, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed solely to such entity (and not allocated or otherwise allowed to its partners or shareholders) for such taxable year; and
(C) Any partner's or S corporation shareholder's share of any qualified investment in an advanced manufacturing facility for which an elective payment election has been made for the taxable year, is reduced to zero for such taxable year.
(iii) Coordination with sections 705 and 1366. Any amount with respect to which the election is made is treated as tax exempt income for purposes of sections 705 and 1366 of the Code.
(iv) Partner's distributive share—(A) In general. Except as provided in paragraphs (d)(2)(iv)(B) and (C) of this section, a partner's distributive share of such tax exempt income is equal to such partner's distributive share of its otherwise allocable basis in qualified property under regulations under section 48D that apply for purposes of allocating a partner's share of its basis in qualified property placed in service by the partnership for such taxable year.
(B) Interim rule. If a partnership meets the requirements of paragraph (d)(2)(iv)(C) of this section, a partner's distributive share of the tax exempt income resulting from a section 48D(d) elective payment election made by the partnership with respect to property held directly by the partnership, may be determined in accordance with the basic principles for partnership income allocations as described in § 1.704-1(b)(1)(i) instead of in accordance with the partner's distributive share of the otherwise applicable section 48D credits as determined under §§ 1.704-1(b)(4)(ii) and 1.46-3(f).
(C) Partnership requirements. A partnership meets the requirements of this paragraph (d)(2)(iv)(C) if its partnership agreement is a written binding contract that was entered into after December 31, 2021, and before June 22, 2023, and it was formed for the purpose of owning and operating an advanced manufacturing facility or qualified property.
(v) S corporation shareholder's pro-rata share. An S corporation shareholder's pro rata share (as determined under section 1377(a) of the Code) of such tax exempt income is taken into account by the S corporation shareholder in the taxable year (as determined under sections 444 and 1378(b) of the Code) in which the section 48D credit is determined and is based on the shareholder's otherwise apportioned basis in qualified property under regulations under section 48D that apply for purposes of allocating an S corporation shareholder's pro-rata share of basis in qualified property placed in service by the S corporation for the taxable year.
(vi) Timing of tax exempt income. Such tax exempt income resulting from such election is treated as received or accrued, including for purposes of sections 705 and 1366 of the Code, as of the date the qualified property is placed in service with respect to the partnership or S corporation.
(3) Disregarded entity ownership. In the case of a qualified property held directly by an entity disregarded as separate from a partnership or S corporation for Federal income tax purposes, such qualified property will be treated as held directly by the partnership or S corporation for purposes of making an elective payment election.
(4) Electing partnerships in tiered structures—(i) In general. If a partnership (upper-tier partnership) is a direct or indirect partner of a partnership that makes an elective payment election (lower-tier partnership) and directly or indirectly receives an allocation of tax exempt income resulting from the elective payment election made by the lower-tier partnership, the upper-tier partnership must determine its partners' distributive shares of such tax exempt income in proportion to each partner's distributive share of its otherwise allocable basis in qualified property under regulations under section 48D that apply for purposes of allocating a partner's share of its basis in qualified property placed in service by a partnership for such taxable year.
(ii) Electing partnerships in tiered structures; interim rule. If a lower-tier partnership determined its partners' distributive shares of the tax exempt income described in paragraph (d)(2)(iii) of this section using the interim rule described in paragraph (d)(2)(iv)(B) of this section, an upper-tier partnership that is a direct or indirect partner in such lower-tier partnership may determine its partners' distributive shares of the tax exempt income in accordance with the basic principles for partnership income allocations as described in § 1.704-1(b)(1)(i).
(5) Character of tax exempt income. Tax exempt income resulting from an elective payment election by an S corporation or a partnership is treated as arising from an investment activity and not from the conduct of a trade or business within the meaning of section 469(c)(1)(A). As such, the tax exempt income is not treated as passive income to any partners or shareholders who do not materially participate within the meaning of section 469(c)(1)(B).
(6) Determination of amount of the section 48D credit—(i) In general. In determining the amount of the section 48D credit that will result in a payment under paragraph (d)(2)(ii)(A) of this section, the partnership or S corporation must compute the amount of the credit allowable (without regard to section 38(c)) as if an elective payment election were not made. Because a partnership or S corporation is not subject to sections 38(b) and (c) and 469 (that is, those sections apply at the partner or shareholder level), the amount of the credit determined by a partnership or S corporation is not subject to limitation by those sections. Because the section 48D credit is an investment credit under section 46, sections 49 and 50 apply to limit the amount of the credit.
(ii) Application of section 49 at-risk rules to determination of section 48D credit for partnerships and S corporations. Any amount of section 48D credit determined with respect to qualified property held directly by a partnership or S corporation must be determined by the partnership or S corporation taking into account the section 49 at-risk rules at the partner or shareholder level as of the close of the taxable year in which the qualified property is placed in service. Thus, if the credit base of a qualified property is limited to a partner or S corporation shareholder by section 49, then the amount of the section 48D credit determined by the partnership or S corporation is also limited. A partnership or S corporation that directly holds qualified property must request from each of its partners or shareholders, respectively, that is subject to section 49, the amount of such partner's or shareholder's nonqualified nonrecourse financing with respect to the qualified property as of the close of the taxable year in which the property is placed in service. Additionally, the partnership or S corporation must attach to its tax return for the taxable year in which the qualified property is placed in service, the amount of each partner's or shareholder's section 49 limitation with respect to any qualified property. Changes to at-risk amounts under section 49 for partners or S corporation shareholders after the close of the taxable year in which the qualified property is placed in service do not impact the section 48D credit determined by the partnership or S corporation, but do impact the partner(s) or S corporation shareholder(s) as provided in paragraph (d)(6)(iii) of this section.
(iii) Changes in at-risk amounts under section 49 at partner or shareholder level. A partner or shareholder in a partnership or S corporation, respectively, must apply the rules under section 49 at the partner or shareholder level if there is a change in nonqualified nonrecourse financing with respect to the partner or shareholder after the close of the taxable year in which the qualified property is placed in service and the section 48D credit is determined. If there is an increase in nonqualified nonrecourse financing to a partner, any adjustment under the rules of section 49(b) is calculated based on the partner's share of the basis (or cost) of the qualified property to which the section 48D credit was determined in accordance with regulations under section 48D that apply for purposes of allocating a partner's share of its basis in qualified property placed in service by the partnership. If there is an increase in nonqualified nonrecourse financing to a shareholder, any adjustment under the rules of section 49(b) is calculated based on the shareholder's pro rata share of the basis (or cost) of the qualified property to which the section 48D credit was determined in accordance with regulations under section 48D that apply for purposes of allocating an S corporation shareholder's pro-rata share of basis in qualified property placed in service by the S corporation. If there is a decrease in nonqualified nonrecourse financing, any increase in the credit base is taken into account by the partner or shareholder as provided under section 49, and any resulting credit is not eligible for an elective payment election under section 48D(d).
(7) Partnerships subject to subchapter C of chapter 63 of the Code. See § 301.6241-7(j) of this chapter for rules applicable to payments made to partnerships subject to subchapter C of chapter 63 of the Code for a partnership taxable year.
(8) Example. P is a calendar-year partnership consisting of partners A and B, each 50 percent owners. P constructs Facility A, an advanced manufacturing facility, at V. P completes the pre-filing registration with respect to Facility A at V for 2024 in accordance with paragraph (b) of this section. In 2024, P places in service qualified property that is part of Facility A at V. P timely files its 2024 Form 1065 and properly makes the elective payment election in accordance with paragraph (c) of this section. On its Form 1065, P properly determines that the amount of section 48D credit with respect to the qualified property placed in service at Facility A for 2024 is $100,000. The IRS processes P's return and makes a $100,000 payment to P. Before determining A's and B's distributive shares, P reduces the section 48D credit to zero. However, for other purposes of the Code, the $100,000 section 48D credit is deemed to have been allowed to P for 2024. P does not qualify for the interim rule described in paragraph (d)(2)(iv)(B) of this section. The $100,000 is treated as tax exempt income for purposes of section 705, and A's and B's distributive shares of such tax exempt income is based on each partner's otherwise allocable basis in qualified property under regulations under section 48D that apply for purposes of allocating a partner's share of its basis in qualified property placed in service by the partnership for the 2024 taxable year ($50,000 each). A's and B's basis in their partnership interests and capital accounts will be appropriately adjusted to take into account basis adjustments made to the qualified property under section 50(c)(5) and § 1.704-1(b)(2)(iv)(j). See paragraph (g)(2) of this section. The tax exempt income received or accrued by P as a result of the elective payment election is treated as received or accrued, including for purposes of section 705, as of date P placed in service the qualified property in 2024.
(e) Denial of double benefit—(1) In general. In the case of a taxpayer making an election under section 48D(d) and this section with respect to any section 48D credit determined under section 48D(a) and regulations under section 48D that apply for purposes of determining the section 48D credit, such credit is reduced to zero and is, for any other purposes under the Code, deemed to have been allowed to the taxpayer for such taxable year. Paragraphs (e)(2) and (3) of this section explain the application of the section 48D(d)(3) denial of a double benefit rule to a taxpayer (other than a partnership or S corporation). The application of section 48D(d)(3) to a partnership or S corporation is provided in paragraphs (d)(2)(ii)(B) and (C) of this section.
(2) Application of the denial of double benefit rule. A taxpayer (other than a partnership or S corporation) making an elective payment election applies section 48D(d)(3) by taking the following steps:
(i) Compute the amount of the Federal income tax liability (if any) for the taxable year, without regard to the general business credit under section 38 of the Code (GBC), that is payable on the due date of the tax return (without regard to extensions), and the amount of the Federal income tax liability that may be offset by GBCs pursuant to the limitation based on the amount of tax under section 38.
(ii) Compute the allowed amount of the GBC carryforwards carried to the taxable year under section 38(a)(1) plus the amount of the current year GBCs (including the current section 48D credit) for the taxable year under section 38(a)(2) and (b). Because the election is made on an original return for the taxable year for which the section 48D credit is determined, any business credit carrybacks are not considered when determining the elective payment amount for the taxable year.
(iii) Calculate the net elective payment amount for the section 48D credit, which equals the lesser of the section 48D credit for which an elective payment election is made or the excess (if any, otherwise the excess is zero) of the total GBC credits described in paragraph (e)(2)(ii) of this section over the amount of the Federal income tax liability that may be offset by GBCs pursuant to the limitation based on amount of tax under section 38 computed in paragraph (e)(2)(i) of this section. Treat the net elective payment amount of the section 48D credit for which an elective payment election is made as a payment against the tax imposed by subtitle A for the taxable year with respect to which such credit is determined.
(iv) Excluding the net elective payment amount determined under paragraph (e)(2)(iii) of this section, but including any portion of the section 48D credit that is not part of the net elective payment amount, compute the allowed amount of GBC carryforwards carried to the taxable year plus the amount of current year GBCs allowed for the taxable year under section 38 (including, for clarity purposes, the ordering rules in section 38(d)). Apply these GBCs against the tax liability computed in paragraph (e)(2)(i) of this section.
(v) Reduce the section 48D credit for which an elective payment election is made by the net elective payment amount, as provided in paragraph (e)(2)(iii) of this section, and by the amount (if any) allowed as a GBC under section 38 for the taxable year, as provided in paragraph (e)(2)(iv) of this section, which results in the section 48D credit being reduced to zero.
(3) Use of the section 48D credit for other purposes. The full amount of the section 48D credit for which an elective payment election is made is deemed to have been allowed for all other purposes of the Code, including, but not limited to, the basis reduction and recapture rules imposed by section 50 and the calculation of tax, calculation of the amount of any underpayment of estimated tax under sections 6654 and 6655 of the Code, and the addition to tax for the failure to pay under section 6651(a)(2) of the Code (if any).
(4) Examples. The following examples illustrate the rules of this paragraph (e).
(i) Example 1. Z Corp is a calendar-year C corporation. Z Corp places in service qualified property that is part of an advanced manufacturing facility in June of 2024. Z Corp completes the pre-filing registration in accordance with this section and receives a registration number for the qualified property. Z Corp timely files (with extension) its 2024 Form 1120 on October 15, 2025, properly making the elective payment election with respect to the section 48D credit earned with respect to the qualified property in accordance with this section. On its return, Z Corp properly determines that it has $500,000 of tax imposed by subtitle A of the Code (see paragraph (e)(2)(i) of this section). For simplicity, assume the maximum amount of GBCs that can be claimed for the taxable year is $375,000. Z Corp properly determines that the amount of the section 48D credit determined with respect to the qualified property (its GBC for the taxable year) is $100,000 (see paragraph (e)(2)(ii) of this section). Under paragraph (e)(2)(iii) of this section, the net elective payment amount is $0, so the section 48D credit is considered a credit that reduces Z Corp's tax liability to $400,000 under paragraph (e)(2)(iv) of this section. Z Corp pays its $400,000 tax liability on October 15, 2025. Under paragraph (e)(2)(v) of this section, the $100,000 of section 48D credit is reduced by the $100,000 of section 48D credit claimed as GBCs for the taxable year, which results in the section 48D credit being reduced to zero. However, the $100,000 of the current year section 48D credit is deemed to have been allowed to Z Corp for 2024 for all other purposes of the Code (paragraph (e)(3) of this section). Because Z Corp paid its tax liability after the original due date for the filing of its Form 1120, Z Corp will owe a failure to pay penalty under section 6651(a)(2) and interest. Z Corp may also owe a penalty for failure to pay estimated income tax under section 6655.
(ii) Example 2. Assume the same facts as in paragraph (e)(4)(i) of this section (Example 1), except that Z Corp has $80,000 of tax imposed by subtitle A (paragraph (e)(2)(i) of this section) and calculates its limitation of GBC under section 38(c) (simplified) is $60,000 (paragraph (e)(2)(i) of this section), and Z Corp timely files its Form 1120 on April 15 instead of October 15. Under paragraph (e)(2)(iii) of this section, the net elective payment amount is $40,000 (lesser of $100,000 section 48D credit or $100,000 of total GBC credits described in paragraph (e)(2)(ii) of this section minus $60,000 of section 38(c) limitation). Under paragraph (e)(2)(iv) of this section, Z Corp uses $60,000 of its $100,000 of section 48D credit against its tax liability. Z Corp reduces the section 48D credit by the $40,000 net elective payment amount determined in paragraph (e)(2)(iii) of this section and by the $60,000 section 48D credit claimed against tax in paragraph (e)(2)(iv) of this section, resulting in the credit being reduced to zero (paragraph (e)(2)(v) of this section). When the IRS processes Z Corp's 2024 Form 1120, the net elective payment amount results in a $20,000 refund to Z Corp (after applying $20,000 of the $40,000 net elective payment amount to cover Z Corp's tax shown on the return). However, for other purposes of the Code, the $100,000 section 48D credit is deemed to have been allowed to Z Corp for 2024 (paragraph (e)(3) of this section). Even though Z Corp did not owe tax after applying the net elective payment amount against its net tax liability, Z Corp may be subject to the section 6655 penalty for failure to pay estimated income tax. The net elective payment is not an estimated tax installment, rather, it is treated as a payment made at the filing of the return.
(iii) Example 3. X Corp is a calendar-year C corporation. X Corp places in service qualified property that is part of an advanced manufacturing facility in June of 2025. X Corp completes the pre-filing registration in accordance with this section and receives a registration number for the qualified property. In 2026, X Corp timely files its 2025 return (without extension), calculating its federal income tax before GBCs of $125,000 and that its limitation of GBC under section 38(c) (simplified) is $100,000 (paragraph (e)(2)(i) of this section). X Corp attaches Form 3468 to claim a current section 48D credit of $50,000. X Corp also attaches Form 5884 to claim a current work opportunity tax credit (WOTC) of $50,000. X Corp also has business credit carryforwards of $25,000, which together with the 48D credit and WOTC results in a total of $125,000 of GBC for the taxable year (paragraph (e)(2)(ii) of this section). Under paragraph (e)(2)(iii) of this section, the net elective payment amount is $25,000. Under paragraph (e)(2)(iv) of this section, including using the ordering rules in section 38(d), X Corp is allowed $25,000 of the carryforwards, $25,000 of section 48D credit (as its section 46 investment credit) plus $50,000 of WOTC against net income tax, as defined under section 38(c)(1)(B). The $25,000 of unused section 48D credit is the net elective payment amount that results in a $25,000 payment against tax by X Corp (paragraph (e)(2)(iii) of this section). On its return, X Corp shows net tax liability of $25,000 ($125,000−$100,000 allowed GBC) and the net elective payment of $25,000 which X Corp applied to net tax liability, resulting in zero tax owed on the return. Under paragraph (e)(2)(v) of this section, X Corp's section 48D credit is reduced by the $25,000 of the net elective payment amount, as well as by the $25,000 of section 48D credit claimed as a GBC for the taxable year, resulting in the $50,000 of section 48D credit being reduced to zero. However, for all other purposes of the Code, the $50,000 of section 48D credit is deemed to have been allowed to X Corp for 2025 (paragraph (e)(3) of this section). Even though X Corp did not owe tax after applying the net elective payment amount against its net tax liability, X Corp may be subject to the section 6655 penalty for failure to pay estimated income tax. The net elective payment is not an estimated tax installment, rather, it is treated as a payment made at the filing of the return.
(iv) Example 4. Assume the same facts as in paragraph (e)(4)(iii) of this section (Example 3), except X Corp filed the return on a timely filed extension after the due date of the return (without extensions). Even though X Corp did not owe tax after applying the net elective payment amount against its net tax liability, X Corp may be subject to the section 6651(a)(2) penalty for failure to pay tax.
(f) Excessive payment—(1) In general. Except as provided in paragraph (f)(2) of this section, in the case of any amount treated as a payment which is made by the taxpayer under section 48D(d)(1) and paragraph (a) of this section, or any payment made pursuant to section 48D(d)(2)(A)(i)(I) and paragraph (d) of this section, with respect to any property, which amount the Commissioner determines constitutes an excessive payment as defined in paragraph (f)(3) of this section, the tax imposed on such taxpayer by chapter 1 of the Code for the taxable year in which such determination is made is increased by an amount equal to the sum of—
(i) The amount of such excessive payment; plus
(ii) An amount equal to 20 percent of such excessive payment.
(2) Reasonable cause. Paragraph (f)(1)(ii) of this section will not apply if the taxpayer demonstrates to the satisfaction of the Commissioner that the excessive payment resulted from reasonable cause.
(3) Excessive payment defined. For purposes of section 48D(d) and this paragraph (f), the term excessive payment means, with respect to any property for which an election is made under section 48D(d) and this section for any taxable year, an amount equal to the excess of—
(i) The amount treated as a payment which is made by the taxpayer pursuant to section 48D(d)(2)(A)(i)(I) and paragraph (d) of this section, or any payment made by the Commissioner pursuant to section 48D(d)(2)(A)(i)(l) and paragraph (d) of this section, with respect to such property for such taxable year; over
(ii) The amount of the section 48D credit which, without application of section 48D(d) and this section, would be otherwise allowable (determined without regard to section 38(c)) under section 48D(a) and the section 48D regulations with respect to such property for such taxable year.
(4) Example. A Corp is a calendar-year C corporation. A Corp places in service qualified property that is part of Facility A, an advanced manufacturing facility in 2023. A Corp properly completes the pre-filing registration in accordance with paragraph (b) of this section and receives a registration number for the advanced manufacturing facility. A Corp timely files its 2023 Form 1120, properly providing the registration number for Facility A on Form 3800 and the relevant source credit form and otherwise complying with paragraph (c) of this section. On its return, A Corp calculates that the amount of the section 48D credit with respect to the qualified property is $100,000 and that the net elective payment amount is $100,000. A Corp receives a refund in the amount of $100,000. In 2025, the IRS determines that the amount of the section 48D credit properly allowable to A Corp in 2023 with respect to Facility A (as determined under regulations under section 48D that apply for purposes of determining the amount of the section 48D credit and without regard to the limitation based on tax in section 38(c)) was $60,000. A Corp is not able to show reasonable cause for the difference. The excessive payment amount is $40,000 ($100,000 treated as a payment−$60,000 allowable amount). In 2025, the tax imposed under chapter 1 on A Corp is increased in the amount of $48,000 ($40,000 + (20% * $40,000 = $8,000)).
(g) Basis reduction and recapture—(1) In general. The rules in section 50(a) and (c) of the Code apply with respect to elective payments under paragraphs (a) and (d) of this section.
(2) Basis adjustment—(i) In general. If a section 48D credit is determined with respect to property for which a taxpayer makes an election under section 48D(d)(1), then the adjusted basis of the property must be reduced by the amount of the section 48D credit determined for which the taxpayer made an election under section 48D(d)(1).
(ii) Basis adjustment by partnership or S corporation. If an advanced manufacturing investment credit is determined with respect to property for which a partnership or S corporation makes an election under section 48D(d)(1), then the adjusted basis of the property must be reduced by the amount of the advanced manufacturing investment credit determined with respect to the property held by the partnership or S corporation, for which the IRS made a payment to the partnership or S corporation pursuant to section 48D(d)(2)(A)(i)(I).
(iii) Basis adjustment of partners and S corporation shareholders. The adjusted basis of a partner's interest in a partnership, and stock in an S corporation, must be appropriately adjusted pursuant to section 50(c)(5) to take into account adjustments made under paragraph (g)(2)(ii) of this section in the basis of property held by the partnership or S corporation, as the case may be.
(3) Recapture reporting. Any reporting of recapture is made on the taxpayer's annual return in the manner prescribed by the IRS in any guidance.
(h) Applicability dates—(1) In general. Except as provided in paragraph (h)(2) of this section, this section applies to taxable years ending on or after March 11, 2024.
(2) Prior taxable years. For taxable years ending before March 11, 2024 taxpayers may choose to apply the rules of this section to property that is placed in service after December 31, 2022, provided the taxpayers apply the rules in their entirety and in a consistent manner.
[T.D. 9989, 89 FR 17606, Mar. 11, 2024; 89 FR 29257, Apr. 22, 2024]
§ 1.48(e)-0 Table of contents.
This section lists the captions contained in § 1.48(e)-1.
§ 1.48(e)-1 Low-Income Communities Bonus Credit Program.
(a) In general.
(b) Qualified solar or wind facility defined.
(1) In general.
(2) Facility categories.
(i) Category 1 Facility.
(ii) Category 2 Facility.
(iii) Category 3 Facility.
(iv) Category 4 Facility.
(3) Single project treated as single facility.
(c) Eligible property.
(1) In general.
(2) Energy storage technology installed in connection with qualified solar or wind facility.
(3) Safe harbor for requirement of paragraph (c)(2)(ii) of this section.
(d) Location.
(1) In general.
(2) Nameplate Capacity Test.
(i) Nameplate capacity for purpose of Nameplate Capacity Test.
(ii) Exclusion of energy storage technology.
(e) Financial benefits for a Category 3 Facility.
(1) In general.
(2) Threshold requirement.
(3) Financial value of the energy produced by the facility.
(4) Gross financial value.
(5) Net financial value defined.
(i) Common ownership.
(ii) Third-party ownership.
(iii) Equitable allocation of financial benefits.
(A) If financial value distributed via utility bill savings.
(B) If financial value is not distributed via utility bill savings.
(6) Benefits Sharing Statement.
(i) In general.
(ii) Notification requirement.
(f) Financial benefits for a Category 4 Facility.
(1) In general.
(2) Bill credit discount rate.
(i) In general.
(ii) No or nominal cost of participation.
(iii) Calculation on annual basis.
(iv) Examples.
(A) Example 1.
(B) Example 2.
(3) Low-income verification.
(i) In general.
(ii) Methods of verification.
(A) Categorical eligibility.
(B) Other income verification methods.
(C) Impermissible verification method.
(g) Annual Capacity Limitation.
(h) Reservations of Capacity Limitation allocation for facilities that meet certain additional selection criteria.
(1) In general.
(2) Ownership criteria.
(i) In general.
(ii) Indirect ownership.
(A) Disregarded entities.
(B) Partnership.
(iii) Tribal enterprise.
(iv) Alaska native corporation.
(v) Renewable energy cooperative.
(vi) Qualified renewable energy company.
(vii) Qualified tax-exempt entity.
(3) Geographic criteria.
(i) In general.
(A) Persistent Poverty County.
(B) Certain census tracts.
(ii) Applicable terms for certain census tracts.
(A) Energy burden or cost.
(B) Exposure.
(C) Energy cost.
(D) PM2.5.
(E) Low-income.
(i) Sub-reservations of allocation for Category 1 facilities.
(1) In general.
(2) Definitions.
(i) Behind the meter (BTM) facility.
(ii) Eligible residential BTM facility.
(iii) Eligible FTM facility.
(j) Process of application evaluation.
(1) In general.
(2) Information required as part of application.
(3) No administrative appeal of capacity limitation allocation decisions.
(k) Placed in service.
(1) Requirement to report date placed in service.
(2) Requirement to submit final eligibility information at placed in service time.
(3) DOE confirmation.
(4) Definition of placed in service.
(l) Facilities placed in service prior to an allocation award.
(1) In general.
(2) Rejection or rescission.
(m) Disqualification.
(n) Recapture of section 48(e) increase to the section 48(a) credit.
(1) In general.
(2) Exception to application of recapture.
(3) Recapture events.
(4) Section 50(a) Recapture.
(o) Applicability date.
[T.D. 9979, 88 FR 55540, Aug. 15, 2023; 88 FR 59446, Aug. 29, 2023]
§ 1.48(e)-1 Low-Income Communities Bonus Credit Program.
(a) In general. For purposes of section 48 of the Internal Revenue Code (Code), the energy percentage used to calculate the amount of the energy investment credit determined under section 48(a) (section 48 credit) is increased under section 48(e)(1) in the case of eligible property (as defined in paragraph (c) of this section) that is part of any qualified solar or wind facility (as defined in paragraph (b) of this section) placed in service in connection with low-income communities with respect to which an allocation of the environmental justice solar and wind capacity limitation (Capacity Limitation) is made under the Low-Income Communities Bonus Credit Program (Program) established under section 48(e)(4) of the Code on February 13, 2023. See Notice 2023-17, 2023-10 I.R.B. 505. In this section, the terms applicant and taxpayer are used interchangeably as the context may require.
(b) Qualified solar or wind facility defined—(1) In general. A qualified solar or wind facility means any facility that—
(i) Generates electricity solely from a wind facility (described in section 45(d)(1) of the Code) for which an election to treat the facility as energy property was made under section 48(a)(5) (wind facility), solar energy property (described in section 48(a)(3)(A)(i)) (solar energy property), or small wind energy property (described in section 48(a)(3)(A)(vi)) (small wind energy property);
(ii) Has a maximum net output of less than 5 megawatts (MW) (as measured in alternating current (AC)); and
(iii) Is described in at least one of the four categories described in section 48(e)(2)(A)(iii) and paragraph (b)(2) of this section.
(2) Facility categories—(i) Category 1 Facility. A facility is a Category 1 Facility if it is located in a low-income community. The term low-income community is generally defined under section 45D(e)(1) of the Code as any population census tract if the poverty rate for such tract is at least 20 percent based on the 2011-2015 American Community Survey (ACS) low-income community data currently used for the New Markets Tax Credit (NMTC) under section 45D, or, in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or, in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income. The term low-income community also includes the modifications in section 45D(e)(4) and (5) for tracts with low population and modification of the income requirement for census tracts with high migration rural counties. Low-income community information for NMTC can be found at https://www.cdfifund.gov/cims3. For purposes of this paragraph (b)(2)(i), if updated ACS low-income community data is released for the NMTC program, a taxpayer can choose to base the poverty rate for any population census tract on either the 2011-2015 ACS low-income community data for the NMTC program or the updated ACS low-income community data for the NMTC program for a period of 1 year following the date of the release of the updated data. After the 1-year transition period, the updated ACS low-income community data for the NMTC program must be used to determine the poverty rate for any population census tract. Populations census tracts that satisfy the definition of low-income community at the time of application are considered to continue to meet the definition of low-income community for the duration of the recapture period described in paragraph (n)(1) of this section unless the location of the facility changes.
(ii) Category 2 Facility. A facility is a Category 2 Facility if it is located on Indian land. The term Indian land is defined in section 2601(2) of the Energy Policy Act of 1992 (25 U.S.C. 3501(2)).
(iii) Category 3 Facility. A facility is a Category 3 Facility if it is part of a qualified low-income residential building project. A facility will be treated as part of a qualified low-income residential building project if such facility is installed on a residential rental building that participates in a covered housing program or other affordable housing program described in section 48(e)(2)(B)(i) (Qualified Residential Property) and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building as provided in paragraph (e) of this section. A facility is considered installed on a Qualified Residential Property even if not on the building if the facility is installed on the same or an adjacent parcel of land as the Qualified Residential Property, and the other requirements to be a Category 3 Facility are satisfied.
(iv) Category 4 Facility. A facility is a Category 4 Facility if it is part of a qualified low-income economic benefit project. A facility will be treated as part of a qualified low-income economic benefit project if, as provided in paragraph (f) of this section, at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with income of less than—
(A) Two-hundred percent of the poverty line (as defined in section 36B(d)(3)(A) of the Code) applicable to a family of the size involved, or
(B) Eighty percent of area median gross income (as determined under section 142(d)(2)(B) of the Code).
(3) Single project treated as single facility. Multiple solar or wind facilities or energy properties that are operated as part of a single project are aggregated and treated as a single facility or energy property for purposes of determining if it is a qualified solar or wind facility under paragraph (b)(1) of this section. Any facility or energy property treated as part of a single facility under this paragraph (b)(3) will also be treated as a single facility for all other purposes under this section and all other guidance applicable to section 48(e) published in the Internal Revenue Bulletin. See § 601.601 of this chapter. Whether multiple facilities or energy properties are operated as part of a single project will depend on the relevant facts and circumstances and a single factor may not be dispositive. Factors indicating that multiple facilities or energy properties are operated as part of a single project may include—
(i) The facilities or energy properties are owned by a single legal entity;
(ii) The facilities or energy properties are constructed on contiguous pieces of land;
(iii) The facilities or energy properties are described in a common power purchase agreement (PPA) or more than one common power purchase agreements (PPAs);
(iv) The facilities or energy properties have a common interconnection;
(v) The facilities or energy properties share a common substation;
(vi) The facilities or energy properties are described in one or more common environmental or other regulatory permits;
(vii) The facilities or energy properties were constructed pursuant to a single master construction contract; or
(viii) The facilities or construction of the energy properties was financed pursuant to the same loan agreement.
(c) Eligible property—(1) In general. Eligible property is energy property that is part of a qualified solar or wind facility described in paragraph (b) of this section. Eligible property also includes energy storage technology (as described in section 48(a)(3)(A)(ix)) installed in connection with such qualifying energy property.
(2) Energy storage technology installed in connection with qualified solar or wind facility. Energy storage technology is installed in connection with other eligible property if the requirements of both paragraph (c)(2)(i) of this section and paragraph (c)(2)(ii) of this section (including by reason of paragraph (c)(3) of this section) are satisfied.
(i) The requirements of this paragraph (c)(2)(i) are satisfied if the energy storage technology and other eligible property are considered part of a single qualified solar or wind facility based on the energy storage technology and other eligible property being:
(A) Owned by a single legal entity,
(B) Located on the same or contiguous pieces of land,
(C) Having a common interconnection point, and
(D) Described in one or more common environmental or other regulatory permits.
(ii) The requirement of this paragraph (c)(2)(ii) is satisfied if the energy storage technology is charged no less than an annual average of 50 percent by the other eligible property.
(3) Safe harbor for requirement of paragraph (c)(2)(ii) of this section. For purposes of paragraph (c)(2)(ii) of this section, energy storage technology is deemed to be charged at least 50 percent by the facility if the power rating of the energy storage technology (in kW) is less than 2 times the capacity rating of the connected wind facility (in kW AC) or solar facility (in kW direct current (DC)).
(d) Location—(1) In general. A qualified solar or wind facility is treated as located in a low-income community or located on Indian land under section 48(e)(2)(A)(iii)(I) if the qualified solar or wind facility satisfies the Nameplate Capacity Test of paragraph (d)(2) of this section. Similarly, a qualified solar or wind facility is treated as located in a geographic area under the additional selection criteria described in paragraph (h) of this section if it satisfies the Nameplate Capacity Test.
(2) Nameplate Capacity Test. A qualified solar or wind facility is considered located in or on the relevant geographic area described in paragraph (d)(1) of this section if 50 percent or more of the facility's nameplate capacity is in a qualifying area. The percentage of a facility's nameplate capacity (as defined in paragraph (d)(2)(i) of this section) that is in a qualifying area is determined by dividing the nameplate capacity of the facility's energy-generating units that are located in the qualifying area by the total nameplate capacity of all the energy-generating units of the facility.
(i) Nameplate capacity for purpose of Nameplate Capacity Test. Nameplate capacity for an electricity generating unit means the maximum electricity generating output that the unit is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition provided in 40 CFR 96.202. Where applicable, the International Standard Organization conditions are used to measure the maximum electricity generating output or usable energy capacity. For purposes of assessing the Nameplate Capacity Test, qualified solar facilities use the nameplate capacity in DC and qualified wind facilities use the nameplate capacity in AC.
(ii) Exclusion of energy storage technology. The nameplate capacity of any energy storage technology installed in connection with the qualified solar or wind facility is disregarded in applying the Nameplate Capacity Test.
(e) Financial benefits for a Category 3 Facility—(1) In general. To satisfy the requirements of a Category 3 Facility as provided in paragraph (b)(2)(iii) of this section, the financial benefits of the electricity produced by the facility must be allocated equitably among the occupants of the dwelling units of the Qualified Residential Property. A Qualified Residential Property could either be a multifamily rental property or single-family rental property. The same rules for financial benefits for Category 3 Facilities apply to both types of Qualified Residential Property.
(2) Threshold requirement. At least 50 percent of the financial value of the energy produced by the facility (as defined in paragraph (e)(3) of this section) must be equitably allocated to the Qualified Residential Property's occupants that are designated as low-income occupants under the covered housing program or other affordable housing program.
(3) Financial value of the energy produced by the facility. For purposes of this paragraph (e), the financial value of the energy produced by the facility is defined as the greater of:
(i) Twenty-five percent of the gross financial value (as defined in paragraph (e)(4) of this section) of the annual energy produced by the energy property, or
(ii) The net financial value (as defined in paragraph (e)(5) of this section) of the annual energy produced by the energy property.
(4) Gross financial value. For purposes of this paragraph (e), gross financial value of the annual energy produced by the facility is calculated as the sum of:
(i) The total self-consumed kilowatt-hours produced by the qualified solar or wind facility multiplied by the applicable building's metered volumetric price of electricity,
(ii) The total exported kilowatt-hours produced by the qualified solar or wind facility multiplied by the applicable building's volumetric export compensation rate for solar or wind kilowatt-hours, and
(iii) The sale of any attributes associated with the facility's production (including, for example, any Federal, State, or Tribal renewable energy tax credits or incentives), if separate from the metered price of electricity or export compensation rate.
(5) Net financial value defined—(i) Common ownership. For purposes of this paragraph (e), if the facility and Qualified Residential Property are commonly owned, net financial value is defined as the gross financial value of the annual energy produced minus the annual average (or levelized) cost of the qualified solar or wind facility over the useful life of the facility (including debt service, maintenance, replacement reserve, capital expenditures, and any other costs associated with constructing, maintaining, and operating the facility).
(ii) Third-party ownership. For purposes of this paragraph (e), if the facility and the Qualified Residential Property are not commonly owned and the facility owner enters into a PPA or other contract for energy services with the Qualified Residential Property owner and/or building occupants, net financial value is defined as the gross financial value of the annual energy produced minus any payments made by the building owner and/or building occupants to the facility owner for energy services associated with the facility in a given year.
(iii) Equitable allocation of financial benefits. There are different rules to ensure an equitable allocation of financial benefits depending on whether or not financial value is distributed to building occupants via utility bill savings or through different means.
(A) If financial value distributed via utility bill savings. If financial value is distributed via utility bill savings, financial benefits will be considered to be equitably allocated if at least 50 percent of the financial value of the energy produced by the facility is distributed as utility bill savings in equal shares to each building dwelling unit among the Qualified Residential Property's occupants that are designated as low-income under the covered housing program or other affordable housing program (described in section 48(e)(2)(B)(i)) or alternatively distributed in proportional shares based on each low-income dwelling unit's square footage, or each low-income dwelling unit's number of occupants. For any occupant(s) who choose to not receive utility bill savings (for example, exercise their right to not participate in or to opt out of a community solar subscription in applicable jurisdictions), the portion of the financial value that would otherwise be distributed to non-participating occupants must be instead distributed to all participating occupants. No less than 50 percent of the Qualified Residential Property's occupants that are designated as low-income must participate and receive utility bill savings for the facility to utilize this method of benefit distribution. In the case of a solar facility, applicants must follow the Department of Housing and Urban Development (HUD) guidance on the Treatment of Community Solar Credits on Tenant Utility Bills (July 2022), located at https://www.hud.gov/sites/dfiles/Housing/documents/MF_Memo_Community_Solar_Credits_signed.pdf, Community Solar Credits in PIH Programs (August 2022), located at https://www.hud.gov/sites/dfiles/documents/Solar%20Credits_PH_HCV.pdf, or future HUD guidance, or other guidance or notices from the Federal agency that oversees the applicable housing program identified in section 48(e)(2)(B) to ensure that tenants' utility allowances and annual income for rent calculations are not negatively impacted. Applicants should apply similar principles in the case of a wind facility.
(B) If financial value is not distributed via utility bill savings. If financial value is not distributed via utility bill savings, financial benefits will be considered to be equitably allocated if at least 50 percent of the financial value of the energy produced by the facility is distributed to occupants using one of the methods described in HUD guidance on the Treatment of Solar Benefits in Master-metered Building (May 2023) located at https://www.hud.gov/sites/dfiles/Housing/documents/MF_Memo_re_Community_Solar_Credits_in_MM_Buildings.pdf, or future HUD guidance, or other guidance or notices from the Federal agency that oversees the applicable housing program identified in section 48(e)(2)(B). In the case of a solar facility, applicants must comply with HUD guidance, or future HUD guidance, for how residents of master-metered HUD-assisted housing can benefit from owners' sharing of financial benefits accrued from an investment in solar energy generation to ensure that tenants' utility allowances and annual income for rent calculations are not negatively impacted. Applicants should apply similar principles in the case of a wind facility.
(6) Benefits Sharing Statement—(i) In general. The facility owner must prepare a Benefits Sharing Statement, which must include:
(A) A calculation of the facility's gross financial value using the method described paragraph (e)(4) of this section,
(B) A calculation of the facility's net financial value using the method described in paragraph (e)(5) of this section,
(C) A calculation of the financial value required to be distributed to building occupants using the method described in paragraph (e)(3) of this section,
(D) A description of the means through which the required financial value will be distributed to building occupants, and
(E) If the facility and Qualified Residential Property are separately owned, indication of which entity will be responsible for the distribution of benefits to the occupants.
(ii) Notification requirement. The Qualified Residential Property owner must formally notify the occupants of units in the Qualified Residential Property of the development of the facility and planned distribution of benefits.
(f) Financial benefits for a Category 4 Facility—(1) In general. To satisfy the requirements of a Category 4 Facility as provided in paragraph (b)(2)(iv) of this section:
(i) The facility must serve multiple qualifying low-income households under section 48(e)(2)(C)(i) or (ii) (Qualifying Household),
(ii) At least 50 percent of the facility's total output in kW must be assigned to Qualifying Households, and
(iii) Each Qualifying Household must be provided a bill credit discount rate (as defined in paragraph (f)(2) of this section) of at least 20 percent.
(2) Bill credit discount rate—(i) In general. A bill credit discount rate is the difference between the financial benefit provided to a Qualifying Household (including utility bill credits, reductions in a Qualifying Household's electricity rate, or other monetary benefits accrued by the Qualifying Household on their utility bill) and the cost of participating in the community program (including subscription payments for renewable energy and any other fees or charges), expressed as a percentage of the financial benefit distributed to the Qualifying Household. The bill credit discount rate can be calculated by starting with the financial benefit provided to the Qualifying Household, subtracting all payments made by the Qualifying Household to the facility owner and any related third parties as a condition of receiving that financial benefit, then dividing that difference by the financial benefit distributed to the Qualifying Household.
(ii) No or nominal cost of participation. In cases where the Qualifying Household has no or only a nominal cost of participation, the bill credit discount rate should be calculated as the financial benefit provided to a Qualifying Household (including utility bill credits, reductions in a Qualifying Household's electricity rate, or other monetary benefits accrued by a Qualifying Household on their utility bill) divided by the total value of the electricity produced by the facility and assigned to the Qualifying Household (including any electricity services, products, and credits provided in conjunction with the electricity produced by such facility), as measured by the utility, independent system operator (ISO), or other off-taker procuring electricity (and related services, products, and credits) from the facility.
(iii) Calculation on annual basis. In all instances, the bill credit discount rate is calculated on an annual basis.
(iv) Examples. The provisions of this paragraph (f)(2) may be illustrated by the following examples:
(A) Example 1. A Qualifying Household signs a community solar subscription agreement with the facility owner that (1) requires the facility owner to cause a portion of the electricity generated (or its value) to be assigned to the utility bill of the Qualifying Household on a monthly basis, and (2) requires the Qualifying Household to pay the facility owner the equivalent of 80 percent of the monetary value of the assigned generation (that is, 80 percent of the value of bill credits provided to the Qualifying Household's utility bill) on a monthly basis. In this example, over the course of the first year the facility owner or their agent cause $200 in utility bill credits to be placed on the Qualifying Household's bill, and the Qualifying Household pays $160, inclusive of any upfront fees. The subsequent year, due to variation in solar generation and/or the compensation paid by the utility for solar generation, the facility owner, in accordance with the community solar subscription agreement, cause $220 in bill credits to be provided to the Qualifying Household's bill and the household pays $176. In each year of facility operation described within this example, a bill credit discount rate of 20 percent is maintained.
(B) Example 2. Due to the regulatory structure of the applicable jurisdiction or program, the terms of the community solar subscription, the use of a “net-crediting” mechanism, or other reason, the Qualifying Household does not make a direct payment to the facility owner. Assume that the total value of the electricity produced by the facility and assigned to the household, as measured by the utility, ISO, or other off-taker procuring the electricity, is $500 in the first year and $600 in the second year. Assume further that the Qualifying Household receives a “net” bill credit of $100 in the first year and $120 in the second year. In this case, the bill credit discount rate is 20 percent in each year ($500 × .2 = $100) and ($600 × .2 = $120), respectively.
(3) Low-income verification—(i) In general. To establish that financial benefits are provided to Qualifying Households as provided in paragraph (f)(1) of this section, applicants must, in accordance with guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter), submit documentation upon placing the qualified solar or wind facility in service that identifies each Qualifying Household, the output from the facility allocated to each Qualifying Household in kW, and the method of income verification utilized for each Qualifying Household. A Qualifying Household's low-income status is determined at the time the household enrolls in the subscription program and does not need to be re-verified.
(ii) Methods of verification. Applicants may use categorical eligibility or other income verification methods to establish that a household is a Qualifying Household.
(A) Categorical eligibility. Categorical eligibility consists of obtaining proof of the household's participation in a needs-based Federal, State, Tribal, or utility program with income limits at or below the qualifying income level required to be a Qualifying Household. Federal programs may include, but are not limited to: Medicaid, Low-Income Home Energy Assistance Program (LIHEAP) administered by the Department of Health and Human Services, Weatherization Assistance Program (WAP) administered by the Department of Energy (DOE), Supplemental Nutrition Assistance Program (SNAP) administered by the Department of Agriculture (USDA), Section 8 Project-Based Rental Assistance, the Housing Choice Voucher Program administered by HUD, the Federal Communication Commission's Lifeline Support for Affordable Communications, the National School Lunch Program administered by the USDA, the Supplemental Security Income Program administered by the Social Security Administration, and any verified government or non-profit program serving Asset Limited Income Constrained Employed (ALICE) persons or households. With respect to the Federal programs listed previously an individual in the household must currently be approved for assistance from or participation in the program with an award letter or other written documentation within the last 12 months for enrollment in that program to establish categorical eligibility of the household. State agencies can also provide verification that a household is a Qualifying Household if the household participates in a State's solar or other program and income limits for such program are at or below the qualifying income level required to be a Qualifying Household. The qualifying income level for a Qualifying Household is based on where such household is located.
(B) Other income verification methods. Paystubs, Federal or State tax returns, or income verification through crediting agencies and commercial data sources can be used to establish that a household is a Qualifying Household.
(C) Impermissible verification method. A self-attestation from a household is not a permissible method to establish a household is a Qualifying Household. This prohibition on direct self-attestation from a household does not extend to categorical eligibility for needs-based Federal, State, Tribal, or utility programs with income limits that rely on self-attestation for verification of income.
(g) Annual Capacity Limitation. Under section 48(e)(4)(C), the total annual capacity limitation is 1.8 gigawatts of DC capacity for the calendar year 2023 and 2024 Program. The annual Capacity Limitation for each Program year is divided across the four facility categories described in section 48(e)(2)(A)(iii) and paragraph (b)(2) of this section as provided in guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter. The Capacity Limitation for each Program year is divided across the four facility categories based on factors such as the anticipated number of applications that are expected for each category and the amount of Capacity Limitation that needs to be reserved for each category to encourage market participation in each category consistent with statutory intent and the goals of the Program. After the Capacity Limitation for each facility category is established in guidance published in the Internal Revenue Bulletin, it may later be re-allocated across facility categories and sub-reservation in the event one category or sub-reservation is oversubscribed and another has excess capacity. A facility category or sub-reservation is oversubscribed if it receives applications in excess of Capacity Limitation reserved for the facility category or sub-reservation.
(h) Reservations of Capacity Limitation allocation for facilities that meet certain additional selection criteria—(1) In general. At least 50 percent of the total Capacity Limitation in each facility category described in paragraph (b)(2) of this section will be reserved for qualified facilities meeting the additional selection criteria described in paragraph (h)(2) of this section (relating to ownership criteria) and paragraph (h)(3) of this section (relating to geographic criteria) as provided in guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter. Revenue Procedure 2023-27, 2023-35 I.R.B. provides the specific amounts reserved for 2023 and future guidance published in the Internal Revenue Bulletin will provide the amounts reserved for future years. The procedure for utilizing these additional selection criteria is provided in guidance published in the Internal Revenue Bulletin. After the reservation of Capacity Limitation for qualified facilities meeting the additional selection criteria described in paragraphs (h)(2) and (3) of this section is established in guidance published in the Internal Revenue Bulletin, it may later be re-allocated across facility categories and sub-reservations in the event one category or sub-reservation within a category is oversubscribed and another has excess capacity.
(2) Ownership criteria—(i) In general. The ownership criteria is based on characteristics of the applicant that owns the qualified solar or wind facility. A qualified solar or wind facility will meet the ownership criteria if it is owned by one of the following:
(A) A Tribal enterprise (as defined in paragraph (h)(2)(iii) of this section),
(B) An Alaska native corporation (as defined in paragraph (h)(2)(iv) of this section),
(C) A renewable energy cooperative (as defined in paragraph (h)(2)(v) of this section),
(D) A qualified renewable energy company meeting certain characteristics (as defined in paragraph (h)(2)(vi) of this section), or
(E) A qualified tax-exempt entity (as defined in paragraph (h)(2)(vii) of this section).
(ii) Indirect ownership—(A) Disregarded entities. If an applicant wholly owns an entity that is the owner of a qualified solar or wind facility, and the entity is disregarded as separate from its owner for Federal income tax purposes (disregarded entity), the applicant, and not the disregarded entity, is treated as the owner of the qualified solar or wind facility for purposes of the ownership criteria.
(B) Partnership. If an applicant is an entity treated as a partnership for Federal income tax purposes, and an entity described in paragraphs (h)(2)(i)(A) through (E) of this section owns at least a one percent interest (either directly or indirectly) in each material item of partnership income, gain, loss, deduction, and credit and is a managing member or general partner (or similar title) under State law of the partnership (or directly owns 100 percent of the equity interests in the managing member or general partner) at all times during the existence of the partnership, the qualified solar or wind facility will be deemed to meet the ownership criteria. If the partnership becomes the owner of the facility after an allocation is made to an entity described in paragraphs (h)(2)(i)(A) through (E) of this section, the transfer of the facility to the partnership is not a disqualification event for purposes of paragraph (m)(5) of this section, so long as the requirements of paragraph (m)(5) of this section are satisfied. The original applicant and the successor partnership should refer to guidance published in the Internal Revenue Bulletin for the procedures to request a transfer of the Capacity Limitation allocation to the successor partnership.
(iii) Tribal enterprise. A Tribal enterprise for purposes of the ownership criteria is an entity that is:
(A) Owned at least 51 percent directly by an Indian Tribal government (as defined in section 30D(g)(9) of the Internal Revenue Code (Code)), or owned at least 51 percent indirectly through a corporation that is wholly owned by the Indian Tribal government and is created under either the Tribal laws of the Indian Tribal government or through a corporation incorporated under the authority of either section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 5124 or section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. 5203), and
(B) Subject to Tribal government rules, regulations, and/or codes that regulate the operations of the entity.
(iv) Alaska native corporation. An Alaska Native corporation for purposes of the ownership criteria is defined in section 3 of the Alaska Native Claims Settlement Act, 43 U.S.C. 1602(m).
(v) Renewable energy cooperative. A renewable energy cooperative for purposes of the ownership criteria is an entity that develops qualified solar and/or wind facilities and is either:
(A) A consumer or purchasing cooperative controlled by its members with each member having an equal voting right and with each member having rights to profit distributions based on patronage as defined by proportion of volume of energy or energy credits purchased (kWh), volume of financial benefits delivered ($), or volume of financial payments made ($); and in which at least 50 percent of the patronage in the qualified facility is by cooperative members who are low-income households (as defined in section 48(e)(2)(C)), or
(B) A worker cooperative controlled by its worker-members with each member having an equal voting right.
(vi) Qualified renewable energy company. A qualified renewable energy company for purposes of the ownership criteria is an entity that serves low-income communities and provides pathways for the adoption of clean energy by low-income households. In addition to its general business purpose, a qualified renewable energy company must satisfy the ownership requirements described in one of paragraphs (h)(2)(vi)(A) through (F) of this section and each of the requirements in paragraphs (h)(2)(vi)(G), (H), and (I) of this section.
(A) At least 51 percent of the entity's equity interests are owned and controlled by one or more individuals.
(B) At least 51 percent of the entity's equity interests are owned and controlled by a Community Development Corporation (as defined in 13 CFR 124.3).
(C) At least 51 percent of the entity's equity interests are owned and controlled by an agricultural or horticultural cooperative (as defined in section 199A(g)(4)(A)).
(D) At least 51 percent of the entity's equity interests are owned and controlled by an Indian Tribal government (as defined in section 30D(g)(9)).
(E) At least 51 percent of the entity's equity interests are owned and controlled by an Alaska Native corporation (as defined in section 3 of the Alaska Native Claims Settlement Act, 43 U.S.C. 1602(m)).
(F) At least 51 percent of the entity's equity interests are owned and controlled by a Native Hawaiian organization (as defined in 13 CFR 124.3).
(G) Has less than 10 full-time equivalent employees (as determined under section 4980H(c)(2)(E) and (c)(4)) and less than $20 million in annual gross receipts in the previous calendar year; this must include the employees or receipts of all affiliates when determining the size of a business. Affiliation with another business is based on the power to control, whether exercised or not. The power to control exists when an external party has 50 percent or more ownership. It may also exist with considerably less than 50 percent ownership by contractual arrangement, or when one or more parties own a large share compared to other parties.
(H) First installed and/or operated a qualified solar or wind facility as defined in section 48(e)(2)(A) two or more years prior to the date of application; or
(I) Has provided solar services as a contractor or subcontractor to qualified solar or wind facilities as defined in section 48(e)(2)(A) with at least 100 kW of cumulative nameplate capacity located in one or more low-income communities as defined in section 48(e)(2)(A)(iii)(I).
(vii) Qualified tax-exempt entity. A qualified tax-exempt entity for purposes of the ownership criteria is:
(A) An organization exempt from the tax imposed by subtitle A by reason of being described in section 501(c)(3) or section 501(d);
(B) Any State, the District of Columbia, or political subdivision thereof, or any agency or instrumentality of any of the foregoing;
(C) An Indian Tribal government (as defined in section 30D(g)(9)), a political subdivision thereof, or any agency or instrumentality of any of the foregoing; or
(D) Any corporation described in section 501(c)(12) operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas.
(3) Geographic criteria—(i) In general. Geographic criteria does not apply to Category 2 Facilities. To meet the geographic criteria, a facility must be located in a county or census tract that is described in paragraph (h)(3)(i)(A) or (B) of this section. Applicants who meet the geographic criteria at the time of application are considered to continue to meet the geographic criteria for the duration of the recapture period, unless the location of the facility changes.
(A) Persistent Poverty County. A Persistent Poverty County (PPC for which information can be found at https://www.ers.usda.gov/data-products/poverty-area-measures/), which is generally defined as any county where 20 percent or more of residents have experienced high rates of poverty over the past 30 years. For the purposes of the Program, the PPC measure is that adopted by the USDA to make this determination. The most recent measure, which would apply for the 2023 Program year, incorporates poverty estimates from the 1980, 1990, and 2000 censuses, and 2007-11 ACS 5-year average. If updated data is released by USDA, a taxpayer will have a 1-year period following the date of the release of the updated data to be eligible under the previous data. After the 1-year transition period, the updated data must be used to determine eligibility. Applicants who satisfy the definition of PPC community at the time of application are considered to continue to meet the definition of PPC for the duration of the recapture period described in paragraph (n)(1) of this section, unless the location of the facility changes.
(B) Certain census tracts. A census tract that is designated in the Climate and Economic Justice Screening Tool (CEJST), which can be found at https://screeningtool.geoplatform.gov/en/#3/33.47/-97.5, as disadvantaged based on whether the tract is described in paragraph (h)(3)(ii)(A) or (B) of this section. The CEJST website provides further detail on the terms described in paragraphs (h)(3)(ii)(C) through (E) of this section, which are used in identifying census tracts described in paragraphs (h)(3)(ii)(A) and (B) of this section. See CEJST, Methodology & data, https://screeningtool.geoplatform.gov/en/methodology.
(ii) Applicable terms for certain census tracts. The following terms are applicable to this paragraph (h)(3):
(A) Energy burden or cost. The census tract is greater than or equal to the 90th percentile for energy burden (or energy cost) and is greater than or equal to the 65th percentile for low income.
(B) Exposure. The census tract is greater than or equal to the 90th percentile for PM2.5 exposure and is greater than or equal to the 65th percentile for low income.
(C) Energy cost. Energy cost is defined as average household annual energy cost in dollars divided by the average household income.
(D) PM2.5. PM2.5 is defined as fine inhalable particles with 2.5 or smaller micrometer diameters. The percentile is the weight of the particles per cubic meter.
(E) Low-income. Low income is defined as the percent of a census tract's population in households where household income is at or below 200 percent of the Federal poverty level, not including students enrolled in higher education.
(i) Sub-reservations of allocation for Category 1 Facilities—(1) In general. Capacity Limitation reserved for Category 1 Facilities will be subdivided each Program year for facilities seeking a Category 1 allocation with Capacity Limitation reserved specifically for eligible residential behind the meter (BTM) facilities, including rooftop solar. The remaining Capacity Limitation is available for applicants with front of the meter (FTM) facilities as well as non-residential BTM facilities. The specific sub-reservation for eligible residential BTM facilities in Category 1 is provided in guidance published in the Internal Revenue Bulletin and is established based on factors such as promoting efficient allocation of Capacity Limitation and allowing like-projects to compete for an allocation. After the sub-reservation is established in guidance published in the Internal Revenue Bulletin, it may later be re-allocated in the event it has excess capacity.
(2) Definitions—(i) Behind the meter (BTM) facility. For purposes of the Program, a qualified wind or solar facility is BTM if:
(A) It is connected with an electrical connection between the facility and the panelboard or sub-panelboard of the site where the facility is located,
(B) It is to be connected on the customer side of a utility service meter before it connects to a distribution or transmission system (that is, before it connects to the electricity grid), and
(C) Its primary purpose is to provide electricity to the utility customer of the site where the facility is located. This also includes systems not connected to a grid and that may not have a utility service meter, and whose primary purpose is to serve the electricity demand of the owner of the site where the system is located.
(ii) Eligible residential BTM facility. For purposes of paragraph (i)(1) of this section, an eligible residential BTM facility is defined as a single-family or multi-family residential qualified solar or wind facility that does not meet the requirements for a Category 3 Facility and is BTM. A qualified solar or wind facility is residential if it is uses solar or wind energy to generate electricity for use in a dwelling unit that is used as a residence.
(iii) Eligible FTM facility. For purposes of the Program, a qualified solar or wind facility is FTM if it is directly connected to a grid and its primary purpose is to provide electricity to one or more offsite locations via such grid or utility meters with which it does not have an electrical connection; alternatively, FTM is defined as a facility that is not BTM. For the purposes of Category 4 Facilities, a qualified solar or wind facility is also FTM if 50 percent or more of its electricity generation on an annual basis is physically exported to the broader electricity grid.
(j) Process of application evaluation—(1) In general. Applications for a Capacity Limitation allocation will be evaluated according to the procedures specified in guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter. If a facility category is oversubscribed, a lottery system may be used to allocate Capacity Limitation to similarly situated applicants.
(2) Information required as part of application. Applicants are required to submit with each application for a Capacity Limitation allocation information, documentation, and attestations to demonstrate eligibility for an allocation and project viability as specified in guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter.
(3) No administrative appeal of capacity limitation allocation decisions. An applicant may not administratively appeal decisions regarding Capacity Limitation allocations.
(k) Placed in service—(1) Requirement to report date placed in service. For any facility that received an allocation of Capacity Limitation the owner of the facility must report to DOE the date the eligible property was placed in service. This report is done through the same portal by which the original application for allocation was submitted.
(2) Requirement to submit final eligibility information at placed in service time. At the time that the owner reports that eligible property has been placed in service the owner also must confirm information about the facility and submit additional documentation to prove the facility is still eligible to maintain the allocation and the increased energy percentage under section 48(e)(1) as specified in guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter.
(3) DOE confirmation. DOE will review the placed in service documentation and attestations to determine if the facility meets the eligibility criteria for the owner to claim an increased energy percentage. DOE then provides a recommendation to the IRS regarding whether the facility continues to meet the eligibility requirements for the facility to retain its allocation or if the facility should be disqualified (as provided in paragraph (m) of this section). Based on DOE's recommendation, the IRS will decide whether the facility should retain its allocation or if the facility should be disqualified and will notify DOE of its decision. Each applicant must receive confirmation from the IRS that DOE has reviewed the placed in service submissions, and that eligibility is confirmed, prior to the owner (or a partner or shareholder in the case of a partnership or S corporation) claiming the increased credit amount on Form 3468, Investment Credit (or Form 3800, General Business Credit), or successor form, if eligible, making a transfer election under section 6418 of the Code, or, if eligible, making an elective payment election under section 6417 of the Code.
(4) Definition of placed in service. For purposes of this section, eligible property is considered placed in service in the earlier of the following taxable years:
(i) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such eligible property begins; or
(ii) The taxable year in which the eligible property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income.
(l) Facilities placed in service prior to an allocation award—(1) In general. Qualified solar or wind facilities must be placed in service after being awarded an allocation of Capacity Limitation.
(2) Rejection or rescission. An application for a qualified solar or wind facility that is placed in service prior to submission of the application will be rejected. If a facility is placed in service after the application is submitted, but prior to the allocation of Capacity Limitation, and the facility is awarded an allocation, the allocation will be rescinded.
(m) Disqualification. A facility will be disqualified and lose its allocation if prior to or upon the facility being placed in service an occurrence described in one of paragraphs (m)(1) through (5) of this section takes place.
(1) The location where the facility will be placed in service changes.
(2) The net output of the facility increases such that it exceeds the less than 5 MW AC output limitation provided in section 48(e)(2)(A)(ii) or the nameplate capacity decreases by the greater of 2 kW or 25 percent of the Capacity Limitation awarded in the allocation (AC for a wind facility; DC for a solar facility).
(3) The facility cannot satisfy the financial benefits requirements under section 48(e)(2)(B)(ii) and paragraph (e) of this section as planned, if applicable, or cannot satisfy the financial benefits requirements under section 48(e)(2)(C) or paragraph (f) of this section as planned, if applicable.
(4) The eligible property that is part of the facility that received the Capacity Limitation allocation is not placed in service within four years after the date the applicant was notified of the allocation of Capacity Limitation to the facility.
(5) The facility received a Capacity Limitation allocation based, in part, on meeting the ownership criteria and ownership of the facility changes prior to the facility being placed in service, unless the original applicant transfers the facility to an entity treated as a partnership for Federal income tax purposes and retains at least a one percent interest (either directly or indirectly) in each material item of partnership income, gain, loss, deduction, and credit of such partnership and is a managing member or general partner (or similar title) under State law of the partnership (or directly owns 100 percent of the equity interests in the managing member or general partner) at all times during the existence of the partnership.
(n) Recapture of section 48(e) Increase to the section 48(a) credit—(1) In general. Section 48(e)(5) provides for recapturing the benefit of any increase in the credit allowed under section 48(a) by reason of section 48(e) with respect to any property that ceases to be property eligible for such increase (but that does not cease to be investment credit property within the meaning of section 50(a)). Section 48(e) provides that the period and percentage of such recapture must be determined under rules similar to the rules of section 50(a). Therefore, if, at any time during the five year recapture period beginning on the date that a qualified solar or wind facility property under section 48(e) is placed in service, there is a recapture event under paragraph (n)(3) of this section with respect to such property, then the Federal income tax imposed on the taxpayer by chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by the recapture percentage of the benefit of the increase in the section 48 credit. The recapture percentage is determined according to the table provided in section 50(a)(1)(B).
(2) Exception to application of recapture. Such recapture may not apply with respect to any property if, within 12 months after the date the applicant becomes aware (or reasonably should have become aware) of such property ceasing to be property eligible for such increase in the credit allowed under section 48(a), the eligibility of such property for such increase pursuant to section 48(e) is restored. Such restoration of an increase pursuant to section 48(e) is not available more than once with respect to any facility.
(3) Recapture events. Any of the following circumstances result in a recapture event if the property ceases to be eligible for the increased credit under section 48(e):
(i) Property described in section 48(e)(2)(A)(iii)(II) fails to provide financial benefits.
(ii) Property described under section 48(e)(2)(B) ceases to allocate the financial benefits equitably among the occupants of the dwelling units, such as not allocating to residents the required net energy savings of the electricity, as required by paragraph (e) of this section.
(iii) Property described under section 48(e)(2)(C) ceases to provide at least 50 percent of the financial benefits of the electricity produced to qualifying households as described under section 48(e)(2)(C)(i) or (ii), or fails to provide those households the required minimum 20 percent bill credit discount rate, as required by paragraph (f) of this section.
(iv) For property described under section 48(e)(2)(B), the residential rental building the facility is a part of ceases to participate in a covered housing program or any other affordable housing program described in section 48(e)(2)(B)(i), as applicable.
(v) A facility increases its output such that the facility's output is 5 MW AC or greater, unless the applicant can prove that the output increase is not attributable to the original facility but rather is output associated with a new facility under the 80/20 Rule (the cost of the new property plus the value of the used property).
(4) Section 50(a) recapture. Any event that results in recapture under section 50(a) will also result in recapture of the benefit of the increase in the section 48 credit by reason of section 48(e). The exception to the application of recapture provided in paragraph (n)(2) of this section does not apply in the case of a recapture event under section 50(a).
(o) Applicability date. The rules of this section will apply to taxable years ending on or after October 16, 2023.
[T.D. 9979, 88 FR 55540, Aug. 15, 2023; 88 FR 59446, Aug. 29, 2023, as amended at 88 FR 87903, Dec. 20, 2023]
§ 1.48E-0 Table of contents.
This section lists the captions contained in §§ 1.48E-1 through 1.48E-5.
§ 1.48E-1 Clean electricity investment credit.
(a) Overview.
(1) In general.
(2) Claim.
(3) Code.
(4) EST.
(5) kWh.
(6) Qualified facility.
(7) Qualified investment with respect to a qualified facility.
(8) Qualified investment with respect to EST.
(9) Secretary.
(10) Section 48E credit.
(11) Section 48E regulations.
(12) Waste energy recovery property (WERP).
(b) Credit amount.
(1) In general.
(2) Applicable percentage.
(3) Base rate.
(4) Alternative rate.
(5) Energy communities increase in credit rate.
(i) In general.
(ii) Applicable credit rate increase.
(6) Domestic content increase in credit rate.
(i) In general.
(ii) Applicable credit rate increase.
(c) Credit phase-out.
(1) In general.
(2) Phase-out percentage.
(3) Applicable year.
(d) Related taxpayers.
(1) Definition.
(2) Related taxpayer rule.
(e) Applicability date.
§ 1.48E-2 Qualified investments in qualified facilities and EST for purposes of section 48E.
(a) Qualified investment with respect to a qualified facility.
(1) In general.
(2) Total basis amount.
(b) Qualified facility.
(1) In general.
(2) Placed in service.
(i) In general.
(ii) Qualified facility subject to § 1.48-4 election to treat lessee as purchaser.
(c) Qualified property.
(1) In general.
(2) Location of property.
(d) Property included in qualified facility.
(1) In general.
(2) Unit of a qualified facility.
(i) In general.
(ii) Functionally interdependent.
(3) Integral part.
(i) In general.
(ii) Power conditioning and transfer equipment.
(iii) Roads.
(iv) Fences.
(v) Buildings.
(vi) Shared integral property.
(vii) Examples.
(e) Definitions related to requirements for qualified property.
(1) Tangible personal property.
(2) Other tangible property.
(3) Depreciation allowable.
(i) In general.
(ii) Exclusions from allowable.
(4) Construction, reconstruction, or erection of the property.
(5) Acquisition of qualified property.
(6) Original use of the property.
(7) Retrofitted qualified facility.
(f) Coordination with other credits.
(1) In general.
(2) Allowed.
(3) Examples.
(g) EST.
(1) Property included in EST.
(2) Unit of EST.
(i) In general.
(ii) Functionally interdependent.
(3) Integral part.
(4) Qualified investment with respect to EST.
(5) Placed in service.
(i) In general.
(ii) EST subject to § 1.48-4 election to treat lessee as purchaser.
(6) Types of EST.
(i) Electrical energy storage property.
(ii) Thermal energy storage property.
(iii) Hydrogen energy storage property.
(7) Modification of EST.
(h) Applicability date.
§ 1.48E-3 Rules relating to the increased credit for prevailing wage and apprenticeship.
(a) In general.
(b) Qualified facility or EST requirements.
(c) Nameplate capacity for purposes of the One Megawatt Exception.
(1) Qualified facilities.
(2) Nameplate capacity for qualified facilities that generate in direct current for purposes of the One Megawatt Exception.
(3) EST.
(i) In general.
(ii) Electrical energy storage property.
(iii) Thermal energy storage property.
(iv) Hydrogen energy storage property.
(4) Integrated operations.
(i) One Megawatt Exception.
(ii) EST One Megawatt Exception.
(d) Transition waiver of penalty for prevailing wage requirements.
(e) No alteration or repair during recapture period described in § 1.48-13(c)(3).
(f) Applicability date.
§ 1.48E-4 Rules of general application.
(a) Qualified interconnection costs included in certain lower-output qualified facilities.
(1) In general.
(2) Qualified interconnection property.
(3) Five-Megawatt Limitation.
(i) In general.
(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation.
(iii) Nameplate capacity for qualified facilities that generate in direct current for purposes of the Five-Megawatt Limitation.
(4) Interconnection agreement.
(5) Utility.
(6) Reduction to amounts chargeable to capital account.
(7) Examples.
(b) Expansion of facility; Incremental production (Incremental Production Rule).
(1) In general.
(2) Measurement standard.
(3) Special rule for restarted facilities.
(4) Computation of qualified investment for a new unit or an addition of capacity.
(i) New unit.
(ii) Addition of capacity.
(5) Examples.
(c) Retrofit of an existing facility (80/20 Rule).
(1) In general.
(2) Expenditures taken into account.
(3) Cost of new components.
(4) New costs.
(5) Excluded costs.
(6) Examples.
(d) Special rules regarding ownership.
(1) Qualified investment with respect to a qualified facility or EST.
(2) Multiple owners.
(3) Section 761(a) election.
(4) Examples.
(e) Coordination rule for section 42 credits and section 48E credits.
(f) Recapture.
(1) In general.
(2) Recapture event.
(i) In general.
(ii) Changes to the Annual Table.
(iii) Yearly determination.
(iv) Carryback and carryforward adjustments.
(3) Recapture amount.
(i) In general.
(ii) Applicable recapture percentage.
(4) Recapture period.
(5) Increase in tax for recapture.
(g) Qualified progress expenditure election.
(h) Incremental cost.
(i) Cross references.
(j) Applicability date.
§ 1.48E-5 Greenhouse gas emissions rates for qualified facilities under section 48E.
(a) In general.
(b) Definitions.
(c) Non-C&G Facilities.
(d) C&G Facilities.
(e) Use of methane from certain sources to produce electricity.
(f) Carbon capture and sequestration.
(g) Annual publication of emissions rates.
(h) Provisional emissions rates.
(1) In general.
(2) Rate not established.
(3) Process for filing a PER petition.
(4) PER determination.
(5) Emissions value request process.
(6) LCA model for determining an emissions value for C&G Facilities.
(7) Effect of PER.
(i) Determining anticipated greenhouse gas emissions rate.
(1) In general.
(2) Examples of objective indicia.
(j) Reliance on Annual Table or Provisional Emissions Rate.
(k) Substantiation.
(1) In general.
(2) Sufficient substantiation.
(l) Applicability date.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E-1 Clean electricity investment credit.
(a) Overview—(1) In general. For purposes of section 46 of the Internal Revenue Code (Code), the section 48E credit (defined in paragraph (a)(10) of this section) is determined under section 48E of the Code and the section 48E regulations (defined in paragraph (a)(11) of this section). This paragraph (a) provides definitions of terms that, unless otherwise specified, apply for purposes of section 48E, the section 48E regulations, and any provision of the Code or this chapter that expressly refers to any provision of section 48E or the section 48E regulations. Paragraph (b) of this section provides rules for determining the amount of the section 48E credit for any taxable year. Paragraph (c) of this section provides rules regarding the phase-out of the section 48E credit. See § 1.48E-2 for rules relating to qualified investments in qualified facilities and energy storage technology (EST) for purposes of the section 48E credit. See § 1.48E-4 for rules of general application for the section 48E credit. See § 1.48E-5 for rules to determine greenhouse gas emissions rates for qualified facilities under section 48E.
(2) Claim. For purposes of determining a taxpayer's section 48E credit with respect to a qualified facility or EST or a credit described in section 48E(b)(3)(C), the term claim means filing a completed Form 3468, Investment Credit, or any successor form(s), or other relevant form as it relates to the credits described in section 48E(b)(3)(C), with the taxpayer's timely filed (including extensions) Federal income tax return or Federal return, as appropriate, for the taxable year in which the qualified facility or EST is placed in service, and for the taxable year in which the facility for which the credit described in section 48E(b)(3)(C) is placed in service. It includes making an election under section 6417 or 6418 of the Code and 26 CFR 1.6417-1 and 1.6418-1, respectfully, with respect to such section 48E credit on the taxpayer's filed return.
(3) Code. The term Code means the Internal Revenue Code.
(4) EST. The term EST for purposes of the section 48E credit means energy storage technology as defined in § 1.48E-2(g).
(5) kWh. The term kWh means kilowatt hours.
(6) Qualified facility. The term qualified facility for purposes of the section 48E credit has the meaning provided in § 1.48E-2(b).
(7) Qualified investment with respect to a qualified facility. The term qualified investment with respect to a qualified facility for purposes of the section 48E credit has the meaning provided in § 1.48E-2(a).
(8) Qualified investment with respect to EST. The term qualified investment with respect to EST for purposes of the section 48E credit has the meaning provided in § 1.48E-2(g)(4).
(9) Secretary. The term Secretary means the Secretary of the Treasury or their delegate.
(10) Section 48E credit. The term section 48E credit means the clean electricity investment credit determined under section 48E of the Code and the section 48E regulations.
(11) Section 48E regulations. The term section 48E regulations means this section and §§ 1.48E-2 through 1.48E-5.
(12) Waste energy recovery property (WERP). WERP is property that generates electricity solely from heat from buildings or equipment if the primary purpose of such building or equipment is not the generation of electricity. Examples of buildings or equipment the primary purpose of which is not the generation of electricity include, but are not limited to, manufacturing plants, medical care facilities, facilities on school campuses, and associated equipment.
(b) Credit amount—(1) In general. For purposes of section 46 of the Code, the section 48E credit for any taxable year is an amount equal to the applicable percentage of the qualified investment for such taxable year with respect to any qualified facility and any EST.
(2) Applicable percentage. The term applicable percentage means the base rate described in paragraph (b)(3) of this section or the alternative rate described in paragraph (b)(4) of this section. The applicable percentage may be increased as provided in section 48E(a)(3)(A) and paragraph (b)(5) of this section in the case of a qualified facility that is located in an energy community. Similarly, the applicable percentage may be increased as provided in section 48E(a)(3)(B) and paragraph (b)(6) of this section in the case of a qualified facility that satisfies the domestic content requirements.
(3) Base rate. Under section 48E(a)(2)(A)(i) and (B)(i), in the case of any qualified facility or EST that does not satisfy the requirements provided in section 48E(a)(2)(A)(ii) or (B)(ii), the applicable percentage is the base rate, which is 6 percent.
(4) Alternative rate. In the case of any qualified facility or EST that satisfies the prevailing wage and apprenticeship requirements provided in section 48E(a)(2)(A)(ii) or (B)(ii), the applicable percentage is the alternative rate, which is 30 percent.
(5) Energy communities increase in credit rate—(i) In general. In the case of any qualified facility or EST that is placed in service within an energy community (as defined in section 45(b)(11)(B)), the applicable percentage under section 48E(a)(2) and paragraph (b)(2) of this section will be increased by the applicable credit rate increase described in section 48E(a)(3)(A)(ii) and paragraph (b)(5)(ii) of this section.
(ii) Applicable credit rate increase. In the case of any qualified investment with respect to a qualified facility or EST to which the base rate is applicable, the applicable credit rate increase is 2 percentage points, and with respect to any qualified investment with respect to a qualified facility or EST to which the alternative rate is applicable, the applicable credit rate increase is 10 percentage points.
(6) Domestic content increase in credit rate—(i) In general. In the case of any qualified facility or EST that satisfies the requirements of section 45(b)(9)(B) (domestic content requirement), the applicable percentage under section 48E(a)(2) and paragraph (b)(2) of this section will be increased by the applicable credit rate increase described in paragraph (b)(6)(ii) of this section.
(ii) Applicable credit rate increase. In the case of any qualified investment with respect to a qualified facility or EST to which the base rate is applicable, 2 percentage points, and with respect to any qualified investment with respect to a qualified facility or EST to which the alternative rate is applicable, 10 percentage points.
(c) Credit phase-out—(1) In general. The amount of the credit as determined under section 48E(a) and paragraph (b) of this section for any qualified facility or EST, the construction of which begins during a calendar year described in section 48E(e)(2) and paragraph (c)(2) of this section is equal to the product of—
(i) The amount of the credit determined under section 48E(a) and paragraph (b) of this section without regard to section 48E(e) and paragraph (c) of this section; multiplied by
(ii) The phase-out percentage under section 48E(e)(2) and paragraph (c)(2) of this section.
(2) Phase-out percentage. The phase-out percentage under this paragraph (c)(2) is equal to—
(i) For any qualified investment with respect to any qualified facility or EST the construction of which begins during the first calendar year following the applicable year, 100 percent;
(ii) For any qualified investment with respect to any qualified facility or EST the construction of which begins during the second calendar year following the applicable year, 75 percent;
(iii) For any qualified investment with respect to any qualified facility or EST the construction of which begins during the third calendar year following the applicable year, 50 percent; and
(iv) For any qualified investment with respect to any qualified facility or EST the construction of which begins during any calendar year subsequent to the calendar year described in paragraph (c)(2)(iii) of this section, 0 percent.
(3) Applicable year. For purposes of this paragraph (c), the term applicable year has the same meaning provided under § 1.45Y-1(c)(3).
(d) Related taxpayers—(1) Definition. For purposes of the section 48E credit, the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).
(2) Related taxpayer rule. For purposes of the section 48E credit, related taxpayers are treated as one taxpayer in determining whether a taxpayer has made an investment in a qualified facility or EST with respect to which a section 48E credit may be determined.
(e) Applicability date. This section applies to qualified facilities and ESTs placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E-2 Qualified investments in qualified facilities and EST for purposes of section 48E.
(a) Qualified investment with respect to a qualified facility—(1) In general. A qualified investment of a taxpayer for a taxable year with respect to a qualified facility is the total basis amount for the taxable year with respect to the qualified facility.
(2) Total basis amount. The total basis amount is the sum of:
(i) The basis of any qualified property that is a part of the qualified facility and that is placed in service by the taxpayer during the taxable year; plus
(ii) The amount of any expenditures paid or incurred by the taxpayer for qualified interconnection property (as defined in section § 1.48E-4(a)(2)) in connection with a qualified facility which has a maximum net output of not greater than five megawatts (as measured in alternating current), that was placed in service during the taxable year of the taxpayer, and that are properly chargeable to the capital account.
(b) Qualified facility—(1) In general. A qualified facility is a facility that:
(i) Is used for the generation of electricity, meaning that it is a net generator of electricity taking into account any electricity consumed by the facility;
(ii) Is placed in service by the taxpayer after December 31, 2024; and
(iii) Has an anticipated greenhouse gas emissions rate of not greater than zero (as determined under the rules provided in § 1.48E-5).
(2) Placed in service—(i) In general. A qualified facility is considered placed in service in the earlier of:
(A) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such qualified facility begins; or
(B) The taxable year in which the qualified facility is placed in a condition or state of readiness and availability to produce electricity, whether in a trade or business or in the production of income. A qualified facility in a condition or state of readiness and availability to produce electricity includes, but is not limited to, components of property that are acquired and set aside during the taxable year for use as replacements for a particular qualified facility (or facilities) in order to avoid operational time loss and equipment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. However, components of property acquired to be used in the construction of a qualified facility are not considered in a condition or state of readiness and availability for a specifically assigned function.
(ii) Qualified facility subject to § 1.48-4 election to treat lessee as purchaser. Notwithstanding paragraph (b)(2)(i) of this section, a qualified facility with respect to which an election is made under section 50(d)(5) of the Code and § 1.48-4 to treat the lessee as having purchased such qualified facility is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.
(c) Qualified property—(1) In general. For purposes of this paragraph (c), the term qualified property means all property owned by the taxpayer that meets all of the requirements of paragraphs (c)(1)(i) through (iii) of this section:
(i) The property is tangible personal property (as defined in paragraph (e)(1) of this section) or other tangible property (as defined in paragraph (e)(2) of this section) but only if such other tangible property is used as an integral part of the qualified facility;
(ii) Depreciation (or amortization in lieu of depreciation) is allowable (as defined in paragraph (e)(3) of this section) with respect to the property; and
(iii) Either—
(A) The construction, reconstruction, or erection of the property is completed by the taxpayer (as defined in paragraph (e)(4) of this section) with respect to the property; or
(B) The taxpayer acquires the property (as defined in paragraph (e)(5) of this section) and the original use of the property (as defined in paragraph (e)(6) of this section) commences with the taxpayer.
(2) Location of property. Any component of qualified property that otherwise satisfies the requirements of this paragraph (c) is part of a qualified facility regardless of where such component is located.
(d) Property included in qualified facility—(1) In general. A qualified facility includes a unit of a qualified facility (as defined in paragraph (d)(2) of this section) owned by the taxpayer. A qualified facility also includes components of qualified property owned by the taxpayer that are an integral part (as defined in paragraph (d)(3) of this section) of the qualified facility. Any component of qualified property that meets the requirements of this paragraph (d) is part of a qualified facility regardless of where such component of qualified property is located. A qualified facility does not include any electrical transmission equipment, such as electrical transmission lines and towers, or any equipment beyond the electrical transmission stage. See § 1.48E-4(b) regarding the Incremental Production Rule and § 1.48E-4(c) for rules regarding a retrofitted qualified facility (80/20 rule).
(2) Unit of a qualified facility—(i) In general. For purposes of the section 48E credit, a unit of a qualified facility includes all functionally interdependent components of property (as defined in paragraph (d)(2)(ii) of this section) owned by the taxpayer that are operated together and that can operate apart from other property to produce electricity. No provision of this section, § 1.48E-1, or §§ 1.48E-3 through 1.48E-5 uses the term unit in respect of a qualified facility with any meaning other than that provided in this paragraph (d)(2)(i).
(ii) Functionally interdependent. Components of property are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of the other components to generate electricity.
(3) Integral part—(i) In general. For purposes of the section 48E credit, a component of property owned by a taxpayer is an integral part of a qualified facility if it is used directly in the intended function of the qualified facility and is essential to the completeness of such function. Property that is an integral part of a qualified facility is part of the qualified facility. A taxpayer may not claim the section 48E credit for any property not owned by the taxpayer that is an integral part of the qualified facility owned by the taxpayer.
(ii) Power conditioning and transfer equipment. Power conditioning equipment and transfer equipment are integral parts of a qualified facility. Power conditioning equipment includes, but is not limited to, transformers, inverters and converters, which modify the characteristics of electricity into a form suitable for use, transmission, or distribution. Parts related to the functioning or protection of power conditioning equipment are also treated as power conditioning equipment and include, but are not limited to, switches, circuit breakers, arrestors, and hardware used to monitor, operate, and protect power conditioning equipment. Transfer equipment includes components of property that allow for the aggregation of electricity generated by a qualified facility and components of property that alter voltage to permit electricity to be transferred to a transmission or distribution line. Transfer equipment does not include transmission or distribution lines. Examples of transfer equipment include, but are not limited to, wires, cables, and combiner boxes that conduct electricity. Parts related to the functioning or protection of transfer equipment are also treated as transfer equipment and may include items such as current transformers used for metering, electrical interrupters (such as circuit breakers fuses, and other switches) and hardware used to monitor, operate, and protect transfer equipment.
(iii) Roads. Roads that are integral to the intended function of the qualified facility such as onsite roads that are used to operate and maintain the qualified facility are an integral part of a qualified facility. Roads used primarily to access the site, or roads used primarily for employee or visitor vehicles, are not integral to the intended function of the qualified facility, and thus are not an integral part of a qualified facility.
(iv) Fences. Fencing is not an integral part of a qualified facility because it is not integral to the intended function of the qualified facility.
(v) Buildings. Generally, buildings are not integral parts of a qualified facility because they are not integral to the intended function of the qualified facility. For purposes of section 48E, a structure that is essentially an item of machinery or equipment is not considered a building. In addition, a structure is not a building if it houses components of property that are integral to the intended function of the qualified facility and if the use of the structure is so closely related to the use of the housed components of property therein that the structure clearly can be expected to be replaced if the components of property it initially houses are replaced.
(vi) Shared integral property. Multiple qualified facilities (whether owned by one or more taxpayers), including qualified facilities with respect to which a taxpayer has claimed a credit under section 48E or another Federal income tax credit, may include shared property that may be considered an integral part of each qualified facility so long as the cost basis for the shared property is properly allocated to each qualified facility and the taxpayer only claims a section 48E credit with respect to the portion of the cost basis properly allocable to a qualified facility for which the taxpayer is claiming a section 48E credit. The total cost basis of such shared property divided among the qualified facilities may not exceed 100 percent of the cost of such shared property. In addition, a component of property that is shared by a qualified facility as defined by section 48E(b)(3) (48E Qualified Facility) and a qualified facility as defined in section 45Y(b) (45Y Qualified Facility) that is an integral part of both qualified facilities will not affect the eligibility of the 48E Qualified Facility for the section 48E credit or the 45Y Qualified Facility for the section 45Y credit.
(vii) Examples. This paragraph (d)(3)(vii) provides examples illustrating the rules of this paragraph (d).
(A) Example 1. Co-located qualified facilities owned by the same taxpayer that share integral property. X constructs and owns a solar facility (Solar Facility) and nearby also constructs and owns a wind facility (Wind Facility) that are each a qualified facility. The Solar Facility and Wind Facility each connect to a shared transformer that steps up the electricity produced by each qualified facilities to electrical grid voltage before it is transmitted to the electrical grid through an intertie. X assigns 50% of the cost of the shared transformer to the Solar Facility and the Wind Facility, respectively. The fact that the Solar Facility and Wind Facility share property that is integral to both does not impact the ability of X to claim a section 48E credit for both qualified facilities. When X places the qualified facilities in service, 50% of the cost of the transformer is included in X's basis in each of the qualified facilities for purposes of computing the section 48E credit.
(B) Example 2. Co-located qualified facilities owned by different taxpayers that share integral property. X constructs and owns a solar facility (Solar Facility), and nearby Y constructs and owns a wind facility (Wind Facility) that are each a qualified facility. The Solar Facility and the Wind Facility both connect to a shared transformer that steps up the electricity produced by both qualified facilities to electrical grid voltage before it is transmitted to the electrical grid through an intertie. X and Y each pay 50% of the cost of the shared transformer. The fact that the Solar Facility and Wind Facility share property that is integral to both does not impact the ability of X or Y to claim a section 48E credit for their respective qualified facilities. When X and Y place their respective qualified facilities in service, 50% of the cost of the transformer is included in X's and Y's basis in their respective qualified facilities for purposes of computing the section 48E credit.
(C) Example 3. Co-located qualified facility and Energy Storage Technology (EST) owned by the same taxpayer. X constructs and owns a wind facility (Wind Facility) that is co-located with an EST that X also constructs and owns. The Wind Facility and EST share transfer equipment that is integral to both. X assigns 50% of the cost of the shared transfer equipment to the Wind Facility and 50% of the cost to the EST. The fact that the Wind Facility and EST share property that is integral to both does not impact the ability of X to claim a section 48E credit for the Wind Facility and the EST. X may include 50% of the cost of the transfer equipment in its basis to determine a section 48E credit for the Wind Facility and the EST.
(D) Example 4. Co-located qualified facility and Energy Storage Technology owned by different taxpayers. X constructs and owns a solar facility that is a qualified facility (Solar Facility) and is co-located with an EST constructed and owned by Y. The Solar Facility and EST share transfer equipment that is integral to both. X and Y each incur 50% of the cost of the transfer equipment. The fact that the Solar Facility and EST share property that is integral to both does not impact the ability of X to claim a section 48E credit for the Solar Facility or Y to claim a section 48E credit for the EST. When X and Y place in service the Solar Facility and EST, for purposes of computing the section 48E credit, 50% of the cost of the transfer equipment is included in X's basis in the Solar Facility and 50% of the cost is included in Y's basis in the EST.
(E) Example 5. Qualified facility with integral property owned by a different taxpayer. X constructs and owns a hydropower production facility that is a qualified facility (Hydropower Facility). The Hydropower Facility connects to a dam owned by Y, a government entity, that is an integral part of the Hydropower Facility. X pays for upkeep of the dam. The fact that X does not own the dam does not impact the ability of X to claim a section 48E credit for the Hydropower Facility. When X places in service the Hydropower Facility, for purposes of computing the section 48E credit, the cost incurred by X related to the dam would not be included in X's basis in the Qualified Facility because X does not own the dam.
(e) Definitions related to requirements for qualified property—(1) Tangible personal property. The term tangible personal property means any tangible property except land or improvements thereto, such as buildings or other inherently permanent structures (including items that are structural components of such buildings or structures. Tangible personal property includes all property (other than structural components) that is contained in or attached to a building. Further, all property that is in the nature of machinery (other than structural components of a building or other inherently permanent structure) is considered tangible personal property even though located outside a building. Machinery located outside of a building is qualified property if it is used for the generation of electricity and the components of machinery are functionally interdependent. Local law does not control whether property is tangible property or is tangible personal property for purposes of the section 48E credit. Thus, tangible property may be tangible personal property for purposes of the section 48E credit even though under local law the property is considered a fixture and therefore is real property under local law.
(2) Other tangible property. The term other tangible property means tangible property other than tangible personal property (not including a building and its structural components) that is used as an integral part of furnishing electricity by a person engaged in a trade or business of furnishing any such service. Other tangible property may be tangible property for purposes of the section 48E credit even though under local law the property is considered a fixture and is therefore real property under local law.
(3) Depreciation allowable—(i) In general. For purposes of applying paragraph (c) of this section, depreciation (or amortization in lieu of depreciation) (collectively, depreciation) is allowable with respect to the property if such property is of a character subject to the allowance for depreciation under section 167 of the Code and the basis or cost of such property is recovered using a method of depreciation (for example, the straight line method), which includes any additional first year depreciation deduction method of depreciation (for example, under section 168(k) of the Code). Further, if an adjustment with respect to the Federal income tax or Federal return, as appropriate, for such taxable year requires the basis or cost of such qualified property to be recovered using a method of depreciation, depreciation is allowable to the taxpayer with respect to the qualified property.
(ii) Exclusions from allowable. For purposes of paragraph (c) of this section, depreciation is not allowable with respect to a qualified facility if the basis or cost of such qualified facility is not recovered through a method of depreciation but, instead, such basis or cost is recovered through a deduction of the full basis or cost of the qualified facility in one taxable year (for example, under section 179 of the Code).
(4) Construction, reconstruction, or erection of the property. The term construction, reconstruction, or erection of the property means work performed to construct, reconstruct, or erect property either by the taxpayer or for the taxpayer in accordance with the taxpayer's specifications.
(5) Acquisition of qualified property. The term acquisition of qualified property means a transaction by which a taxpayer acquires the rights and obligations to establish tax ownership of the property for Federal tax purposes.
(6) Original use of the property. The term original use of the property means the first use to which the unit of property is put, whether or not such use is by the taxpayer.
(7) Retrofitted qualified facility. A retrofitted qualified facility acquired by the taxpayer will not be treated as being put to original use by the taxpayer unless the rules in § 1.48E-4(c) regarding retrofitted qualified facilities (80/20 Rule) apply. The question of whether a qualified facility meets the 80/20 Rule is a facts and circumstances determination.
(f) Coordination with other credits—(1) In general. The term qualified facility (as defined in section 48E(b)(3)) and paragraph (b) of this section does not include any facility for which a credit determined under section 45, 45J, 45Q, 45U, 45Y, 48, or 48A is allowed under section 38 of the Code for the taxable year or any prior taxable year. A taxpayer that directly owns a qualified facility (as defined in section 48E(b)(3)) for which the taxpayer is eligible for both a section 48E credit and another Federal income tax credit is eligible for the section 48E credit only if the other Federal income tax credit was not allowed to the taxpayer with respect to the qualified facility. Nothing in this paragraph (f) precludes a taxpayer from claiming a section 48E credit with respect to a qualified facility (as defined in section 48E(b)(3)) that is co-located with another facility for which a credit determined under section 45, 45J, 45Q, 45U, 45Y, 48, or 48A is allowed under section 38 of the Code for the taxable year or any prior taxable year.
(2) Allowed. For purposes of this paragraph (f), the term allowed only includes credits that taxpayers have claimed on a Federal income tax return or Federal return, as appropriate, and that the Internal Revenue Service (IRS) has not challenged in terms of the taxpayer's eligibility.
(3) Examples. This paragraph (f)(3) provides examples illustrating the rules provided in this paragraph (f).
(i) Example 1. Taxpayer claims a section 45Y credit on a solar farm and section 48E credit on co-located Energy Storage Technology. X owns a solar farm that is a qualifying facility (as defined in § 1.45Y-2(a)) (Solar Qualified Facility), and a co-located EST (Energy Storage). The Energy Storage is not part of the Solar Qualified Facility, and therefore X may claim the section 45Y credit based on the kWh of electricity produced by the Solar Qualified Facility, and X may also claim the section 48E credit based on its qualified investment in the Energy Storage.
(ii) Example 2. Different taxpayers claim a section 45Y credit for a solar farm and a co-located Energy Storage Technology. X owns a solar farm that is a qualifying facility (as defined in § 1.45Y-2(a)) (Solar Qualified Facility), and Y owns a co-located EST (Energy Storage). The Energy Storage is not part of the Solar Qualified Facility, and therefore, X may claim the section 45Y credit based on the kWh of electricity produced by the Solar Qualified Facility, and Y may claim the section 48E credit based on its qualified investment in the Energy Storage.
(iii) Example 3. Taxpayer claiming a section 48E credit; another credit is not allowed. X owns a wind facility that satisfies the requirements of a qualified facility under section 48E as well as the requirements of a qualified facility as defined in § 1.45Y-2(a) under section 45Y. X claims a section 45Y credit with respect to the wind facility. While a credit may be available with regard to the wind facility under section 48E, because X has already claimed a section 45Y credit with respect to the wind facility, a section 48E credit is not allowed. Local law is not controlling for purposes of determining whether property is or is not tangible property or tangible personal property. Thus, tangible property may be personal property for purposes of the energy credit even though under local law the property is considered a fixture and therefore real property.
(iv) Example 4. Interaction of section 48E and section 45Q credits for single qualified facility. X owns a qualified facility (Facility A) that includes carbon capture equipment, which is needed for the facility to meet the zero greenhouse gas requirement, so it is functionally interdependent to the production of electricity by the Facility A. X uses the carbon capture equipment to capture and utilize (as described in section 45Q(f)(5)) qualified carbon dioxide and claimed a section 45Q credit in the current taxable year. As a result, X cannot claim a section 48E credit for its 48E Facility A because a qualified facility does not include a facility for which a credit determined under section 45Q is allowed.
(v) Example 5. Interaction of section 48E and section 45Q credits for co-located qualified facilities. Assume the same facts as in paragraph (f)(3)(iv) of this section (Example 4), except that X owns a co-located qualified facility (Facility B) that also includes carbon capture equipment, which is needed for the facility to meet the zero greenhouse gas requirement, so it is functionally interdependent to the production of electricity by the Facility B. X uses the carbon capture equipment to capture and utilize (as described in section 45Q(f)(5)) qualified carbon dioxide, but does not claim a section 45Q credit with respect to the Facility B. While X claimed a section 45Q credit in the current taxable year for the Facility A (see Example 4), the Facility B is not part of the Facility A, and, therefore, X may claim the section 48E credit for its Facility B.
(g) EST—(1) Property included in EST. An EST includes a unit of energy storage technology (unit of EST) (as defined in paragraph (g)(2) of this section) that meets the requirements of paragraph (g)(2)(ii) of this section. An EST also includes property owned by the taxpayer that is an integral part (as defined in paragraph (g)(3) of this section) of the EST. An EST does not include equipment that is an addition or modification to an existing EST. For purposes of the section 48E credit, EST includes electrical energy storage property (as described in paragraph (g)(6)(i) of this section), thermal energy storage property (as described in paragraph (g)(6)(ii) of this section), and hydrogen energy storage property (as described in paragraph (g)(6)(iii) of this section).
(2) Unit of EST—(i) In general. For purposes of the section 48E credit, a unit of EST includes all functionally interdependent components of property (as defined in paragraph (g)(2)(ii) of this section) owned by the taxpayer that are operated together and that can operate apart from other property to perform the intended function of the EST. No provision of this section, § 1.48E-1, or §§ 1.48E-3 through 1.48E-5 uses the term unit in respect of an EST with any meaning other than that provided in this paragraph (g)(2)(i).
(ii) Functionally interdependent. Components of property are functionally interdependent if the placing in service of each of the components is dependent upon the placing in service of each of the other components to perform the intended function of the EST.
(3) Integral part. For purposes of the section 48E credit, property owned by a taxpayer is an integral part of an EST owned by the same taxpayer if it is used directly in the intended function of the EST and is essential to the completeness of such function. Property that is an integral part of an EST is part of that EST. A taxpayer may not claim the section 48E credit for any property not owned by the taxpayer that is an integral part of EST owned by the taxpayer.
(4) Qualified investment with respect to EST. The qualified investment with respect to any EST for any taxable year is the basis of any EST placed in service by the taxpayer during such taxable year.
(5) Placed in service—(i) In general. An EST is considered placed in service in the earlier of:
(A) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such EST begins; or
(B) The taxable year in which the EST is placed in a condition or state of readiness and availability for the intended function of the EST, whether in a trade or business or in the production of income. An EST in a condition or state of readiness and availability for its intended function includes, but is not limited to, components of property that are acquired and set aside during the taxable year for use as replacements for a particular EST (or ESTs) in order to avoid operational time loss and equipment that is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. However, components of property acquired to be used in the construction of an EST are not considered in a condition or state of readiness and availability for a specifically assigned function.
(ii) EST subject to § 1.48-4 election to treat lessee as purchaser. Notwithstanding paragraph (g)(5)(i) of this section, EST with respect to which an election is made under section 50(d)(5) of the Code and § 1.48-4 to treat the lessee as having purchased such EST is considered placed in service by the lessor in the taxable year in which possession is transferred to such lessee.
(6) Types of EST—(i) Electrical energy storage property. Electrical energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that receives, stores, and delivers energy for conversion to electricity, and has a nameplate capacity of not less than 5 kWh. For example, subject to the exclusion for property primarily used in the transportation of goods or individuals, electrical energy storage property includes but is not limited to rechargeable electrochemical batteries of all types (such as lithium-ion, vanadium redox flow, sodium sulfur, and lead-acid); ultracapacitors; physical storage such as pumped storage hydropower, compressed air storage, flywheels; and reversible fuel cells.
(ii) Thermal energy storage property—(A) In general. Thermal energy storage property is property comprising a system that is directly connected to a heating, ventilation, or air conditioning (HVAC) system; removes heat from, or adds heat to, a storage medium for subsequent use; and provides energy for the heating or cooling of the interior of a residential or commercial building. Thermal energy storage property includes equipment and materials, and parts related to the functioning of such equipment, to store thermal energy for later use to heat or cool, or to provide hot water for use in heating a residential or commercial building. It does not include property that transforms other forms of energy into heat in the first instance. Property that “removes heat from, or adds heat to, a storage medium for subsequent use” is property that is designed with the particular purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used for heating or cooling of the interior of a residential or commercial building. Paragraph (g)(6)(ii)(B) of this section provides a safe harbor for determining whether a thermal energy storage property has such a purpose. Thermal energy storage property does not include a swimming pool, combined heat and power system property (as defined in section 45Y(g)(2)), or a building or its structural components. For example, thermal energy storage property includes, but is not limited to, a system that adds heat to bricks heated to high temperatures that later use this stored energy to heat a building through the HVAC system; thermal ice storage systems that use electricity to run a refrigeration cycle to produce ice that is later connected to the HVAC system as an exchange medium for air conditioning a building, heat pump systems that store thermal energy in an underground tank, an artificial pit, an aqueous solution, a borehole field, or a solid-liquid phase change material to be extracted for later use for heating and/or cooling; and air-to-water heat pump systems with a water storage tank. However, consistent with § 1.48-14(d), if thermal energy storage property, such as a heat pump system, includes equipment, such as a heat pump, that also serves a purpose in an HVAC system that is installed in connection with the thermal energy storage property, the taxpayer's qualified investment with respect to the thermal energy storage property includes the total cost of the thermal energy storage property and HVAC system less the cost of an HVAC system without thermal storage capacity that would meet the same functional heating or cooling needs as the heat pump system with a storage medium, other than time shifting of heating or cooling. See § 1.48-14(h) for application of the Incremental Cost Rule.
(B) Safe harbor. A thermal energy storage property will be deemed to have the purpose of substantially altering the time profile of when heat added to or removed from the thermal storage medium can be used to heat or cool the interior of a residential or commercial building if that thermal energy storage property is capable of storing energy that is sufficient to provide heating or cooling of the interior of a residential or commercial building for a minimum of one hour.
(iii) Hydrogen energy storage property. Hydrogen energy storage property is property (other than property primarily used in the transportation of goods or individuals and not for the production of electricity) that stores hydrogen and has a nameplate capacity of not less than 5 kWh, equivalent to 0.127 kg of hydrogen or 52.7 standard cubic feet (scf) of hydrogen. Hydrogen energy storage property includes, but is not limited to, above ground storage tanks, underground storage facilities, and associated compressors. Property that is an integral part of hydrogen energy storage property includes, but is not limited to, hydrogen liquefaction equipment and gathering and distribution lines within a hydrogen energy storage property.
(7) Modification of EST. With respect to an electrical energy storage property or a hydrogen energy storage property, modified as set forth in this paragraph (g)(7), such property will be treated as an electrical energy storage property (as described in paragraph (g)(6)(i) of this section) or a hydrogen energy storage property (as described in paragraph (g)(6)(iii) of this section), except that the basis of any existing electrical energy storage property or hydrogen energy storage property prior to such modification is not taken into account for purposes of this paragraph (g)(7) and section 48E. This paragraph (g)(7) applies to any electrical energy storage property and hydrogen energy storage property that either:
(i) Was placed in service before August 16, 2022, and would be described in section 48(c)(6)(A)(i), except that such property had a nameplate capacity of less than 5 kWh and is modified in a manner that such property (after such modification) has a nameplate capacity of not less than 5 kWh; or
(ii) Is described in section 48(c)(6)(A)(i) and is modified in a manner that such property (after such modification) has an increase in nameplate capacity of not less than 5 kWh. The increase in nameplate capacity is equal to the difference between nameplate capacity immediately after the modification and nameplate capacity immediately prior to the modification.
(h) Applicability date. This section applies to qualified facilities and EST placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E-3 Rules relating to the increased credit for prevailing wage and apprenticeship.
(a) In general. If any qualified facility or EST satisfies the requirements in paragraph (b) of this section, the applicable percentage used for calculating the amount of the credit for a qualified investment determined under section 48E(a) for the taxable year equals 30 percent.
(b) Qualified facility or EST requirements. A qualified facility or EST satisfies the requirements of this paragraph (b) if it is a facility described in one of paragraphs (b)(1) through (6) of this section:
(1) A qualified facility with a maximum net output of less than one megawatt of electrical energy (as measured in alternating current) based on the nameplate capacity as provided in paragraph (c) of this section (One Megawatt Exception);
(2) A qualified facility the construction of which began prior to January 29, 2023;
(3) A qualified facility that meets the prevailing wage requirements of section 48E(d)(3) and §§ 1.45-7(a)(2) and (3) and (b) through (d) and 1.48-13(c), the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12;
(4) An EST with a capacity of less than one megawatt based on the nameplate capacity as provided in paragraph (c) of this section (EST One Megawatt Exception);
(5) An EST the construction of which began prior to January 29, 2023; or
(6) An EST that satisfies the prevailing wage requirements of section 48E(d)(3) and §§ 1.45-7(a)(2) and (3) and (b) through (d) and 1.48-13(c), the apprenticeship requirements of section 45(b)(8) and § 1.45-8, and the recordkeeping and reporting requirements of § 1.45-12.
(c) Nameplate capacity for purposes of the One Megawatt Exception—(1) Qualified facilities. For purposes of paragraph (b)(1) of this section, whether a qualified facility has a maximum net output of less than 1 megawatt (MW) of electrical energy (as measured in alternating current) is determined based on the nameplate capacity of the facility. If a qualified facility has integrated operations (as defined in paragraph (c)(4)(i) of this section) with one or more other qualified facilities, then the aggregate nameplate capacity of the qualified facilities is used for the purposes of determining if the qualified facilities satisfy the One Megawatt Exception. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output of a facility.
(2) Nameplate capacity for qualified facilities that generate in direct current for purposes of the One Megawatt Exception. For qualified facilities that generate electricity in direct current, the taxpayer determines the maximum net output (in alternating current) of each unit of qualified facility by using the lesser of:
(i) The sum of the nameplate generating capacities within the unit of qualified facility in direct current, which is deemed the nameplate generating capacity of the unit of qualified facility in alternating current; or
(ii) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
(3) EST—(i) In general. Paragraphs (c)(3)(ii) through (iv) of this section provide rules for applying the EST One Megawatt Exception described in paragraph (b)(4) of this section to different types of energy storage properties. If the EST has integrated operations (as defined in paragraph (c)(4)(ii) of this section) with one or more other ESTs, then the aggregate nameplate capacity of the ESTs is used for the purposes of the EST One Megawatt Exception. If applicable, taxpayers should use the ISO conditions to measure the maximum net output of an EST.
(ii) Electrical energy storage property. In the case of electrical energy storage property (as defined in § 1.48E-2(g)(6)(i)), the EST One Megawatt Exception is determined by using the storage device's maximum net output. If the output of electrical energy storage property is in direct current, taxpayer should apply the rules of paragraph (c)(2) of this section.
(iii) Thermal energy storage property. In the case of thermal energy storage property (as defined in § 1.48E-2(g)(6)(ii)), the EST One Megawatt Exception is determined by using the property's maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 million British Thermal Units per hour (mmBtu/hour) for heating and 284 tons for cooling (Btu per hour/3,412,140 = MW). The maximum net output is the maximum instantaneous rate of discharge and is determined based on the nameplate capacity of the equipment that generates or distributes thermal energy for productive use (including distributing the thermal energy from the storage medium). For purposes of determining the maximum net output of thermal energy storage property, if the nameplate capacity of the thermal energy storage is not available, the nameplate capacity of the equipment delivering thermal energy to the thermal energy storage may be used. For thermal energy storage property distributing thermal energy to a building or buildings, the nameplate capacity can be assessed as either the aggregate maximum thermal capacity of all individual heating or cooling elements within the building or buildings, or as the maximum thermal output that the thermal energy storage property is capable of delivering to a building or buildings at any given moment. The maximum thermal capacity of an entire thermal energy storage property is capable of delivering at any given moment does not take into account the capacity of redundant equipment if such equipment is not operated when the system is at maximum output during normal operation. For thermal energy storage property and other energy property that generates or distributes thermal energy for a productive use, the maximum thermal capacity that the entire system is capable of delivering is considered to be the greater of the rate of cooling or the rate of heating of the aggregate of the nameplate capacity of the equipment distributing energy for productive use, including distributing the thermal energy from the thermal energy storage medium to the building or buildings. If such nameplate capacity is unavailable, in the case of thermal energy storage property only, the maximum thermal capacity may instead be considered to be the greater of the rate of cooling or the rate of heating of the aggregate of the nameplate capacity of all the equipment delivering energy to the thermal energy storage property in the project.
(iv) Hydrogen energy storage property. In the case of a hydrogen energy storage property (as defined in § 1.48E-2(g)(6)(iii)), the EST One Megawatt Exception is determined by using the property's maximum net output. The maximum net output in MW is calculated by using a conversion whereby one MW is equal to 3.4 mmBtu/hour of hydrogen or equivalently 10,500 standard cubic feet (scf) per hour of hydrogen.
(4) Integrated operations—(i) One Megawatt Exception. Solely for the purposes of the One Megawatt Exception described in paragraph (b)(1) of this section, a qualified facility is treated as having integrated operations with any other qualified facility of the same technology type if the facilities are:
(A) Owned by the same or related taxpayers;
(B) Placed in service in the same taxable year; and
(C) Transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user.
(ii) EST One Megawatt Exception. Solely for the purposes of the EST One Megawatt Exception described in paragraph (b)(4) of this section, an EST is treated as having integrated operations with any other EST of the same technology type if the ESTs are:
(A) Owned by the same or related taxpayers;
(B) Placed in service in the same taxable year; and
(C) Transmit energy through the same point of interconnection or, if the ESTs are not grid-connected or are providing storage directly to an end user behind a utility meter, are able to support the same end user. In the case of EST described in paragraphs (c)(3)(iii) and (iv) of this section, which use the same piping and distribution systems for the respective type of EST.
(d) Transition waiver of penalty for prevailing wage requirements. For purposes of the transition waiver described in § 1.48-13(c)(2) (by reference to § 1.45-7(c)(6)(iii)), the penalty payment required by § 1.45-7(c)(1)(ii) to cure a failure to satisfy the prevailing wage requirements in paragraph (b)(3) or (6) of this section is waived with respect to a laborer or mechanic who performed work in the construction, alteration, or repair of an energy project on or after January 29, 2023, and prior to January 15, 2025, if the taxpayer relied upon Notice 2022-61, 2022-52 I.R.B. 560, or the PWA proposed regulations (REG-100908-23) (88 FR 60018), corrected in 88 FR 73807 (Oct. 27, 2023), corrected in 89 FR 25550 (April 11, 2024), to determine when the activities of any laborer or mechanic became subject to the prevailing wage requirements, and the taxpayer makes the correction payments required by § 1.45-7(c)(1)(i) with respect to such laborer and mechanics within 180 days of January 15, 2025.
(e) No alteration or repair during recapture period described in § 1.48-13(c)(3). If no alteration or repair work occurs during the five-year recapture period, the taxpayer is deemed to satisfy the prevailing wage requirements described in paragraph (b)(3) or (6) of this section with respect to such taxable year.
(f) Applicability date. This section applies to qualified facilities and qualified ESTs placed in service in taxable years ending after January 15, 2025, and the construction of which begins after March 17, 2025. Taxpayers may apply this section to qualified facilities and qualified ESTs placed in service in taxable years ending on or after January 15, 2025, the construction of which begins before January 15, 2025, provided that taxpayers follow this section in its entirety and in a consistent manner.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E-4 Rules of general application.
(a) Qualified interconnection costs included in certain lower-output qualified facilities—(1) In general. For purposes of determining the section 48E credit (as defined in § 1.48E-1(a)), the qualified investment with respect to a qualified facility (as defined in § 1.48E-2(a)) includes amounts paid or incurred by the taxpayer for qualified interconnection property (as defined in paragraph (a)(2) of this section), in connection with a qualified facility (as defined in § 1.48E-2(a)) that has a maximum net output of not greater than 5 MW (as measured in alternating current) as described in paragraph (a)(3) of this section (Five-Megawatt Limitation). The qualified interconnection property must provide for the transmission or distribution of the electricity produced by a qualified facility and must be properly chargeable to the capital account of the taxpayer as reduced by paragraph (a)(6) of this section. If the costs borne by the taxpayer are reduced by utility or non-utility payments, Federal income tax principles may require the taxpayer to reduce the amounts of costs treated as paid or incurred for qualified interconnection property to determine a section 48E credit.
(2) Qualified interconnection property. For purposes of this paragraph (a), the term qualified interconnection property means, with respect to a qualified facility, any tangible property that is part of an addition, modification, or upgrade to a transmission or distribution system that is required at or beyond the point at which the qualified facility interconnects to such transmission or distribution system in order to accommodate such interconnection; is either constructed, reconstructed, or erected by the taxpayer (as defined in § 1.48E-2(e)(4)), or for which the cost with respect to the construction, reconstruction, or erection of such property is paid or incurred by such taxpayer; and the original use (as defined in § 1.48E-2(e)(6)) of which, pursuant to an interconnection agreement (as defined in paragraph (a)(4) of this section), commences with a utility (as defined in paragraph (a)(5) of this section). For purposes of determining the original use of interconnection property in the context of a sale-leaseback or lease transaction, the principles of section 50(d)(4) of the Internal Revenue Code (Code) must be taken into account, as applicable, with such original use determined on the date of the sale-leaseback or lease. Qualified interconnection property is not part of a qualified facility. As a result, qualified interconnection property is not taken into account in determining whether a qualified facility satisfies the requirements for the increase in credit rate for energy communities provided in section 48E(a)(3)(A) of the Code, the increase in credit rate for domestic content referenced in section 48E(a)(3)(B) (by reference to the rules of section 48(a)(12)) or the increase in credit rate for prevailing wage requirements referenced in section 48E(d)(3) and apprenticeship requirements referenced in section 48E(d)(4).
(3) Five-Megawatt Limitation—(i) In general. For purposes of this paragraph (a), the Five-Megawatt Limitation is measured at the level of the qualified facility in accordance with section 48E(b)(1)(B). The maximum net output of a qualified facility is measured only by nameplate generating capacity (in alternating current) of the unit of qualified facility, which does not include the nameplate capacity of any integral property, at the time the qualified facility is placed in service. The nameplate generating capacity of the unit of qualified facility is measured independently from any other qualified facilities that share the same integral property.
(ii) Nameplate capacity for purposes of the Five-Megawatt Limitation. For purposes of paragraph (a)(1) of this section, the determination of whether a qualified facility has a maximum net output of not greater than 5 MW (as measured in alternating current) is based on the nameplate capacity. The nameplate capacity for purposes of the Five-Megawatt Limitation is the maximum electrical generating output in megawatts that the unit of qualified facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, taxpayers should use the International Standard Organization (ISO) conditions to measure the maximum electrical generating output of a unit of qualified facility.
(iii) Nameplate capacity for qualified facilities that generate in direct current for purposes of the Five-Megawatt Limitation. For qualified facilities that generate electricity in direct current, a taxpayer determines whether a qualified facility has a maximum net output of not greater than five MW (in alternating current) by using the lesser of:
(A) The sum of the nameplate generating capacities within the unit of qualified facility property in direct current, which is deemed the nameplate generating capacity of the unit of qualified facility property in alternating current; or
(B) The nameplate capacity of the first component of the qualified facility that inverts the direct current electricity into alternating current.
(4) Interconnection agreement. For purposes of this paragraph (a), the term interconnection agreement means an agreement with a utility for the purposes of interconnecting the qualified facility owned by such taxpayer to the transmission or distribution system of the utility. In the case of the election provided under section 50(d)(5) (relating to certain leased property), the term includes an agreement regarding a qualified facility leased by such taxpayer.
(5) Utility. For purposes of this paragraph (a), the term utility means the owner or operator of an electrical transmission or distribution system that is subject to the regulatory authority of a State or political subdivision thereof, any agency or instrumentality of the United States, a public service or public utility commission or other similar body of any State or political subdivision thereof, or the governing or ratemaking body of an electric cooperative.
(6) Reduction to amounts chargeable to capital account. In the case of costs paid or incurred for qualified interconnection property as defined in paragraph (a)(2) of this section, amounts otherwise chargeable to capital account with respect to such costs must be reduced under rules of section 50(c) (including section 50(c)(3)).
(7) Examples. This paragraph (a)(7) provides examples illustrating the application of the general rules provided in paragraph (a)(1) of this section and Five-Megawatt Limitation provided in this paragraph (a).
(i) Example 1. Application of Five-Megawatt Limitation to an interconnection agreement for qualified facilities owned by taxpayer. X places in service two solar qualified facilities (48E Facilities) each with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of an inverter, which is the first component of property attached to each of the 48E Facilities that inverts the direct current electricity into alternating current). The two 48E Facilities each have their own inverter, which is integral property to each facility, and share a step-up transformer, which is integral property to both facilities. As part of the development of the 48E Facilities, interconnection costs are required by the utility to modify and upgrade the transmission system at or beyond the common intertie to the utility's transmission system to accommodate the interconnection. X has an interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost to X of the qualified interconnection property. X may include the costs paid or incurred by X, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, to calculate X's section 48E credit for each of the 48E Facilities because each qualified facility has a maximum net output of not greater than 5 MW (alternating current).
(ii) Example 2. Application of Five-Megawatt Limitation to an interconnection agreement for qualified facilities owned by separate taxpayers. X places in service a solar farm that is a qualified facility (as defined in § 1.48E-2(a)) (Solar Qualified Facility) with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Solar Qualified Facility that inverts the direct current electricity into alternating current). The Solar Qualified Facility includes an inverter, which is integral property. Y places in service a wind facility (as defined in § 1.48E-2(a)) (Wind Qualified Facility), with a maximum net output of 5 MW (as measured in alternating current by using the nameplate capacity of the first component of property attached to the Wind Qualified Facility that inverts the direct current electricity into alternating current). The Solar Qualified Facility and the Wind Qualified Facility share a step-up transformer, which is integral to both facilities. As part of the development of the Solar Qualified Facility and Wind Qualified Facility, interconnection costs are required by the utility to modify and upgrade the transmission system at or beyond the common intertie to the utility's transmission system to accommodate the interconnection. X and Y are party to the same interconnection agreement with the utility that allows for a maximum output of 10 MW (as measured in alternating current). The interconnection agreement provides the total cost of the qualified interconnection property to X and Y. X and Y may include the costs paid or incurred by X and Y, respectively, for qualified interconnection property subject to the terms of the interconnection agreement, to calculate their respective section 48E credits for the Solar Qualified Facility and the Wind Qualified Facility because each has a maximum net output of not greater than 5 MW (alternating current).
(iii) Example 3. Application of Five-Megawatt Limitation to an interconnection agreement for a single qualified facility. X develops three solar farms (Solar Qualified Facilities) located in close proximity. Each of the Solar Qualified Facilities is a unit of qualified facility that has a maximum net output of 4 MW. The nameplate capacity of each Solar Qualified Facility is determined by using the sum of the nameplate generating capacities within the unit of each Solar Qualified Facility in direct current, which is deemed the nameplate generating capacity of each Solar Qualified Facility in alternating current. Electricity from the three Solar Qualified Facilities feeds into a single gen-tie line and a common point of interconnection with the transmission system. X is party to a separate interconnection agreement with the utility for each of the Solar Qualified Facilities and each interconnection agreement allows for a maximum output of 10 MW (as measured in alternating current). X may include the costs it paid or incurred for qualified interconnection property for each of the Solar Qualified Facilities to calculate its section 48E credit for each of the Solar Qualified Facilities, subject to the terms of each interconnection agreement, because each of the Solar Qualified Facilities has a maximum net output of not greater than 5 MW (in alternating current). X cannot include more than the total costs X paid or incurred for the qualified interconnection property in calculating the aggregate section 48E credit amount for the Solar Qualified Facilities.
(iv) Example 4. Utility payment reducing costs borne by taxpayer. In year 1, X places in service a solar facility (Solar Qualified Facility) with a maximum net output of 3 MW (as measured in alternating current) by using the nameplate capacity of the inverter attached to the solar facility, which is the first component of the qualified facility that inverts the direct current electricity into alternating current. X is party to an interconnection agreement with a utility for the purpose of connecting the Solar Qualified Facility to the transmission or distribution system of the utility. Pursuant to the interconnection agreement, X pays $1 million to the utility, and the utility places in service qualified interconnection property. In year 1, X had no reasonable expectation of any payment from the utility or other parties with respect to the qualified interconnection property. The $1 million is properly chargeable to the capital account of X, subject to paragraph (a)(6) of this section. X properly includes the $1 million paid to the utility in determining its credit under section 48E for Year 1. In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays the utility $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. The utility pays $100,000 to X. Under these circumstances, the payment from the utility in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48E credit in year 1; instead X would treat the payment as income.
(v) Example 5. Non-utility payment reducing costs borne by taxpayer. The facts in year 1 are the same as in paragraph (a)(7)(iii) of this section (Example 3). In Year 4, taxpayer Y enters into an agreement with the utility under which Y pays X $100,000 for the use of qualified interconnection property placed in service by the utility pursuant to the interconnection agreement between X and the utility. Y pays $100,000 to X. In year 1, X had no reasonable expectation of any payment from Y for subsequent agreements with Y or other parties with respect to the qualified interconnection property. Under these circumstances, the payment from Y in year 4 would not require X to reduce the amount treated as paid or incurred for the qualified interconnection property for the purpose of determining the section 48E credit in year 1; instead X would treat the payment as income.
(b) Expansion of facility; Incremental production (Incremental Production Rule)—(1) In general. Solely for purposes of this paragraph (b), the term qualified facility includes either a new unit or an addition of capacity placed in service after December 31, 2024, in connection with a facility described in section 48E(b)(3)(A) (without regard to section 48E(b)(3)(A)(ii)), which was placed in service before January 1, 2025, but only to the extent of the increased amount of electricity produced at the facility by reason of such new unit or addition of capacity. This paragraph (b) is only applicable to an addition of capacity or new unit that would not otherwise qualify as a separate qualified facility as defined in section 48E(b)(3). A new unit or an addition of capacity that meets the requirements of this paragraph (b) will be treated as a separate qualified facility. For purposes of this paragraph (b), a new unit or an addition of capacity requires the addition or replacement of qualified property (as defined in § 1.48E-2(e)), including any new or replacement integral property, added to a facility necessary to increase capacity. For purposes of assessing the One Megawatt Exception provided in section 48E(a)(2)(A)(ii)(I), the maximum net output for a new unit or an addition of capacity is the sum of the capacity of the added qualified facility and the capacity of the facility to which the qualified facility was added, as determined under § 1.48E-3(c) and paragraph (b)(2) of this section.
(2) Measurement standard. For purposes of this paragraph (b), taxpayers must use one of the measurement standards described in paragraph (b)(2)(i), (ii), or (iii) of this section to measure the capacity and change in capacity of a facility, except a taxpayer cannot use the measurement standard described in paragraph (b)(2)(ii) of this section if the taxpayer is able to use the measurement standard described in paragraph (b)(2)(i) of this section:
(i) Modified or amended facility operating licenses from the Federal Energy Regulatory Commission (FERC) or the Nuclear Regulatory Commission (NRC), or related reports prepared by FERC or NRC as part of the licensing process;
(ii) Nameplate capacity certified consistent with generally accepted industry standards, such as the International Standard Organization (ISO) conditions to measure the nameplate capacity of the facility consistent with the definition of nameplate capacity provided in 40 CFR 96.202; or
(iii) A measurement standard prescribed by the Secretary in guidance published in the Internal Revenue Bulletin (see § 601.601 of this chapter).
(3) Special rule for restarted facilities. Solely for purposes of this paragraph (b), a facility that is decommissioned or in the process of decommissioning and restarts can be considered to have increased capacity from a base of zero if the conditions described in each of paragraphs (b)(3)(i) through (iv) of this section are met:
(i) The existing facility must have ceased operations;
(ii) The existing facility must have a shutdown period of at least one calendar year during which it was not authorized to operate by its respective Federal regulatory authority (that is, FERC or NRC);
(iii) The restarted facility must be eligible to restart based on an operating license issued by either FERC or NRC; and
(iv) The existing facility may not have ceased operations for the purpose of qualifying for the special rule for restarted facilities.
(4) Computation of qualified investment for a new unit or an addition of capacity. For purposes of this paragraph (b), a new unit or an addition of capacity requires the addition or replacement of components of qualified property, including any new or replacement integral property, added to a facility necessary to increase capacity. The taxpayer's qualified investment during the taxable year that resulted in an increased capacity of a facility by reason of a new unit or addition of capacity is its total qualified investment associated with the components of property that result in the new unit or addition of capacity.
(5) Examples. This paragraph (b)(5) provides examples illustrating the rules of this paragraph (b).
(i) Example 1. New Unit. X owns a hydropower facility (Facility H) that was originally placed in service in 2020, with a FERC license authorizing an installed capacity of 60 megawatts. During taxable years 2020 through 2024, X claimed a section 45 credit for the electricity produced by Facility H. On July 1, 2025, as allowed by a FERC license amendment, X places in service components of property comprising a new unit that results in Facility H having an increased authorized installed capacity of 90 megawatts in 2025. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(e)). For purposes of this paragraph (b), this new unit will be treated as a separate facility (Facility J). X determines the amount of its section 48E credit based on the amount of its qualified investment in Facility J. Even though X claimed a section 45 credit for electricity produced by Facility H in taxable years 2020 through 2024, X can claim a section 48E credit for its qualified investment in Facility J. X may also continue to claim the section 45 credit through taxable year 2030 for electricity generated by Facility H (excluding the incremental electricity generation related to Facility J).
(ii) Example 2. Addition of Capacity. Y owns a nuclear facility (Facility N) that was originally placed in service on January 1, 2000. Y claimed a section 45U credit in taxable years 2024 and 2025 for the electricity generated by Facility N. On January 15, 2026, Y completed and placed in service an investment associated with a power uprate approved by an NRC license amendment that involved the removal and replacement of components of property and placing in service additional components of property. Both of these replacement and additional components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). NRC reports associated with the license amendment describe the uprate as increasing the nuclear facility's electrical capacity by 100 MW to 900 MW. For purposes of this paragraph (b), Facility N's addition of capacity equal to 100 MW is treated as a new separate qualified facility placed in service on January 15, 2026 (Facility P). Y determines the amount of its section 48E credit based on the entire amount of its qualified investment on January 15, 2026. Even though Y claimed a section 45U credit in taxable years 2024 and 2025 for the existing capacity of Facility N, Y can claim a section 48E credit for its investment in components of property needed to support the increase in capacity. Y may also continue to claim the section 45U credit for electricity generated by Facility N (excluding the incremental electricity generation related to Facility P).
(iii) Example 3. Geothermal Turbine and Generator Additions of Capacity. X owns a geothermal power plant (Facility G) with a 24 MW nameplate capacity, which is placed in service in 2007. Over the subsequent years, the plant's generating capability declines because of physical degradation of the turbine and generator. On March 1, 2027, X places in service components of property at Facility G that increase its capacity. The turbine rotor is removed, and the eroded blades are replaced with new blades, with associated capital expenditures. The generator is refurbished by removing old subcomponents of the generator and replacing those with new subcomponents, as well as replacing the old copper windings with new windings in concert with new insulation. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). After the upgrade, the plant increases its nameplate capacity to 26 MW, an increase of 2 MW over the previous nameplate capacity. For purposes of this paragraph (b), the addition of capacity to Facility G is treated as a new separate qualified facility placed in service on March 1, 2027 (Facility N). X determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed to increase the capacity of the facility.
(iv) Example 4. Hydropower Addition of Capacity. X owns a hydropower plant (Facility H) placed in service in 1960. Facility H has become less efficient since it was placed in service with attendant reductions in its generating capacity. As approved by a FERC license amendment, X increases Facility H's capacity by installing new headcovers, new turbines with integrated dissolved oxygen injection, and a new high pressure digital governor system. All of the existing turbine systems are replaced with new turbine and governor systems. The new turbines are more efficient, and are capable of more power output, than the original design installed in 1960. Improvements to the generators involve removing the old asphalt coated copper windings and purchasing and then installing new epoxy coated double wound windings. X adds digital controls to effectively utilize new digital governors. These components of property meet the requirements of qualified property (as defined in § 1.48E-2(c)). X simultaneously invests in cybersecurity protection. As set forth in the FERC order amending its license, these investments, which are placed in service on April 15, 2026, increase Facility H's authorized installed nameplate capacity from 180 MW to 190 MW, an increase of 10 MW over the previous nameplate capacity. For purposes of this paragraph (b), Facility H's addition of capacity is treated as a new separate qualified facility placed in service on April 16, 2026 (Facility A). X determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed in Facility A to result in the final 190 MW capacity, which would not include any investments in intangible property, such as those that might be associated with cybersecurity protection.
(v) Example 5. Nonoperational Nuclear Facility that Satisfies Restart Rule. T owns a nuclear facility (Facility N) that was originally placed in service in 1982. In 2020, Facility N ceased operations, began decommissioning, and the NRC no longer authorized the operation of Facility N. T did not cease operations at Facility N for the purpose of qualifying for the special rule for restarted facilities under section 48E. In 2028, the NRC authorized Facility N to restart, and, on October 1, 2028, Facility N placed in service qualified property that enabled Facility N to restart and resume operations, with an electrical capacity of 800 MW, as indicated in NRC documents related to the authorization to restart. For purposes of this paragraph (b), the restart of Facility N is considered to have increased capacity from a base of zero, and Facility N is treated as having an addition of capacity equal to 800 MW. For purposes of this paragraph (b), Facility N's 800 MW addition of capacity is treated as a new qualified facility placed in service on October 1, 2028 (Facility P). T determines the amount of its section 48E credit based on the amount of its qualified investment in qualified property needed to restart the facility.
(c) Retrofit of an existing facility (80/20 Rule)—(1) In general. For purposes of section 48E(b)(3)(A)(ii), a retrofitted qualified facility or an energy storage technology (EST) may qualify as originally placed in service even if it contains some used components of property within the unit of qualified facility or unit of EST, provided that the fair market value of the used components of the unit of qualified facility or unit of EST is not more than 20 percent of the total value of the unit of qualified facility or unit of EST (that is, the cost of the new components of property plus the value of the used components of property within the unit of qualified facility or unit of EST) (80/20 Rule). A qualified facility or EST that meets the 80/20 Rule may claim the section 48E credit without regard to any addition of capacity to the qualified facility or EST.
(2) Expenditures taken into account. Notwithstanding the rule provided in paragraph (c)(1) of this section, only the cost of new components of the unit of qualified facility or unit of EST are taken into account for purposes of computing the credit determined under section 48E with respect to the qualified facility or EST.
(3) Cost of new components. For purposes of this 80/20 Rule, the cost of new components of the unit of qualified facility or unit of EST includes all costs properly included in the depreciable basis of the new components of the unit of qualified facility.
(4) New costs. If the taxpayer satisfies the 80/20 Rule with regard to the unit of qualified facility or unit of EST and the taxpayer pays or incurs new costs for property that is an integral part of the qualified facility (as defined in § 1.48E-2(a)) or the EST (as defined in § 1.48E-2(g)), the taxpayer may include these new costs paid or incurred for property that is an integral part of the qualified facility or EST in the basis of the qualified facility or EST for purposes of the section 48E credit.
(5) Excluded costs. Costs incurred for new components of property added to used components of a unit of qualified facility or unit of EST may not be taken into account for purposes of the section 48E credit unless the taxpayer satisfies the 80/20 Rule by placing in service a unit of qualified facility or unit of EST for which the fair market value of the used components of property is not more than 20 percent of the total value of the unit of qualified facility or unit of EST taking into account the cost of the new components of property plus the value of the used components of property.
(6) Examples. This paragraph (c)(6) provides examples illustrating the rules of this paragraph (c).
(i) Example 1. Retrofitted facility that satisfies the 80/20 Rule. A owns an existing wind facility. On February 1, 2026, A replaces used components of unit of qualified facility of the wind facility with new components at a cost of $2 million. The fair market value of the remaining original components of the unit of qualified facility is $400,000, which is not more than 20 percent of the retrofitted unit of qualified facility's total fair market value of $2.4 million (the cost of the new components ($2 million) + the fair market value of the remaining original components of the unit of qualified facility ($400,000)). Thus, the retrofitted wind facility will be considered newly placed in service for purposes of section 48E, assuming all the other requirements of section 48E are met, and A will be able to claim a section 48E credit based on its investment in 2026 ($2 million).
(ii) Example 2. Retrofit of an existing facility that meets the 80/20 Rule. Facility Z, a facility that was originally placed in service on January 1, 2026, was not a qualified facility (as defined in § 1.48E-2(a)) when it was placed in service because it did not meet the greenhouse gas emissions rate requirements (as determined under rules provided in § 1.48E-5). On January 1, 2027, Facility Z was retrofitted and now meets the requirements to be a qualified facility (as defined in § 1.48E-2(a)). After the retrofit, the cost of the new property included in the unit of qualified facility of Facility Z is greater than 80 percent of unit of qualified facility's total fair market value. Because Facility Z meets the 80/20 Rule, Facility Z is deemed to be originally placed in service on January 1, 2027. Assuming all the other requirements of section 48E are met, Z may claim a section 48E credit based on its investment in the new components used to retrofit the existing facility in 2027.
(iii) Example 3. Retrofitted nuclear facility that satisfied the 80/20 Rule. T owns a nuclear facility (Facility N) that was originally placed in service on March 1, 1982. T replaces used components of property of the unit of qualified facility of Facility N with new components at a cost of $200 million, and then places in Facility N in service on July 15, 2026. The fair market value of the remaining original components of the unit of qualified facility, prior to the retrofit, is $30 million, which is not more than 20 percent of the unit of qualified facility's total fair market value of $230 million (the cost of the new components ($200 million) + the fair market value of the remaining original components of the unit of qualified facility ($30 million)) ($30 million/$230 million = 13%). Thus, assuming all the other requirements of section 48E are met, Facility N will be considered newly placed in service on July 15, 2026, for purposes of section 48E, and T will be able to claim a section 48E credit based on its investment in the new components ($200 million).
(iv) Example 4. Capital improvements to an existing qualified facility that do not satisfy the 80/20 Rule. X owns an existing facility, Facility C, that was originally placed in service on January 1, 2023. X makes capital improvements to Facility C that are placed in service on June 6, 2026. The cost of the capital improvements to the unit of qualified facility of Facility C total $500,000 and the fair market value of the unit of qualified facility after the improvements is $2 million. The fair market value of the old components of the unit of qualified facility is $1,500,000 or 75 percent of the total fair market value of the Facility C after the improvements. Because the fair market value of the new property included in the unit of qualified facility is less than 80 percent of the unit of qualified facility's total fair market value, Facility C does not meet the 80/20 Rule.
(v) Example 5. Upgrades to a hydropower qualified facility that satisfies the 80/20 Rule: Y owns a hydropower qualified facility (hydropower facility) and no taxpayer, including Y, has ever claimed a section 45 credit for the hydropower facility. The hydropower facility consists of a unit of qualified facility including water intake, water isolation mechanisms, turbine, pump, motor, and generator. The associated impoundment (dam) and power conditioning equipment are integral parts of the unit of qualified facility. Y makes upgrades to the unit of qualified facility by replacing the turbine, pump, motor, and generator with new components at a cost of $1.5 million. Y does not make any upgrades to the property that is an integral part of the unit of qualified facility. The remaining original components of the unit of qualified facility have a fair market value of $100,000, which is not more than 20 percent of the retrofitted hydropower facility's total value of $1.6 million (that is, the cost of the new components ($1.5 million) + the value of the remaining original components ($100,000)). Thus, the retrofitted hydropower facility will be considered newly placed in service for purposes of section 48E, and Y will be able to claim a section 48E credit based on the cost of the new components ($1.5 million).
(d) Special rules regarding ownership—(1) Qualified investment with respect to a qualified facility or EST. For purposes of this paragraph (d), a taxpayer that owns a qualified investment with respect to a qualified facility or EST is eligible for the section 48E credit only to the extent of the taxpayer's basis in the qualified facility or EST. In the case of multiple taxpayers holding direct ownership through their qualified investments in a single qualified facility or EST (and such arrangement is not treated as a partnership for Federal income tax purposes), each taxpayer determines its basis based on its fractional ownership interest in the qualified facility or EST.
(2) Multiple owners. A taxpayer must directly own at least a fractional interest in the entire unit of qualified facility (as defined in § 1.48E-2(b)(2)) or unit of EST (as defined in § 1.48E-2(g)(2)) for a section 48E credit to be determined with respect to such taxpayer's interest. No section 48E credit may be determined with respect to a taxpayer's ownership of one or more separate components of a qualified facility or an EST if the components do not constitute a unit of qualified facility (as defined in § 1.48E-2(b)(2)) or unit of EST (as defined in § 1.48E-2(g)(2)). However, the use of property owned by one taxpayer that is an integral part of a qualified facility or EST owned by another taxpayer will not prevent a section 48E credit from being determined with respect to the second taxpayer's qualified investment in a qualified facility or EST (though neither taxpayer would be eligible for a section 48E credit with respect to the first taxpayer's property). See § 1.48E-2(b)(3)(vi) for rules regarding shared integral property.
(3) Section 761(a) election. If a qualified facility or EST is owned through an unincorporated organization that has made a valid election under section 761(a) of the Code, each member's undivided ownership share in the qualified facility or EST will be treated as a separate qualified facility or EST owned by such member.
(4) Examples. The following examples illustrate the rules in this paragraph (d). In each example, X and Y are unrelated taxpayers.
(i) Example 1. Fractional ownership required to satisfy section 48E. X and Y each own a direct fractional ownership interest in an entire qualified facility (as defined in § 1.48E-2(b)) and as a result, a section 48E credit may be determined with respect to X's and Y's qualified investment in their fractional ownership interests in the qualified facility.
(ii) Example 2. Ownership of separate components of property that are part of a qualified facility. X and Y each own separate components of a qualified facility, which taken together would constitute a unit of qualified facility but taken separately would not constitute a unit of qualified facility. X owns component A and Y owns component B. No section 48E credit may be determined with respect to either component A or component B because X and Y each owns a separate component of a qualified facility that does not constitute a unit of qualified facility (as defined in § 1.48E-2(b)(2)).
(iii) Example 3. Separate ownership of property that is an integral part of separate qualified facilities. X owns a solar farm that is a qualified facility (as defined in § 1.48E-2(b)) (Solar Qualified Facility), which includes property that is an integral part of the Solar Qualified Facility, specifically a transformer in which the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. Y owns a wind facility that is a qualified facility (as defined in § 1.48E-2(b)) (Wind Qualified Facility) that connects to X's transformer. X and Y are not related persons within the meaning of paragraph (d)(4)(i) of this section. Because Y does not hold an ownership interest in the transformer, Y may compute its section 48E credit for the Wind Qualified Facility, but it may not include any costs relating to the transformer in its section 48E credit base.
(iv) Example 4. Related taxpayers and property that is an integral part. X owns a wind facility that is a unit of qualified facility and a solar facility that is a unit of qualified facility. Both the wind facility and the solar facility are connected to a transformer where the electricity is stepped up to electrical grid voltage before being transmitted to the electrical grid through an intertie. The transformer is an integral part of both the wind facility and the solar facility (within the meaning of § 1.48E-2(d)(3)(i)) and is owned by Y. X and Y are related persons within the meaning of paragraph (d)(4)(i) of this section. X and Y are treated as one taxpayer under paragraph (d)(4)(ii) of this section. X may include the basis of the transformer in computing its section 48E credit with respect to the wind facility and the solar facility (but may not include more than 100% of that basis in the aggregate).
(e) Coordination rule for section 42 credits and section 48E credits. As provided under section 50(c)(3)(C) of the Code, in determining eligible basis for purposes of calculating a credit under section 42 of the Code (section 42 credit), a taxpayer is not required to reduce its basis in a qualified facility or EST by the amount of the section 48E credit determined with respect to the taxpayer's qualified investment with respect to such qualified facility or EST. The qualified investment with respect to a qualified facility or EST property may be used to determine a section 48E credit and may also be included in eligible basis to determine a section 42 credit. See paragraph (d) of this section for special rules regarding ownership.
(f) Recapture—(1) In general. The credit calculated under section 48E(a) and § 1.48E-1(b) is subject to general recapture rules under section 50(a). Additionally, section 48E(g) provides for recapture for any qualified facility for which a taxpayer claimed a section 48E credit that has a greenhouse gas emissions rate (as determined under rules provided in § 1.45Y-5) of greater than 10 grams of CO2e per kWh during the five-year period beginning on the date such qualified facility is originally placed in service (five-year recapture period).
(2) Recapture event—(i) In general. Any event that results in a qualified facility having a greenhouse gas emissions rate (as determined under rules provided in § 1.45Y-5) of greater than 10 grams of CO2e per kWh during the five-year period is a recapture event. If a qualified facility's greenhouse gas emissions rate exceeds 10 grams of CO2e per kWh, the section 48E credit is subject to recapture.
(ii) Changes to the Annual Table. A change to the greenhouse gas emissions rate for a type or category of facility that is published in the Annual Table (as defined in § 1.48E-5(f)) after a facility is placed in service does not result in a recapture event.
(iii) Yearly determination—(A) In general. A determination of whether a recapture event occurred under this paragraph (f)(2) must be made for each taxable year (or portion thereof) occurring within the five-year recapture period, beginning with the taxable year ending after the date the qualified facility is placed in service. Thus, for each taxable year that begins or ends within the five-year recapture period, the taxpayer must determine, for any qualified facility for which it has claimed the section 48E credit, whether such facility has maintained a greenhouse gas emissions rate of not greater than 10 grams of CO2e per kWh.
(B) Annual reporting requirement. A taxpayer that has claimed the section 48E credit amount under § 1.48E-1(b), including a taxpayer that has transferred a specified credit portion under section 6418 of the Code, is required to provide to the IRS information on the greenhouse gas emissions rate of the qualified facility during the recapture period at the time and in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter.
(iv) Carryback and carryforward adjustments. In the case of any recapture event described in this paragraph (f)(2), the carrybacks and carryforwards under section 39 of the Code must be adjusted by reason of such recapture event.
(3) Recapture amount—(i) In general. If a recapture event occurred as described in paragraph (f)(2) of this section, the tax under chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by an amount equal to the applicable recapture percentage multiplied by the credit amount that was claimed by the taxpayer under § 1.48E-1(b).
(ii) Applicable recapture percentage. If the recapture event occurs:
(A) Within one full year after the property is placed in service, the recapture percentage is 100;
(B) Within one full year after the close of the period described in paragraph (f)(3)(ii)(A) of this section, the recapture percentage is 80;
(C) Within one full year after the close of the period described in paragraph (f)(3)(ii)(B) of this section, the recapture percentage is 60;
(D) Within one full year after the close of the period described in paragraph (f)(3)(ii)(C) of this section, the recapture percentage is 40; and
(E) Within one full year after the close of the period described in paragraph (f)(3)(ii)(D) of this section, the recapture percentage is 20.
(4) Recapture period. The five-year recapture period begins on the date the qualified facility is placed in service and ends on the date that is five full years after the placed in service date. Each 365-day period (366-day period in case of a leap year) within the five-year recapture period is a separate recapture year for recapture purposes.
(5) Increase in tax for recapture. The increase in tax under chapter 1 of the Code for the recapture of the credit amount claimed under section 48E(a) and § 1.48E-1(b) occurs in the year of the recapture event.
(g) Qualified progress expenditure election. A taxpayer may elect, as provided in § 1.46-5, to increase the qualified investment with respect to any qualified facility or EST of an eligible taxpayer for the taxable year, by any qualified progress expenditures made after August 16, 2022.
(h) Incremental cost—(1) In general. For purposes of section 48E, if a component of qualified property of a qualified facility or component of property of an EST is also used for a purpose other than the intended function of the qualified facility or EST, only the incremental cost of such component is included in the basis of the qualified facility or EST. The term incremental cost means the excess of the total cost of a component over the amount that would have been expended for the component if that component were used for a non-qualifying purpose.
(2) Example. A installs a solar qualified facility above the surface of an existing roof of a building that A owns. The solar qualified facility uses bifacial panels that convert to energy the light that strikes both the front and back of the panels. Therefore, along with installing the bifacial panels, A is reroofing their building with a reflective roof that has a highly reflective surface. Because the reflective roof enables the panels' generation of significant amounts of electricity from reflected sunlight, when installed in connection with the solar qualified facility, it constitutes part of that solar qualified facility to the extent that the cost of the reflective roof exceeds the cost of reroofing A's building with a non-reflective roof. The cost of reroofing with the reflective roof is $15,000 whereas the cost of a reroofing with a standard roof for the building would be $10,000. The incremental cost of the reflective roof is $5,000, and that amount is included in A's basis in the solar qualified facility for purposes of the section 48E credit.
(i) Cross references. (1) To determine applicable recapture rules, see section 50(a) of the Code.
(2) For rules regarding the credit eligibility of property used outside the United States, see section 50(b)(1) of the Code.
(3) For rules regarding the credit eligibility of property used by certain tax-exempt organizations, see section 50(b)(3) of the Code. See section 6417(d)(2) of the Code for an exception to the rule in section 50(b)(3) in the case of an applicable entity making an elective payment election.
(4) For application of the normalization rules to the section 48E credit in the case of certain regulated companies, including rules regarding the election not to apply the normalization rules to EST (as defined in section 48(c)(6) of the Code without regard to section 48(c)(6)(D) of the Code), see section 50(d)(2) of the Code.
(5) For rules relating to certain leased property, see section 50(d)(5) of the Code.
(j) Applicability date. This section applies to qualified facilities and ESTs placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E-5 Greenhouse gas emissions rates for qualified facilities under section 48E.
(a) In general. Section 48E(b)(3)(B)(ii) provides that rules similar to the rules of section 45Y(b)(2) regarding greenhouse emissions rates apply for purposes of section 48E. Paragraphs (b) through (f) of this section thus provide that the definitions and rules regarding greenhouse gas emissions rate requirements (as determined under rules provided in § 1.45Y-5) apply for purposes of section 48E and this section. Paragraph (g) of this section provides rules related to provisional emissions rates for purposes of section 48E and this section. Paragraph (h) of this section provides rules for determining an anticipated greenhouse gas emissions rate. Paragraph (i) of this section provides rules regarding reliance on the annual publication of emissions rates and provisional emissions rates. Finally, paragraph (j) of this section provides rules regarding substantiation requirements.
(b) Definitions. The definitions provided in § 1.45Y-5(b) apply for purposes of section 48E and this section.
(c) Non-C&G Facilities. The rules provided in § 1.45Y-5(c) apply for purposes of determining greenhouse gas emissions rates for Non-C&G Facilities for purposes of section 48E and this section.
(d) C&G Facilities. The rules provided in § 1.45Y-5(d) apply for purposes of determining greenhouse gas emissions rates for C&G Facilities for purposes of section 48E and this section.
(e) Use of methane from certain sources to produce electricity. The rules provided in § 1.45Y-5(e) regarding the use of methane from certain sources to produce electricity apply for purposes of section 48E and this section.
(f) Carbon capture and sequestration. The rules provided in § 1.45Y-5(f) regarding carbon capture and sequestration apply for purposes of section 48E and this section.
(g) Annual publication of emissions rates. The rules provided in § 1.45Y-5(g) regarding the annual publication of a table (Annual Table) that sets forth the greenhouse gas emissions rates for types or categories of facilities apply for purposes of section 48E and this section.
(h) Provisional emissions rates—(1) In general. In the case of any facility for which an emissions rate has not been established by the Secretary, a taxpayer that owns such facility may file a petition with the Secretary for determination of the emissions rate with respect to such facility (Provisional Emissions Rate or PER). A PER must be determined and obtained under the rules of this section.
(2) Rate not established. An emissions rate has not been established by the Secretary for a facility for purposes of sections 45Y(b)(2)(C)(ii) and 48E(b)(3)(B)(ii) if such facility is not described in the Annual Table. If a taxpayer's request for an emissions value pursuant to paragraph (h)(5) of this section is pending at the time such facility is or becomes described in the Annual Table, the taxpayer's request for an emissions value will be automatically denied.
(3) Process for filing a PER petition. To file a PER petition with the Secretary, a taxpayer must submit a PER petition by attaching it to the taxpayer's Federal income tax return or Federal return, as appropriate, for the taxable year in which the taxpayer claims the section 48E credit with respect to the facility to which the PER petition relates. The PER petition must contain an emissions value and, if applicable, the associated letter from DOE. An emissions value may be obtained from DOE or by using the designated LCA model in accordance with paragraph (h)(6) of this section. An emission value obtained from DOE will be based on an analytical assessment of the emissions rate associated with the facility performed by one or more of the National Laboratories, in consultation with other Federal agency experts as appropriate, consistent with this section. A taxpayer must retain in its books and records the application and correspondence to and from DOE including a copy of the taxpayer's request to DOE for an emissions value and any information provided by the taxpayer to DOE pursuant to the emissions value request process provided in paragraph (h)(5) of this section. Alternatively, an emissions value can be determined by the taxpayer for a facility using the most the recent version of an LCA model, as of the time the PER petition is filed, that has been designated by the Secretary for such use under paragraph (h)(6) of this section. If an emissions value is determined using the designated LCA model under paragraph (h)(6) of this section, a taxpayer is required to provide to the IRS information to support its determination in the form and manner prescribed in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter. A taxpayer may not request an emissions value from DOE for a facility for which an emissions value can be determined using the most recent version of an LCA model or models designated for such use under paragraph (h)(6) of this section.
(4) PER determination. Upon the IRS's acceptance of the taxpayer's return to which a PER petition is attached, the emissions value of the facility specified on such petition is deemed accepted. A taxpayer can rely upon an emissions value provided by DOE for purposes of claiming a section 48E credit, provided that any information, representations, or other data provided to DOE in support of the request for an emissions value are accurate. If applicable, a taxpayer may rely upon an emissions value determined for a facility using the LCA model designated under paragraph (h)(6) of this section, provided that any information, representations, or other data used to obtain such emissions value are accurate. The IRS's deemed acceptance of an emissions value is the Secretary's determination of the PER. However, the taxpayer must also comply with all applicable requirements for the section 48E credit and any information, representations, or other data supporting an emissions value are subject to later examination by the IRS.
(5) Emissions value request process. An applicant that submits a request for an emissions value must follow the procedures specified by DOE to request and obtain such emissions value. Emissions values will be determined consistent with the rules provided in this section. An applicant can request an emissions value from DOE only after a front-end engineering and design (FEED) study or similar indication of project maturity, as determined by DOE, such as the completion of a project specification and cost estimation sufficient to inform a final investment decision for the facility. DOE may decline to review applications that are not responsive, including those applications that relate to a facility described in the Annual Table (consistent with paragraph (h)(2) of this section) or a facility for which an emissions value can be determined by an LCA model under paragraph (h)(6) of this section (consistent with paragraph (h)(3) of this section), or applications that are incomplete. Applicants must follow DOE's guidance and procedures for requesting and obtaining an emissions value from DOE. DOE will publish this guidance and procedures, including a process for, under limited circumstances, a revision to DOE's initial assessment of an emissions value on the basis of revised technical information or facility design and operation.
(6) LCA model for determining an emissions value for C&G Facilities. The rules provided in § 1.45Y-5(h)(6) regarding the designation of an LCA model or models for determining an emissions value for C&G Facilities apply for purposes of section 48E and this section.
(7) Effect of PER. A taxpayer who files for a PER must use a PER determined by the Secretary to determine eligibility for the section 48E credit, provided all other requirements of section 48E are met. The Secretary's PER determination is not an examination or inspection of books of account for purposes of section 7605(b) of the Code and does not preclude or impede the IRS (under section 7605(b) or any administrative provisions adopted by the IRS) from later examining a return or inspecting books or records with respect to any taxable year for which the section 48E credit is claimed. Further, a PER determination does not signify that the IRS has determined that the requirements of section 48E have been satisfied for any taxable year.
(i) Determining anticipated greenhouse gas emissions rate—(1) In general. A facility's anticipated greenhouse gas emissions rate must be objectively determined based on an examination of all the facts and circumstances. Certain Non-C&G Facilities, such as the facilities described in § 1.45Y-5(c)(2), may have an anticipated greenhouse gas emissions rate that is not greater than zero based on the technology and practices they rely upon to generate electricity. For facilities that require the use of certain fuel sources, which may vary, or carbon capture and sequestration, to generate electricity with a greenhouse gas emissions rate that is not greater than zero, objective indicia that such facilities will use such fuel sources or operate such carbon capture equipment, as applicable, in a manner that results in a greenhouse gas emissions rate that is not greater than zero for at least 10 years beginning from the date the facility is placed in service are required to establish a reasonable expectation that the combination of fuel, type of facility, and practice will result in a greenhouse gas emissions rate that is not greater than zero. Taxpayers must attest under penalty of perjury that the anticipated greenhouse gas emissions rate as determined under the statute and these final regulations is not greater than zero. A facility subject to legally binding Federal or State permit conditions requiring that the facility operate in a manner that would be incompatible with a greenhouse gas emissions rate of not greater than zero is not a facility for which the anticipated greenhouse gas emissions rate is not greater than zero.
(2) Examples of objective indicia. Examples of objective indicia that may establish an anticipated greenhouse gas emissions rate that is not greater than zero for specific elements of the type of facility, fuel source, or practice include, but are not limited to:
(i) Co-location of the facility with a fuel source (for example, an anaerobic digester) for which the combination of fuel, type of facility, and practice is reasonably expected to result in a greenhouse gas emissions rate that is not greater than zero;
(ii) A 10-year binding written contract to purchase fuels for which the combination of fuel, type of facility, and practice is reasonably expected to result in a greenhouse gas emissions rate that is not greater than zero;
(iii) A facility type that only accommodates one type of fuel or a small range of fuels for which the combination of fuel, type of facility, and practice is reasonably expected to result in a greenhouse gas emissions rate that is not greater than zero;
(iv) A 10-year binding written contract for the permanent geological storage (including after injection into an enhanced oil and gas recovery (EOR) project) or utilization of qualified carbon dioxide from the facility for which the combination of fuel, type of facility, and capture and practice is reasonably expected to result in a greenhouse gas emissions rate that is not greater than zero; or
(v) A legally binding Federal or State air permit which requires, as a condition of the permit, that the facility operates in a manner for which the combination of fuel, type of facility, and practice is reasonably expected to result in a greenhouse gas emissions rate that is not greater than zero and that any captured carbon dioxide is permanently geologically stored and subjects the holder to civil or criminal penalties in the event the relevant permit requirements are breached.
(j) Reliance on Annual Table or provisional emissions rate. Taxpayers may rely on the Annual Table in effect as of the date a facility began construction or the provisional emissions rate determined by the Secretary for the taxpayer's facility under paragraph (h)(4) of this section to determine the facility's greenhouse gas emissions rate, provided that the facility continues to operate as a type of facility that is described in the Annual Table or the facility's emissions value request, as applicable, for the entire taxable year.
(k) Substantiation—(1) In general. A taxpayer must maintain in its books and records documentation regarding the design and operation of a facility that establishes that such facility had an anticipated greenhouse gas emissions rate that is not greater than zero in the year in which the section 48E credit is determined and operated with a greenhouse gas emissions rate that is not greater than 10 grams of CO2e per kWh during each year of the recapture period that applies for purposes of section 48E(g).
(2) Sufficient substantiation. Documentation sufficient to substantiate that a facility had a greenhouse gas emissions rate, as determined under this section, not greater than 10 grams of CO2e per kWh during each year of the recapture period that applies for purposes of section 48E(g) includes documentation or a report prepared by an unrelated party that verifies the facility's actual emissions rate. A facility described in § 1.45Y-5(c)(2) can maintain sufficient documentation to demonstrate a greenhouse gas emissions rate that is not greater than 10 grams of CO2e per kWh during each year of the recapture period that applies for purposes of section 48E(g) by showing that it is the type of facility described in § 1.45Y-5(c)(2). The Secretary may determine that other types of facilities can sufficiently substantiate a greenhouse gas emissions rate, as determined under this section, that is not greater than 10 grams of CO2e per kWh during each year of the recapture period that applies for purposes of section 48E(g) with certain documentation and will describe such facilities and documentation in IRS forms or instructions or in publications or guidance published in the Internal Revenue Bulletin. See § 601.601 of this chapter. For such other types of facilities that utilize biomass feedstocks, the taxpayer must substantiate that the source of such fuels or feedstocks used are consistent with the taxpayer's claims. For all facilities that utilize unmarketable feedstocks that are indistinguishable from marketable feedstocks (for instance, after processing), the taxpayer will be required to maintain documentation substantiating the origin and original form of the feedstock.
(l) Applicability date. This section applies to qualified facilities placed in service after December 31, 2024, and during a taxable year ending on or after January 15, 2025.
[T.D. 10024, 90 FR 4110, Jan. 15, 2025]
§ 1.48E(h)-0 Table of contents.
This section lists the captions contained in § 1.48E(h)-1.
§ 1.48E(h)-1 Clean Electricity Low-Income Communities Bonus Credit Amount Program.
(a) Overview.
(1) General rule.
(2) Certain terms used in this section.
(i) Applicant.
(ii) Disregarded entity.
(iii) Internal Revenue Bulletin.
(b) Applicable facility defined.
(1) In general.
(2) Facility categories.
(i) Category 1 facility.
(ii) Category 2 facility.
(iii) Category 3 facility.
(iv) Category 4 facility.
(3) Less than five megawatts requirement.
(i) In general.
(ii) Nameplate capacity for purposes of the less than five megawatts requirement.
(iii) Nameplate capacity for an applicable facility that generates in direct current for purposes of the less than five megawatts requirement.
(iv) Integrated operations.
(4) Related taxpayers.
(c) Eligible property.
(d) Location.
(1) In general.
(2) Nameplate Capacity Test for Location.
(3) Nameplate capacity for purpose of Nameplate Capacity Test for Location.
(e) Financial benefits for a Category 3 facility.
(1) In general.
(2) Threshold requirement.
(3) Financial value of the electricity produced by the facility.
(4) Gross financial value defined.
(5) Net financial value defined.
(i) Common ownership.
(ii) Third-party ownership.
(iii) Equitable allocation of financial benefits.
(A) If financial value distributed via utility bill savings.
(B) If financial value is not distributed via utility bill savings.
(6) Benefits sharing statement.
(i) In general.
(ii) Notification requirement.
(f) Financial benefits for a Category 4 facility.
(1) In general.
(2) Bill credit discount rate.
(i) With cost to participate.
(ii) No or nominal cost of participation.
(iii) Calculation on annual basis.
(iv) Examples.
(A) Example 1.
(B) Example 2.
(C) Example 3.
(3) Demonstration of financial benefits statement.
(4) Low-income verification and recordkeeping.
(i) In general.
(ii) Methods of verification.
(A) Categorical eligibility.
(B) Direct income verification methods.
(C) Impermissible verification method.
(g) Annual Capacity Limitation.
(1) In general.
(2) Sub-reservations.
(3) Redistribution within Program year.
(4) Carryover of unallocated Annual Capacity Limitation.
(5) Allocations to applicable facilities with nameplate capacity in alternating current.
(h) Reservations of Capacity Limitation allocation for facilities that meet certain Additional Selection Criteria.
(1) In general.
(2) Ownership criteria.
(i) In general.
(ii) Indirect ownership.
(A) Disregarded entities.
(B) Partner qualifying partnership under ownership criteria.
(C) Partner qualifying partnership involving low-income housing credit under ownership criteria.
(iii) Tribal enterprise.
(iv) Alaska Native Corporation.
(v) Native Hawaiian Organization.
(vi) Renewable energy cooperative.
(vii) Qualified tax-exempt entity.
(viii) Qualified renewable energy company.
(3) Geographic criteria.
(i) In general.
(ii) Persistent Poverty County.
(iii) Certain census tracts under Climate and Economic Justice Screening Tool.
(A) Energy burden.
(B) PM2.5.
(C) Low-income.
(i) Sub-reservations of allocation for Category 1 facilities.
(1) In general.
(2) Definitions.
(i) Behind the meter (BTM) facility.
(ii) Eligible residential BTM facility.
(iii) FTM facility.
(j) Process of application evaluation.
(1) In general.
(2) Information required as part of application.
(3) No administrative appeal of Capacity Limitation allocation decisions.
(4) Application period.
(i) Opening and closing dates.
(ii) Initial 30-day period.
(iii) Applications submitted after the initial 30-day period.
(A) In general.
(B) Additional Selection Criteria Applications submitted after the initial 30-day period.
(k) Placed in service.
(1) Requirement to report date placed in service.
(2) Requirement to submit final eligibility information at placed in service time.
(3) Confirmation.
(4) Definition of placed in service.
(l) Facilities placed in service prior to an allocation award.
(1) In general.
(2) Rejection or rescission.
(m) Disqualification.
(n) Recapture of section 48E(h) Increase to the section 48E(a) credit.
(1) In general.
(2) Exception to application of recapture.
(3) Recapture events.
(4) Section 50(a) recapture.
(o) Record retention.
(p) Applicability date.
[T.D. 10025, 90 FR 2861, Jan. 13, 2025]
§ 1.48E(h)-1 Clean Electricity Low-Income Communities Bonus Credit Amount Program.
(a) Overview—(1) General rule. For purposes of section 46 of the Internal Revenue Code (Code), if an allocation of the capacity limitation (Capacity Limitation) is made with respect to eligible property (as defined in paragraph (c) of this section) that is part of any applicable facility (as defined in paragraph (b) of this section) placed in service in connection with low-income communities under the Clean Electricity Low-Income Communities Bonus Credit Amount Program (Program) established under section 48E(h)(4), the applicable percentage used to calculate the amount of the clean electricity investment credit determined under section 48E(a) (section 48E credit) is increased under section 48E(h)(1).
(2) Certain terms used in this section. In this section:
(i) Applicant. The terms applicant and taxpayer are used interchangeably as the context may require. An applicant is the taxpayer that owns the applicable facility and that intends to claim the section 48E credit and will be applying for an allocation of Capacity Limitation for purposes of the section 48E(h) Increase. A disregarded entity is not eligible to be an applicant. The regarded taxpayer that owns the disregarded entity is the owner of the applicable facility and, therefore, the applicant, for purposes of the Program and this section.
(ii) Disregarded entity. The term disregarded entity means an entity that is disregarded as separate from its owner for Federal income tax purposes.
(iii) Internal Revenue Bulletin. The term Internal Revenue Bulletin has the meaning provided in § 601.601 of this chapter.
(b) Applicable facility defined—(1) In general. An applicable facility means any qualified facility (as defined in section 48E(b)(3)) that—
(i) Is a non-combustion and gasification facility for which the Secretary of the Treasury or her delegate has determined has a greenhouse gas (GHG) emissions rate of not greater than zero and announced in guidance published either in the Federal Register or in the Internal Revenue Bulletin as of the opening date for a Program year;
(ii) Has a maximum net output of less than five megawatts (MW) (as measured in alternating current (AC)); and
(iii) Is described in at least one of the four categories described in section 48E(h)(2)(A)(iii) and paragraph (b)(2) of this section.
(2) Facility categories—(i) Category 1 facility. A facility is a Category 1 facility if it is located in a low-income community. The term low-income community is defined under section 45D(e)(1) of the Code as any population census tract for which the poverty rate is at least 20 percent based on the most recently released American Community Survey (ACS) low-income community data currently used for the New Markets Tax Credit (NMTC) under section 45D, or, in the case of a tract not located within a metropolitan area, the median family income for such tract does not exceed 80 percent of statewide median family income, or, in the case of a tract located within a metropolitan area, the median family income for such tract does not exceed 80 percent of the greater of statewide median family income or the metropolitan area median family income. The term low-income community also includes the modifications in section 45D(e)(4) and (5) for tracts with low population and modification of the income requirement for census tracts with high migration rural counties. Low-income community information for NMTC can be found at https://www.cdfifund.gov/cims3. For purposes of this paragraph (b)(2)(i), if updated ACS low-income community data is released for the NMTC, a taxpayer can choose to base the poverty rate for any population census tract on either the prior version of the ACS low-income community data for the NMTC program or the updated ACS low-income community data for the NMTC program for a period of 1 year following the date of the release of the updated data. After the 1-year transition period, the updated ACS low-income community data for the NMTC program must be used to determine the poverty rate for any population census tract. Population census tracts that satisfy the definition of low-income community at the time of application are considered to continue to meet the definition of low-income community for the duration of the recapture period described in paragraph (n)(1) of this section unless the location of the facility changes.
(ii) Category 2 facility. A facility is a Category 2 facility if it is located on Indian land. The term Indian land is defined in section 2601(2) of the Energy Policy Act of 1992 (25 U.S.C. 3501(2)).
(iii) Category 3 facility. A facility is a Category 3 facility if it is part of a qualified low-income residential building project. A facility will be treated as part of a qualified low-income residential building project if such facility is installed on a residential rental building that participates in a covered housing program or other affordable housing program as described in section 48E(h)(2)(B)(i) (Qualified Residential Property) and the financial benefits of the electricity produced by such facility are allocated equitably among the occupants of the dwelling units of such building as provided in paragraph (e) of this section. A Qualified Residential Property could either be a multifamily rental property or single-family rental property. However, the building, and not merely the tenants, must participate in a covered housing program or other affordable housing program described in section 48E(h)(2)(B)(i). A facility does not need to be installed directly on the building to be considered installed on a Qualified Residential Property if the facility is installed on the same or an adjacent parcel of land as the Qualified Residential Property, and the other requirements to be a Category 3 facility are satisfied.
(iv) Category 4 facility. A facility is a Category 4 facility if it is part of a qualified low-income economic benefit project. A facility will be treated as part of a qualified low-income economic benefit project if, as provided in paragraph (f) of this section, at least 50 percent of the financial benefits of the electricity produced by such facility are provided to households with income of less than—
(A) Two-hundred percent of the poverty line (as defined in section 36B(d)(3)(A) of the Code) applicable to a family of the size involved; or
(B) Eighty percent of area median gross income (as determined under section 142(d)(2)(B) of the Code).
(3) Less than five megawatts requirement—(i) In general. For purposes of this paragraph (b), the less than five megawatts requirement in paragraph (b)(1)(ii) of this section is measured at the level of the applicable facility in accordance with section 48E(h)(2)(A)(ii). The maximum net output of an applicable facility is measured only by nameplate generating capacity of the applicable facility, which includes only functionally interdependent components of the applicable facility, at the time the applicable facility is placed in service. Components of property are functionally interdependent if the placing in service of each component is dependent upon placing in service other components to produce electricity.
(ii) Nameplate capacity for purposes of the less than five megawatts requirement. The determination of whether an applicable facility has a maximum net output of less than 5 MW (as measured in AC) is based on the nameplate capacity of the applicable facility. If an applicable facility has integrated operations with one or more other qualified facilities of the same technology type, then the aggregate nameplate capacity of the applicable facility and each other qualified facility is used to determine whether the less than five megawatts requirement in paragraph (b)(1)(ii) of this section is met. If an applicable facility has a maximum net output equal to or more than 5MW (as measured in AC), it is not eligible for the Program. The nameplate capacity for purposes of the less than five megawatts requirement in paragraph (b)(1)(ii) of this section is the maximum electrical generating output in MW that the applicable facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, the International Standard Organization conditions should be used to measure the maximum electrical generating output of an applicable facility.
(iii) Nameplate capacity for an applicable facility that generates in direct current for purposes of the less than five megawatts requirement. Only for applicable facilities that generate electricity in direct current, the taxpayer may choose to determine the maximum net output (in alternating current) of the applicable facility by using the lesser of:
(A) The nameplate generating capacity of the applicable facility in direct current, which is deemed the nameplate generating capacity of the applicable facility in alternating current; or
(B) The nameplate capacity of the first component of property that inverts the direct current electricity into alternating current.
(iv) Integrated operations. For the purposes of the less than five megawatts requirement in paragraph (b)(1)(ii) of this section, an applicable facility is treated as having integrated operations with one or more other qualified facilities of the same technology type if the facilities are:
(A) Owned by the same or related taxpayers;
(B) Placed in service in the same taxable year; and
(C) Transmit electricity generated by the facilities through the same point of interconnection or, if the facilities are not grid-connected or are delivering electricity directly to an end user behind a utility meter, are able to support the same end user.
(4) Related taxpayers—(i) Definition. For purposes of this paragraph (b), the term related taxpayers means members of a group of trades or businesses that are under common control (as defined in § 1.52-1(b)).
(ii) Related taxpayer rule. For purposes of this paragraph (b), related taxpayers are treated as one taxpayer in determining whether an applicable facility has integrated operations.
(c) Eligible property. Eligible property means a qualified investment (as defined in section 48E(b)) with respect to any applicable facility.
(d) Location—(1) In general. An applicable facility is treated as located in a low-income community or located on Indian land under section 48E(h)(2)(A)(iii)(I) if the applicable facility satisfies the requirements of the Nameplate Capacity Test for Location of paragraph (d)(2) of this section. Similarly, an applicable facility is treated as located in a geographic area under the Additional Selection Criteria described in paragraph (h) of this section if it satisfies the Nameplate Capacity Test for Location.
(2) Nameplate Capacity Test for Location. An applicable facility satisfies the requirements of the Nameplate Capacity Test for Location of this paragraph (d)(2) and is considered located in or on the relevant geographic area described in paragraph (d)(1) of this section if 50 percent or more of the applicable facility's nameplate capacity is in a qualifying area. The percentage of an applicable facility's nameplate capacity (as defined in paragraph (d)(3) of this section) that is in a qualifying area is determined by dividing the nameplate capacity of the applicable facility's electricity-generating units that are located in the qualifying area by the total nameplate capacity of all the electricity-generating units of the applicable facility.
(3) Nameplate capacity for purpose of Nameplate Capacity Test for Location. Nameplate capacity for an electricity generating unit means the maximum electrical output that the applicable facility is capable of producing on a steady state basis and during continuous operation under standard conditions, as measured by the manufacturer and consistent with the definition of nameplate capacity provided in 40 CFR 96.202. If applicable, the International Standard Organization conditions should be used to measure the maximum electrical generating output. For purposes of assessing the Nameplate Capacity Test, electricity-generating units that generate direct current (DC) power before converting to AC (for example, solar photovoltaic), should use nameplate capacity in DC, otherwise the nameplate capacity in AC should be used.
(e) Financial benefits for a Category 3 facility—(1) In general. To satisfy the requirements of a Category 3 facility as provided in paragraph (b)(2)(iii) of this section, the financial benefits of the electricity produced by the facility must be allocated equitably among the occupants of the dwelling units of the Qualified Residential Property. The same rules for financial benefits for Category 3 facilities apply to both multi-family property and single-family Qualified Residential Property.
(2) Threshold requirement. At least 50 percent of the financial benefits of the electricity produced by the applicable facility (as defined in paragraph (e)(3) of this section) must be allocated equitably to the Qualified Residential Property's occupants that are designated as low-income occupants under the covered housing program or other affordable housing program.
(3) Financial value of the electricity produced by the facility. Financial benefits are calculated as the financial value of the electricity produced by the applicable facility. For purposes of this paragraph (e), financial value of the electricity produced by the facility means the greater of:
(i) 25 percent of the gross financial value (as defined in paragraph (e)(4) of this section) of the annual electricity produced by the applicable facility; or
(ii) The net financial value (as defined in paragraph (e)(5) of this section) of the annual electricity produced by the applicable facility.
(4) Gross financial value defined. For purposes of this paragraph (e), gross financial value of the annual electricity produced by the applicable facility means the sum of:
(i) The total self-consumed kilowatt-hours produced by the applicable facility multiplied by the Qualified Residential Property's metered volumetric price of electricity;
(ii) The total exported kilowatt-hours produced by the applicable facility multiplied by the Qualified Residential Property's volumetric export compensation rate for the type of electricity produced by the applicable facility per kilowatt-hour; and
(iii) The sale of any attributes associated with the applicable facility's production (including, for example, any Federal, State, Tribal, or utility incentives or renewable energy certificates), if separate from the metered price of electricity or export compensation rate.
(5) Net financial value defined—(i) Common ownership. For purposes of this paragraph (e), if the facility and Qualified Residential Property are commonly owned, net financial value means:
(A) The gross financial value of the annual electricity produced; minus
(B) The annual average (or levelized) cost of the applicable facility over the useful life of the facility (including debt service, maintenance, replacement reserve, capital expenditures, and any other costs associated with constructing, maintaining, and operating the facility).
(ii) Third-party ownership. For purposes of this paragraph (e), if the facility and the Qualified Residential Property are not commonly owned and the facility owner enters into a power purchase agreement or other contract for electricity services with the Qualified Residential Property owner and/or building occupants, net financial value means:
(A) The gross financial value of the annual electricity produced; minus
(B) Any payments made by the building owner and/or building occupants to the facility owner for electricity services associated with the facility in a given year.
(iii) Equitable allocation of financial benefits. Paragraphs (e)(5)(iii)(A) and (B) of this section provide rules regarding an equitable allocation of financial benefits in circumstances where financial value is distributed to building occupants via utility bill savings or via different means, respectively. Distributed financial benefits or investments previously made to the Qualified Residential Property are not considered eligible financial benefits for this purpose.
(A) If financial value distributed via utility bill savings. If financial value is distributed via utility bill savings, financial benefits will be considered to be allocated equitably if at least 50 percent of the financial value of the electricity produced by the facility is distributed as utility bill savings in equal shares to each building dwelling unit among the Qualified Residential Property's occupants that are designated as low-income under the covered housing program or other affordable housing program (described in section 48E(h)(2)(B)(i)) or alternatively distributed in proportional shares based on each low-income dwelling unit's square footage, or each low-income dwelling unit's number of occupants. For any occupant(s) who choose to not receive utility bill savings (for example, who exercise their right to not participate in or to opt out of a community solar subscription in their applicable jurisdictions), the portion of the financial value that would otherwise be distributed to non-participating occupants must be distributed instead to all participating occupants. No less than 50 percent of the Qualified Residential Property's occupants that are designated as low-income must participate and receive utility bill savings for the facility to use this method of benefit distribution. In the case of a solar facility, applicants must follow guidance published by the Department of Housing and Urban Development (HUD) regarding benefits sharing, such as Treatment of Financial Benefits to HUD-Assisted Tenants Resulting from Participation in Solar Programs Notice (Housing Notice 2023-09), located at https://www.hud.gov/sites/dfiles/OCHCO/documents/2023-09hsgn.pdf, or other applicable HUD guidance, or other guidance or notices from the Federal agency that oversees the applicable housing program identified in section 48E(h)(2)(B) to ensure that tenants' annual income for rent calculations or other requirements impacting total tenant payment are not negatively impacted by the distribution of financial value. In the case of any other applicable facility, applicants must follow applicable HUD guidance on benefits sharing, or other guidance from the Federal agency that oversees the applicable housing program. In the absence of applicable guidance from a Federal agency, applicants should apply principles similar to those articulated in HUD guidance in the case of any other applicable facility.
(B) If financial value is not distributed via utility bill savings. If financial value is not distributed via utility bill savings, financial benefits will be considered to be allocated equitably if at least 50 percent of the financial value of the electricity produced by the facility is distributed to occupants using one or more methods described in HUD guidance regarding benefits sharing for master-metered HUD-assisted housing, such as the Treatment of Financial Benefits to HUD-Assisted Tenants Resulting from Participation in Solar Programs Notice (Housing Notice 2023-09) located at https://www.hud.gov/sites/dfiles/OCHCO/documents/2023-09hsgn.pdf, or other applicable HUD guidance, or other guidance or notices from the Federal agency that oversees the applicable housing program identified in section 48E(h)(2)(B). In the case of a solar facility, applicants must comply with applicable HUD guidance for how residents of master-metered HUD-assisted housing can benefit from owners' sharing of financial benefits accrued from an investment in solar electricity generation to ensure that HUD-assisted tenants' calculations for utility allowances and annual income for rent are not negatively impacted. In the absence of applicable guidance from a Federal agency, applicants should apply principles similar to those articulated in HUD guidance in the case of any other applicable facility.
(6) Benefits sharing statement—(i) In general. The facility owner must prepare a Benefits sharing statement to submit at placed in service reporting, which must include:
(A) A calculation of the facility's gross financial value using the method described paragraph (e)(4) of this section;
(B) A calculation of the facility's net financial value using the method described in paragraph (e)(5) of this section;
(C) A calculation of the financial value required to be distributed to building occupants using the method described in paragraph (e)(3) of this section;
(D) A description of the means through which the required financial value will be distributed to building occupants; and
(E) If the facility and Qualified Residential Property are separately owned, specify which entity will be responsible for the distribution of benefits to the occupants.
(ii) Notification requirement. The Qualified Residential Property owner must formally notify the occupants of units in the Qualified Residential Property of the development of the facility and planned distribution of benefits.
(f) Financial benefits for a Category 4 facility—(1) In general. The requirements of each of paragraph (f)(1)(i) through (iii) of this section must be met to satisfy the requirements of a Category 4 facility as provided in paragraph (b)(2)(iv) of this section.
(i) The facility must serve multiple qualifying low-income households under section 48E(h)(2)(C)(i) or (ii) (Qualifying Household).
(ii) At least 50 percent of the total financial benefits of the electricity produced by the applicable facility must be assigned to Qualifying Households. Total financial benefits is calculated as the sum of all value from electricity production as measured by the utility, independent system operator, or other off-taker procuring electricity, and any additional value (including, for example, any electricity services, products, and credits or certificates such as RECs provided in connection with the electricity produced by such facility, but excluding any Federal tax credits), from the facility.
(iii) Each Qualifying Household must be provided a bill credit discount rate (as defined in paragraph (f)(2) of this section) of at least 20 percent.
(2) Bill credit discount rate—(i) With cost to participate. A bill credit discount rate is the difference between the amount of the total financial benefits provided to a Qualifying Household (including utility bill credits, reductions in a Qualifying Household's electricity rate, or other monetary benefits accrued by the Qualifying Household on their utility bill) and the cost by a Qualifying Household for participating in the program (including, but not limited to subscription payments for zero carbon and any other fees or charges, such as consolidated billing fees), expressed as a percentage of the amount of the total financial benefits provided to a Qualifying Household. The bill credit discount rate must be calculated by starting with the amount of the total financial benefits provided to a Qualifying Household, subtracting all payments made by a Qualifying Household (or payments remitted on behalf of the Qualifying Household through net crediting, consolidated billing, or similar arrangements) to the facility owner and any related third parties as a condition of receiving that financial benefit to determine the net financial benefit (cost savings) to a Qualified Household, then dividing that difference by the amount of the total financial benefit provided to the Qualifying Household.
(ii) No or nominal cost of participation. In cases in which the Qualifying Household has no or only a nominal cost of participation, and financial benefits are delivered through a utility or government body, the bill credit discount rate must be calculated as the net financial benefits (cost savings) provided to a Qualifying Household (including utility bill credits, reductions in a Qualifying Household's electricity rate, or other monetary benefits accrued by a Qualifying Household on their utility bill) divided by the amount of the total financial benefit assigned to a Qualifying Household.
(iii) Calculation on annual basis. In all instances, the bill credit discount rate is calculated on an annual basis.
(iv) Examples. The provisions of this paragraph (f)(2) may be illustrated by the following examples:
(A) Example 1. A Qualifying Household signs a community solar subscription agreement with the facility owner. Each month, the facility owner will assign a portion of the electricity generated (or its value) by the facility to the household's utility bill, and the household will pay the facility owner. The amount the household pays the facility owner cannot exceed 80 percent of the monetary value of the assigned generation. The remaining 20 percent is a cost savings to the household on electricity. In this example, over the course of the first year the facility owner or their agent cause $180 in utility bill credits to be placed on the Qualifying Household's bill, and the Qualifying Household pays $144, inclusive of any upfront fees. The subsequent year, due to variation in solar generation and/or the compensation paid by the utility for solar generation, the facility owner, in accordance with the community solar subscription agreement, causes $240 in bill credits to be provided to the Qualifying Household's bill and the household pays $192. In each year of facility operation described within this example, a bill credit discount rate of 20 percent is maintained (($180-$144)/$180 = 20%) and (($240-$192)/$240 = 20%), respectively.
(B) Example 2. Due to the regulatory structure of the applicable jurisdiction or program, the terms of the community solar subscription, the use of a net-crediting mechanism, or other reason, the Qualifying Household does not make a direct payment to the facility owner, but rather payment is remitted on their behalf by the utility. In this example, over the course of the first year the facility owner or their agent cause $200 in utility bill credits to be placed on the Qualifying Household's bill, and the Qualifying Household's utility remits $160 to the facility owner, inclusive of any upfront fees. The subsequent year, due to variation in solar generation and/or the compensation paid by the utility for solar generation, the facility owner, in accordance with the community solar subscription agreement, causes $240 in bill credits to be provided to the Qualifying Household's bill and the utility remits $192 to the facility owner. In each year of facility operation described within this example, a bill credit discount rate of 20 percent is maintained (($200-$160)/$200 = 20%) and (($240-$192)/$240 = 20%), respectively.
(C) Example 3. Assume the facility is part of a program by which the financial benefits are delivered to 100 Qualifying Households through a utility or government body, and each Qualifying Household pays no cost to participate. Assume that the financial value of the electricity produced by the facility's total output is $120,000 in the first year and $160,000 in the second year. Assume that 50% of the facility's financial value of the electricity is assigned to Qualifying Households and is therefore calculated as $60,000 in the first year ($120,000 × 50% = $60,000) and $80,000 in the second year ($160,000 × 50% = $80,000). Assume further that each Qualifying Household is assigned the same total financial benefit ($600 in the first year and $800 in the second year). If the bill credit discount rate for each Qualifying Household is 20 percent in each year, the net financial benefits (or cost savings) provided to each Qualifying Household is $120 in the first year ($120/$600 = 20%) and $160 in the second year ($160/$800 = 20%).
(3) Demonstration of financial benefits statement. The facility owner must prepare a Demonstration of Financial Benefits Statement, which must include:
(i) A calculation of the total financial benefits of annual electricity production, as described in paragraph (f)(1)(ii) of this section;
(ii) The percent of the total financial benefits provided and/or assigned to Qualifying Households;
(iii) The bill credit discount rate method used (with cost to participate or no or nominal cost of participation);
(iv) A calculation of the bill credit discount rate;
(v) A description of the means of distributing the required benefits to Qualifying Households; and
(vi) Documentation that the facility is enrolled in the applicable utility tariff, program, or other arrangement used to distribute financial benefits to Qualifying Households.
(4) Low-income verification and recordkeeping—(i) In general. Taxpayers must verify that a household meets the income limits under section 48E(h)(2)(C)(i) or (ii), whichever is applicable to the household based on the household's location, for the household to be a Qualifying Household under paragraph (f)(1)(i) of this section. A household's low-income status is determined at the time the household enrolls in the subscription program and does not need to be re-verified. The qualifying income level for a Qualifying Household is based on where such household is located. Taxpayers must additionally maintain records of the verification for each household that prove the taxpayer has provided requisite percentage of financial benefits to Qualifying Households.
(ii) Methods of verification. Applicants may use categorical eligibility verification or direct income verification methods, but not an impermissible verification method described in paragraph (f)(4)(ii)(C) of this section, to establish that a household is a Qualifying Household.
(A) Categorical eligibility. Categorical eligibility consists of obtaining proof of the household's participation in a needs-based Federal, State, Tribal, or utility program with income limits at or below the qualifying income level required to be a Qualifying Household. An individual in the household must currently be approved for assistance from or participation in a program with an award letter or other written documentation within the last 12 months for enrollment in that program to establish categorical eligibility of the household.
(B) Direct income verification methods. Documentation like paystubs, Federal or State tax returns, or income verification through crediting agencies and commercial data sources can be used to establish that a household is a Qualifying Household.
(C) Impermissible verification method. A self-attestation from a member or members of a household is not a permissible method to establish a household is a Qualifying Household. This prohibition on direct self-attestation from a household, for purposes of this Program, does not extend to categorical eligibility verification where the eligible needs-based Federal, State, Tribal, or utility programs with income limits rely on self-attestation for verification of income, and the taxpayer has obtained proof of a member or members of a household's participation in such a program.
(g) Annual Capacity Limitation—(1) In general. Under section 48E(h)(4)(C), the total annual Capacity Limitation is 1.8 gigawatts of DC capacity (Annual Capacity Limitation) for each calendar year of the Program. The Annual Capacity Limitation for each Program year is divided across the four facility categories described in section 48E(h)(2)(A)(iii) and paragraph (b)(2) of this section based on factors such as the anticipated number of applications that are expected for each category and the amount of Capacity Limitation that needs to be reserved for each category to encourage market participation in each category. The initial distribution of the Annual Capacity Limitation for each Program year is:
Table 1 to Paragraph (g)(1) of This Section
Category | Capacity limitation (DC)
1: Located in a Low-Income Community | 600 MW.
2: Located on Indian Land | 200 MW.
3: Qualified Low-Income Residential Building Project | 200 MW.
4: Qualified Low-Income Economic Benefit Project | 800 MW.
(2) Sub-reservations. The reservation of Capacity Limitation for Category 1 is further divided into Category 1 sub-reservations, which are described in paragraph (i) of this section. The category 1 sub-reservation distribution of Capacity Limitation is:
Table 2 to Paragraph (g)(2) of This Section
Eligible Residential BTM facilities | 400 MW.
Eligible FTM facilities and non-residential BTM facilities | 200 MW.
(3) Redistribution within Program year. At the close of the application period for a Program year, if some categories or sub-reservations are undersubscribed, while others are oversubscribed, capacity will be redistributed within the Program year for allocation to applicants in another Category or sub-reservation. A category or sub-reservation is undersubscribed if the amount of capacity applied for in all eligible applications within a reservation is less than the amount of the Capacity Limitation portion distributed to that reservation. A category or sub-reservation is oversubscribed if the amount of capacity applied for in all eligible applications within a particular reservation is in excess of the Capacity Limitation portion distributed to that reservation. Capacity Limitation will be redistributed within a Program year in the following manner:
(i) Capacity will first be redistributed within a category from the undersubscribed reservation to the oversubscribed reservation. For example, if the Additional Selection Criteria reservation is undersubscribed while the non-Additional Selection Criteria reservation is oversubscribed, the remaining capacity reservation for the Additional Selection Criteria will be redistributed to and increase the non-Additional Selection Criteria reservation or sub-reservation in the same category.
(ii) If there is remaining capacity in a category after redistribution under paragraph (g)(3)(i) of this section, or, in general, if a category is, as a whole, undersubscribed such that paragraph (g)(3)(i) of this section does not apply to that category, then, any remaining capacity in any category will be redistributed to and increase the reservation for Category 1 residential BTM facilities, but only if Category 1 residential BTM is oversubscribed. If both the Additional Selection Criteria and non-Additional Section Criteria reservations are oversubscribed for Category 1 residential BTM, then consistent with paragraph (h)(1) of this section, the redistributed capacity limitation will first increase the reservation for Additional Selection Criteria applications, and then if any capacity is remaining it will be added to the reservation for non-Additional Selection Criteria applications.
(iii) If there is remaining capacity after redistribution under paragraphs (g)(3)(i) and (ii) of this section, or if redistribution under paragraph (g)(3)(ii) of this section is inapplicable due to undersubscription in Category 1 residential BTM, then the remaining capacity will be redistributed to and increase the reservation for Category 4. If both the Additional Selection Criteria and the non-Additional Selection Criteria reservations under Category 4 are oversubscribed, then consistent with paragraph (j)(4)(ii) of this section, the redistributed capacity limitation will first increase the reservation for Additional Selection Criteria applications, and then if any capacity is remaining it will be added to the reservation for non-Additional Selection Criteria applications.
(iv) If there is remaining capacity after redistribution under paragraphs (g)(3)(i) through (iii) of this section, or if redistribution under paragraph (g)(3)(iii) of this section is inapplicable due to undersubscription in Category 1 residential BTM and Category 4, then the remaining capacity will be redistributed to and increase the reservation for Category 3. If both the Additional Selection Criteria and the non-Additional Selection Criteria reservations under Category 3 are oversubscribed, then consistent with paragraph (j)(4)(ii) of this section, the redistributed capacity limitation will first increase the reservation for Additional Selection Criteria applications, and then if any capacity is remaining it will be added to the reservation for non-Additional Selection Criteria applications.
(v) If there is remaining capacity after redistribution under paragraphs (g)(3)(i) through (iv) of this section, or if redistribution under paragraph (g)(3)(iv) of this section is inapplicable due to undersubscription in Category 1 residential BTM, Category 4, and Category 3 then the remaining capacity will be redistributed to and increase the reservation for Category 2. If both the Additional Selection Criteria and the non-Additional Selection Criteria reservations under Category 2 are oversubscribed, then consistent with paragraph (j)(4)(ii) of this section, the redistributed capacity limitation will first increase the reservation for Additional Selection Criteria applications, and then if any capacity is remaining it will be added to the reservation for non-Additional Selection Criteria applications.
(vi) If there is remaining capacity after redistribution under paragraphs (g)(3)(i) through (v) of this section, or if redistribution under paragraph (g)(3)(iv) of this section is inapplicable due to undersubscription in Category 1 residential BTM, Category 4, Category 3, and Category 2, then the remaining capacity will be redistributed to and increase the reservation for Category 1 Eligible FTM facilities and non-residential BTM facilities. If both the Additional Selection Criteria and the non-Additional Selection Criteria reservations under Category 1 Eligible FTM facilities and non-residential BTM facilities are oversubscribed, then consistent with paragraph (j)(4)(ii) of this section, the redistributed capacity limitation will first increase the reservation for Additional Selection Criteria applications, and then if any capacity is remaining it will be added to the reservation for non-Additional Selection Criteria applications.
(vii) If after redistribution under paragraphs (g)(3)(i) through (vi) of this section, there is remaining Capacity Limitation at the close of a Program year, the unallocated amount of Capacity Limitation will be carried forward to the succeeding year as described in paragraph (g)(4) of this section.
(4) Carryover of unallocated Annual Capacity Limitation. If the Annual Capacity Limitation, as described in paragraph (g)(1) of this section, for any calendar year exceeds the aggregate amount of Annual Capacity Limitation allocated for a given calendar year, the Annual Capacity Limitation for the succeeding calendar year will be increased by the amount of such excess or remainder from previous Program Year. No amount of Capacity Limitation may be carried to any calendar year after the third calendar year following the applicable year (as defined in section 45Y(d)(3) of the Code). Any unallocated Capacity Limitation carried over from the preceding year will be equally distributed across Category 1, 2, 3, and 4. Within Category 1, the portion distributed from the carried over Capacity Limitation will be equally distributed across Category 1 sub-reservations and further across the reservation for Additional Selection Criteria within those sub-reservations. The portion of the carried over Capacity Limitation distributed to each of Category 2, 3, and 4 will be equally distributed within each category to the Additional Selection Criteria reservation and the non-Additional Selection Criteria reservation.
(5) Allocations to applicable facilities with nameplate capacity in alternating current. For applicable facilities which have a nameplate capacity in AC, and which are awarded an allocation, such an applicable facility will be awarded an amount of Capacity Limitation in direct current that is equal to the applicable facility's reported nameplate capacity in alternating current.
(h) Reservations of Capacity Limitation allocation for facilities that meet certain Additional Selection Criteria—(1) In general. 50 percent of the total Capacity Limitation in each facility category described in paragraph (b) of this section and Category 1 sub-reservation (described in paragraph (i) of this section) will be reserved at the beginning of an application period for applicable facilities meeting the Additional Selection Criteria described in paragraph (h)(2) of this section (relating to ownership criteria) and paragraph (h)(3) of this section (relating to geographic criteria). The reservation of Capacity Limitation for applicable facilities meeting the Additional Selection Criteria may be redistributed across facility categories and sub-reservations as described in paragraph (g)(3) of this section. If after the initial 30-day period an Additional Selection Criteria reservation for a category or Category 1 sub-reservation is undersubscribed, such Additional Selection Criteria reservation of 50 percent is maintained. The procedures for applying under these Additional Selection Criteria are provided in guidance published in the Internal Revenue Bulletin.
(2) Ownership criteria—(i) In general. The ownership criteria are based on characteristics of the applicant that owns the applicable facility. An applicable facility will meet the ownership criteria if it is owned by one of the following:
(A) A Tribal enterprise (as defined in paragraph (h)(2)(iii) of this section);
(B) An Alaska Native Corporation (as defined in paragraph (h)(2)(iv) of this section);
(C) A Native Hawaiian Organization (as defined in paragraph (h)(2)(v) of this section);
(D) A renewable energy cooperative (as defined in paragraph (h)(2)(vi) of this section); or
(E) A qualified tax-exempt entity (as defined in paragraph (h)(2)(vii) of this section).
(F) A qualified renewable energy company (as defined in paragraph (h)(2)(viii) of this section).
(ii) Indirect ownership—(A) Disregarded entities. If an applicant wholly owns a disregarded entity that is the owner of an applicable facility, then the applicant, and not the disregarded entity, is treated as the owner of the applicable facility for purposes of the ownership criteria. For entities wholly owned and chartered under Tribal law and corporations incorporated under the authority of either section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 5124, or section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. 5203, an application may be made as a Tribal Enterprise. Disregarded entities are not eligible for an award and may not submit an application.
(B) Partner qualifying partnership under ownership criteria. Except as described in paragraph (h)(2)(ii)(C) of this section, if an applicant is an entity classified as a partnership for Federal income tax purposes, and an entity described in paragraphs (h)(2)(i)(A) through (E) of this section owns at least a one percent interest (either directly or indirectly) in each material item of partnership income, gain, loss, deduction, and credit of the partnership and is also a managing member or general partner (or similar title) under State or Tribal law of the partnership (or directly owns 100 percent of the equity interests in the managing member or general partner) at all times during the existence of the partnership, the applicable facility will be deemed to meet the ownership criteria. If the partnership described in the preceding sentence becomes the owner of the facility after an allocation is made to an entity described in paragraphs (h)(2)(i)(A) through (E) of this section, then the transfer of the facility to the partnership is not a disqualification event for purposes of paragraph (m)(5) of this section, so long as the requirements of paragraph (m)(5) of this section are satisfied. Nothing in this paragraph (h)(2)(ii)(B) applies to an applicant described in paragraph (h)(2)(i)(F) of this section.
(C) Partner qualifying partnership involving low-income housing credit under ownership criteria. If an applicant is an entity classified as a partnership for Federal income tax purposes and is the owner of an applicable facility connected to a residential building to which credits under section 42 of the Code are reasonably anticipated or have been determined and has a partner for Federal income tax purposes that is an entity described in paragraphs (h)(2)(i)(A) through (E) of this section, the applicable facility will be deemed to meet the ownership criteria. If the partnership becomes the owner of the facility after an allocation is made to an entity described in paragraph (h)(2)(i)(E) of this section, and complete ownership is transferred to a partnership that owns a qualified low-income building within the meaning of section 42(c)(2) (including, through a disregarded entity owned by the partnership), then the transfer of the facility to the partnership is not a disqualification event for purposes of paragraph (m)(5) of this section or subject to recapture for purposes of paragraph (n) of this section, so long as the requirements of paragraph (m)(5) of this section are satisfied.
(iii) Tribal enterprise. A Tribal enterprise for purposes of the ownership criteria is an entity that is:
(A) Owned at least 51 percent directly by an Indian Tribal government (as defined in section 30D(g)(9) of the Code), or owned at least 51 percent indirectly through an entity that is wholly owned by the Indian Tribal government and is created under either the Tribal laws of the Indian Tribal government or through a corporation incorporated under the authority of either section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 5124, or section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. 5203; and
(B) Subject to Tribal government rules, regulations, and/or codes that regulate the operations of the entity.
(iv) Alaska Native Corporation. An Alaska Native Corporation for purposes of the ownership criteria is defined in section 3 of the Alaska Native Claims Settlement Act, 43 U.S.C. 1602(m).
(v) Native Hawaiian Organization. A Native Hawaiian Organization for purposes of the ownership criteria is defined in 13 CFR 124.3.
(vi) Renewable energy cooperative. A renewable energy cooperative for purposes of the ownership criteria is an entity that develops applicable facilities and is either:
(A) A consumer or purchasing cooperative controlled by its members with each member having an equal voting right and with each member having rights to profit distributions based on patronage as defined by proportion of volume of electricity or energy credits purchased (kWh), volume of financial benefits delivered (in United States dollars), or volume of financial payments made (in United States dollars); and in which at least 50 percent of the patronage in the qualified facility is by cooperative members who are low-income households (as defined in section 48E(h)(2)(C)); or
(B) A worker cooperative controlled by its worker-members with each member having an equal voting right.
(vii) Qualified tax-exempt entity. A qualified tax-exempt entity for purposes of the ownership criteria is:
(A) An organization exempt from the tax imposed by subtitle A of the Code by reason of being described in section 501(c)(3) or (d) of the Code;
(B) Any State, the District of Columbia, or political subdivision thereof, or any agency or instrumentality of any of the foregoing;
(C) An Indian Tribal government (as defined in section 30D(g)(9)), a political subdivision thereof, or any agency or instrumentality of any of the foregoing; or
(D) Any corporation described in section 501(c)(12) operating on a cooperative basis that is engaged in furnishing electric energy to persons in rural areas.
(viii) Qualified renewable energy company. A qualified renewable energy company (QREC) for purposes of the ownership criteria is an entity that serves low-income communities and provides pathways for the adoption of clean energy by low-income households. To be a QREC, an entity must meet all of the requirements in paragraphs (h)(2)(vii)(A) through (D) of this section.
(A) The entity's business purpose must be to serve low-income households or low-income communities, and this purpose must be stated in governing documents and dated at least two years prior to application submission;
(B) At least 51 percent of the entity's equity interests must be owned and controlled by one or more individuals;
(C) The entity must have first installed, operated, or provided services as a contractor or subcontractor to an applicable facility two or more years prior to the date of application; and
(D) The entity must have at least one but less than 10 full-time equivalent employees (as determined under section 4980H(c)(2)(E) and (c)(4) of the Code) and less than $20 million in annual gross receipts in the previous two calendar years. The number of full-time equivalent employees and amount in annual gross receipts must include the full-time equivalent employees and annual gross receipts of all affiliated entities. An entity is considered to be an affiliated entity if—
(1) 25 percent or more of an entity's board seats, voting rights, or equity interests, are cumulatively held by another entity and related entities (as described in described in section 267(b) or section 707(b)(1) of the Code); or
(2) One or more of an entities' officers, directors, managing members or partners with authority over the board of directors or management and operations also have authority over the board of directors or management and operations of another entity.
(3) Geographic criteria—(i) In general. Geographic criteria do not apply to Category 2 facilities. To meet the geographic criteria, a facility must be located in a county or census tract that is described in paragraph (h)(3)(ii) or (iii) of this section. Applicants who meet the geographic criteria at the time of application are considered to continue to meet the geographic criteria for the duration of the recapture period unless the location of the facility changes.
(ii) Persistent Poverty County. A Persistent Poverty County (PPC), which is, generally, described as any county where 20 percent or more of residents have experienced high rates of poverty over the past 30 years. For purposes of the Program and this section, the PPC measure adopted by the USDA is used to make this determination. If updated data is released by USDA, a taxpayer will have a 1-year period following the date of the release of the updated data to be eligible under the previous data. After the 1-year transition period, the updated data must be used to determine eligibility.
(iii) Certain census tracts under Climate and Economic Justice Screening Tool. A census tract that is described in the latest official Climate and Economic Justice Screening Tool (CEJST), as greater than or equal to the 90th percentile for energy burden and greater than or equal to the 65th percentile for low income, or as greater than or equal to the 90th percentile for PM2.5 exposure and greater than or equal to the 65th percentile for low income.
(A) Energy burden. Energy burden is defined as average household annual energy cost in dollars divided by the average household income.
(B) PM2.5. PM2.5 is defined as fine inhalable particles with 2.5 or smaller micrometer diameters. The percentile is the weight of the particles per cubic meter.
(C) Low-income. Low income, for purposes of this section, is defined as the percent of a census tract's population in households for which household income is at or below 200 percent of the Federal poverty level, not including students enrolled in higher education.
(i) Sub-reservations of allocation for Category 1 facilities—(1) In general. Capacity Limitation reserved for Category 1 facilities will be subdivided each Program year for facilities seeking a Category 1 allocation with Capacity Limitation reserved specifically for eligible residential behind the meter (BTM) facilities, including rooftop solar. The remaining Capacity Limitation is available for applicants with front of the meter (FTM) facilities as well as non-residential BTM facilities. The specific sub-reservation for eligible residential BTM facilities in Category 1 is provided in guidance published in the Internal Revenue Bulletin and is established based on factors such as promoting efficient allocation of Capacity Limitation and allowing like-projects to compete for an allocation. After the sub-reservation is established in guidance published in the Internal Revenue Bulletin, the sub-reservation may be reallocated later in the event it has excess capacity.
(2) Definitions—(i) Behind the meter (BTM) facility. For purposes of the Program and this section, an applicable facility is BTM if:
(A) It is connected with an electrical connection between the facility and the panelboard or sub-panelboard of the site where the facility is located;
(B) It is to be connected on the customer side of a utility service meter before it connects to a distribution or transmission system (that is, before it connects to the electricity grid); and
(C) Its primary purpose is to provide electricity to the utility customer of the site where the facility is located. This also includes systems not connected to a grid and that may not have a utility service meter, and whose primary purpose is to serve the electricity demand of the owner of the site where the system is located.
(ii) Eligible residential BTM facility. For purposes of paragraph (i)(1) of this section, an eligible residential BTM facility is defined as a single-family or multi-family residential applicable facility that does not meet the requirements for a Category 3 facility and is BTM. An applicable facility is residential if it uses energy to generate electricity for use in a dwelling unit that is used as a residence.
(iii) FTM facility. For purposes of the Program and this section, an applicable facility is FTM if it is directly connected to a grid and its primary purpose is to provide electricity to one or more offsite locations via such grid or utility meters with which it does not have an electrical connection; alternatively, a FTM facility is defined as a facility that is not a BTM facility. For the purpose of Category 4 facilities, an applicable facility is also FTM if 50 percent or more of its electricity generation on an annual basis is exported physically to the broader electricity grid.
(j) Process of application evaluation—(1) In general. Applications for a Capacity Limitation allocation will be evaluated according to the procedures specified in guidance published in the Internal Revenue Bulletin.
(2) Information required as part of application. With each application for a Capacity Limitation allocation, applicants are required to submit information, documentation, and attestations to demonstrate eligibility for an allocation and project viability as specified in guidance published in the Internal Revenue Bulletin.
(3) No administrative appeal of Capacity Limitation allocation decisions. An applicant may not administratively appeal decisions regarding Capacity Limitation allocations.
(4) Application period—(i) Opening and closing dates. For calendar year 2026 and each succeeding calendar year of the Program, the application period will open the first Monday of February at 9 a.m. EST and close the first Friday of August at 11:59 p.m. EST. The application period for calendar year 2025 will be announced in guidance published in the Internal Revenue Bulletin.
(ii) Initial 30-day period. For each year, there will be an initial 30-day period during which all applications submitted will be considered to be submitted at the same time and date. The initial 30-day period will begin on the opening day of the application period described in paragraph (j)(4)(i) of this section, and end at 11:59 p.m. EST on the 30th calendar day after the opening day of the application period. The opening day is included in calculating the 30-day period. All applications submitted within the 30-day period will be ordered for review and consideration of an allocation of Capacity Limitation within the same category based on a process described in procedural guidance published in the Internal Revenue Bulletin. If during the initial 30-day period, an Additional Selection Criteria reservation for a category or Category 1 sub-reservation is oversubscribed with Additional Selection Criteria applications, Capacity Limitation from the applicable category or sub-reservation may be reallocated to prioritize review and consideration of Additional Selection Criteria applications. Additional Selection Criteria applications received during the initial 30-day period receive priority over other applications received during the initial 30-day period.
(iii) Applications submitted after the initial 30-day period—(A) In general. Applications submitted after the close of the initial 30-day period will be held for review and consideration of an allocation of Capacity Limitation after the applications in the same category or Category 1 sub-reservation which were submitted during the initial 30-day period. Review of such applications will occur only if sufficient Capacity Limitation remains to be allocated in a given category or Category 1 sub-reservation, and in conjunction with the redistribution provisions described under paragraph (g)(2) of this section. Provided sufficient Capacity Limitation remains in a given category or Category 1 sub-reservation, these applications submitted after the initial 30-day period will be reviewed and considered for an allocation in the order in which they are received.
(B) Additional Selection Criteria Applications submitted after the initial 30-day period. If the Additional Selection Criteria reservation for a category or Category 1 sub-reservation is undersubscribed after the initial 30-day period ends, then the Additional Selection Criteria reservation of 50 percent is maintained. Additional Selection Criteria applications submitted after the initial 30-day period will be prioritized for review and consideration of an allocation of Capacity Limitation from the Additional Selection Criteria reservation in the applicable category or Category 1 sub-reservation until such Additional Selection Criteria reservation is allocated or is reallocated.
(k) Placed in service—(1) Requirement to report date placed in service. For any facility that receives an allocation of Capacity Limitation, the owner of the facility must report the date the eligible property was placed in service.
(2) Requirement to submit final eligibility information at placed in service time. At the time that the owner reports that eligible property has been placed in service, the owner also must confirm information about the facility and submit additional documentation to demonstrate the facility is still eligible to maintain the allocation and claim the increased applicable percentage under section 48E(h)(1) as specified in guidance published in the Internal Revenue Bulletin.
(3) Confirmation. The placed in service documentation and attestations demonstrating that the facility meets the eligibility criteria for the owner to claim an increased applicable percentage will be reviewed. A recommendation will then be considered by the IRS regarding whether the facility continues to meet the eligibility requirements for the facility to retain its allocation or if the facility should be disqualified (as provided in paragraph (m) of this section). Based on this recommendation and underlying facts and circumstances analysis, the IRS will decide whether the facility should retain its allocation or if the facility should be disqualified. Eligibility is determined, prior to the owner (or a partner or shareholder in the case of a partnership or S corporation) claiming the increased credit amount on Form 3468, Investment Credit (or Form 3800, General Business Credit), or successor form, or, if eligible, making a transfer election under section 6418 of the Code, or an elective payment election under section 6417 of the Code.
(4) Definition of placed in service. For purposes of this section, eligible property is considered placed in service in the earlier of the following taxable years:
(i) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such eligible property begins; or
(ii) The taxable year in which the eligible property is placed in a condition or state of readiness and availability for a specifically assigned function, whether in a trade or business or in the production of income.
(l) Facilities placed in service prior to an allocation award—(1) In general. Applicable facilities must be placed in service after being awarded an allocation of Capacity Limitation.
(2) Rejection or rescission. An application for an applicable facility that is placed in service prior to submission of the application will be rejected. If a facility is placed in service after the application is submitted, but prior to the allocation of Capacity Limitation, and the facility is awarded an allocation, the allocation will be rescinded.
(m) Disqualification. A facility will be disqualified and lose its allocation if prior to or upon the facility being placed in service an occurrence described in one of paragraphs (m)(1) through (5) of this section takes place.
(1) The location where the facility will be placed in service materially changes or is in a different census tract.
(2) The maximum net output of the facility increases such that it exceeds the less than five megawatts AC requirement provided in section 48E(h)(2)(A)(ii) or the nameplate capacity decreases by the greater of 2 kW or 25 percent of the Capacity Limitation awarded in the allocation. However, the amount of bonus credit capacity allocated will not be exceeded from the original allocation amount.
(3) The facility either cannot or did not satisfy the financial benefits requirements under section 48E(h)(2)(B)(ii) and paragraph (e) of this section as planned, if applicable, or cannot satisfy the financial benefits requirements under section 48E(h)(2)(C) or paragraph (f) of this section as planned, if applicable.
(4) The eligible property that is part of the facility that received the Capacity Limitation allocation is not placed in service within four years after the date the applicant was notified of the allocation of Capacity Limitation to the facility.
(5) The facility received a Capacity Limitation allocation based, in part, on meeting the ownership criteria and ownership of the facility changes prior to the facility being placed in service, unless the original applicant transfers the facility to an entity classified as a partnership for Federal income tax purposes and retains at least a one percent interest (either directly or indirectly) in each material item of partnership income, gain, loss, deduction, and credit of such partnership and is a managing member or general partner (or similar title) under State or Tribal law of the partnership (or directly owns 100 percent of the equity interests in the managing member or general partner) at all times during the existence of the partnership.
(n) Recapture of section 48E(h) Increase to the section 48E(a) credit—(1) In general. Section 48E(h)(5) provides for recapturing the benefit of any increase in the credit allowed under section 48E(a) by reason of section 48E(h) with respect to any property that ceases to be property eligible for such increase (but that does not cease to be investment credit property within the meaning of section 50(a) of the Code). Section 48E(h) provides that the period and percentage of such recapture must be determined under rules similar to the rules of section 50(a). Therefore, if, at any time during the five year recapture period beginning on the date that an applicable facility under section 48E(h) is placed in service, there is a recapture event under paragraph (n)(3) of this section with respect to such property, then the Federal income tax imposed on the taxpayer by chapter 1 of the Code for the taxable year in which the recapture event occurs is increased by the recapture percentage of the benefit of the increase in the section 48E credit. The recapture percentage is determined according to the table provided in section 50(a)(1)(B).
(2) Exception to application of recapture. Such recapture may not apply with respect to any property if, within 12 months after the date the applicant becomes aware (or reasonably should have become aware) of such property ceasing to be property eligible for such increase in the credit allowed under section 48E(a), the eligibility of such property for such increase pursuant to section 48E(h) is restored. Such restoration of an increase pursuant to section 48E(h) is not available more than once with respect to any facility.
(3) Recapture events. Any of the following circumstances result in a recapture event if the property ceases to be eligible for the increased credit under section 48E(h):
(i) Property described in section 48E(h)(2)(A)(iii)(II) fails to provide financial benefits;
(ii) Property described under section 48E(h)(2)(B) ceases to allocate the financial benefits equitably among the occupants of the dwelling units as described under section 48E(h)(2)(B)(ii), such as not allocating to residents the required net electricity savings of the electricity, as required by paragraph (e) of this section;
(iii) Property described under section 48E(h)(2)(C) ceases to provide at least 50 percent of the financial benefits of the electricity produced to Qualifying Households as described under section 48E(h)(2)(C)(i) or (ii), or fails to provide those households the required minimum 20 percent bill credit discount rate, as required by paragraph (f) of this section;
(iv) For property described under section 48E(h)(2)(B), the residential rental building the facility is a part of ceases to participate in a covered housing program or any other affordable housing program described in section 48E(h)(2)(B)(i), as applicable; or
(v) A facility increases its maximum net output or nameplate capacity such that the facility's maximum net output or nameplate capacity is 5 MW AC or greater.
(4) Section 50(a) recapture. Any event that results in recapture under section 50(a) also will result in recapture of the benefit of the increase in the section 48E credit by reason of section 48E(h). The exception to the application of recapture provided in paragraph (n)(2) of this section does not apply in the case of a recapture event under section 50(a).
(o) Record retention. The applicant is required to retain records and materials related to the application for the following periods:
(1) For at least 6 years after the due date (with extensions) for filing the Federal income tax return after the tax year that return is filed to claim the increase in the section 48E credit; and
(2) For at least 6 years after the due date (with extensions) for filing the Federal income tax return for the last year that the applicant could be subject to recapture as described in paragraph (n) of this section.
(p) Applicability date. This section applies to applicable facilities placed in service after December 31, 2024, and during taxable years ending on or after January 13, 2025.
[T.D. 10025, 90 FR 2861, Jan. 13, 2025]
§ 1.50-0 Table of contents.
This section lists the table of contents for §§ 1.50-1 and 1.50-2.
§ 1.50-1 Lessee's income inclusion following election of lessor of investment credit property to treat lessee as acquirer.
(a) In general.
(b) Coordination with basis adjustment rules.
(1) Basis adjustment.
(2) Amount of credit included ratably in gross income.
(i) In general.
(ii) Special rule for the energy credit.
(3) Special rule for partnerships and S corporations.
(i) In general.
(ii) Definition of ultimate credit claimant.
(c) Coordination with the recapture rules.
(1) In general.
(2) Income inclusion exceeds unrecaptured credit.
(3) Special rule for the energy credit.
(4) Timing of income inclusion or reduction following recapture.
(d) Election to accelerate income inclusion outside of the recapture period.
(1) In general.
(2) Exceptions.
(3) Manner and time for making election.
(e) Examples.
(1) Example 1.
(2) Example 2.
(3) Example 3.
(4) Example 4.
(5) Example 5.
(6) Example 6.
(f) Applicability date.
§ 1.50-2 Recapture of the advanced manufacturing investment credit in the case of certain expansions.
(a) Recapture in connection with certain expansions.
(1) In general.
(2) Exception.
(3) Carrybacks and carryover adjusted.
(b) Definitions.
(1) Applicable period.
(2) Applicable taxpayer.
(i) In general.
(ii) Special rules for partnerships and S corporations and their partners and shareholders.
(iii) Examples.
(A) Example 1: Applicable taxpayer: In general.
(B) Example 2: Applicable taxpayer: In general.
(C) Example 3: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders.
(D) Example 4: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders.
(E) Example 5: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders.
(F) Example 6: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders.
(iv) Affiliated groups.
(3) Applicable transaction.
(4) Applicable transaction recapture amount.
(5) Existing facility.
(6) Foreign country of concern.
(7) Material expansion.
(8) Semiconductor manufacturing capacity.
(9) Significant renovations.
(10) Significant transaction.
(i) In general.
(ii) Required agreement.
(11) Technology licensing.
(12) Technology or product that raises national security concerns.
(c) Exception from the definition of applicable transaction for the manufacturing of legacy semiconductors.
(1) In general.
(2) Legacy semiconductor.
(d) Example: Applicable transaction credit claimed.
(e) Applicability date.
[T.D. 10009, 89 FR 84760, Oct. 23, 2024]
§ 1.50-1 Lessee's income inclusion following election of lessor of investment credit property to treat lessee as acquirer.
(a) In general. Section 50(d)(5) provides that, for purposes of computing the investment credit, rules similar to the rules of former section 48(d) (relating to certain leased property) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990 (Pub. L. 101-508, 104 Stat. 1388 (November 5, 1990))) apply. This section provides rules similar to the rules of former section 48(d)(5) that the Secretary has determined shall apply for purposes of determining the inclusion in gross income required when a lessor elects to treat a lessee as having acquired investment credit property.
(b) Coordination with basis adjustment rules. In the case of any property with respect to which an election is made under § 1.48-4 by a lessor of investment credit property to treat the lessee as having acquired the property—
(1) Basis adjustment. Section 50(c) does not apply with respect to such property.
(2) Amount of credit included ratably in gross income—(i) In general. A lessee of the property must include ratably in gross income, over the shortest recovery period which could be applicable under section 168 with respect to that property, an amount equal to the amount of the credit determined under section 46 with respect to that property. The ratable income inclusion under this paragraph begins on the date the investment credit property is placed in service and continues on each one year anniversary date thereafter until the end of the applicable recovery period. The lessee will include in gross income the amount of its credit determined under section 46 regardless of limitations on the amount of the credit allowed under section 38(c) based on the amount of the lessee's income tax.
(ii) Special rule for the energy credit. In the case of any energy credit determined under section 48(a), paragraph (b)(2)(i) of this section applies only to the extent of 50 percent of the amount of the credit determined under section 46.
(3) Special rule for partnerships and S corporations—(i) In general. For purposes of paragraph (b)(2) of this section, if the lessee of the property is a partnership (other than an electing large partnership) or an S corporation, the gross income includible under such paragraph is not an item of partnership income to which the rules of subchapter K of Chapter 1, subtitle A of the Code apply or an item of S corporation income to which the rules of subchapter S of Chapter 1, subtitle A of the Code apply. Any partner or S corporation shareholder that is an ultimate credit claimant (as defined in paragraph (b)(3)(ii) of this section) is treated as a lessee that must include in gross income the amounts required under paragraph (b)(2) of this section in proportion to the credit determined under section 46 with respect to such partner or S corporation shareholder.
(ii) Definition of ultimate credit claimant. For purposes of this section, the term ultimate credit claimant means any partner or S corporation shareholder that files (or that would file) Form 3468, “Investment Credit,” with such partner's or S corporation shareholder's income tax return to claim an investment credit determined under section 46 with respect to such partner or S corporation shareholder.
(c) Coordination with the recapture rules—(1) In general. If section 50(a) requires an increase in the lessee's or the ultimate credit claimant's tax or a reduction in the carryback or carryover of an unused credit (or both) as a result of an early disposition (including a lease termination), etc., of leased property for which an election had been made under § 1.48-4, the lessee or the ultimate credit claimant is required to include in gross income an amount equal to the excess, if any, of the amount of the credit that is not recaptured over the total increases in gross income previously made under paragraph (b)(2) of this section with respect to the property. Such amount is in addition to the amounts the lessee or the ultimate credit claimant previously included in gross income under paragraph (b)(2) of this section.
(2) Income inclusion exceeds unrecaptured credit. If section 50(a) requires an increase in the lessee's or ultimate credit claimant's tax or a reduction in the carryback or carryover of an unused credit (or both) as a result of an early disposition (including a lease termination), etc., of leased property for which an election had been made under § 1.48-4, the lessee's or the ultimate credit claimant's gross income shall be reduced by an amount equal to the excess, if any, of the total increases in gross income previously included under paragraph (b)(2) of this section over the amount of the credit that is not recaptured.
(3) Special rule for the energy credit. In the case of any energy credit determined under section 48(a), paragraphs (c)(1) and (2) of this section apply by substituting the phrase “50 percent of the amount of the credit that is not recaptured” for the phrase “the amount of the credit that is not recaptured.”
(4) Timing of income inclusion or reduction following recapture. Any adjustment required by paragraphs (c)(1) and (2) of this section is taken into account in the taxable year in which the property is disposed of or otherwise ceases to be investment credit property.
(d) Election to accelerate income inclusion outside of the recapture period—(1) In general. If after the recapture period described in section 50(a), but prior to the expiration of the recovery period described in paragraph (b)(2) of this section, there is a lease termination, the lessee otherwise disposes of the lease, or a partner or S corporation shareholder that is an ultimate credit claimant disposes of its entire interest, either direct or indirect, in a lessee partnership (other than an electing large partnership) or S corporation, the lessee, or, in the case of a partnership or S corporation, the ultimate credit claimant may irrevocably elect to take into account the remaining amount required to be included in gross income under this section in the taxable year of the disposition or termination.
(2) Exceptions. The election provided under paragraph (d)(1) of this section is not available to—
(i) Lessees or ultimate credit claimants required by paragraph (c) of this section to account for the remaining amount required to be included in gross income after accounting for recapture in the taxable year in which the property was disposed of or otherwise ceased to be investment credit property under section 50(a); or
(ii) Former partners or S corporation shareholders that own no interest, either direct or indirect, in a lessee partnership or S corporation at the time of a lease termination or disposition.
(3) Manner and time for making election. The election under paragraph (d)(1) of this section is made by including the remaining amount required to be included under this section in gross income in the taxable year of the lease termination or disposition or the disposition of the ultimate credit claimant's entire interest, either direct or indirect, in a partnership or S corporation. The election must be made on or before the due date (including any extension of time) of the lessee's income tax return, or, in the case of a partnership or S corporation, the ultimate credit claimant's income tax return for the taxable year in which the lease termination or disposition or the disposition of the ultimate credit claimant's entire interest, either direct or indirect, in a partnership or S corporation occurs.
(e) Examples. The provisions of this section may be illustrated by the following examples:
(1) Example 1. X, a calendar year C corporation, leases nonresidential real property from Y. The property is placed in service on October 1, 2016. Y elects under § 1.48-4 to treat X as having acquired the property. X's investment credit determined under section 46 for 2016 with respect to such property is $9,750. The shortest recovery period that could be available to the property under section 168 is 39 years. Because Y has elected to treat X as having acquired the property, Y does not reduce its basis in the property under section 50(c). Instead, X, the lessee of the property, must include ratably in gross income over 39 years an amount equal to the credit determined under section 46 with respect to such property. Under paragraph (b)(2) of this section, X's increase in gross income for each of the 39 years beginning with 2016 is $250 ($9,750/39 year recovery period).
(2) Example 2. The facts are the same as in Example 1 in paragraph (e)(1) of this section, except that instead of nonresidential real property, X leases from Y solar energy equipment for which an energy credit under section 48 is determined under section 46. X's investment credit determined under section 46 for 2016 with respect to the property is $9,750. The shortest recovery period that could be available to the property under section 168 is 5 years. X, the lessee of the property, must include ratably in gross income over 5 years an amount equal to 50% of the credit determined under section 46 with respect to such property. Under paragraph (b)(2) of this section, X's increase in gross income for each of the 5 years beginning with 2016 is $975 ($4,875/5 year recovery period).
(3) Example 3. A and B, calendar year taxpayers, form a partnership, the AB partnership, that leases nonresidential real property from Y. The property is placed in service on October 1, 2016. Y elects under § 1.48-4 to treat the AB partnership as having acquired the property. A's investment credit determined under section 46 for 2016 is $3,900 and B's investment credit determined under section 46 for 2016 is $7,800 with respect to the property. The shortest recovery period that could be available to the property under section 168 is 39 years. Because Y has elected to treat the AB partnership as having acquired the property, Y does not reduce its basis in the building under section 50(c). Instead, A and B, the ultimate credit claimants, must include the amount of the credit determined with respect to A and B under section 46 ratably in gross income over 39 years, the shortest recovery period available with respect to such property. Therefore, A and B must include ratably in gross income over 39 years under paragraph (b)(2) of this section an amount equal to $3,900 and $7,800, respectively. Under paragraph (b)(2) of this section, A's increase in gross income for each of the 39 years beginning with 2016 is $100 ($3,900/39 year recovery period) and B's is $200 ($7,800/39 year recovery period). Because the gross income A and B are required to include under paragraph (b)(2) of this section is not an item of partnership income, the rules under subchapter K applicable to items of partnership income do not apply with respect to such income. In particular, A and B are not entitled to an increase in the outside basis of their partnership interests under section 705(a) and are not entitled to an increase in their capital accounts under section 704(b).
(4) Example 4. The facts are the same as in Example 3 in paragraph (e)(3) of this section, except that on January 1, 2019, the lease between AB partnership and Y terminates (Y retains ownership of the property), which is a recapture event under section 50(a). A's and B's income tax for 2019 is increased under section 50(a) by $2,340 and $4,680, respectively (60% of $3,900 and $7,800, respectively, assuming that the aggregate decrease in the credits allowed under section 38 was the full amount of the investment credits determined as to A and B under section 46). Therefore, the amount of the unrecaptured credit as to A and B is $1,560 and $3,120, respectively (40% of $3,900 and $7,800, respectively). The amounts that A and B previously included in gross income under paragraph (b)(2) of this section are $300 ($100 for each of 2016, 2017, and 2018) and $600 ($200 for each of 2016, 2017, and 2018), respectively. A and B are required under paragraph (c)(1) of this section to include in gross income an amount equal to the excess of the credit that is not recaptured ($1,560 and $3,120, respectively) over the total increases in gross income previously made under paragraph (b)(2) of this section with respect to the property ($300 and $600, respectively). Therefore, A and B must include in gross income $1,260 and $2,520, respectively, in the taxable year of the lease termination (2019) in addition to the recapture amounts described above.
(5) Example 5. (i) The facts are the same as in Example 4 in paragraph (e)(4) of this section, except that instead of nonresidential real property, the AB partnership leases from Y solar energy equipment for which an energy credit under section 48 is determined under section 46. Because the shortest recovery period that could be available to the property under section 168 is 5 years, A and B are required under paragraph (b)(2)(ii) of this section to include ratably in gross income over 5 years an amount equal to 50% of the credit determined under section 46 with respect to such property (50% of $3,900/5, or $390, per year for A, and 50% of $7,800/5, or $780, per year for B).
(ii) The January 1, 2019 lease termination requires A's and B's income tax for 2019 to be increased under section 50(a) by $2,340 and $4,680, respectively (60% of $3,900 and $7,800, respectively). Therefore, the amount of the unrecaptured credit as to A and B is $1,560 and $3,120, respectively (40% of $3,900 and $7,800, respectively). Under paragraph (b)(2)(ii) of this section, the amounts A and B previously included in gross income are $1,170 ($390 for each of 2016, 2017, and 2018) and $2,340 ($780 for each of 2016, 2017, and 2018), respectively. A and B are entitled to a reduction in gross income under paragraph (c)(2) of this section equal to the excess of the total increases in gross income made under paragraph (b)(2)(ii) of this section ($1,170 and $2,340, respectively) over 50% of the amount of the credit that is not recaptured ($780 and $1,560, respectively). Therefore, A and B are entitled to a reduction in gross income in the amount of $390 and $780, respectively, in the taxable year of the lease termination (2019).
(6) Example 6. (i) The facts are the same as in Example 3 in paragraph (e)(3) of this section, except that on December 1, 2021, A sells its entire interest to C, and on January 1, 2022, the lease between AB partnership and Y terminates. At the time of the lease termination, B is still a partner in the AB partnership. There is no recapture event under section 50(a) because both the lease termination and the disposition of A's interest in the partnership occurred outside of the recapture period.
(ii) At the time that A sold its interest in the AB partnership to C, A had previously included $500 ($100 for each of 2016-2020) in gross income under paragraph (b)(2) of this section. Under paragraph (b)(2) of this section, A must continue to include the remaining $3,400 (including $100 in 2021) in gross income ratably over the remaining portion of the applicable recovery period of 39 years. Alternatively, under paragraph (d)(1) of this section, A may irrevocably elect to include the remaining $3,400 in gross income in the taxable year that A sold its entire interest in the AB partnership to C (2021). Pursuant to paragraph (d)(2) of this section, A cannot make this election in the taxable year of the lease termination (2022).
(iii) At the time of the lease termination, B had previously included $1,200 ($200 for each of 2016-2021) in gross income under paragraph (b)(2) of this section. Under paragraph (b)(2) of this section, B must continue to include the remaining $6,600 required in gross income ratably over the remaining portion of the applicable recovery period of 39 years. Alternatively, under paragraph (d)(1) of this section, B may irrevocably elect to include the remaining $6,600 in gross income in the taxable year of the lease termination (2022).
(f) Applicability date. This section applies to property placed in service on or after September 19, 2016.
[T.D. 9872, 84 FR 34780, July 19, 2019]
§ 1.50-2 Recapture of the advanced manufacturing investment credit in the case of certain expansions.
(a) Recapture in connection with certain expansions—(1) In general. Except as provided in section 50(a)(3)(B) of the Code and paragraph (a)(2) of this section, if an applicable taxpayer engages in an applicable transaction before the close of the applicable period, then the tax under chapter 1 for the taxable year in which such transaction occurs is increased by 100 percent of the applicable transaction recapture amount. Any taxpayer, including an applicable taxpayer, that engages in an applicable transaction during a taxable year does not meet the definition of an eligible taxpayer under section 48D(c) and the section 48D regulations and is ineligible for the section 48D credit for that taxable year. See paragraph (b) of this section for definitions of terms used in section 50(a)(3) and this section.
(2) Exception. Section 50(a)(3)(A) and paragraph (a)(1) of this section do not apply if the applicable taxpayer demonstrates to the satisfaction of the Commissioner that the applicable transaction has been ceased or abandoned within 45 days of a determination and notice by the Commissioner. A taxpayer that ceases or abandons a particular applicable transaction for a taxable year may still be treated as engaging in a different applicable transaction for a taxable year. A taxpayer may not circumvent the application of section 50(a)(3) and this section by engaging in a series of applicable transactions, multiple applicable transactions, or other similar arrangements.
(3) Carrybacks and carryover adjusted. In the case of any cessation described in section 50(a)(1) or (2), or any applicable transaction to which section 50(a)(3) and paragraph (a)(1) of this section apply, any carryback or carryover under section 39 of the Code is appropriately adjusted by reason of such cessation or applicable transaction.
(b) Definitions. The following definitions apply for purposes of section 50(a)(3) and this section.
(1) Applicable period. The term applicable period means the 10-year period beginning on the date that an applicable taxpayer placed in service property that is eligible for the section 48D credit.
(2) Applicable taxpayer—(i) In general. Except as provided in paragraph (b)(2)(ii) of this section, the term applicable taxpayer means any taxpayer who was allowed a section 48D credit or made an election under section 48D(d)(1) with respect to such credit, for any taxable year prior to the taxable year in which such taxpayer entered into an applicable transaction.
(ii) Special rules for partnerships and S corporations and their partners and shareholders. In the case of qualified property placed in service by a partnership or an S corporation for which a section 48D credit was determined, the term applicable taxpayer also means—
(A) The partnership and the partners of such partnership (directly or indirectly through one or more tiered partnerships) who were allowed a section 48D credit for such property, or S corporation and the shareholder(s) of such S corporation who were allowed a section 48D credit for such property, for any taxable year prior to the taxable year in which such partnership or S corporation entered into an applicable transaction;
(B) Any partner in a partnership (directly or indirectly through one or more tiered partnerships) or any shareholder in an S corporation with respect to the partner's or S corporation shareholder's share of any section 48D credit allowed for such property for any taxable year prior to when such partner or S corporation shareholder entered into an applicable transaction;
(C) Any partnership or S corporation that made an election under section 48D(d)(2) with respect to a credit determined under section 48D(a)(1) for any taxable year prior to the taxable year in which such partnership or S corporation entered into an applicable transaction; and
(D) Any partner in a partnership (directly or indirectly through one or more tiered partnerships) or shareholder in an S corporation with respect to the partner's or S corporation shareholder's share of any tax-exempt income from the partnership or S corporation that made an election under section 48D(d)(2) for any taxable year prior to when such partner or shareholder entered into an applicable transaction.
(iii) Examples. The following examples illustrate the rules of this paragraph (b)(2).
(A) Example 1: Applicable taxpayer: In general. On July 1, 2026, X Corp, a calendar-year C corporation, entered into an applicable transaction. In 2025, X Corp had placed in service qualified property that is part of an advanced manufacturing facility and was allowed a section 48D credit for its 2025 taxable year. X Corp is an applicable taxpayer when it entered into the applicable transaction.
(B) Example 2: Applicable taxpayer: In general. The facts are the same as in paragraph (b)(2)(iii)(A) of this section (Example 1), except that X timely filed its 2025 tax return properly making an election under section 48D(d)(1) with respect to the section 48D credit. X Corp is an applicable taxpayer when it entered into the applicable transaction.
(C) Example 3: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders. A, B, C, and D, all calendar-year C corporations, are partners in the ABCD partnership. Partners A, B, C, and D share partnership profits equally. On May 1, 2027, the ABCD partnership engages in an applicable transaction. On November 1, 2025, the ABCD partnership had placed in service qualified property with a basis of $1 million. Each partner's share of the basis of the qualified property, as determined in § 1.46-3(f)(2), is $250,000 ($1m x 0.25) and each partner's qualified investment is $250,000. A, B, C, and D each filed its 2025 tax return claiming a section 48D credit. The ABCD partnership and A, B, C, and D each are an applicable taxpayer when ABCD partnership enters into the applicable transaction.
(D) Example 4: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders. The facts are the same as in paragraph (b)(2)(iii)(C) of this section (Example 3), except that on May 1, 2027, A, and not ABCD partnership, engages in an applicable transaction. A is an applicable taxpayer with respect to A's share of the section 48D credit when A enters into the applicable transaction. Neither the ABCD partnership nor partners B, C, nor D are an applicable taxpayer with respect to the applicable transaction entered into by A.
(E) Example 5: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders. The facts are the same as in paragraph (b)(2)(iii)(C) of this section (Example 3), except that A, B, C and D do not claim a section 48D credit on their timely filed 2025 tax returns. Instead, the ABCD partnership makes an election pursuant to section 48D(d)(2) with respect to the section 48D credit determined under section 48D(a)(1). The ABCD partnership is an applicable taxpayer with respect to the elective payment to the ABCD partnership pursuant to section 48D(d)(2)(A)(i)(I).
(F) Example 6: Applicable taxpayer: Special rules for partnerships and S corporations and their partners and shareholders. The facts are the same as in paragraph (b)(2)(iii)(E) of this section (Example 5), except that the ABCD partnership did not engage in an applicable transaction. On May 1, 2027, A engages in an applicable transaction. A is an applicable taxpayer with respect to its share of tax-exempt income allocated to A pursuant to section 48D(d)(2)(A)(i)(II) and (IV). Neither the ABCD partnership nor partners B, C, or D are an applicable taxpayer with respect to the applicable transaction entered into by A.
(iv) Affiliated groups. For purposes of this paragraph (b)(2), all members of an affiliated group under section 1504(a) of the Code, determined without regard to section 1504(b)(3), are treated as one taxpayer.
(3) Applicable transaction. Except as provided in section 50(a)(6)(D)(ii) and paragraph (c)(1) of this section, the term applicable transaction means, with respect to any applicable taxpayer, any significant transaction involving the material expansion of semiconductor manufacturing capacity of such applicable taxpayer in any foreign country of concern.
(4) Applicable transaction recapture amount. The term applicable transaction recapture amount means, with respect to an applicable taxpayer, the aggregate decrease in the credits allowed under section 38 of the Code for all prior taxable years that would have resulted solely from reducing to zero any credit determined under section 46 of the Code that is attributable to the advanced manufacturing investment credit under section 48D(a), with respect to property that has been placed in service during the applicable period.
(5) Existing facility. The term existing facility means any facility built, equipped, and operating prior to a taxpayer placing in service qualified property as defined in section 48D(b)(2) and § 1.48D-3. Existing facilities are defined by their semiconductor manufacturing capacity at the time the qualified property is placed in service; facilities that undergo significant renovations, as defined in paragraph (b)(9) of this section, will no longer qualify as existing facilities within the meaning of this paragraph (b)(5).
(6) Foreign country of concern. The term foreign country of concern has the same meaning as provided in 15 CFR 231.102.
(7) Material expansion. The term material expansion means—
(i) With respect to an existing facility, the increase of the semiconductor manufacturing capacity of that facility by more than five percent during the applicable period due to the addition of a cleanroom, production line or other physical space, or a series of such additions; or
(ii) Any construction of a new facility for semiconductor manufacturing.
(8) Semiconductor manufacturing capacity. The term semiconductor manufacturing capacity means, consistent with 15 CFR 231.117, the productive capacity of a semiconductor facility. In the case of a semiconductor wafer production facility that includes the processes of growing single-crystal ingots and boules, wafer slicing, wafer bonding, etching and polishing, cleaning, epitaxial deposition, and metrology, semiconductor manufacturing capacity is measured in wafer starts per month. In the case of a semiconductor fabrication facility, semiconductor manufacturing capacity is measured in wafer starts per year. In the case of a packaging facility, semiconductor manufacturing capacity is measured in packages per year.
(9) Significant renovations. The term significant renovations means building new cleanroom space or adding a production line or other physical space to an existing facility that, in the aggregate during the applicable period, increases semiconductor manufacturing capacity by 10 percent or more of the capacity.
(10) Significant transaction—(i) In general. As determined in coordination with the Secretary of Commerce and the Secretary of Defense and except as provided in paragraph (b)(10)(ii) of this section, the term significant transaction means any of the following:
(A) An investment, whether proposed, pending, or completed, including any capital expenditure, loan, or gift;
(B) The formation of a subsidiary, whether classified as a corporation or partnership for Federal tax purposes;
(C) A merger, acquisition, or takeover, including—
(1) The acquisition of a new or additional ownership interest in an entity;
(2) The acquisition of a material portion of the assets of an entity; or
(3) A consolidation;
(D) The formation of a joint venture; or
(E) A long-term lease or concession arrangement under which a lessee (or equivalent) makes substantially all business decisions concerning the operation of a leased entity (or equivalent), as if it were the owner.
(F) A transaction that involves the expansion of manufacturing capacity for legacy semiconductors (other than with respect to an existing facility or equipment of an applicable taxpayer for manufacturing legacy semiconductors) if less than 85 percent of the output of the semiconductor manufacturing facility (for example, wafers, semiconductor devices, or packages) by value, is incorporated into final products (that is, not an intermediate product that is used as factory inputs for producing other goods) that are used or consumed in the market of a foreign country of concern; or
(G) A transaction during the applicable period in which an applicable taxpayer knowingly (within the meaning of 15 CFR 231.106) engages in any joint research, as defined in 15 CFR 231.105, or technology licensing effort with a foreign entity of concern that relates to a technology or product that raises national security concerns.
(ii) Required agreement. If a taxpayer enters into a required agreement with the Secretary of Commerce pursuant to 15 U.S.C. 4652(a)(6)(C) and 15 CFR 231.112, then the term significant transaction for purposes of section 48D and the section 48D regulations has the meaning provided in the required agreement. Defined terms in the required agreement control only for purposes of determining the meaning of the term significant transaction. Thus, the effect of a significant transaction is determined under section 50(a)(3) and (6) during the applicable term defined under paragraph (b)(1) of this section.
(11) Technology licensing. The term technology licensing has the same meaning as provided in 15 CFR 231.120.
(12) Technology or product that raises national security concerns. The term technology or product that raises national security concerns has the same meaning as provided in 15 CFR 231.121.
(c) Exception from the definition of applicable transaction for the manufacturing of legacy semiconductors—(1) In general. The term applicable transaction, as defined in section 50(a)(6)(D) and paragraph (b)(3) of this section, does not include a transaction that primarily involves the expansion of manufacturing capacity for legacy semiconductors, but only to the extent not described in paragraph (b)(10)(i)(F) of this section.
(2) Legacy semiconductor. The term legacy semiconductor has the same meaning as provided in 15 CFR 231.107.
(d) Example: Applicable transaction credit claimed. On January 15, 2025, X Corp, a C corporation that is a calendar-year taxpayer, placed in service Property A, qualified property with a basis of $1 million. X Corp's qualified investment, as determined in § 1.46-3(c), for the taxable year is $1 million. X Corp's advanced manufacturing investment credit for the taxable year is $250,000 ($1 million × 0.25) and, assume that X Corp's income tax liability is $400,000. X Corp does not determine any other credits in 2025. X claims an advanced manufacturing investment credit of $250,000 for its 2025 taxable year. On December 15, 2026, X Corp engages in an applicable transaction, as defined in section 50(a)(6)(D) and paragraph (b)(3) of this section and did not cease or abandon the transaction within 45 days of a determination and notice by the Commissioner. X Corp has not determined or claimed any general business credits since its 2025 taxable year. The aggregate decrease in credits allowed under section 38 for all prior years resulting from reducing to zero any credit determined under section 46 that is attributable to the advanced manufacturing investment credit is $250,000 ($250,000 (credit allowed)−$0 (credit that would have been allowed)). X Corp's tax under chapter 1 is increased by $250,000 (1.0 × $250,000) for the 2026 taxable year. Pursuant to section 48D(c), for the 2026 taxable year, X Corp is not an eligible taxpayer and is ineligible to claim or carryforward the advanced manufacturing investment credit.
(e) Applicability date. This section applies to property that is placed in service after December 31, 2022, and during a taxable year ending on or after October 23, 2024.
[T.D. 10009, 89 FR 84761, Oct. 23, 2024]
9 rules for computing credit for expenses of work incentive programs
§ 1.50A-1 Determination of amount.
(a) In general. Except as otherwise provided in this section and in § 1.50A-2, the amount of the work incentive program (WIN) credit allowed by section 40 for the taxable year is equal to 20 percent of the taxpayer's WIN expenses (as determined under paragraph (a) of § 1.50B-1). The amount equal to 20 percent of the WIN expenses shall be referred to in this section and §§ 1.50A-2 through 1.50B-5 as the “credit earned.”
(b) Limitation based on amount of tax. Notwithstanding the amount of the credit earned for the taxable year, under section 50A(a)(2) the credit allowed by section 40 for the taxable year is limited to—
(1) If the liability for tax (as defined in paragraph (c) of this section) is $25,000 or less, the liability for tax; or
(2) If the liability for tax is more than $25,000, then, the first $25,000 of the liability for tax plus 50 percent of the liability for tax in excess of $25,000. However, such $25,000 amount may be reduced in the case of certain married individuals filing separate returns (see paragraph (e) of this section); corporations which are members of a controlled group (see paragraph (f) of this section); estates and trusts (see paragraph (c) of § 1.50B-3); and organizations to which section 593 applies, regulated investment companies or real estate investment trusts subject to taxation under subchapter M, chapter 1 of the Code, and cooperative organizations described in section 1381(a) (see § 1.50B-5). The excess of the credit earned for the taxable year over the limitations described in this paragraph for such taxable year is an unused credit which may be carried back or forward to other taxable years in accordance with § 1.50A-2.
(c) Liability for tax. For the purpose of computing the limitation based on amount of tax, section 50A(a)(3) defines the liability for tax as the income tax imposed for the taxable year by chapter 1 of the Code, reduced by the sum of the credits allowable under—
(1) Section 33 (relating to taxes of foreign countries and possessions of the United States,
(2) Section 37 (relating to credit for the elderly),
(3) Section 38 (relating to investment in certain depreciable property), and
(4) Section 41 (relating to contributions to candidates for public office).
For purposes of this paragraph, the tax imposed for the taxable year by section 56 (relating to imposition of minimum tax for tax preferences), section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees), section 402(e) (relating to tax on lump sum distributions), section 408(f) (relating to additional tax on income from certain retirement accounts), section 531 (relating to imposition of accumulated earnings tax), section 541 (relating to imposition of personal holding company tax), or section 1378 (relating to tax on certain capital gains of subchapter S corporations), and any additional tax imposed for the taxable year by section 1351(d)(1) (relating to recoveries of foreign expropriation losses), shall not be considered tax imposed by chapter 1 of the Code for such year. Thus, the liability for tax for purposes of computing the limitation based on amount of tax for the taxable year is determined without regard to any tax imposed by sections 56, 72(m)(5)(B), 402(e), 408(f), 531, 541, 1351(d)(1) or 1378 of the Code. In addition, any increase in tax resulting from the application of section 50A (c) and (d) and § 1.50A-3 (relating to recomputation of credit allowed due to early termination of employment by employer, or failure to pay comparable wages) shall not be treated as tax imposed by chapter 1 of the Code for purposes of computing the liability for tax. See section 50A (c)(3) and (d)(2).
(d) Example. The application of paragraphs (a), (b), and (c) of this section may be illustrated by the following example:
Example. X Corporation's WIN expenses for its taxable year ending December 31, 1973, are $500,000. X's credit earned for its taxable year is $100,000 (20 percent of $500,000). X's income tax for such year, computed without regard to credits against tax and without regard to any tax imposed by section 56, 531, 541, 1351(d)(1) or 1378, is $190,000. That amount includes $5,000 resulting from the application of section 50A(c)(3) and § 1.50 A-3. X is allowed under section 33 a foreign tax credit of $50,000. X's liability for tax is computed as follows:
Income tax (including increase in tax under section 50A(c)(3), but before any credits and without regard to any tax imposed by section 56, 531, 541, 1351(d)(1) or 1378) | $190,000
Less:
Increase in tax resulting from application of section 50A(c)(3) | $5,000
Foreign tax credit | 50,000
55,000
Liability for tax | 135,000
Under section 50A(a)(2) and paragraph (b) of this section, X's limitation based on amount of tax for the taxable year is $80,000 ($25,000 plus 50 percent of $110,000). X Corporation's credit allowed by section 40 for the taxable year therefore is $80,000. X has an unused credit for the year of $20,000 ($100,000 less $80,000) which it may carry back or forward to other taxable years in accordance with § 1.50A-2.
(e) Married individuals. If a separate return is filed by a husband or wife, the limitation based on amount of tax under paragraph (b) of this section shall be computed by substituting a $12,500 amount for the $25,000 amount in applying such paragraph (b). However, this reduction of the $25,000 amount to $12,500 applies only if the taxpayer's spouse is entitled to a credit under section 40 for the taxable year of such spouse which ends with, or within, the taxpayer's taxable year. The taxpayer's spouse is entitled to a credit under section 40 either because of incurring WIN expenses for such taxable year of the spouse (whether directly incurred by such spouse or whether apportioned to such spouse, for example, from an electing small business corporation, as defined in section 1371(b)), or because of a credit carryback or carryover to such taxable year under § 1.50A-2. The determination of whether an individual is married shall be made under the principles of section 143 and the regulations thereunder.
(f) Apportionment of $25,000 amount among component members of a controlled group—(1) In general. In determining the limitation based on amount of tax under section 50A(a)(2) in the case of corporations which are component members of a controlled group of corporations on a December 31, only one $25,000 amount is available to such component members for their taxable years that include such December 31. See subparagraph (2) of this paragraph for apportionment of such amount among such component members. See subparagraph (3) of this paragraph for the definition of “component member.”
(2) Manner of apportionment. (i) In the case of corporations which are component members of a controlled group on a particular December 31, the $25,000 amount may be apportioned among such members for their taxable years that include such December 31 in any manner the component members may select, provided that each such member less than 100 percent of whose stock is owned, in the aggregate, by the other component members of the group on such December 31 consents to an apportionment plan. The consent of a component member to an apportionment plan with respect to a particular December 31 shall be made by means of a statement signed by a person duly authorized to act on behalf of the consenting member, stating that such member consents to the apportionment plan with respect to such December 31. The statement shall set forth the name, address, employer identification number, and taxable year of each component member of the group on such December 31, the amount apportioned to each such member under the plan, and the location of the Internal Revenue Service center where the statement is to be filed. The consent of more than one component member may be incorporated in a single statement. The statement shall be timely filed with the Internal Revenue Service center where the component member having the taxable year first ending on or after such December 31 files its return for such taxable year and shall be irrevocable after such filing. If two or more component members have the same such taxable year, a statement of consent may be filed by any one of such members. Such statement shall be considered as timely filed if filed on or before the due date (including any extensions of time) of such member's income tax return which includes such December 31. However, if the due date (including any extensions of time) of the return of such member is on or before December 15, 1972, the required statement shall be considered as timely filed if filed on or before March 15, 1973. Each component member of the group on such December 31 shall keep as a part of its records a copy of the statement containing all the required consents.
(ii) An apportionment plan adopted by a controlled group with respect to a particular December 31 shall be valid only for the taxable year of each member of the group which includes such December 31. Thus, a controlled group must file a separate consent to an apportionment plan with respect to each taxable year which includes a December 31 as to which an apportionment plan is desired.
(iii) If an apportionment plan is not timely filed, the $25,000 amount specified in section 50A(a)(2) shall be reduced for each component member of the controlled group, for its taxable year which includes a December 31, to an amount equal to $25,000 divided by the number of component members of each group on such December 31.
(iv) If a component member of the controlled group makes its income tax return on the basis of a 52-53 week taxable year, the principles of section 441(f)(2)(A)(ii) and paragraph (b)(1) of § 1.441-2 apply in determining the last day of such taxable year.
(3) Definitions of controlled group of corporations and component member of controlled group. For the purpose of this paragraph, the terms “controlled group of corporations” and “component member” of a controlled group of corporations shall have the same meaning assigned to those terms in section 1563 (a) and (b) and the regulations thereunder. For purposes of applying § 1.1563-1(b)(2)(ii)(c), an electing small business corporation shall be treated as an excluded member whether or not it is subject to the tax imposed by section 1378.
(4) Members of a controlled group filing a consolidated return. If some component members of a controlled group join in filing a consolidated return pursuant to § 1.1502-3(a)(3), and other component members do not join, then, unless a consent is timely filed apportioning the $25,000 amount among the group filing the consolidated return and the other component members of the controlled group, each component member of the controlled group (including each component member which joins in filing the consolidated return) shall be treated as a separate corporation for purposes of equally apportioning the $25,000 amount under subparagraph (2)(iii) of this paragraph. In such case, the limitation based on the amount of tax for the group filing the consolidated return shall be computed by substituting for the $25,000 amount the total of the amount apportioned to each component member which joins in filing the consolidated return. If the affiliated group, filing the consolidated return and the other component members of the controlled group adopt an apportionment plan, the affiliated group shall be treated as a single member for the purpose of applying subparagraph (2)(i) of this paragraph. Thus, for example, only one consent executed by the common parent to the apportionment plan is required for the group filing the consolidated return. If any component member of the controlled group which joins in the filing of the consolidated return is an organization to which section 593 applies or a cooperative organization described in section 1381(a), rules similar to the rules contained in paragraph (a)(3)(ii) of § 1.1502-3 are applicable.
(5) Examples. The provisions of this paragraph may be illustrated by the following examples:
Example 1.At all times during 1972 Smith, an individual, owns all the stock of corporations X, Y, and Z. Corporation X files an income tax return on a calendar year basis. Corporation Y files an income tax return on the basis of a fiscal year ending June 30. Corporation Z files an income tax return on the basis of a fiscal year ending September 30. On December 31, 1972, X, Y, and Z are component members of the same controlled group. X, Y, and Z all consent to an apportionment plan in which the $25,000 amount is apportioned entirely to Y for its taxable year ending June 30, 1973 (Y's taxable year which includes December 31, 1972). Such consent is timely filed. For purposes of computing the credit under section 40, Y's limitation based on amount of tax for its taxable year ending June 30, 1973, is so much of Y's liability for tax as does not exceed $25,000, plus 50 percent of Y's liability for tax in excess of $25,000. X's and Z's limitations for their taxable years ending December 31, 1972, and September 30, 1973, respectively, are equal to 50 percent of X's liability for tax and 50 percent of Z's liability for tax. On the other hand, if an apportionment plan is not timely filed, X's limitation would be so much of X's liability for tax as does not exceed $8,333.33, plus 50 percent of X's liability in excess of $8,333.33, and Y's and Z's limitations would be computed similarly.
Example 2.At all times during 1972, Jones, an individual, owns all the outstanding stock of corporations P, Q, and R. Corporations Q and R both file returns for taxable year ending December 31, 1972. P files a consolidated return as a common parent for its fiscal year ending June 30, 1973, with its wholly owned subsidiaries N and O. On December 31, 1972, N, O, P, Q, and R are component members of the same controlled group. No consent to an apportionment plan is filed. Therefore, each member is apportioned $5,000 of the $25,000 amount ($25,000 divided equally among the five members). The limitation based on the amount of tax for the group filing the consolidated return (P, N, and O) for the year ending June 30, 1973 (the consolidated taxable year within which December 31, 1972, falls), is computed by using $15,000 instead of the $25,000 amount. The $15,000 is arrived at by adding together the $5,000 amounts apportioned to P, N, and O.
[38 FR 6152, Mar. 7, 1973, as amended by T.D. 7636, 44 FR 47049, Aug. 10, 1979]
§ 1.50A-2 Carryback and carryover of unused credit.
(a) Allowance of unused credit as carryback or carryover—(1) In general. Section 50A(b)(1) provides for carrybacks and carryovers of any unused credit. An unused credit is the excess of the credit earned for the taxable year (as determined under paragraph (a) of § 1.50A-1) over the limitation based on amount of tax for such taxable year (as determined under paragraph (b) of § 1.50A-1). Subject to the limitation contained in paragraph (b) of this section, an unused credit shall be added to the amount allowable as a credit under section 40 for the years to which the unused credit can be carried. The year with respect to which an unused credit arises shall be referred to in this section as the “unused credit year.”
(2) Taxable years to which unused credit may be carried. An unused credit shall be a work incentive program (WIN) credit carryback to each of the 3 taxable years preceding the unused credit year and a WIN credit carryover to each of the 7 taxable years succeeding the unused credit year, except that an unused credit shall be a carryback only to taxable years beginning after December 31, 1971. An unused credit must be carried first to the earliest of the taxable years to which it may be carried, and then to each of the other taxable years (in order of time) to the extent that the unused credit may not be added (because of the limitation contained in paragraph (b) of this section) to the amount allowable as a credit under section 40 for a prior taxable year.
(b) Limitation on allowance of unused credit. The amount of the unused credit from any particular unused credit year which may be added to the amount allowable as a credit under section 40 for any of the preceding or succeeding taxable years to which such credit may be carried shall not exceed the amount by which the limitation based on amount of tax for such preceding or succeeding taxable year exceeds the sum of (1) the credit earned for such preceding or succeeding year, and (2) other unused credits carried to such preceding or succeeding year which are attributable to unused credit years prior to the particular unused credit year.
(c) Corporate acquisitions. For the carryover of unused credits in the case of certain corporate acquisitions, see section 381(c)(24) and the regulations thereunder. [§ 1.381(c)(24)-1]
(d) Periods of less than 12 months. A fractional part of a year which is considered as a taxable year under sections 441(b) and 7701(a)(23) shall be treated as a preceding or a succeeding taxable year for the purpose of determining under section 50A(b) and this section the taxable years to which an unused credit may be carried.
(e) Example. The provisions of paragraphs (a) through (d) of this section may be illustrated by the following example:
Example. Corporation X files its income tax return on the basis of the calendar year. X's credit earned and its limitation based on amount of tax for each of its taxable years 1972 through 1978 are as follows:
Credit earned | Limitation based on amount of tax
1972 | $175,000 | $200,000
1973 | 250,000 | 160,000
1974 | 200,000 | 210,000
1975 | 210,000 | 230,000
1976 | 220,000 | 260,000
1977 | 260,000 | 220,000
1978 | 270,000 | 280,000
(i) Corporation X's credit earned for 1972, $175,000, is allowable in full as a credit under section 40 for 1972 since such amount is less than the limitation based on amount of tax for such year, $200,000. Since the limitation based on amount of tax for 1973 is $160,000, only $160,000 of the $250,000 credit earned for such year is allowable under section 40 as a credit for 1973. The unused credit for 1973 of $90,000 ($250,000 less $160,000) is a WIN credit carryback to 1972 and a WIN credit carryover to 1974 and subsequent years up to and including 1980. The portion of the $90,000 unused credit which shall be added to the amount allowable as a credit under section 40 for 1972 and 1974 and subsequent years is computed as follows:
(a) 1972. The portion of the unused credit for 1973 ($90,000) which is allowable as a credit for 1972 is $25,000. This amount shall be added to the amount allowable as a credit for 1972. The balance of the unused credit for 1973 to be carried to 1974 is $65,000. These amounts are computed as follows:
Carryback to 1972 | $90,000
1972 limitation based on tax | $200,000
Less: Credit earned for 1972 | $175,000
Unused credits attributable to years preceding 1973 | 0
175,000
Limit on amount of 1973 unused credit which may be added as a credit for 1972 | 25,000
Balance of 1973 unused credit to be carried to 1974 | 65,000
(b) 1974. The portion of the balance of the unused credit for 1973 ($65,000) allowable as a credit for 1974 is $10,000. This amount shall be added to the amount allowable as a credit for 1974. The balance of the unused credit for 1973 to be carried to 1975 is $55,000. These amounts are computed as follows:
Carryover to 1974 | $65,000
1974 limitation based on tax | $210,000
Less: Credit earned for 1974 | $200,000
Unused credits attributable to years preceding 1973 | 0
____ | 200,000
Limit on amount of 1973 unused credit which may be added as a credit for 1974 | 10,000
Balance of 1973 unused credit to be carried to 1975 | 55,000
(c) 1975. The portion of the balance of the unused credit for 1973 ($55,000) allowable as a credit for 1975 is $20,000. This amount shall be added to the amount allowable as a credit for 1975. The balance of the unused credit for 1973 to be carried to 1976 is $35,000. These amounts are computed as follows:
Carryover to 1975 | $55,000
1975 limitation based on tax | $230,000
Less: Credit earned for 1975 | $210,000
Unused credits attributable to years preceding 1973 | 0
210,000
Limit on amount of 1973 unused credit which may be added as a credit for 1975 | $20,000
Balance of 1973 unused credit to be carried to 1976 | 35,000
(d) 1976. The entire balance of the unused credit for 1973 ($35,000) is allowable as a credit for 1976, since the limitation based on amount of tax for 1976 exceeds the sum of the credit earned for 1976 and unused credits attributable to years prior to 1973 by an amount in excess of $35,000. Since the balance of the unused credit for 1973 has been fully allowed, no portion thereof remains to be carried to subsequent taxable years. This is illustrated as follows:
Carryover to 1976 | $35,000
1976 limitation based on tax | $260,000
Less: Credit earned for 1976 | $220,000
Unused credits attributable to years preceding 1973 | 0
220,000
Limit on amount of 1973 unused credit which may be added as a credit for 1976 | 40,000
Balance of 1973 unused credit to be carried to 1977 | 0
(ii) Since the limitation based on amount of tax for 1977 is $220,000, only $220,000 of the $260,000 credit earned for such year is allowable as a credit for 1977. The unused credit for 1977 of $40,000 ($260,000 less $220,000) is a WIN credit carryback to 1974, 1975, and 1976 and a WIN credit carryover to 1978 and subsequent years. The portions of the $40,000 unused credit which shall be added to the amount allowable as a credit for such years are computed as follows:
(a) 1974. The portion of the unused credit for 1977 ($40,000) allowable as a credit for 1974 is zero. The balance of the unused credit for 1977 to be carried to 1975 is $40,000. These amounts are computed as follows:
Carryback to 1974 | $40,000
1974 limitation based on tax | $210,000
Less: Credit earned for 1974 | $200,000
Unused credits attributable to years preceding 1977 (unused credit from 1973) | 10,000
$210,000
Limit on amount of 1977 unused credit which may be added as a credit for 1974 | 0
Balance of 1977 unused credit to be carried to 1975 | 40,000
(b) 1975. The portion of the unused credit for 1977 ($40,000) allowable as a credit for 1975 is zero. The balance of the unused credit for 1977 to be carried to 1976 is $40,000. These amounts are computed as follows:
Carryback to 1975 | $40,000
1975 limitation based on tax | $230,000
Less: Credit earned for 1975 | $210,000
Unused credits attributable to years preceding 1977 (unused credit from 1973) | 20,000
____ | 230,000
Limit on amount of 1977 unused credit which may be added as a credit for 1975 | 0
Balance of 1977 unused credit to be carried to 1976 | 40,000
(c) 1976. The portion of the unused credit for 1977 ($40,000) allowable as a credit for 1976 is $5,000. This amount shall be added to the amount allowable as a credit for 1976. The balance of the unused credit for 1977 to be carried to 1978 is $35,000. These amounts are computed as follows:
Carryback to 1976 | $40,000
1976 limitation based on tax | $260,000
Less: Credit earned for 1976 | $220,000
Unused credits attributable to years preceding 1977 (unused credit from 1973) | 35,000
____ | 255,000
Limit on amount of 1977 unused credit which may be added as a credit for 1976 | 5,000
Balance of 1977 unused credit to be carried to 1978 | 35,000
(d) 1978. The portion of the balance of the unused credit for 1977 ($35,000) allowable as a credit for 1978 is $10,000. This amount shall be added to the amount allowable as a credit for 1978. The balance of the unused credit for 1977 to be carried to 1979 and subsequent years is $25,000. These amounts are computed as follows:
Carryover to 1978 | $35,000
1978 limitation based on tax | $280,000
Less: Credit earned for 1978 | $270,000
Unused credits attributable to years preceding 1977 | 0
____ | $270,000
Limit on amount of 1977 unused credit which may be added as a credit for 1978 | $10,000
Balance of 1977 unused credit to be carried to 1979 | 25,000
(f) Electing small business corporation. An unused credit of a corporation which arises in an unused credit year for which the corporation is not an electing small business corporation (as defined in section 1371(b)) and which is a carryback or carryover to a taxable year for which the corporation is an electing small business corporation shall not be added to the amount allowable as a credit under section 40 to the shareholders of such corporation for any taxable year. However, a taxable year for which the corporation is an electing small business corporation shall be counted as a taxable year for purposes of determining the taxable years to which such unused credit may be carried.
[38 FR 6153, Mar. 7, 1973]
§ 1.50A-3 Recomputation of credit allowed by section 40.
(a) General rule—(1) Early termination of employment by employer—(i) In general. If the employment of any employee, with respect to whom work incentive program (WIN) expenses (as defined in paragraph (a) of § 1.50B-1) are taken into account under paragraph (a) of § 1.50A-1, is terminated by the taxpayer at any time during the first 12 months of such employment (whether or not consecutive) or before the close of the 12th calendar month after the calendar month in which such employee completes the first 12 months of employment (whether or not consecutive) with the taxpayer, then subparagraph (3) of this paragraph shall apply. See paragraph (c) of this section for rules relating to the determination of the first 12 months of employment (whether or not consecutive). See § 1.50A-4 for rules relating to other circumstances under which a termination of employment will not be treated as a termination of employment to which the provisions of subparagraph (3) of this paragraph are applicable.
(ii) Rules for determining whether a termination of employment has occurred. For purposes of this section, the taxpayer is deemed to have terminated the employment of any WIN employee (as defined in paragraph (h) of § 1.50B-1) if the employment relationship (as determined under common law principles) has terminated. A layoff for any reason is considered a termination of employment for purposes of the preceding sentence. However, a temporary suspension of employment of any WIN employee necessitated by the installation of new equipment or by the retooling of existing equipment (such as for a model changeover in the automobile industry) shall not be deemed to be a termination of employment if such suspension is for a period of time no longer than 60 days. For purposes of this section, the death of the taxpayer is considered a termination of the employment relationship between the taxpayer and any WIN employee.
(2) Failure to pay comparable wages—(i) In general. If, at any time during the period described in subparagraph (1)(i) of this paragraph, the taxpayer pays wages (as defined in section 50B(b) and paragraph (b) of § 1.50B-1) to an employee, with respect to whom WIN expenses are taken into account under paragraph (a) of § 1.50A-1, which are less than the wages paid to other employees of the taxpayer who perform comparable services, then subparagraph (3) of this paragraph shall apply.
(ii) Comparable services. (a) For purposes of subdivision (i) of this subparagraph, the term “comparable services” refers to services performed in work positions which require similar education, training, and skills. Comparable services are those associated with other work positions which require similar levels of judgment and responsibility, which make similar physical and mental demands of an employee, and which could easily be performed by the employee without substantial additional training or experience.
(b) If substantial training, skill, or experience are material to the performance of a particular job, a taxpayer may pay wages to a WIN employee which are less than those paid to other employees of the taxpayer who possess such training, skill, or experience. However, there must be a reasonable relationship between the lower wages or salary of such WIN employee and his relative lack of training, skill, or experience.
(3) Recomputation of credit earned. (i) If, by reason of subparagraph (1) or (2) of this paragraph, this subparagraph (3) is applicable, then the credit earned for all credit years (as defined in subdivision (ii)(a) of this subparagraph) shall be recomputed under the principles of paragraph (a) of § 1.50A-1 by not taking into account WIN expenses with respect to the employee (or employees) described in subparagraph (1) or (2) of this paragraph. There shall be recomputed under the principles of §§ 1.50A-1 and 1.50A-2 the credit allowed for all credit years and for any other taxable year affected by reason of the reduction in credit earned for such credit year or years, giving effect to such reduction in the computation of carrybacks or carryovers of unused credit from any taxable year. If the recomputation described in the preceding sentence results, in the aggregate, in a decrease (taking into account any recomputation under this paragraph in respect of prior recapture years, as defined in subdivision (ii)(b) of this subparagraph) in the credits allowed for any credit year and for any other taxable year affected by the reduction in credit earned for any credit year, then the income tax for the recapture year shall be increased by the amount of such decrease in credits allowed. For treatment of such increase in tax, see paragraph (b) of this section. For special rules in the case of an electing small business corporation (as defined in section 1371(b)), an estate or trust, or a partnership, see respectively, § 1.50A-5, § 1.50A-6 or § 1.50A-7.
(ii) For purposes of this section and §§ 1.50A-4 through 1.50B-6—
(a) The term “credit year” means a taxable year in which WIN expenses with respect to the employee described in subparagraph (1) or (2) of this paragraph are taken into account under paragraph (a) of § 1.50A-1.
(b) The term “recapture year” means a taxable year in which a termination of employment (within the meaning of subparagraph (1) of this paragraph) or a failure to pay comparable wages (within the meaning of subparagraph (2) of this paragraph) occurs by reason of which the rule of subparagraph (3) of this paragraph becomes applicable.
(c) The term “recapture determination” means a recomputation made under this paragraph.
(b) Increase in income tax and reduction of WIN credit carryback and carryover—(1) Increase in tax. Except as provided in subparagraph (2) of this paragraph, any increase in income tax under this section shall be treated as income tax imposed on the taxpayer by chapter 1 of the Code for the recapture year notwithstanding that without regard to such increase the taxpayer has no income tax liability, has a net operating loss for such taxable year, or no income tax return was otherwise required for such taxable year.
(2) Special rule. Any increase in income tax under this section shall not be treated as income tax imposed on the taxpayer by chapter 1 of the Code for purposes of determining the amount of the credits allowable to such taxpayer under—
(i) Section 33 (relating to taxes of foreign countries and possessions of the United States),
(ii) Section 35 (relating to partially tax-exempt interest received by individuals),
(iii) Section 37 (relating to retirement income),
(iv) Section 38 (relating to investment in certain depreciable property),
(v) Section 39 (relating to certain uses of gasoline, special fuels, and lubricating oil),
(vi) Section 40 (relating to expenses of work incentive programs), and
(vii) Section 41 (relating to contributions to candidates for public office).
(3) Reduction in credit allowed as a result of a net operating loss carryback. (i) If a net operating loss carryback from the recapture year or from any taxable year subsequent to the recapture year reduces the amount allowed as a credit under section 40 for any taxable year up to and including the recapture year, then there shall be a new recapture determination under paragraph (a) of this section for each recapture year affected, taking into account the reduced amount of credit allowed after application of the net operating loss carryback.
(ii) Subdivision (i) of this subparagraph may be illustrated by the following example:
Example. (a) X Corporation, which makes its returns on the basis of a calendar year, hired WIN employees on March 1, 1972, and incurred $10,000 in WIN expenses with respect to these employees for the year. For the taxable year 1972, X Corporation's credit earned of $2,000 (20 percent of $10,000) was allowed under section 40 as a credit against its liability for tax of $2,000. In 1973 and 1974 X Corporation had no liability for tax and had no WIN expenses. In January 1974, X Corporation terminated the employees for whom the WIN expenses had been incurred. Since these terminations were not subject to the exceptions provided by § 1.50A-4, there was a recapture determination under paragraph (a) of this section. The income tax imposed by chapter 1 of the Code on X Corporation for the taxable year 1974 was increased by the $2,000 decrease in its credit earned for the taxable year 1972 (that is, the $2,000 original credit earned minus zero recomputed credit earned).
(b) For the taxable year 1975, X Corporation has a net operating loss which is carried back to the taxable year 1972 and reduces its liability for tax, as defined in paragraph (c) of § 1.50A-1, for such taxable year to $800. As a result of such net operating loss carryback, X Corporation's credit allowed under section 40 for the taxable year 1972 is limited to $800 and the excess of $1,200 ($2,000 credit earned minus the $800 limitation based on amount of tax) is a WIN credit carryover to the taxable year 1973.
(c) For 1975 there is a recapture determination under subdivision (i) of this subparagraph for the 1974 recapture year. The $2,000 increase in the income tax imposed on X Corporation for the taxable year 1974 is redetermined to be $800 (that is, the $800 credit allowed after taking into account the 1975 net operating loss minus zero credit which would have been allowed taking into account the 1974 recapture determination). In addition, X Corporation's $1,200 WIN credit carryover to the taxable year 1973 is reduced by $1,200 ($2,000 minus $800) to zero and X Corporation is entitled to a $1,200 refund of the $2,000 tax paid as a result of the 1974 recapture determination.
(4) Statement of recomputation. The taxpayer shall attach to his income tax return for the recapture year a separate statement showing in detail the computation of the increase in income tax imposed on such taxpayer by chapter 1 of the Code and the reduction in any WIN credit carryovers.
(c) Period of employment—(1) Initial date of employment. For purposes of this section and §§ 1.50A-4 through 1.50B-6, the initial date of employment (for purposes of applying paragraph (a) (1) and (2) of this section and paragraphs (a)(1) and (f) of § 1.50B-1) is the date the WIN employee reports to the taxpayer (or in the case where the taxpayer is a partner of a partnership, a beneficiary of an estate or trust, or a shareholder of an electing small business corporation, to such partnership, estate, trust, or electing small business corporation) for work.
(2) Computation of the first 12 months of employment (whether or not consecutive). For purposes of computing the first 12 months of employment (whether or not consecutive), the first month of employment shall begin with the initial date of employment (as defined in subparagraph (1) of this paragraph) of the WIN employee, the second month of employment shall begin with the corresponding date in the following month, the third month of employment shall begin with the corresponding date in the next following month, and so forth. If the WIN employee performs any services during any such month (as determined under the preceding sentence), that month shall be counted in computing the WIN employee's “first 12 months of employment (whether or not consecutive)”. If the WIN employee performs no services during any such month, that month shall not be counted in computing the WIN employee's “first 12 months of employment (whether or not consecutive)”. Thus, if the initial date of employment of a WIN employee is June 15, the first month of employment of such employee shall be the period beginning June 15, and ending July 14. The second month of employment is the period beginning July 15 and ending August 14. If during such second month of employment the employee performs no services for the taxpayer, that month is not counted in determining the employee's first 12 months of employment (whether or not consecutive).
[38 FR 6154, Mar. 7, 1973]
§ 1.50A-4 Exceptions to the application of § 1.50A-3.
(a) In general. Notwithstanding the provisions of paragraph (a) of § 1.50A-3, a termination of employment shall not be deemed to occur if paragraph (b) (relating to voluntary termination of employment), paragraph (c) (relating to termination of employment due to disability), paragraph (d) (relating to termination of employment due to misconduct), paragraph (f) (relating to transactions to which section 381(a) applies), or paragraph (g) (relating to mere change in form of conducting a trade or business) applies.
(b) Voluntary termination of employment. A termination of employment shall not be deemed to occur for purposes of paragraph (a) of § 1.50A-3 if the employee voluntarily leaves the employment of the taxpayer. If the taxpayer makes the working conditions of the employee so untenable that the employee is, in effect, compelled by the taxpayer to quit, or if the employee is coerced into quitting, the employee will not be deemed to have voluntarily left the employment of the taxpayer. For purposes of the preceding sentence, a substantial reduction in the benefits of employment of an employee (such as a substantial decrease in the hours of the employee's working week) shall constitute untenable working conditions. An employee has voluntarily left the employment of the taxpayer if he leaves for any reason external to his employment, such as sickness or death in the employee's family which the employee feels necessitates his quitting work with the taxpayer to remain at home. Any employee who participates in an authorized strike (as finally determined by a court, labor relations administrative body, or arbiter) will not be deemed to have voluntarily left the employment of the taxpayer.
(c) Termination of employment due to death or disability. A termination of employment shall not be deemed to occur for purposes of paragraph (a) of § 1.50A-3 if, after the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) and before the close of the period referred to in paragraph (a)(1) of § 1.50A-3, the employee becomes disabled, by reason of illness or injury (including a disability relating to the employment), to perform the services required by such employment, unless, before the close of such period:
(1) Such disability is removed,
(2) The employer knows of the removal of the disability, and
(3) The employer fails to offer reemployment to such employee.
The death of an employee shall not be deemed a termination of employment for purposes of paragraph (a) of § 1.50A-3.
(d) Termination of employment due to misconduct. A termination of employment shall not be deemed to occur for purposes of paragraph (a) of § 1.50A-3 if it is determined by the appropriate State administrative agency or State court that under the applicable State unemployment compensation law such termination was due to the misconduct of the WIN employee. If the WIN employee is not covered by the applicable State unemployment compensation law (or if the employee did not work for the minimum period required to qualify for unemployment compensation or if the employee did not apply for unemployment compensation), a termination of employment shall not be deemed to occur for purposes of paragraph (a) of § 1.50A-3 if the taxpayer demonstrates by convincing evidence that, were such employee covered by the applicable State unemployment compensation law (or if the employee had worked for such minimum period or if the employee had applied for unemployment compensation), he could reasonably have been found by such administrative agency or court to have been terminated for misconduct.
(e) Recordkeeping requirement. A taxpayer who is claiming that a termination of employment falls within the provisions of paragraph (b), (c), or (d) of this section shall maintain sufficient records to support his claim until the expiration of the pertinent period of limitations.
(f) Transactions to which section 381(a) applies—(1) General rule. The employment relationship between the taxpayer and a WIN employee (as defined in paragraph (h) of § 1.50B-1) shall not be deemed terminated for purposes of paragraph (a) of § 1.50A-3 in the case of a transaction to which section 381(a) (relating to carryovers in certain corporate acquisitions) applies. If there is a termination of employment (within the meaning of paragraph (a) of § 1.50A-3 and this section) by the acquiring corporation with respect to the WIN employee described in the preceding sentence, or if the acquiring corporation fails to pay comparable wages to such employee (within the meaning of paragraph (a)(2) of § 1.50A-3), then paragraph (a)(3) of § 1.50A-3 shall apply to the acquiring corporation with respect to the credit allowed the acquired corporation as well as the credit allowed the acquiring corporation with respect to such employee. For purposes of the preceding sentence, the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) of such employee with respect to the acquired corporation shall be deemed to be the initial date of employment of such employee with respect to the acquiring corporation and employment by the acquired corporation shall be deemed employment by the acquiring corporation.
(2) Examples. This paragraph may be illustrated by the following examples:
Example 1. (i) X Corporation, a wholly owned subsidiary of Y Corporation, incurred WIN expenses of $12,000 for its taxable year ending December 31, 1972, with respect to WIN employees hired on March 1, 1972. Both X and Y made their returns on the basis of a calendar year. For the taxable year 1972 X Corporation's credit earned of $2,400 (20 percent of $12,000) was allowed under section 40 as a credit against its liability for tax. On December 15, 1973, X Corporation is liquidated under section 332 and all of its assets and liabilities are transferred to Y Corporation in a transaction to which section 334(b)(2) is not applicable. In addition, Y Corporation continues the employment of the WIN employees which were employed by X Corporation and with respect to which X Corporation was allowed the credit for its taxable year 1972.
(ii) Under subparagraph (1) of this paragraph, a termination of employment of the WIN employees shall not be deemed to occur for purposes of paragraph (a)(1) of § 1.50A-3 due to the liquidation of X Corporation on December 15, 1973. Thus, no recapture determination under paragraph (a)(3) of § 1.50A-3 shall be made with respect to X Corporation.
Example 2. (i) The facts are the same as in Example 1 and, in addition, on February 2, 1974, Y Corporation terminates the employment of the employees with respect to whom X Corporation had incurred WIN expenses. The termination is a termination for purposes of paragraph (a)(1) of § 1.50A-3. For purposes of applying the period described in paragraph (a)(1) of § 1.50A-3, the date the employees reported for work at X Corporation is deemed to be the initial date of employment of the employees with respect to Y Corporation.
(ii) Under subparagraph (1) of this paragraph, a termination of employment of the WIN employees shall not be deemed to occur for purposes of paragraph (a)(1) of § 1.50A-3 due to the liquidation of X Corporation on December 15, 1973. However, a termination of employment of the WIN employees is deemed to occur for purposes of paragraph (a)(1) of § 1.50A-3 on February 2, 1974. Thus, Y Corporation shall make a recapture determination under paragraph (a) of § 1.50A-3 with respect to the credit allowed X Corporation with respect to the WIN employees.
(g) Mere change in form of conducting a trade or business—(1) General rule. (i) The employment relationship between the taxpayer and a WIN employee (as defined in paragraph (h) of § 1.50B-1) shall not be deemed terminated for purposes of paragraph (a) of § 1.50A-3 in the case of a mere change in the form of conducting the trade or business in which such employment occurs, provided that the conditions set forth in subdivision (ii) of this subparagraph are satisfied.
(ii) The conditions referred to in subdivision (i) of this subparagraph are as follows:
(a) The WIN employee described in subdivision (i) of this subparagraph is retained in the same trade or business,
(b) The taxpayer retains a substantial ownership interest in such trade or business,
(c) Substantially all the assets necessary to operate such trade or business are transferred to the transferee who continues the employment of the WIN employee described in subdivision (i) of this subparagraph, and
(d) The basis of the assets described in (c) of this subdivision in the hands of the transferee is determined in whole or in part by reference to the basis of such assets in the hands of the transferor.
This subparagraph shall not apply if paragraph (e) of this section (relating to transactions to which section 381(a) applies) is applicable with respect to such transfer.
(2) Substantial interest. For purposes of this paragraph, the taxpayer shall be considered as having retained a substantial ownership interest in the trade or business only if, after the change in form, the ownership interest in such trade or business by such taxpayer—
(i) Is substantial in relation to the total ownership interests of all persons, or
(ii) Is equal to or greater than the ownership interest prior to the change in form.
Thus, where a taxpayer owns a 5-percent interest in a partnership, and, after the incorporation of that partnership, the taxpayer retains at least a 5-percent interest in the corporation, the taxpayer will be considered as having retained a substantial interest in the trade or business as of the date of the change in form because of the application of the rule contained in subdivision (ii) of this subparagraph.
(3) Termination of employment. (i) If employment of a WIN employee described in subparagraph (1)(i) of this paragraph is terminated by the transferee, the employment of such employee shall be deemed terminated by the taxpayer for purposes of paragraph (a) of § 1.50A-3. For purposes of determining the period described in paragraph (a)(1) of § 1.50A-3 with respect to such taxpayer employment by the transferee shall be deemed employment by the transferor.
(ii) If in any taxable year the taxpayer does not retain a substantial ownership interest in the trade or business directly or indirectly (through ownership in other entities provided that such other entities' bases in such interest are determined in whole or in part by reference to the basis of such interest in the hands of the taxpayer) then, for purposes of paragraph (a)(1) of § 1.50A-3, there shall be deemed to be a termination of employment of the WIN employees described in subparagraph (1)(i) of this paragraph on the first date on which such taxpayer does not retain a substantial interest in the trade or business. For purposes of determining the period described in paragraph (a)(1) of § 1.50A-3, employment by the transferee shall be deemed employment by the transferor. Any taxpayer who seeks to establish his interest in a trade or business under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in such trade or business after any such transfer or transfers.
(iii) Notwithstanding subparagraph (1) of this paragraph and subdivision (ii) of this subparagraph in the case of a mere change in the form of a trade or business, if the interest of a taxpayer in the trade or business is reduced but such taxpayer has retained a substantial interest in such trade or business, paragraph (a)(2) of § 1.50A-5 (relating to electing small business corporations), paragraph (a)(2) of § 1.50A-6 (relating to estates or trusts), or paragraph (a)(2)(ii) of § 1.50A-7 (relating to partnerships) shall apply, as the case may be.
(4) Failure to pay comparable wages. If the transferee fails to pay comparable wages (within the meaning of paragraph (a)(2) of § 1.50A-3) to the WIN employee within the period described in paragraph (a)(1) of § 1.50A-3, then such failure shall be deemed to be a failure of the transferor (or in a case where the transferor is a partnership, estate, trust, or electing small business corporation, the partners, beneficiaries, or shareholders), and a recapture determination shall be made with respect to such WIN employee as provided in § 1.50A-3. For purposes of determining the period described in paragraph (a)(1) of § 1.50A-3 with respect to such transferor (or such partners, beneficiaries, or shareholders), employment by the transferee shall be deemed employment by such transferor. For special rules in the case of an electing small business corporation (as defined in section 1371(b)), an estate or trust, or a partnership, see respectively, § 1.50A-5, § 1.50A-6, or § 1.50A-7.
(5) Examples. This paragraph may be illustrated by the following examples in each of which it is assumed that the transfer satisfies the conditions of subparagraphs (1)(ii) (a), (c) and (d) of this paragraph.
Example 1. (i) On January 1, 1972, A, an individual, employed WIN employees in his sole proprietorship. A incurred WIN expenses with respect to these employees of $12,000 for the taxable year ending December 31, 1972. For the taxable year 1972 A's credit earned of $2,400 (20 percent of $12,000) was allowed under section 40 as a credit against his liability for tax. On March 15, 1973, A transferred all of the assets used in his sole proprietorship to X Corporation, a newly formed corporation, in exchange for 45 percent of the stock of X Corporation.
(i) Under subparagraph (1)(i) of this paragraph, paragraph (a) of § 1.50A-3 does not apply to the March 15, 1973, transfer to X Corporation.
Example 2. (i) The facts are the same as in Example 1 and in addition on June 1, 1973, X Corporation terminates the employment of WIN employees with respect to whom 50 percent of the WIN expenses were incurred during A's 1972 taxable year.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a) of § 1.50A-3 does not apply to the March 15, 1973, transfer to X Corporation. However, under subparagraph (3)(i) of this paragraph, paragraph (a) of § 1.50A-3 applies to the June 1, 1973, termination of WIN employees by X Corporation. The actual period of employment of such WIN employees is 1 year and 5 months (that is, the period beginning on January 1, 1972, and ending on June 1, 1973). For taxable year 1972, A's recomputed credit earned is $1,200 (20 percent of $6,000). The income tax imposed by chapter 1 of the Code on A for the taxable year 1973 is increased by the $1,200 decrease in his credit earned for the taxable year 1972 (that is, $2,400 original credit earned minus $1,200 recomputed credit earned).
Example 3. (i) The facts are the same as in Example 1 and in addition on April 1, 1973, X Corporation begins paying wages to the employees referred to in Example 1 which are less than the wages paid to its other employees who perform comparable services.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) of § 1.50A-3 does not apply to the March 15, 1973, transfer to X Corporation. However, under subparagraph (4) of this paragraph, paragraph (a) of § 1.50A-3 applies to the failure of X Corporation to pay wages to the WIN employees which are equal to the wages paid to its other employees who perform comparable services. For taxable year 1972, A's recomputed credit earned is zero. The income tax imposed by chapter 1 of the Code on A for the taxable year 1973 is increased by the $2,400 decrease in his credit earned for the taxable year 1972.
Example 4. (i) On January 1, 1972, partnership ABC, which makes its returns on the basis of a calendar year, employed WIN employees. Partnership ABC incurred WIN expenses with respect to these employees of $20,000 for the taxable year. Partnership ABC has 10 partners who make their returns on the basis of a calendar year and share partnership profits equally. Each partner's share of the WIN expenses is 10 percent, that is, $2,000. On March 15, 1973, partnership ABC transfers all of the assets used in its trade or business to the X Corporation, a newly formed corporation, in exchange for its stock and immediately thereafter transfers 10 percent of the stock to each of the 10 partners.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) of § 1.50A-1 does not apply to the March 15, 1973, transfer by the ABC Partnership to X Corporation.
Example 5. (i) The facts are the same as in Example 4 except that partnership ABC transfers 10 percent of the stock in X Corporation to each of eight partners, 20 percent to partner A, and cash to partner B.
(ii) Under subparagraph (1)(i) of this paragraph, with respect to all of the partners (including partner A) except partner B, paragraph (a)(1) of § 1.50A-3 does not apply to the March 15, 1973, transfer by the ABC Partnership. Paragraph (a)(1) of § 1.50A-3 applies with respect to partner B's $2,000 share of the WIN expenses. See paragraph (a)(2) of § 1.50A-7.
Example 6. (i) X Corporation operates a manufacturing business and a separate retail sales business. During the month of January 1972, X incurred WIN expenses in its manufacturing business. On February 10, 1973, X transfers all the assets used in its manufacturing business to Partnership XY in exchange for a 50 percent interest in such partnership.
(ii) Under subparagraph (1)(i) of this paragraph, paragraph (a)(1) of § 1.50A-3 does not apply to the February 10, 1973, transfer to Partnership XY.
[T.D. 7263, 38 FR 6156, Mar. 7, 1973; 38 FR 8656, Apr. 5, 1973]
§ 1.50A-5 Electing small business corporations.
(a) In general—(1) Termination of employment by a corporation. If an electing small business corporation (as defined in section 1371(b)) or a former electing small business corporation terminates (in a termination subject to the provisions of paragraph (a) of § 1.50A-3) the employment of any WIN employee with respect to whom WIN expenses have been paid or incurred, a recapture determination shall be made under § 1.50A-3 with respect to each shareholder who is treated, under paragraph (a) of § 1.50B-2 as a taxpayer who paid or incurred such expenses. Each such recapture determination shall be made with respect to the pro rata share of the WIN expenses of such employee which were taken into account by such shareholder under paragraph (a) of § 1.50B-2. For purposes of each such recapture determination the period of employment of such employee or employees shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the electing small business corporation and ending with the date of such employee's termination (as defined in paragraph (a)(1)(ii) of § 1.50A-3). For the definition of the term “recapture determination” see paragraph (a)(3) of § 1.50A-3.
(2) Disposition of shareholder's interest. (i) If—
(a) WIN expenses are apportioned to a shareholder of an electing small business corporation who takes such expenses into account in computing his WIN expenses, and
(b) After the end of the shareholder's taxable year in which such apportionment was taken into account and before the close of the period to which paragraph (a)(1) of § 1.50A-3 applies with respect to the employee to which such WIN expenses relate, such shareholder's proportionate stock interest in such corporation is reduced (for example, by a sale or redemption, or by the issuance of additional shares) below the percentage specified in subdivision (ii) of this subparagraph,
then, on the date of such reduction the employment of such employee shall be deemed terminated with respect to such shareholder to the extent of the actual reduction in such shareholder's proportionate stock interest. (For example, if $100 of WIN expenses were apportioned to a shareholder and if his proportionate stock interest is reduced from 60 percent to 30 percent (that is, 50 percent of his original interest), then the employment of the employee to which such WIN expenses relate shall be deemed terminated as to that shareholder to the extent of $50.) Accordingly, a recapture determination shall be made with respect to such shareholder. For purposes of such recapture determination the period of employment of any employee or employees with respect to whom WIN expenses were paid or incurred shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the electing small business corporation and ending with the date on which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the shareholder's proportionate stock interest in the corporation on the date of the apportionment under paragraph (a) of § 1.50B-2. However, once employment of an employee has been treated under this subparagraph as having terminated with respect to the shareholder to any extent, the percentage referred to shall be 33 1/3 percent of the shareholder's proportionate stock interest in the corporation on the date of apportionment under paragraph (a) of § 1.50B-2.
(iii) In determining a shareholder's proportionate stock interest in a former electing small business corporation for purposes of this subparagraph, the shareholder shall be considered to own stock in such corporation which he owns directly or indirectly (through ownership in other entities provided such other entities' bases in such stock are determined in whole or in part by reference to the basis of such stock in the hands of the shareholder). For example, if A, who owns all of the 100 shares of the outstanding stock of corporation X, a corporation which was formerly an electing small business corporation, transfers on November 1, 1973, 70 shares of X stock to corporation Y in exchange for 90 percent of the stock of Y in a transaction to which section 351 applies, then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own 93 percent of the stock of X, 30 percent directly and 63 percent indirectly (i.e., 90 percent of 70). Any taxpayer who seeks to establish his interest in the stock of a former electing small business corporation under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the corporation after any such transfer or transfers.
(3) Computation of the first 12 months of employment. The period described in paragraph (a)(1) of § 1.50A-3 shall not be affected by a change in the shareholders in such corporation and shall not be affected by a reduction in any shareholder's proportionate stock interest in such corporation (for example, by a sale or redemption or by the issuance of additional shares). Thus, the first 12 months of employment (whether or not consecutive) of any WIN employee shall be the same with respect to any shareholder who is allowed a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee. Also, such first 12 months of employment and the period described in section 50B(c)(4) with respect to any WIN employee shall not be deemed to begin again in the case of a corporation making a valid election under section 1372.
(b) Election of a small business corporation under section 1372—(1) General rule. If a corporation makes a valid election under section 1372 to be an electing small business corporation (as defined in section 1371(b)), then on the last day of the first taxable year immediately preceding the taxable year for which such election is effective, the employment of any WIN employees whose initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) occurred in taxable years prior to the first taxable year for which the election is effective (and whose employment has not been terminated prior to such last day) shall be considered as having been terminated on such last day with respect to the WIN expenses paid or incurred by such corporation and § 1.50A-3 shall apply to such corporation. However, if the corporation and each of the persons who are shareholders of the corporation on the first day of the first taxable year for which the election under section 1372 is to be effective, or on the date of such election, whichever is later, execute the agreement specified in subparagraph (2) of this paragraph, § 1.50A-3 shall not apply with respect to any such WIN expenses by reason of the election by the corporation under section 1372.
(2) Agreement of shareholders and corporation. (i) The agreement referred to in subparagraph (1) of this paragraph shall be signed by the shareholders and by the corporation. The agreement shall recite that:
(a) In the event the employment of any WIN employee described in subparagraph (1) of this paragraph is later terminated (in a termination subject to the rules contained in paragraph (a) of § 1.50A-3) during a taxable year of the corporation for which the election under section 1372 is effective, each signer agrees to notify the district director or the director of the Internal Revenue service center of such termination, and agrees to be jointly and severally liable to pay to the district director or the director of the Internal Revenue service center an amount equal to the increase in tax which would have been imposed by § 1.50A-3 on the corporation but for the agreement under this paragraph.
(b) In the event any WIN employee described in subparagraph (1) of this paragraph is paid wages (as defined in section 50B(b) and paragraph (b) of § 1.50B-1) by such electing corporation, which are less than the wages paid to other employees of such electing corporation who perform comparable services (as defined in paragraph (a)(2)(ii) of § 1.50A-3), during a taxable year of the corporation for which the election under section 1372 is effective, each signer agrees to notify the district director or the director of the Internal Revenue service center of such failure to pay equal wages for comparable services, and agrees to be jointly and severally liable to pay to the district director or the director of the Internal Revenue service center an amount equal to the increase in tax which would have been imposed by § 1.50A-3 on the corporation as a result of such failure but for the election under section 1372.
For purposes of computing the period described in paragraph (a)(1) of § 1.50A-3, the period of employment by the corporation before the election under section 1372 shall be added to the period of employment by the electing small business corporation after such election.
(ii) The agreement shall set forth the name, address, and taxpayer account number of each party and the internal revenue district or service center in which each such party files his or its income tax return for the taxable year which includes the last day of the corporation's taxable year immediately preceding the first taxable year for which the election under section 1372 is effective. The agreement may be signed on behalf of the corporation by any person who is duly authorized. The agreement shall be filed with the district director or the director of the Internal Revenue service center with whom the corporation files its income tax return for its taxable year immediately preceding the first taxable year for which the election under section 1372 is effective and shall be filed on or before the due date (including extensions of time) of such return. For purposes of the preceding sentence, the district director or the director of the Internal Revenue service center may, if good cause is shown, permit the agreement to be filed on a later date.
(c) Examples. This section may be illustrated by the following examples:
Example 1. (i) X Corporation, an electing small business corporation which makes its returns on the basis of the calendar year, hired employees under a WIN program on July 1, 1972, and incurred expenses for such employees during the following 12 months at an initial rate of $10,000 per month. For taxable year 1972, X Corporation had 20 shares of stock outstanding which were owned equally by A and B who make their returns on the basis of a calendar year. Under paragraph (a) of this section, the WIN expenses were apportioned to the shareholders of X Corporation as follows:
Period ending Dec. 31, 1973
Total WIN expenses for the taxable year | $60,000
Shareholder A (10/20) | 30,000
Shareholder B (10/20) | 30,000
Assuming that during 1972 shareholders A and B did not directly incur any WIN expenses and that they did not own any interest in other electing small business corporations, partnerships, estates, or trusts incurring WIN expenses, the WIN expenses attributable to each shareholder is $30,000. For the taxable year 1972, each shareholder's credit earned of $6,000 (20 percent of $30,000) was allowed under section 40 as a credit against his liability for tax. (ii) On January 1, 1973, X Corporation terminates the employment of the employees accounting for 50 percent of its WIN expenses incurred to that date, or $30,000 in salaries and wages. The actual period of employment for these WIN employees was 6 months. For taxable year 1972, each shareholder's recomputed credit is $3,000 (20 percent of $15,000). The income tax imposed by chapter 1 of the Code on each of the shareholders for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of example 1, except that on January 1, 1973, shareholder A sells five of his 10 shares of stock in X Corporation to C. No other changes in stock ownership occurred during 1973. Under paragraph (a)(2) of this section, the WIN expenses of X Corporation were apportioned on December 31, 1973, to the shareholders of X Corporation as follows:
Period ending Dec. 31, 1972
Total WIN expenses for the taxable year | $60,000
Shareholder A (5/20) | 15,000
Shareholder B (10/20) | 30,000
Shareholder C (5/20) | 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the employment of these WIN employees shall be deemed terminated by shareholder A with respect to 50 percent of the WIN expenses allocated to him since immediately after the January 1, 1973, sale A's proportionate stock interest in X Corporation is reduced to 50 percent of the proportionate stock interest in X Corporation which he held for taxable year 1972. The actual period of employment of the WIN employees accounting for the 50 percent of the WIN expenses originally allocated to A is 6 months (that is, the period beginning with July 1, 1972, and ending with January 1, 1973). The income tax imposed by chapter 1 of the Code on shareholder A for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
(d) Termination or revocation of an election under section 1372. The employment of employees with respect to whom WIN expenses were paid or incurred shall not be considered to have been terminated solely by reason of a termination or revocation of a corporation's election under section 1372.
[38 FR 6158, Mar. 7, 1973]
§ 1.50A-6 Estates and trusts.
(a) In general—(1) Termination of employment by an estate or trust. If an estate or trust terminates (in a termination subject to the provisions of paragraph (a) of § 1.50A-3) the employment of any employee with respect to whom WIN expenses have been paid or incurred, a recapture determination shall be made under § 1.50A-3 with respect to the estate or trust, and each beneficiary who is treated, under paragraph (a) of § 1.50B-3 as a taxpayer who paid or incurred such expenses. For purposes of each such recapture determination the period of employment of such employees shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the estate or trust and ending with the date of such employee or employees' termination (as defined in paragraph (a)(1)(ii) of § 1.50A-3). For definition of “recapture determination” see paragraph (a)(3) of § 1.50A-3.
(2) Disposition of interest. (i) If—
(a) WIN expenses are apportioned to an estate or trust, or to a beneficiary of an estate or trust who takes such expenses into account in computing his WIN expenses, and
(b) After the end of the estate's, trust's, or beneficiary's taxable year in which such apportionment was taken into account and before the close of the period to which paragraph (a)(1) of § 1.50A-3 applies with respect to the employees to which such WIN expenses relate, such estate's, trust's, or such beneficiary's proportionate interest in the income of the estate or trust is reduced (for example, by a sale, or by the terms of the estate or trust instrument) below the percentage specified in subdivision (ii) of this subparagraph,
then, on the date of such reduction, the employment of such employee shall be deemed terminated with respect to such estate, trust, or beneficiary to the extent of the actual reduction in such estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust. (For example, if $100 of WIN expenses were apportioned to a beneficiary and if his proportionate interest in the income of the estate or trust is reduced from 60 percent to 30 percent (that is, 50 percent of his original interest), then the employment of the employee to which such WIN expenses relates shall be deemed terminated as to that beneficiary to the extent of $50.) Accordingly, a recapture determination shall be made with respect to such estate, trust, or beneficiary. For purposes of such recapture determination the period of employment of any employee or employees with respect to whom WIN expenses were paid or incurred shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the estate or trust and ending with the date on which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust for the taxable year of the apportionment under paragraph (a) of § 1.50B-3. However, once employment of an employee has been treated under this subparagraph as having terminated with respect to the estate, trust, or beneficiary to any extent, the percentage referred to shall be 33 1/3 percent of the estate's, trust's, or beneficiary's proportionate interest in the income of the estate or trust for the taxable year of the apportionment under paragraph (a) of § 1.50B-3.
(iii) In determining a beneficiary's proportionate interest in the income of an estate or trust for purposes of this subparagraph, the beneficiary shall be considered to own any interest in such an estate or trust which he owns directly or indirectly (through ownership in other entities provided such other entities' bases in such interests are determined in whole or in part by reference to the basis of such interest in the hands of the beneficiary). For example, if A, whose proportionate interest in the income of trust X is 30 percent, transfers all of such interest to corporation Y in exchange for all of the stock of Y in a transaction to which section 351 applies, then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own a 30-percent interest in trust X. Any taxpayer who seeks to establish his interest in an estate or trust under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the estate or trust after any such transfer or transfers.
(b) Computation of the first 12 months of employment. The period described in paragraph (a)(1) of § 1.50A-3 shall not be affected by a change in the beneficiaries of an estate or trust and shall not be affected by a reduction or a termination of a beneficiary's interest in the income of such estate or trust. Thus, the period described in paragraph (a)(1) of § 1.50A-3 for any WIN employee shall be the same with respect to a trust or estate and any beneficiary of such trust or estate which is allowed a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee. Also, such period with respect to any WIN employee shall not be deemed to begin again as the result of the acquisition of the interest by another.
(c) Examples. Paragraph (a) of this section may be illustrated by the following examples:
Example 1. (i) XYZ Trust, which makes its returns on the basis of the calendar year, hired employees under the WIN program on July 1, 1972, and incurred expenses for such employees during the following 12 months at an initial rate of $10,000 per month. For the taxable year 1972 the income of XYZ Trust is $60,000, which is allocated equally to XYZ Trust and beneficiary A. Beneficiary A makes his returns on the basis of a calendar year. Under paragraph (a) of this section, the WIN expenses were apportioned to XYZ Trust and to beneficiary A as follows:
Period ending Dec. 31, 1972
Total WIN expenses for the taxable year | $60,000
XYZ Trust ($30,000/$60,000) | 30,000
Beneficiary A ($30,000/$60,000) | 30,000
Assuming that during 1972 beneficiary A did not directly incur any WIN expenses and that he did not own any interest in other estates, trusts, electing small business corporations, or partnerships incurring WIN expenses, the WIN expenses incurred by XYZ Trust and by beneficiary A are $30,000 each. For the taxable year 1972, XYZ Trust and beneficiary A each had a credit earned of $6,000. Each credit earned was allowed under section 40 as a credit against the liability for tax. (ii) On January 1, 1973, XYZ Trust terminates the employment of its employees accounting for 50 percent of its WIN expenses incurred to that date, or $30,000 in salaries and wages. The actual period of employment for these WIN employees was 6 months. For the taxable year 1972, XYZ Trust's and beneficiary A's recomputed credit is $3,000 (20 percent of $15,000). The income tax imposed by chapter 1 of the Code on XYZ Trust and on beneficiary A for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of example 1, except that on January 1, 1973, beneficiary A sells 50 percent of his interest in the income of XYZ Trust to B. No other changes in income interest occurred during 1973. Under paragraph (a)(2) of § 1.50B-4, each beneficiary's share and the trust's share of the WIN expenses are apportioned as follows:
Period ending Dec. 31, 1972
Total WIN expenses for the taxable year | $60,000
XYZ Trust ($30,000/$60,000) | 30,000
Beneficiary A ($15,000/$60,000) | 15,000
Beneficiary B ($15,000/$60,000) | 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the employment of these WIN employees shall be deemed terminated by beneficiary A with respect to 50 percent of the WIN expenses allocated to him since immediately after the January 1, 1973, sale A's proportionate interest in the income of XYZ Trust is reduced to 50 percent of his proportionate interest in the income of XYZ Trust for the taxable year 1972. The period of employment of the WIN employees accounting for the 50 percent of the WIN expense originally allocated to A is 6 months (that is, the period beginning with July 1, 1972, and ending with December 31, 1972). For the taxable year 1972 beneficiary A's recomputed credit earned is $3,000 (20 percent of $15,000). The income tax imposed by chapter 1 of the Code on beneficiary A for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
[38 FR 6159, Mar. 7, 1973]
§ 1.50A-7 Partnerships.
(a) In general—(1) Termination of employment by a partnership. If a partnership terminates (in a termination subject to the provisions of paragraph (a) of § 1.50A-3) the employment of any WIN employee with respect to whom WIN expenses have been paid or incurred, a recapture determination shall be made under § 1.50A-3 with respect to each partner who is treated, under paragraph (a) of § 1.50B-4, as a taxpayer with respect to such expenses. Each such recapture determination shall be made with respect to the share of the WIN expenses with respect to such employee which were taken into account by such partner under paragraph (a) of § 1.50B-4. For purposes of each such recapture determination the period of employment of any such employee shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the partnership and ending with the date of such employee's termination (as defined in paragraph (a)(1)(ii) of § 1.50A-3). For the definition of “recapture determination” see paragraph (a)(3) of § 1.50A-3.
(2) Disposition of partner's interest. (i) If—
(a) WIN expenses are allocated to a partner of a partnership who takes such expenses into account in computing his WIN expenses, and
(b) After the end of the partner's taxable year in which such allocation was taken into account and before the close of the period to which paragraph (a)(1) of § 1.50A-3 applies with respect to the employee to which such WIN expenses relate, such partner's proportionate interest in the general profits of the partnership (or in the particular expenses) is reduced (for example, by a sale, by a change in the partnership agreement, or by the admission of a new partner) below the percentage specified in subdivision (ii) of this subparagraph,
then, on the date of such reduction the employment of such employee shall be deemed terminated with respect to such partner to the extent of the actual reduction in such partner's proportionate interest in the general profits (or in the particular expenses) of the partnership. (For example, if $100 of WIN expenses were taken into account by a partner and if his proportionate interest in the general profits of the partnership is reduced from 60 percent to 30 percent (that is, 50 percent of his original interest), then the employment of the employee to which such WIN expenses relate shall be deemed terminated as to that partner to the extent of $50.) Accordingly, a recapture determination shall be made with respect to such partner. For purposes of such recapture determination the period of employment of any employee or employees with respect to whom WIN expenses were paid or incurred shall be the period beginning with the initial date of employment (as defined in paragraph (c)(1) of § 1.50A-3) with respect to the partnership and ending with the date on which such reduction occurs.
(ii) The percentage referred to in subdivision (i)(b) of this subparagraph is 66 2/3 percent of the partner's proportionate interest in the general profits (or in the WIN expenses) of the partnership for the year of the apportionment under § 1.50B-4(a). However, once employment of an employee has been treated under this subparagraph as having terminated with respect to the partner to any extent, the percentage referred to shall be 33 1/3 percent of the partner's proportionate interest in the general profits (or in the WIN expenses) of the partnership for the taxable year of the apportionment under paragraph (a) of § 1.50B-4.
(iii) In determining a partner's proportionate interest in the general profits (or in the WIN expenses) of a partnership for purposes of this subparagraph, the partner shall be considered to own any interest in such a partnership which he owns directly or indirectly (through ownership in other entities provided the other entities' bases in such interests are determined in whole or in part by reference to the basis of such interest in the hands of the partner). For example, if A, whose proportionate interest in the general profits of partnership X is 20 percent, transfers all of such interest to Corporation Y in exchange for all of the stock of Y in a transaction to which section 351 applies then, for purposes of subdivision (i) of this subparagraph, A shall be considered to own a 20 percent interest in partnership X. Any taxpayer who seeks to establish his interest in a partnership under the rule of this subdivision shall maintain adequate records to demonstrate his indirect interest in the partnership after any such transfer or transfers.
(3) Computation of the first 12 months of employment. The period described in paragraph (a)(1) of § 1.50A-3 shall not be affected by a change in the partners of such partnership and shall not be affected by a change in the ratio in which the partners divide the general profits (or the WIN expenses) of the partnership. Thus, such period for any WIN employee shall be the same with respect to any partner claiming a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee.
(b) Examples. Paragraph (a) of this section may be illustrated by the following examples:
Example 1. (i) AB partnership, which makes its returns on the basis of the calendar year, hired employees under the WIN program on July 1, 1972, and incurred expenses for such employees during the following 12 months at an initial rate of $10,000 per month. Partners A and B, who make their returns on the basis of a calendar year, share the profits and losses of AB partnership equally. Under paragraph (a)(2) of this section, each partner's share of the WIN expenses was approportioned as follows:
Period ending Dec. 31, 1972
Total WIN expenses for the taxable year | $60,000
Partner A's share (50 percent) | 30,000
Partner B's share (50 percent) | 30,000
Assuming that during 1972 A and B did not directly incur any WIN expenses and that they did not own any interest in other partnerships, electing small business corporations, estates, or trusts incurring WIN expenses, each partner's share of the WIN expenses is $30,000. For the taxable year 1972, each partner's credit earned of $6,000 (20 percent of $30,000) was allowed under section 40 as a credit against his liability for tax. (ii) On January 1, 1973, AB partnership terminates the employment of its employees accounting for 50 percent of its WIN expenses incurred to that date, or $30,000 in salaries and wages. The actual period of employment for these WIN employees was 6 months. For the taxable year 1972, each partner's recomputed credit earned is $3,000 (20 percent of $15,000). The income tax imposed by chapter 1 of the Code on each of the partners for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
Example 2. (i) The facts are the same as in subdivision (i) of example 1, except that on January 1, 1973, partner A sells one-half of his 50 percent interest in AB partnership to C, to form the ABC partnership. No other changes in the partners' proportionate interest in the general profits of the partnership occurred during 1973. Under paragraph (a)(2) of this section, each partner's share of the WIN expenses was apportioned on December 31, 1973, as follows:
Period ending Dec. 31, 1973
Total WIN expenses for the taxable year | $60,000
Partner A's share (25 percent) | 15,000
Partner B's share (50 percent) | 30,000
Partner C's share (25 percent) | 15,000
(ii) Under paragraph (a)(2) of this section, on January 1, 1973, the employment of these WIN employees shall be deemed terminated by partner A with respect to 50 percent of the WIN expenses allocated to him since immediately after the January 1, 1973, sale, A's proportionate interest in the general profits of ABC partnership is reduced to 50 percent of his proportionate interest in the general profits of AB partnership for 1972. The period of employment of the WIN employees accounting for the 50 percent of the WIN expenses originally allocated to A is 6 months (that is, the period beginning with July 1, 1972, and ending with December 31, 1972). For the taxable year 1972 partner A's recomputed credit earned is $3,000 (20 percent of $15,000). The income tax imposed by chapter 1 of the Code on partner A for the taxable year 1973 is increased by the $3,000 decrease in his credit earned for the taxable year 1972 (that is, $6,000 original credit earned minus $3,000 recomputed credit earned).
[38 FR 6160, Mar. 7, 1973]
§ 1.50B-1 Definitions of WIN expenses and WIN employees.
(a) WIN expenses—(1) In general. Except as otherwise provided in paragraphs (b) through (g) of this section, for purposes of §§ 1.50A-1 through 1.50B-5, the term “work incentive program expenses” (referred to in §§ 1.50A-1 through 1.50B-5 as “WIN expenses”) means the salaries and wages paid or incurred by the taxpayer for services rendered during the first 12 months of employment (whether or not consecutive) by an employee who is certified by the Secretary of Labor as—
(i) Having been placed in employment by the taxpayer (or if the taxpayer is a partner of a partnership, beneficiary of an estate or trust, or a shareholder of an electing small business corporation, by such partnership, estate, trust, or electing small business corporation) under a work incentive (WIN) program established under section 432(b)(1) of the Social Security Act (42 U.S.C. 632(b)(1)), and
(ii) Not having displaced any individual from employment.
The term “WIN expenses” includes only salaries and wages paid or incurred in taxable years beginning after December 31, 1971. See paragraph (c) of § 1.50A-3 for rules relating to the determination of the first 12 months of employment (whether or not consecutive).
(2) Examples. The provisions of subparagraph (1) of this paragraph may be illustrated by the following examples:
Example 1.X Corporation, an accrual basis taxpayer which files its return on the basis of the calendar year, hired an employee on July 1, 1971, who was certified by the Secretary of Labor under this paragraph. The first 12 months of employment were continuous. X is entitled to the credit provided by section 40 with respect to the salaries or wages incurred during its taxable year beginning January 1, 1972, for services rendered by that employee during the period beginning July 1, 1971, and ending June 30, 1972.
Example 2.Y, a cash basis taxpayer who files his return on the basis of the calendar year, employed A, an employee certified by the Secretary of Labor under this paragraph, on July 1, 1971. A's first 12 months of employment were continuous. Y paid A on the basis of a semimonthly payroll period, but paid his payroll 2 days after the close of the payroll period during which the wages were earned. Thus, Y paid A on January 2, 1972, for services rendered between December 16, 1971, and December 31, 1971. Y is entitled to the credit provided by section 40 with respect to the wages paid for services rendered by A during the period beginning December 16, 1971, and ending June 30, 1972, because those wages were paid by Y in a taxable year beginning after December 31, 1971.
(b) Salaries and wages. For purposes of this section, the term “salaries and wages” means only cash remuneration including a check. Amounts deducted and withheld from the employee's pay (for example, taxes and contributions to health and retirement plans) shall be deemed to be cash remuneration even though not actually paid directly to the employee.
(c) Trade or business expenses. The term “WIN expenses” includes only salaries and wages which are paid or incurred in a trade or business of the taxpayer and which are deductible in computing taxable income. Thus, salaries and wages paid to domestic employees in a private home are not “WIN expenses”.
(d) Reimbursed expenses—(1) In general. The term “WIN expenses” does not include salaries and wages to the extent that the taxpayer is reimbursed for such salaries or wages from any source.
(2) Example. Subparagraph (1) of this paragraph may be illustrated by the following example:
Example.X Company, which makes its return on the basis of the calendar year, hired WIN employees on January 1, 1972. X Company has a cost-plus construction contract with the Federal Government. The fact that X has a construction contract with the Federal Government or anyone else does not change its character from a normal business transaction in which there has been a sale of materials and services. Thus, the salaries or wages paid or incurred for services rendered by these WIN employees would not be reimbursed expenses, and X would be entitled to the credit provided by section 40.
(e) Geographical limitation—(1) In general. The term “WIN expenses” does not include salaries and wages paid or incurred for services rendered outside the United States (as defined in sections 638 (relating to Continental Shelf areas) and 7701(a)(9). However, services rendered by any WIN employee outside the United States (as defined in sections 638 (relating to Continental Shelf areas) and 7701(a)(9)) shall contribute to such employee's first 12 months of employment (whether or not consecutive) for purposes of paragraph (a) of § 1.50A-3 and paragraph (a) of this section.
(2) Example. Subparagraph (1) of this paragraph may be illustrated by the following example:
Example.X Corporation, which files its return on the basis of the calendar year, hired A, a WIN employee, on January 1, 1972, and continuously employed him for the following 24-month period. During January and February of 1972, X paid A's wages while he received training conducted in Puerto Rico. For the remainder of the calendar year A performed services for X within the United States. For purposes of paragraph (a) of § 1.50A-3 and paragraph (a) of this section, A's first 12 months of employment are January 1, 1972, to December 31, 1972. Under subparagraph (1) of this paragraph no wages paid to A for services rendered during the months of January and February of 1972 may be taken into account by X under paragraph (a) of this section as WIN expenses because the services were rendered outside the United States. However, X may take into account wages he has incurred with respect to A for the period March 1, 1972, to December 31, 1972.
(f) Maximum period of training or instruction. The term “WIN expenses” does not include salaries and wages paid or incurred for services rendered by a WIN employee after the end of the 24-month period beginning with the date of initial employment (as defined in paragraph (c)(1) of § 1.50A-3) of the WIN employee.
(g) Ineligible individuals. The term “WIN expenses” does not include salaries and wages paid or incurred for services rendered by a WIN employee who—
(1) Bears any of the relationships described in paragraphs (1) through (8) of section 152(a) of the Code to the taxpayer, or, if the taxpayer is a corporation, to an individual who owns, directly or indirectly, more than 50 percent in value of the outstanding stock of the corporation (determined with the application of section 267(c) of the Code),
(2) If the taxpayer is an estate or trust, is a grantor, beneficiary, or fiduciary of the estate or trust, or is an individual who bears any of the relationships described in paragraphs (1) through (8) of section 152(a) of the Code to a grantor, beneficiary, or fiduciary of the estate or trust, or
(3) Is a dependent (described in section 152(a)(9) of the Code) of the taxpayer, or, if the taxpayer is a corporation, of an individual described in subparagraph (1), or, if the taxpayer is an estate or trust, of a grantor, beneficiary, or fiduciary of the estate or trust.
(h) WIN employee. For purposes of §§ 1.50A-1 through 1.50B-5 the term “WIN employee” means an employee who is certified by the Secretary of Labor as meeting the requirements of paragraphs (a)(1) (i) and (ii) of this section.
(i) [Reserved]
(j) Special rule applicable to transactions to which section 381(a) applies and transactions involving a mere change in form of conducting a trade or business. The first 12 months of employment (whether or not consecutive) and the period described in section 50B (c)(4) of any WIN employee, for purposes of determining the amount of WIN expenses (as defined in paragraph (a) of § 1.50B-1), shall not be affected by transactions to which the rule contained in paragraph (f) (relating to transaction to which section 381(a) (relating to certain corporate acquisitions) applies), or paragraph (g) (relating to a mere change in form of conducting a trade or business) of § 1.50A-4 applies.
[38 FR 6161, Mar. 7, 1973]
§ 1.50B-2 Electing small business corporations.
(a) General rule—(1) In general. In the case of an electing small business corporation (as defined in section 1371 (b)), WIN expenses (as defined in paragraph (a) of § 1.50B-1) shall be apportioned pro rata among the persons who are shareholders of such corporation on the last day of such corporation's taxable year, and shall be taken into account for the taxable years of such shareholders within which or with which the taxable year of such corporation ends. The WIN expenses for each employee shall be apportioned separately. In determining who are shareholders of an electing small business corporation on the last day of its taxable year, the rules of paragraph (d)(1) of § 1.1371-1 and of paragraph (a)(2) of § 1.1373-1 shall apply.
(2) Shareholder as taxpayer. A shareholder to whom WIN expenses are apportioned shall, for purposes of the credit allowed by section 40, be treated as the taxpayer who paid or incurred the expenses allocated to him. If a shareholder takes into account in determining his WIN expenses any WIN expenses with respect to an employee of an electing small business corporation, and if the employment of such employee is terminated in a termination subject to the rules contained in paragraph (a) of § 1.50A-3, or if the electing small business corporation fails to pay comparable wages and such failure is subject to the rules contained in paragraphs (a) (2) and (3) of § 1.50A-3, then such shareholder shall make a recapture determination under the provisions of section 50A (c) and (d) of the Code and § 1.50A-3. See § 1.50A-5.
(3) Computation of the first 12 months of employment. The first 12 months of employment (whether or not consecutive) and the period described in section 50B(c)(4) of any WIN employee for purposes of determining the amount of WIN expenses (as defined in paragraph (a) of § 1.50B-1) shall not be affected by a change in the shareholders in such corporation and shall not be affected by a reduction in any shareholder's proportionate stock interest in such corporation (for example, by a sale or redemption or by the issuance of additional shares). Thus, the first 12 months of employment (whether or not consecutive) of any WIN employee shall be the same with respect to any shareholder claiming a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee. Also, such first 12 months of employment and the period described in section 50B(c)(4), with respect to any WIN employee, shall not be deemed to begin again because of the making of a valid election under section 1372.
(b) Summary statement. An electing small business corporation shall attach to its return a statement showing the apportionment to each shareholder of its WIN expenses with respect to each WIN employee.
(c) Examples. Paragraph (a) of this section may be illustrated by the following examples:
Example 1. (i) X Corporation, an electing small business corporation which files its returns on the basis of the calendar year, hired WIN employees on July 1, 1972, whose employment was continuous for the next 24 months. A, a shareholder, has a 10 percent interest in X Corporation. X Corporation incurred $24,000 in wages with respect to these WIN employees in calendar year 1972, and $48,000 in calendar year 1973. Assuming that during 1972 shareholder A did not directly incur any other WIN expenses and did not own any other interest in other electing small business corporations, partnerships, estates, or trusts that incurred WIN expenses, for taxable year 1972 shareholder A's credit earned of $480 (10 percent (A's ownership interest) multiplied by $24,000 of WIN expenses multiplied by 20 percent) was allowed under section 40 as a credit against his liability for tax.
(ii) On March 1, 1973, shareholder A sold all of his interest to B, a new shareholder. Therefore, the employment of the WIN employees is deemed terminated for purposes of paragraph (a) of § 1.50A-3 with respect to shareholder A. For taxable year 1972, A's recomputed credit is zero because the termination occurred before the end of the period described in paragraph (a)(1) of § 1.50A-3. The income tax imposed by chapter 1 of the Code on A for the taxable year 1973 is increased by the $480 decrease in his credit earned for the taxable year 1972 (that is, $480 original credit earned minus zero recomputed credit earned). Under paragraph (a) of this section A has no credit earned for 1973.
(iii) Under paragraph (a)(1) of this section, assuming that during 1973 shareholder B did not directly incur any other WIN expenses and that he did not own any interest in other electing small business corporations, partnerships, estates, or trusts that incurred WIN expenses, shareholder B's credit earned is $480 (10 percent (B's ownership interest) multiplied by $24,000 of WIN expenses multiplied by 20 percent) and is allowable under section 40 as a credit against his liability for tax. Under paragraph (a)(3) for purposes of determining the period of employment that may be taken into account by B the initial date of employment of these WIN employees relates back to the date they were first employed, i.e., July 1, 1972. Thus, the first 12 months of employment ends on June 30, 1973.
Example 2. (i) Y Corporation, an electing small business corporation which files its return on the basis of the calendar year, hires five WIN employees in 1972. The WIN expenses incurred with respect to each employee are as follows:
WIN employee No. | WIN expenses
1 | $6,000
2 | 5,000
3 | 4,000
4 | 4,000
5 | 3,000
Total | 22,000
On December 31, 1972, Y Corporation has 10 shares of stock outstanding which are owned as follows: A owns 3 shares, B owns 2 shares, and C owns 5 shares. (ii) Under this section, the WIN expenses are apportioned to the shareholders of Y Corporation as follows:
WIN employees | 1 | 2 | 3 | 4 | 5 | Total
Total WIN expenses | $6,000 | $5,000 | $4,000 | $4,000 | $3,000
Shareholder A (3/10) | 1,800 | 1,500 | 1,200 | 1,200 | 900 | 6,600
Shareholder B (2/10) | 1,200 | 1,000 | 800 | 800 | 600 | 4,400
Shareholder C (5/10) | 3,000 | 2,500 | 2,000 | 2,000 | 1,500 | 11,000
Assume that shareholders A, B, and C did not directly incur any other WIN expenses during their taxable year in which falls December 31, 1972 (the last day of Y Corporation's taxable year), and that such shareholders did not own any interest in other electing small business corporations, partnerships, estates or trust that incurred WIN expenses. The total WIN expenses of shareholder A are $6,600, of shareholder B are $4,400, and of shareholder C are $11,000.
[38 FR 6162, Mar. 7, 1973]
§ 1.50B-3 Estates and trusts.
(a) General rule—(1) In general. In the case of an estate or trust, WIN expenses (as defined in paragraph (a) of § 1.50B-1) shall be apportioned among the estate or trust and its beneficiaries on the basis of the income of such estate or trust allocable to each. There shall be apportioned to the estate or trust for its taxable year, and to each beneficiary of such estate or trust for his taxable year in which or with which the taxable year of such estate or trust ends, his share (as determined under paragraph (b) of this section) of the total WIN expenses. The WIN expenses for each employee shall be apportioned separately.
(2) Beneficiary as taxpayer. A beneficiary to whom WIN expenses are apportioned shall, for purposes of the credit allowed by section 40, be treated as the taxpayer who paid or incurred such WIN expenses allocated to him. If a beneficiary takes into account in determining his WIN expenses any portion of the WIN expenses paid or incurred by an estate or trust and if the employee with respect to which the WIN expenses were paid or incurred is terminated in a termination subject to the rules in paragraph (a) of § 1.50A-3, or if there is a failure (which is subject to the rules is paragraphs (a) (2) and (3) of § 1.50A-3) to pay such employee comparable wages then such beneficiary shall make a recapture determination under the provisions of section 50A (c) and (d) of the Code and § 1.50A-3. See § 1.50A-6.
(3) Beneficiary. For purposes of this section, the term “beneficiary” includes heir, legatee, and devisee.
(4) Special rule for termination of interest. If during the taxable year of an estate or trust a beneficiary's interest in the income of such estate or trust terminates, WIN expenses paid or incurred by such estate or trust after such termination shall not be apportioned to such beneficiary.
(b) Share. A trust's, estate's, or beneficiary's share of the WIN expenses with respect to each employee shall be:
(1) The total WIN expenses incurred in the taxable year of the estate or trust with respect to such employee, multiplied by
(2) The amount of income allocable to such estate or trust or to such beneficiary for such taxable year, divided by
(3) The sum of the amounts of income allocable to such estate or trust and all its beneficiaries taken into account under subparagraph (2) of this paragraph.
(c) Limitation based on amount of tax. In the case of an estate or trust, the $25,000 amount specified in section 50A(a)(2), relating to limitation based on amount of tax, shall be reduced for the taxable year to—
(1) $25,000, multiplied by
(2) The WIN expenses apportioned to such estate or trust under paragraph (a) of this section, divided by
(3) The WIN expenses apportioned among such estate or trust and its beneficiaries.
(d) Computation of the first 12 months of employment. The first 12 months of employment (whether or not consecutive) and the period described in section 50B(c)(4) of any WIN employee for purposes of determining the amount of WIN expenses (as defined in paragraph (a) of § 1.50B-1) shall not be affected by a change in the beneficiaries of an estate or trust and shall not be affected by a reduction or a termination of a beneficiary's interest in the income of such estate or trust. Thus, the first 12 months of employment (whether or not consecutive) of any WIN employee shall be the same with respect to trust or estate, and any beneficiary of such trust or estate claiming a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee.
(e) Summary statement. An estate or trust shall attach to its return a statement showing the apportionment of WIN expenses with respect to each employee to such estate or trust and to each beneficiary.
(f) Examples. This section may be illustrated by the following examples:
Example 1. (1) XYZ trust, which makes its return on the basis of the calendar year, hires five WIN employees in 1972. The WIN expenses incurred with respect to each employee are as follows:
WIN employee No. | WIN expenses
1 | $6,000
2 | 5,000
3 | 4,000
4 | 4,000
5 | 3,000
Total | 22,000
For the taxable year 1972 the income of XYZ trust is $10,000 which is allocable as follows: $5,000 to XYZ trust, $2,000 to beneficiary A, and $3,000 to beneficiary B. Beneficiaries A and B make their returns on the basis of a calendar year. (2) Under this section, the WIN expenses are apportioned to XYZ trust and to its beneficiaries as follows:
WIN employees | 1 | 2 | 3 | 4 | 5 | Total
Total WIN expenses | $6,000 | $5,000 | $4,000 | $4,000 | $3,000
XYZ Trust: $5,000/10,000 | 3,000 | 2,500 | 2,000 | 2,000 | 1,500 | $11,000
Beneficiary A: $2,000/10,000 | 1,200 | 1,000 | 800 | 800 | 600 | 4,400
Beneficiary B: $3,000/10,000 | 1,800 | 1,500 | 1,200 | 1,200 | 900 | 6,600
Assume that beneficiary A hired a WIN employee during his taxable year 1972 and incurred $6,000 in wages. Also, assume that beneficiary B did not hire WIN employees during his taxable year 1972 and that beneficiaries A and B did not own any interests in other trusts, estates, partnerships, or electing small business corporations that hired WIN employees. The WIN expenses of XYZ trust are $11,000, of beneficiary A are $10,400, and of beneficiary B are $6,600. (3) In the case of XYZ trust, the $25,000 amount specified in section 50A(a)(2) is reduced to $12,500, computed as follows: (i) $25,000 multiplied by (ii) $11,000 (WIN expense apportioned to the trust), divided by (iii) $22,000 (total WIN expenses apportioned among such trust ($11,000), beneficiary A ($4,400), and beneficiary B ($6,600)).
Example 2.The facts are the same as in example 1 except that beneficiary A's interest is reduced to zero. Under paragraph (a)(2) for purposes of determining the period of employment that may be taken into account by XYZ trust and by beneficiary B, the initial date of employment of the WIN employees relates back to the date they were first employed.
[38 FR 6163, Mar. 7, 1973]
§ 1.50B-4 Partnerships.
(a) General rule—(1) In general. In the case of a partnership, each partner shall take into account separately, for his taxable year with or within which the partnership taxable year ends, his share (as determined under subparagraph (3) of this paragraph) of the WIN expenses (as defined in paragraph (a) of § 1.50B-1) of employees employed by the partnership during such partnership's taxable year. The WIN expenses for each employee shall be allocated separately.
(2) Partner as taxpayer. Each partner shall be treated as the taxpayer who paid or incurred the share of the WIN expenses allocated to him. If a partner takes into account in determining his WIN expenses the WIN expenses of an employee of a partnership, and if the employment of such employee is terminated in a termination subject to the rules contained in paragraph (a) of § 1.50A-3, or if the partnership fails to pay comparable wages and such failure is subject to the rules contained in paragraphs (a) (2) and (3) of § 1.50A-3, then such partner shall make a recapture determination under the provisions of section 50A (c) and (d) of the Code and § 1.50A-3. See § 1.50A-7.
(3) Determination of partner's share. (i) Each partner's share of the WIN expenses shall be determined in accordance with the ratio in which the partners divide the general profits of the partnership (that is, the taxable income of the partnership as described in section 702 (a)(9)) regardless of whether the partnership has a profit or a loss for the taxable year during which the WIN expenses are paid or incurred. However, if the ratio in which the partners divide the general profits of the partnership changes during the taxable year of the partnership, the ratio effective for the date on which the WIN expenses are paid or incurred shall apply.
(ii) Notwithstanding subdivision (i) of this subparagraph, if the deduction with respect to any WIN expenses is specially allocated and if such special allocation is recognized under section 704 (a) and (b) and paragraph (b) of § 1.704-1, then each partner's share of the WIN expenses shall be determined by reference to such special allocation effective for the date on which the WIN expenses are paid or incurred.
(4) Computation of the first 12 months of employment. The first 12 months of employment (whether or not consecutive) and the period described in section 50B(c)(4) with respect to any WIN employee for purposes of determining the amount of WIN expenses (as defined in paragraph (a) of § 1.50B-1) shall not be affected by a change in the partners of such partnership and shall not be affected by a change in the ratio in which the partners divide the general profits of the partnership. Thus, the first 12 months of employment (whether or not consecutive) and the 24-month period described in section 50B(c)(4) of any WIN employee shall be the same with respect to any partner claiming a credit under section 40 for salaries and wages paid or incurred for services rendered by such employee.
(b) Summary statement. A partnership shall attach to its return a statement showing the allocation to each partner of its WIN expenses with respect to each WIN employee.
(c) Examples. Paragraph (a) of this section may be illustrated by the following examples:
Example 1.Partnership ABCD hires a WIN employee on January 1, 1972, and hires a second WIN employee on September 1, 1972. The ABCD partnership and each of its partners reports income on the basis of the calendar year. Partners A, B, C, and D share partnership profits equally. Each partner's share of the WIN expenses incurred with respect to these employees is 25 percent.
Example 2.Assume the same facts as in example 1 and the following additional facts: A dies on June 30, 1972, and B purchases A's interest as of such date. Each partner's share of the profits from January 1 to June 30 is 25 percent. From July 1 to December 31, B's share of the profits is 50 percent, and C and D's share of the profits is 25 percent each. B shall take into account 25 percent of the WIN expenses incurred during the period beginning January 1 and ending June 30 and 50 percent of the WIN expenses incurred during the remainder of the year with respect to the employee hired on January 1, 1972. Also, B shall take into account 50 percent of the WIN expenses incurred with respect to the employee hired on September 1, C and D shall each take into account 25 percent of the WIN expenses incurred with respect to the employees employed by the partnership in 1972. Under paragraph (a)(3), for purposes of determining the period of employment that may be taken into account by B, the initial date of employment of the WIN employee hired on January 1 relates back to the date he was first employed, i.e., January 1, 1972.
Example 3.Partnership SH is engaged in manufacturing. Under the terms of the partnership agreements deductions attributable to the employment of WIN employees are specially allocated 70 percent to partner S and 30 percent to partner H. In all other respects S and H share profits and losses equally. If the special allocation with respect to the WIN expenses is recognized under section 704 (a) and (b) and paragraph (b) of § 1.704-1, the WIN expenses shall be taken into account, 70 percent by S and 30 percent by H.
Example 4. (i) LMN partnership, which files its return on the basis of the calendar year, hires five WIN employees in 1973. The WIN expenses incurred with respect to each employee are as follows:
WIN employee No. | WIN expenses
1 | $6,000
2 | 5,000
3 | 4,000
4 | 4,000
5 | 3,000
Total | 22,000
On December 31, 1973, the ratio in which the partners divide the general profits of the LMN partnership is as follows: L receives three-tenths of the general profits, M receives two-tenths of the general profits, and N receives five-tenths of the general profits. (ii) Under this section the WIN expenses are apportioned to the partners of LMN partnership as follows:
WIN employees | 1 | 2 | 3 | 4 | 5 | Total
Total WIN expenses | $6,000 | $5,000 | $4,000 | $4,000 | $3,000 | $22,000
Partner L (3/10) | 1,800 | 1,500 | 1,200 | 1,200 | 900 | 6,600
Partner M (2/10) | 1,200 | 1,000 | 800 | 800 | 600 | 4,400
Partner N (5/10) | 3,000 | 2,500 | 2,000 | 2,000 | 1,500 | 11,000
Assume that partners L, M, and N did not directly incur any other WIN expenses during their taxable year in which falls December 31, 1973 (the last day of LMN partnership's taxable year) and that such partners did not own any interest in other partnerships, electing small business corporations, estates, or trusts that incurred WIN expenses. The total WIN expenses of partner L are $6,600, of partner M are $4,400, and of partner N are $11,000.
[38 FR 6164, Mar. 7, 1973]
§ 1.50B-5 Limitations with respect to certain persons.
(a) Mutual savings institutions. In the case of an organization to which section 593 applies (that is, a mutual savings bank, a cooperative bank, or a domestic building and loan association)—
(1) WIN expenses shall be 50 percent of the amount otherwise determined under paragraph (a) of § 1.50B-1, and
(2) The $25,000 amount specified in section 50A(a)(2), relating to limitation based on amount of tax, shall be reduced by 50 percent of such amount.
For example, a domestic building and loan association incurs $30,000 in WIN expenses (as determined under paragraph (a) of § 1.50B-1) during its taxable year. However, under this paragraph such amount is reduced to $15,000 (50 percent of $30,000). If an organization to which section 593 applies is a member of a controlled group (as defined in section 50A(a)(5)), the $25,000 amount specified in section 50A(a)(2) shall be reduced in accordance with the provisions of paragraph (f) of § 1.50A-1 before such amount is further reduced under this paragraph.
(b) Regulated investment companies and real estate investment trusts. (1) In the case of a regulated investment company or a real estate investment trust subject to taxation under subchapter M, chapter 1 of the Code—
(i) The WIN expenses determined under paragraph (a) of § 1.50B-1, and
(ii) The $25,000 amount specified in section 50A(a)(2), relating to limitation based on amount of tax,
shall be reduced to such person's ratable share of each such amount. If a regulated investment company or a real estate investment trust is a member of a controlled group (as defined in section 50A (a)(5)), the $25,000 amount specified in section 50A(a)(2) shall be reduced in accordance with the provisions of paragraph (f) of § 1.50A-1 before such amount is further reduced under this paragraph.
(2) A person's ratable share of the amount described in subparagraph (1)(i) and the amount described in subparagraph (1)(ii) of this paragraph shall be the ratio which—
(i) Taxable income for the taxable year, bears to,
(ii) Taxable income for the taxable year plus the amount of the deduction for dividends paid taken into account under section 852(b)(2)(D) in computing investment company taxable income, or under section 857(b)(2)(B) (section 857(b)(2)(C), as then in effect, for taxable years ending before October 5, 1976) in computing real estate investment trust taxable income, as the case may be.
For purposes of the preceding sentence, the term “taxable income” means, in the case of a regulated investment company, its investment company taxable income (within the meaning of section 852(b)(2)) and, in the case of a real estate investment trust its real estate investment trust, taxable income (within the meaning of section 857(b)(2)). In the case of a taxable year ending after October 4, 1976, real estate investment trust taxable income, for purposes of this paragraph, is determined by excluding any net capital gain, and by computing the deduction for dividends paid without regard to capital gains dividends (as defined in section 857(b)(3)(C)). The amount of the deduction for dividends paid includes the amount of deficiency dividends (other than capital gains deficiency dividends) taken into account in computing investment company taxable income or real estate investment trust taxable income for the taxable year. See section 860(f) for the definition of deficiency dividends.
(3) This paragraph may be illustrated by the following example:
Example. (i) Corporation X, a regulated investment company subject to taxation under section 852 of the Code, which makes its return on the basis of the calendar year, incurs WIN expenses of $30,000 during the year 1974. Corporation X's investment company taxable income under section 852 (b)(2) is $10,000 after taking into account a deduction for dividends paid of $90,000.
(ii) Under this paragraph, Corporation X's WIN expenses for the taxable year 1974 is $3,000, computed as follows: (a) $30,000 (WIN expenses), multiplied by (b) $10,000 (taxable income), divided by (c) $100,000 (taxable income plus the deduction for dividends paid). For 1974, the $25,000 amount specified in section 50A(a)(2) is reduced to $2,500.
(c) Cooperatives. (1) In the case of a cooperative organization described in section 1381(a)—
(i) The WIN expenses determined under paragraph (a) of § 1.50B-1, and
(ii) The $25,000 amount specified in section 50A(a)(2), relating to limitation based on amount of tax,
shall be reduced to such cooperative's ratable share of each such amount (as determined under subparagraph (2) of this paragraph). If a cooperative organization described in section 1381(a) is a member of a controlled group (as defined in section 50A(a)(5)), the $25,000 amount specified in section 50A(a)(2) shall be reduced in accordance with the provisions of paragraph (f) of § 1.50A-1 before such amount is further reduced under this paragraph.
(2) A cooperative's ratable share of the amount described in subparagraph (1)(i) and the amount described in subparagraph (1)(ii) of this paragraph shall be the ratio which—
(i) Taxable income for the taxable year, bears to
(ii) Taxable income for the taxable year plus the sum of (a) the amount of the deductions allowed under section 1382(b), and (b) the amount of the deductions allowed under section 1382(c), and (c) amounts similar to the amounts described in (a) and (b) of this subdivision the tax treatment of which is determined without regard to subchapter T, chapter 1 of the Code and the regulations thereunder.
(3) This paragraph may be illustrated by the following example:
Example. (i) Cooperative X, an organization described in section 1381(a) which makes its return on the basis of the calendar year, incurs WIN expenses of $30,000 for the taxable year 1972. Cooperative X's taxable income is $10,000 after taking into account deductions of $30,000 allowed under section 1382(b), and deductions of $60,000 allowed under section 1382(c).
(ii) Under this paragraph, Cooperative X's WIN expenses for the taxable year 1972 are $3,000, computed as follows: (a) $30,000 (WIN expenses), multiplied by (b) $10,000 (taxable income), divided by (c) $100,000 (taxable income plus the sum of deductions allowed under sections 1382(b) and 1382(c)). For 1972, the $25,000 amount specified in section 50A(a)(2) is reduced to $2,500.
(Sec. 860(e) (92 Stat. 2849, 26 U.S.C. 860(e)); sec. 860(g) (92 Stat. 2850, 26 U.S.C. 860(g)); sec. 7805 (68A Stat. 917, 26 U.S.C. 7805))
[38 FR 6164, Mar. 7, 1973, as amended by T.D. 7767, 46 FR 11262, Feb. 6, 1981; T.D. 7936, 49 FR 2105, Jan. 18, 1984]
§ 1.51-1 Amount of credit.
(a) Determination of amount—(1) General rule. Except as provided in paragraph (a)(2) of this section, the amount of the targeted jobs credit for purposes of section 38 (formerly designated section 44B) for the taxable year equals 50 percent of the qualified first-year wages (minus any qualified first-year wages paid to individuals while such individuals are qualified summer youth employees) plus 25 percent of the qualified second-year wages.
(2) Special rule for employment of qualified summer youth employees. In the case of an employer who pays or incurs qualified wages after April 30, 1983, to a qualified summer youth employee beginning work for the employer after such date, the amount of the targeted jobs credit for the taxable year is equal to the amount determined under paragraph (a)(1) of this section plus an amount equal to 85 percent of the first $3,000 of qualified wages paid to each qualified summer youth employee during the taxable year. Such wages must be attributable to services tendered by the qualified summer youth employee during any 90-day period beginning on or after May 1 and ending on or before September 15.
(3) Limitation. See section 38(c) for rules limiting the amount of the credit to a percentage of the amount of the taxpayer's net tax liability.
(b) Definitions—(1) Qualified wages. The term “qualified wages” means wages (as defined in paragraph (b)(4)) paid or incurred by the employer during the taxable year to individuals who are members of a targeted group (within the meaning of section 51(d)).
(2) Qualified first-year wages—(i) General rule. Except in the case of qualified summer youth employees, the term “qualified first-year wages” means the first $6,000 of wages (as defined in paragraph (b)(4) of this section) attributable to service rendered by a member of a targeted group during the 1-year period beginning with the day the individual first begins work for the employer. In the case of a vocational rehabilitation referral (as defined in section 51(d)(2)) who begins work for the employer before July 19, 1984, the one-year period begins with the day the individual begins work for the employer on or after the beginning of such individual's rehabilitation plan. However, with the exception of vocational rehabilitation referrals for whom the employer claimed a credit under section 44B (as in effect prior to enactment of the Revenue Act of 1978) for a taxable year beginning before January 1, 1979, members of a targeted group who are first hired after September 26, 1978, and before January 1, 1979, will be treated as if they first began work for the employer on January 1, 1979. The date on which the wages are paid is not determinative of whether the wages are first-year wages; rather, the wages must be attributed to the period during which the work was performed. See paragraph (f)(1) of this section for an additional limitation on the term “qualified first-year wages”. (See examples 1, 2, 3, 4, 5, and 6 in paragraph (j) of this section for examples illustrating the application of the rules in this paragraph (b)(2)).
(ii) Special rule for qualified summer youth employees. In the case of a qualified summer youth employee, qualified first-year wages for purposes of the 85 percent credit referred to in paragraph (a)(2) of this section include only wages attributable to services rendered by a qualified summer youth employee during any 90-day period beginning on or after May 1 and ending on or before September 15. If the individual is retained by the employer after the 90-day period and recertified as a member of another targeted group, the term “qualified first-year wages” for purposes of the 50 percent credit described by section 51(a)(1) has the meaning assigned that term in paragraph (b)(2)(i) of this section except that the $6,000 limitation for qualified first-year wages shall be reduced by wages up to, but not more than, $3,000 attributable to services rendered during the 90-day period.
(3) Qualified second-year wages. The term “qualified second-year wages” means the first $6,000 of wages attributable to services rendered by a member of a targeted group, other than a qualified summer youth employee, during the 1-year period beginning on the day after the last day of the period for qualified first-year wages. The date on which the wages are paid is not determinative of whether the wages are second-year wages; rather, the wages must be attributed to the period during which the work was performed.
(4) Wages—(i) General rule. Except as otherwise provided in paragraphs (b)(4) (ii) and (iii) of this section, the term “wages” shall only include amounts paid or incurred after December 31, 1978, for taxable years ending after December 31, 1978. For purposes of this section, the term “wages” has the meaning assigned such term by section 3306(b) (determined without regard to any dollar limitation contained in such subsection).
(ii) Special rules. In the case of agricultural labor or railway labor, the term “wages” means unemployment insurance wages within the meaning of subparagraph (A) or (B) of section 51(h)(1). The term “wages” shall not include any amounts paid or incurred by an employer for any pay period to any individual for whom the employer receives federally funded payments for on-the-job training for such individual for such pay period. (See example 7 in paragraph (j) of this section.) The amount of wages which would otherwise be qualified wages under this section with respect to an individual for a taxable year shall be reduced by an amount equal to the amount of payments made to the employer (however utilized by such employer) with respect to such individual for such taxable year under a program established under section 414 of the Social Security Act. In addition, the term “wages” shall not include any amount paid or incurred by the employer in a taxable year beginning before January 1, 1982, to an individual with respect to whom the employer claims a credit under section 40 (relating to expenses of work incentive programs). For youths participating in a qualified cooperative education program:
(A) Section 3306(c)(10)(C) (relating to the definition of employment for certain students) does not apply in determining wages under this section; and
(B) The term “wages” shall include only those amounts paid or incurred by the employer that are attributable to services rendered by the individual while he or she meets the conditions specified in section 51(d)(8)(A). For purposes of the preceding sentence, an employee who met the requirement in section 51(d)(8)(A)(iv), dealing with economically disadvantaged status, when hired, shall be deemed to continuously meet the requirement in section 51(d)(8)(A)(iv) during the time the employee is in the cooperative education program. See also paragraph (e) of this section for rules relating to the exclusion of wages paid to certain individuals.
(iii) Termination. The term “wages” shall not include any amount paid or incurred to an individual who begins work for the employer after December 31, 1985.
(5) Special rule for eligible work incentive employees. In the case of an eligible work incentive employee (as defined in § 1.51-1(c)(4)), this paragraph (b) shall be applied for taxable years beginning after December 31, 1981, as if such employee had been a member of a targeted group for taxable years beginning before January 1, 1982. (See example 8 in paragraph (j) of this section.)
(c) Members of targeted groups—(1) In general. An individual is a member of a targeted group if the individual is certified as (i) a vocational rehabilitation referral, (ii) an economically disadvantaged youth, (iii) an economically disadvantaged Vietnam-era veteran, (iv) an SSI recipient, (v) a general assistance recipient, (vi) a youth participating in a cooperative education program, (vii) an economically disadvantaged ex-convict, (viii) an eligible work incentive employee, (ix) a qualified summer youth employee, or (x) an involuntarily terminated CETA employee. Except as provided below, see section 51(d) of this section for a definition of these groups. See paragraph (d) of this section for rules concerning the certification of individuals as members of one of these targeted groups.
(2) Youths participating in a qualified cooperative education Program—(i) Student requirements. For an individual to qualify as a youth participating in a qualified cooperative education program, the individual must meet each of the following conditions (A) through (D)—
(A) The youth must have attained the age of 16 but not 20. (An individual reaching 19 will be treated as a youth participating in a qualified cooperative education program only for wages paid or incurred after November 26, 1979.)
(B) The youth must not have graduated from a high school or vocational school.
(C) The youth must be enrolled in and actively pursuing a qualified cooperative education program (as defined in paragraph (c)(2)(iii) of this section).
(D) With respect to wages paid or incurred after December 31, 1981, the youth must be a member of an economically disadvantaged family when initially hired.
(ii) Economically disadvantaged family. See section 51(d)(11) for the rules relating to the determination of whether an individual is a member of an economically disadvantaged family.
(iii) Qualified cooperative education program. The term “qualified cooperative education program” means a program of vocational education for individuals who (through written cooperative arrangements between a qualified school and one or more employers) receive instruction (including required academic instruction) by alternation of study in school with a job in any occupational field (but only if these two experiences are planned by the school and employer so that each contributes to the student's education and employability). See section 51(d)(8)(C) for the definition of a “qualified school.” For purposes of this paragraph, the term “program of vocational education” means an organized educational program which is directly related to the preparation of individuals for employment, or for additional preparation for a career requiring other than a baccalaureate or advanced degree. An “organized educational program” means only instruction related to the occupation or occupations for which the students are in training or instruction necessary for students to benefit from such training. The student's employment contributes to his or her education and employability only if it is related to the occupation, or a cluster of closely related occupations, for which the student is in training in school. However, the student's employment need not be directly related to or in the same technical field as the training the student receives in school. For example, a student studying carpentry does not have to work as a carpenter for the program to constitute a “qualified cooperative education program.” The program will qualify if, for example, the student works at a hardware store because the student's work would familiarize the student with the materials and tools used by carpenters. The program would not qualify, however, if the student works at a restaurant and generally performs tasks in such employment not related to carpentry.
(iv) Actively pursuing. For purposes of this paragraph (c)(2), a youth will not be considered to be “actively pursuing” a school's qualified cooperative education program (within the meaning of paragraph (c)(2)(iii) of this section) during summer vacation unless that school program continues during the summer vacation. Whether the school program continues during the summer vacation will be determined by examining the written agreement between the school and the employer. Thus, if a written agreement specifically covers the summer vacation period and provides for a significant degree of involvement by school personnel to provide supervision for the students in the program during that period, the school program will be considered to continue during the summer, regardless of whether classes are held during the vacation period.
(3) General assistance recipients. In order for an individual to qualify as a general assistance recipient, the individual, or another member of the assistance unit (within the meaning of 45 CFR 205.40(a)(1)) that the individual is a member of, must receive assistance for a period of not less than 30 days ending within the preemployment period (as defined in section 51(d)(13)) from a qualified general assistance program. A qualified general assistance program is a program of a State or a political sudivision of a State that the Secretary (after consultation with the Secretary of Health and Human Services) has designated as providing general assistance (or similar assistance) which is based on need and consists of money payments or voucher or scrip. For purposes of the preceding sentences, a program qualifying as a general assistance program by reason of non-cash assistance (i.e., voucher or scrip) shall be so treated only with respect to amounts paid or incurred after July 1, 1982, to individuals beginning work for the employer after such date. For purposes of this subparagraph, the term “money” means cash or an instrument convertible into cash (e.g., a check).
(4) Eligible work incentive employees. An eligible work incentive employee means an individual who has been certified by the designated local agency (as defined in paragraph (d)(10) of this section) as—
(i) Being eligible for financial assistance under part A of title IV of the Social Security Act and as having continuously received such financial assistance during the 90-day period which immediately precedes the date on which such individual is hired by the employer, or
(ii) Having been placed in employment under a work incentive program established under section 432(b)(1) or 445 of the Social Security Act.
The provisions of this paragraph (c)(4) are effective with respect to taxable years of the employer beginning after December 31, 1981. (See paragraph (b)(5) of this section for a special rule relating to eligible work incentive employees.)
(5) Involuntarily terminated CETA employees—(i) In general. An involuntarily terminated CETA employee is an individual who first began work for an employer after August 13, 1981, in taxable years of the employer ending after August 13, 1981, and is certified by the designated local agency (as defined in paragraph (d)(10) of this section) as having been involuntarily terminated after December 31, 1980, from employment financed in whole, or in part, under a program under part D of title II or title VI of the Comprehensive Employment and Training Act.
(ii) Termination. Section 51(d)(10) and this paragraph (c)(5) shall not apply to any individual who begins work for the employer after December 31, 1982.
(d) Certification—(1) General rule. Except as otherwise provided in this paragraph, an individual shall not be treated as a member of a targeted group unless, on or before the day on which such individual begins work for the employer, the employer has received, or has requested in writing, a certification that the individual is a member of a targeted group from the designated local agency (as defined in paragraph (d)(10) of this section). In addition, the employer must receive a certification before the targeted jobs credit can be claimed. However, with respect to individuals who began work for the employer on or before May 11, 1982, the certification will be timely only if requested or received before the day the individual began work for the employer. In the case of a request in writing mailed via the United States Postal Service, the request shall be deemed to be made on the date of the postmark stamped on the cover in which such request was mailed to the designated local agency provided the request is mailed in accordance with the mailing requirements in § 301.7502-1(c) and delivered in accordance with the delivery requirements in § 301.7502-1(d). In the case of a deadline that but for this sentence would fall on a Saturday, Sunday, or a legal holiday, the deadline for making a timely request in writing for a certification or receiving a timely certification shall be the next succeeding day which is not a Saturday, Sunday, or legal holiday. (See section 7503 for the definition of “legal holiday.”) See paragraph (d)(2) of this section for transitional rules applicable to certain employees who began work for the employer before September 26, 1981. See paragraph (d)(3) of this section for special rules applicable to cooperative education students and paragraph (d)(4) of this section for special rules applicable to eligible work incentive employees.
(2) Timeliness of certification in the case of an individual to whom a written preliminary eligibility determination has been issued. If on or before the day on which an individual begins work for the employer, such individual has received from a designated local agency (or other agency or organization designated pursuant to a written agreement with such designated local agency) a written preliminary determination that such individual is a member of a targeted group, then such individual may be treated as a member of a targeted group if on or before the fifth day after the day such individual begins work for the employer such employer receives, or requests in writing, from the designated local agency a certification that such individual is a member of a targeted group. This paragraph (d)(2) only applies to individuals who begin work for the employer after July 18, 1984.
(3) Transitional rules for certain employees who began work for the employer on or before September 26, 1981. In the case of an individual, other than a cooperative education student, who began work for the employer before June 29, 1981, the employer must either receive, or request in writing, a certification before July 23, 1981. In the case of an individual, other than a cooperative education student, who began work for the employer after June 28, 1981, and on or before September 26, 1981, the employer must either receive, or request in writing, a certification before September 26, 1981.
(4) Cooperative education students. In the case of cooperative education students, the school administering the cooperative education program must issue the certification. Form 6199 is provided for this purpose. If the student begins work for the employer after September 26, 1981, see the general rule in § 1.51-1(d)(1) for the date when this certification must be received or requested. If the student begins work for the employer on or before September 26, 1981, the employer must receive the certification or request it in writing before September 26, 1981. In order for an employer to claim a credit on wages paid or incurred to a cooperative education student after December 31, 1981, the employer must receive or request in writing a determination that the student is a member of an economically disadvantaged family. A request for economic eligibility determination for a cooperative education student must be made in writing by the employer to the participating school. If the student begins work for the employer on or before September 26, 1981, the employer must receive or request in writing such determination before September 26, 1981. However, a request in writing on or after August 13, 1981, to a participating school for certification will be deemed to include a request for an economic eligibility determination. In addition, any certification issued by a school after August 13, 1981, will be deemed to be issued in response to a request for certification which includes a request for an economic eligibility determination. The rule in the preceding sentence does not eliminate the requirement that the employer receive a certification that includes an economic eligibility determination in order to claim a credit for wages paid or incurred after December 31, 1981. If a certification issued by a school after August 13, 1984, does not contain an economic eligibility determination and the employer wishes to claim a credit for wages paid or incurred after December 31, 1981, the employer must receive a completed certification before the date on which the credit is claimed.
(5) Eligible work incentive employees. In the case of eligible work incentive employees, the employer must either receive, or request in writing, a certification within the time requirements of paragraph (d) (1), (2), or (3) of this section, whichever is applicable. Before October 12, 1981 (the date the Economic Recovery Tax Act of 1981 codified the State employment security agency as the designated local agency for certifying targeted groups), a certificate may be received or requested in writing from either the designated local agency (as defined in paragraph (d)(10) of this section) or the office or agency that properly issued certifications under former section 50B(h)(1) (relating to the work incentive credit).
(6) Certifications that are not timely. Any certification that is not timely received or requested by the employer in accordance with the rules of this paragraph will be treated as invalid. Thus, the employer will not be allowed to claim a credit under section 51 with respect to any wages paid or incurred to an employee whose certification or request for certification is not timely. A timely request for certification does not eliminate the need for the employer to receive a certification before claiming the credit. In the case of a request for certification that was denied, resubmitted, and then approved, the timeliness of the request shall be determined by the timeliness of the first request.
(7) Incorrect certification—(i) In general. Except as otherwise provided in paragraph (d)(7)(ii) of this section, if an individual has been certified as a member of a targeted group, and such certification is based on false information provided by such individual, the certification shall be revoked and wages paid by the employer after the date on which notice of revocation is received by the employer shall not be treated as qualified wages. For purposes of this paragraph, a certification will be revoked only if the individual would not have been certified had correct information been provided to the issuer of the certification. Thus, false information that is not material to an individual's eligibility as a member of a targeted group will not invalidate an otherwise valid certification.
(ii) Employer's knowledge that the certification was incorrect. In the case of an employer who knew, or had reason to know, at the time of certification that the information provided to the designated local agency was false, none of the wages paid by such employer to an individual to whom an incorrect certification has been issued will be qualified wages.
(8) Certifications issued to certain rehires. This paragraph (d)(8) applies in the case of an employee who first began work for the employer before August 13, 1981, and was dismissed and rehired by the employer. A certification received or requested by an employer with respect to such an employee will be considered timely only if there was a valid business reason, unrelated to the availability of the credit, for the dismissal and rehire and if the employer did not dismiss and then rehire the employee in order to meet the timing requirement with respect to certification. An individual who is dismissed and then rehired for the purpose described in the preceding sentence will be considered for purposes of section 51(d)(16) and this paragraph to have been continuously employed by the employer during the time between the dismissal and the rehire. Whether the employer was motivated by reason of the certification rules in section 51(d)(16) and this paragraph to dismiss and then rehire an employee is a question of fact to be determined from all the circumstances surrounding the dismissal and rehire. (See paragraph (e)(2) of this section for a separate rule disallowing the credit in the case of nonqualifying rehires.)
(9) Individuals who continue to be employed by the same employer but as a member of another targeted group. This paragraph (d)(9) applies in the case of an employee who continues to be employed by the same employer but no longer qualifies as a member of the targeted group for which such employee was first certified (e.g., the employee was orginally certified as a qualified summer youth employee with respect to a ninety-day period between May 1 and September 15, but such ninety-day period has ended). In such case, the employer may request a certification that the employee is a member of another targeted group, and if any wages paid to such individual are qualified first-year wages or qualified second-year wages, the employer may be entitled to a targeted jobs credit with respect to such wages. The second certification will not be invalid merely because it was requested or received after the individual began work for the employer; only the first certification (for example, the certification with respect to an individual hired first as a qualified summer youth employee) must meet the requirement of section 51(d)(16) that a certification must be requested or received by an employer on or before the day on which the individual begins work for the employer. In the case of a former qualified summer youth employee or a youth participating in a qualified cooperative education program who is recertified as an economically disadvantaged youth, the term “hiring date” in section 51(d)(3)(B) does not mean the day the individual is hired by the employer but means the day the individual is certified as a member of the new targeted group. Accordingly, the age requirement of section 51(d)(3)(B) shall be applied as of the day the individual is certified as a member of the second targeted group. In addition, see section 51(d)(11) for rules concerning the viability of the original economic eligibility determination.
(10) Certification where a trade or business has been transferred to a new employer. In the case of a transfer of a trade or business in which an individual who is a member of a targeted group is retained as an employee in the trade or business, the certification obtained for such employee by the transferor-employer will apply with respect to the transferee-employer.
(11) Designated local agency—(i) In general. For the period before October 12, 1981, the term “designated local agency” means the agency for any locality designated jointly by the Secretary and the Secretary of Labor to perform certifications of employees for employers in that locality. On or after October 12, 1981, the term “designated local agency” means a State employment security agency established in accordance with the Act of June 6, 1933, as amended (29 U.S.C. 49 through 49n).
(ii) Jurisdiction. The designated local agency is the agency that has, pursuant to its charter, jurisdiction over the individual that is sought to be certified. Thus, any certification that is issued with respect to an individual who is not within the jurisdiction of the designated local agency that issued the certification will be invalid. Notwithstanding any other provision of this section, a request in writing for certification to the appropriate designated local agency that is made before January 23, 1984, will be considered to be timely if it is made after an otherwise timely request in writing for certification was made to a designated local agency that does not have jurisdiction over the individual sought to be certified.
(e) Certain ineligible individuals—(1) Related individuals. For purposes of section 51(a), “qualified wages” does not include any amounts paid or incurred by a taxpayer to any of the following individuals:
(i) An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152 (a)) to the taxpayer;
(ii) An individual who is a dependent (within the meaning of section 152(a)(9)) of the taxpayer;
(iii) An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152(a)) to a shareholder who owns (within the meaning of section 267(c)) more than 50 percent in value of the outstanding stock of the taypayer, if the taxpayer is a corporation;
(iv) An individual who is a dependent (within the meaning of section 152(a)(9)) of a shareholder described in paragraph (e)(1)(iii) of this section;
(v) An individual who is a grantor, beneficiary or fiduciary of the taxpayer, if the taxpayer is an estate or trust;
(vi) An individual who is a dependent (within the meaning of section 152(a)(9)) of an individual described in paragraph (e)(1)(v) of this section; or
(vii) An individual who is related (within the meaning of any of paragraphs (1) through (8) of section 152(a)) to an individual described in paragraph (e)(1)(v) of this section.
(2) Nonqualifying rehires. For purposes of section 51(a), “qualified wages” does not include wages paid to an employee who had been employed by the employer prior to the current hiring date of the employee if at any time during such prior employment the employee was not a member of a targeted group. The preceding sentence shall not apply to an employee who was previously timely certified as a member of a targeted group with respect to the same employer. An employee shall be treated as not having been a member of a targeted group if the certification requirements of section 51(d)(16) were not met. (See example 8 in paragraph (j) of this section.)
(3) Effective date. The provisions of this paragraph (e) are effective with respect to employees first beginning work for an employer after August 13, 1981.
(f) Limitations—(1) Limitation on qualified first-year wages. With respect to taxable years beginning before January 1, 1982, the amount of the qualified first-year wages which may be taken into account for purposes of the targeted jobs credit for any taxable year shall not exceed 30 percent of the aggregate unemployment insurance wages paid by the employer during the calendar year ending in such taxable year. In the case of a group of trades or businesses under common control (as defined in § 1.52-1(b)), the qualified first-year wages cannot exceed 30 percent of the aggregate unemployment insurance wages paid to all employees of that group of trades or businesses under common control during the calendar year ending in such taxable year. For this purpose, the term “unemployment insurance wages” has the same meaning given to the term “wages” as defined in § 1.51-1(b)(4). In this case of agricultural or railway labor, see section 51(h)(1) for the applicable definition of unemployment insurance wages. (See examples 13 and 14 in paragraph (j) of this section.)
(2) Remuneration must be for trade or business employment. Remuneration paid by an employer to an employee during any taxable year shall be taken into account only if more than one-half of the remuneration paid by the employer to an employee is for services in a trade or business of the employer. This determination shall be made by each employer without regard to section 52 (a) or (b). Accordingly, employees of corporations that are members of a controlled group or employees of partnerships, proprietorships, and other trades or businesses (whether or not incorporated) which are under common control will be treated as being employed by each separate employer for this purpose. For this purpose, the term “year” means the taxable year of the employer. (See example 15 in paragraph (j) of this section.)
(g) Election not to claim the targeted jobs credit. The election under section 51(j) (as amended by section 474(p) of the Tax Reform Act of 1984) not to claim the targeted jobs credit is available for taxable years beginning after December 31, 1983, and shall be made for the taxable year in which such credit is available by not claiming such credit on an original return or amended return at any time before the expiration of the 3-year period beginning on the last date prescribed by law for filing the return for the taxable year (determined without regard to extensions). The election may be revoked within the 3-year period by filing an amended return on which the credit is claimed.
(h) Treatment of successor-employers. In the case of a successor-employer referred to in section 3306(b)(1), the determination of the amount of credit under this section with respect to wages paid by such successor-employer shall be made in the same manner as if such wages were paid by the predecessor-employer referred to in such section. Thus, the 1-year period referred to in § 1.51-1(b)(2)(i) will be considered to begin with the day the employee first began work for the transferor-employer, and the amount of qualified first-year wages and qualified second-year wages paid or incurred with respect to the employee must be reduced by the amount of any such wages paid or incurred by the transferor-employer. (See examples 10 and 11 in paragraph (j) of this section.) Also, see paragraph (d)(10) of this section for rules concerning the viability of the employee's certification.
(i) Treatment of employees performing services for other persons. No credit shall be determined under this section with respect to remuneration paid by an employer to an employee for services performed by such employee for another person unless the amount reasonably expected to be received by the employer for such services from such other person exceeds the remuneration paid by the employer to such employee for such services.
(j) Examples. The application of this section may be illustrated by the following examples which, except as otherwise stated, assume that the limitations imposed by §§ 1.51-1(f)(2) and 1.53-3 are inapplicable:
Example 1.Corporation M is a calendar year, cash receipts and disbursements method taxpayer. A, an economically disadvantaged youth, first began work for Corporation M on October 1, 1978. Qualified first-year wages with respect to A are wages attributable to the period beginning on January 1, 1979 (since A was first hired after September 26, 1978, he is treated as having begun work on January 1, 1979) and ending on December 31, 1979. In the 1979 taxable year, Corporation M pays A $5,000 of qualified first-year wages attributable to services performed in 1979. Corporation M's allowable credit is equal to $2,500 (50 percent of $5,000).
Example 2.Assume the same facts as in example 1, except that in 1980 Corporation M pays to A $100 of wages attributable to services rendered in 1979. These wages will still be considered as qualified first-year wages, but the credit may not be claimed until the 1980 taxable year.
Example 3.Corporation O is a calendar year, cash receipts and disbursements method taxpayer. C, a vocational rehabilitation referral, first began work for Corporation O on July 1, 1978. Corporation O claimed a credit under section 44B (as in effect prior to enactment of the Revenue Act of 1978) for $3,000 of wages paid to C in the 1978 taxable year. Corporation O paid C $6,000 for services performed from January 1, 1979 to June 30, 1979. The period during which qualified first-year wages are determined begins on July 1, 1978, and ends on June 30, 1979. Amounts paid before January 1, 1979, however, are not taken into consideration in determining the amount of qualified first-year wages. Accordingly, only the wages attributable to services performed from January 1, 1979, through June 30, 1979, are considered as qualified first-year wages. Corporation O's allowable credit is equal to $3,000 (50 percent of $6,000).
Example 4.I first began work for Corporation Q, a cash receipts and disbursements method taxpayer, on January 1, 1981, and was not a member of a targeted group. On March 1, 1981, I was convicted of a felony and sentenced to prison. I quit working for Corporation Q, and served the prison sentence. On November 1, 1981, I again was hired by Corporation Q and began work on that date. On the November 1, 1981 hiring date, I was an economically disadvantaged ex-convict for whom Corporation Q received a certificate. Corporation Q paid I $500 of wages for services performed from November 1, 1981, to December 31, 1981, and $6,000 of wages for services performed during 1982. The $500 of wages paid for services performed from November 1, 1981, to December 31, 1981, would be qualified first-year wages because these qualified wages were paid for services performed during the 1-year period beginning on the date I first began work for Corporation Q (January 1, 1981). The $6,000 of wages paid for services performed during 1982 would be qualified second-year wages because these qualified wages were paid for services performed during the 1-year period beginning on the day after the first 1-year period. Accordingly, Corporation Q has an allowable credit of $250 attributable to qualified first-year wages and $1,500 attributable to qualified second-year wages.
Example 5.Assume the same facts as in example 4, except that all dates are 1 year later. Thus, I first began work for Corporation Q on January 1, 1982, was convicted on March 1, 1982, and was rehired on November 1, 1982. Under these facts, Q is not entitled to take a targeted jobs credit with respect to I's wages because I is a nonqualifying rehire.
Example 6.J, an economically disadvantaged youth, first began work for Corporation R, a calendar year cash receipts and disbursements method taxpayer, on December 1, 1979. On July 1, 1980, J was laid off by Corporation R and began work for Corporation S, which is unrelated to Corporation R, on July 2, 1980. On November 1, 1980, J again began work for Corporation R and continued working for Corporation R until January 1, 1982. At the time J first began work for Corporation S, J no longer met the qualifications of an economically disadvantaged youth. Corporation S may not claim a credit for wages paid to J because J was not a member of a targeted group at the time he began work for Corporation S. Corporation R, however, may claim a credit for wages paid to J because J was a member of a targeted group when he was hired by Corporation R. Corporation R's qualified first-year wages paid to J are the wages paid for services performed by J from December 1, 1979, to July 1, 1980, and from November 1, 1980, to November 30, 1980. Corporation R's qualified second-year wages paid to J are wages paid for services performed by J from December 1, 1980, to November 30, 1981. Corporation R may not claim a credit for wages paid for services performed by J after November 30, 1981.
Example 7.K, a member of a targeted group, first began work for Corporation T on January 1, 1979. For the pay periods from January 1, 1979, to March 31, 1979, Corporation T received federally funded payments for on-the-job training for K and paid wages of $2,000 to K. During the remainder of 1979 Corporation T paid wages of $7,000 to K. Corporation T may claim a credit on $6,000 of qualified first-year wages. Amounts paid to K by Corporation T during the pay periods for which Corporation T received federally funded payments for on-the-job training for K are not considered wages for purposes of the credit. However, Corporation T may consider $6,000 of the total $7,000 of wages paid after March 31, 1979, as qualified first-year wages.
Example 8.P first began work for Corporation X on January 1, 1981, as an individual who was certified to be an eligible employee for purposes of the WIN credit provided in section 40. Corporation X paid P $6,000 of wages during its taxable year beginning on January 1, 1981, and $6,000 of wages during its taxable year beginning on January 1, 1982. X can claim a targeted jobs credit for the wages paid in 1982 if the requirements of section 51 are met. For purposes of section 51 (a), P's qualified first-year wages are the wages paid from January 1, 1981, to December 31, 1981, and P's qualified second-year wages are the wages paid from January 1, 1982, to December 31, 1982. Thus, Corporation X is only entitled to claim a targeted job credit based on P's qualified second-year wages.
Example 9. (i) L, 15 years of age, first began work for Corporation U on August 1, 1979. On September 3, 1979, L began her junior year in high school and enrolled in a qualified cooperative education program that was to run for her junior and senior years. On October 1, 1979, when L turned 16, she met all the requirements of § 1.51-1(c)(2)(i) and qualified as a youth participating in a qualified cooperative education program. Corporation U is entitled to claim a credit on wages paid or incurred for services performed by L after September 30, 1979, so long as L meets the requisite requirements. L's summer vacation began on June 1, 1980. Assume that the cooperative education program L was enrolled in did not continue during the summer vacation (i.e., the written agreement between the employer and the school did not cover the summer vacation). Thus, during her summer vacation, L did not meet the requirement of actively pursuing a qualified cooperative education program. Accordingly, Corporation U may not claim a credit on wages paid for services performed by L during L's summer vacation. On September 2, 1980, L began her senior year, and again met all the requirements of § 1.51-1(c)(2)(i). She continued to meet these requirements until June 5, 1981, when she graduated from high school. Accordingly, Corporation U may claim a credit on wages paid for services performed after September 1, 1980, and before June 5, 1981.
(ii) Assume the same facts as in (i), above, except that all dates are 3 years later. Under these facts, U is not entitled to claim a targeted jobs credit with respect to any of L's wages because L has not been timely certified under section 51(d)(16) and § 1.51-1(d)(3).
Example 10.D began work for a drugstore owned by E as a sole proprietor on January 1, 1979, and was certified as a member of a targeted group with respect to E. On June 1, 1979, E sold the drugstore where D worked to F, who continued to operate the drugstore with D as an employee. D's qualification as a member of a targeted group is not required to be redetermined in order for F to qualify for the targeted jobs credit. F will take into account the certification of D's eligibility that was provided to E. F will have qualified first-year wages consisting of the first $6,000 of wages paid or incurred to D by E and F from January 1, 1979 to December 31, 1979 (reduced by any qualified wages paid or incurred by E to D from January 1, 1979, to May 31, 1979). F's qualified second-year wages will consist of the first $6,000 of wages paid or incurred to D by F from January 1, 1980, to December 31, 1980.
Example 11.G began work in a machine shop owned by H as a sole proprietor on January 1, 1979, and was certified as a member of a targeted group with respect to H. On June 1, 1980, H transferred all the assets of the machine shop to newly formed Corporation P. Corporation P retained G as an employee in the machine shop. G's qualification as a member of a targeted group is not required to be redetermined in order for P to qualify for the targeted jobs credit. H has qualified first-year wages in the amount of the first $6,000 of wages paid or incurred to G by H from January 1, 1979, to December 31, 1979. Corporation P has qualified second-year wages in the amount of the first $6,000 of wages paid or incurred to G by H and Corporation P from January 1, 1980, to December 31, 1980 (reduced by any qualified second-year wages paid by H to G).
Example 12.W operates a retail store as a sole proprietor. On June 1, 1982, W hires S after receiving a written determination from a local community organization that S meets the requirements of an economically disadvantaged youth. W does not request a certification from the State employment security agency as to S's eligibility. W is not entitled to claim a credit with respect to wages paid to S because W did not receive, or request in writing, a certification from the State employment security agency as to S's eligibility on or before the day on which S began work for W.
Example 13.Corporation V is a cash receipts and disbursements method taxpayer with a July 1 through June 30 taxable year. In the taxable year ending June 30, 1980, the aggregate unemployment insurance wages paid by V were $150,000. In calendar year 1979 the aggregate unemployment insurance wages paid by Corporation V were $110,000. Corporation V's qualified first-year wages are limited to 30 percent of the aggregate unemployment insurance wages paid by it in calendar year 1979 or $33,000 (30 percent of $110,000), even though the aggregate unemployment insurance wages paid by it in the taxable year ending June 30, 1980, were $150,000.
Example 14.Assume the same facts as in example 13, except that all dates are 3 years later. Since the limitation on qualified first-year wages does not apply to taxable years beginning after December 31, 1981, Corporation V's qualified first-year wages are $150,000.
Example 15.M operates a retail store as a sole proprietor. N and O, both members of a targeted group, first began work for M on January 1, 1979. M paid N total qualified first-year wages of $6,000 in 1979. Three thousand one hundred dollars of those wages were for services in M's retail store, and $2,900 of those wages were for services as M's maid. M paid O total qualified first-year wages of $6,000 in 1979. Three thousand dollars of those wages were for services in M's store and $3,000 of those wages were for services as M's chauffeur. M has an allowable credit of $3,000 in 1979 on all $6,000 of qualified first-year wages paid to N because more than one-half of the remuneration paid by M to N was for services in M's trade or business. M may not take into account the wages paid to O because not more than one-half of the remuneration paid by M to O was for services in M's trade or business. Acordingly, M may not claim a credit on wages paid to O.
[T.D. 8062, 50 FR 45998, Nov. 6, 1985]
10 Tax Surcharge
§ 1.52-1 Trades or businesses that are under common control.
(a) Apportionment of jobs credit among members of a group of trades or businesses that are under common control—(1) Targeted jobs credit. (i) In the case of a group of trades or businesses that are under common control (within the meaning of paragraph (b) of this section) at any time during the calendar year, the amount of the targeted jobs credit (computed under section 51 as if all the organizations that are under common control are one trade or business) under section 4-1B must be apportioned among the members of the group on the basis of each member's proportionate share of the wages giving rise to such credit. If the group of trades or businesses that are under common control have different taxable years, the credit shall be computed as if all the organizations have the same taxable year as the organization for which a determination of the proportionate share of the credit is being made. For taxable years beginning before January 1, 1982, the amount of the qualified first-year wages cannot exceed 30 percent of the aggregate unemployment insurance wages paid by the group of trades or businesses under common control during the calendar year ending in the taxable year of the organization for which a determination of the proportionate share of the credit is being made. The limitations in section 53 and the regulations thereunder apply to each organization individually (although, in applying these limitations, an affiliated group of corporations electing to make a consolidated return shall be treated as one organization).
(ii) The application of the subparagraph may be illustrated by the following examples:
Example 1. (a) Corporation M and its three subsidiaries, Corporations N, O, and P, are a group of businesses that are under common control and each uses the cash receipts and disbursements method of accounting and has a calendar year taxable year. Corporations M, N, O, and P paid out the following amounts in unemployment insurance wages, qualified first-year wages and qualified second-year wages during 1980.
Unemployment insurance wages | Qualified 1st-Year wages | Qualified 2d-year wages
Corporation:
M | $600,000 | $184,000 | $75,000
N | 300,000 | 85,000 | 90,000
O | 360,000 | 120,000 | 115,000
P | 24,000 | 24,000 | 0
Total | 1,284,000 | 413,000 | 280,000
(b) Since Corporations M, N, O, and P are under common control, the amount of qualified first-year wages paid by the group is limited to 30 percent of the aggregate unemployment insurance wages paid by the group in the calendar year ending in the group's taxable year. Since the qualified first-year wages of $413,000 exceeds 30% of the aggregate unemployment insurance wages, the group is limited to qualified first-year wages of $385,200 (30% of $1,284,000). The amount of the targeted jobs credit attributable to qualified first-year wages is equal to $192,600 (50% of $385,200). The amount of the credit attributable to qualified second-year wages is equal to $70,000 (25% of $280,000).
(c) The credit is apportioned among Corporations M, N, O, and P on the basis of their proportionate share of the qualified first-year wages or qualified second-year wages giving rise to the credit. Each corporation's share of the credit attributable to qualified first-year wages would be computed as follows:
Each corporation's share of the credit attributable to qualified second-year wages is computed as follows:
Example 2.Assume the facts in example 1 with these additional facts. A, a member of a targeted group, worked for more than one of the members of the controlled group in the taxable year. A first began work for Corporation M on January 1, 1980, and later worked for Corporations N and O during 1980. For services rendered by A during 1980, the following wages were paid to A: Corporation M paid A $2,500 of qualified first-year wages: Corporation N paid A $1,500 of qualified first-year wages; Corporation O paid A $3,000 of qualified first-year wages. Corporations M, N, and O paid A a total of $7,000 of wages during 1980. Only $6,000 of qualified first-year wages per year per employee may be taken into account for purposes of the credit. See § 1.51-1(d)(1). Since Corporations M, N, and O are treated as a single employer under section 52(a), the maximum $6,000 of qualified first-year wages paid A by the group must be apportioned among Corporations M, N, and O as follows:
Example 3. (a) Corporation Q and its two subsidiaries, Corporations R and S, are a group of businesses that are under common control and each uses the cash receipts and disbursements method of accounting. Corporation Q has a calendar year taxable year. Corporation R has a July 1 through June 30 taxable year. Corporation S has an October 1 through September 30 taxable year. For purposes of determining Corporation R's proportionate share of the credit, the credit is computed as if Corporations Q and S have the same taxable year as Corporation R. Accordingly, Corporation R would compute its share of the credit for its 1979-1980 taxable year as set forth below.
Unemployment insurance wages, 1979 | Qualified wages paid from July 1, 1979, to June 30, 1980
1st year wages | 2d year wages
Corporation:
Q | $500,000 | $150,000 | $80,000
R | 300,000 | 110,000 | 50,000
S | 100,000 | 25,000 | 10,000
Total | 900,000 | 285,000 | 140,000
(b) Since Corporations Q, R, and S are under common control, the amount of qualified first-year wages is limited to 30 percent of the aggregate unemployment insurance wages paid by the group during the calendar year ending in Corporation R's taxable year. Since the qualified first-year wages of $285,000 exceeds 30 percent of the aggregate unemployment insurance wages, the group is limited to qualified first-year wages of $270,000 (30% of $900,000). The amount of the targeted jobs credit attributable to qualified first-year wages paid by members of the group during the period of the taxpayer's taxable year is $135,000 (50% of $270,000). The amount of the credit attributable to qualified second-year wages paid or incurred by members of the group during the period of the taxpayer's taxable year is $35,000 (25% of $140,000).
(c) The credit is apportioned to Corporation R on the basis of its proportionate share of the qualified first-year wages and qualified second-year wages giving rise to the credit. Corporation R's share of the credit attributable to qualified first-year wages is $52,105.26
Corporation R's share of the credit attributable to qualified second-year wages is $12,500 Corporation R's share of the credit for its 1979-1980 taxable year is $64,605.26 ($52,105.26 + $12,500).
(2) New jobs credit. In the case of a group of trades or businesses that are under common control at any time during the calendar year, the amount of the new jobs credit (computed under section 51 as if all the organizations that are under common control are one trade or business) under section 44B (as in effect prior to enactment of the Revenue Act of 1978) must be apportioned among the members of the group on the basis of each member's proportionate contribution to the increase in unemployment insurance wages for the entire group. The limitations in section 53 (as in effect prior to enactment of the Revenue Act of 1978) and the regulations thereunder apply to each organization individually (although, in applying these limitations, an affiliated group of corporations electing to make a consolidated return shall be treated as one organization). The application of this subparagraph may be illustrated by the following example:
Example. (a) Corporation T and its three subsidiaries, U, V, and W, are a group of businesses that are under common control and each has a calendar year taxable year. Corporations T, U, V, and W have paid out the following amounts in unemployment insurance wages during 1976 and 1977:
1976 | 1977 | Increase in FUTA wages in 1977 over 1976
Corporation.
T | $1,000,000 | $1,015,000 | + $15,000
U | 500,000 | 650,000 | + 150,000
V | 600,000 | 580,000 | −20,000
W | 40,000 | 100,000 | + 60,000
Total | 2,140,000 | 2,345,000 | 205,000
(b) Since all employees of trades or, businesses that are under common control are treated as employed by a single employer, the computations in section 51 are performed as if all the organizations which are under common control are one trade or business. Consequently, the amounts of the total unemployment insurance wages of the group in 1976 (i.e., $2,140,000) and 1977 (i.e., $2,345,000) are used to determine the increase in unemployment insurance wages in 1977 over the 1976 wage base. Since the amount equal to 102 percent of the 1976 unemployment insurance wages ($2,182,800) is greater than the amount equal to 50 percent of the 1977 unemployment insurance wages ($1,172,500), the increase in unemployment insurance wages in 1977 over the 1976 wage base is $162,200 ($2,345,000-$2,182,800). The limitations in section 51(c), (d), and (g) (as in effect prior to enactment of the Revenue Act of 1978) must also be computed as though all the organizations under common control are one trade or business. For purposes of this example, it is assumed that none of those limitations reduce the amount of increase in unemployment insurance wages. As a result, the amount of the new jobs credit allowed to the group of business is $81,100 (50% of $162,200).
(c) The credit is apportioned among Corporations T, U, and W on the basis of their proportionate contributions to the increase in unemployment insurance wages. No credit would be allowed to Corporation V because it did not contribute to the increase in the group's unemployment insurance wages. Corporation T's share of the credit would be $5,406.66 ($81,100 × ($15,000 ÷ $225,000 (i.e., $15,000 + $150,000 + $60,000))), Corporation U's share would be $54,066.67 ($81,100 × ($150,000 ÷ 225,000)), and Corporation W's share would be $21,626.67 ($81,100 × ($60,000 ÷ $225,000)).
(b) Trades or businesses that are under common control. For purposes of this section, the term “trades or businesses that are under common control” means any group of trades or businesses that is either a “parent-subsidiary group under common control” as defined in paragraph (c) of this section, a “brother-sister group under common control” as defined in paragraph (d) of this section, or a “combined group under common control” as defined in paragraph (e) of this section. For purposes of this section and §§ 1.52-2 and 1.52-3, the term “organization” means a sole proprietorship, a partnership, a trust, an estate, or a corporation. An organization may be a member of only one group of trades or businesses under common control. If, without the application of this paragraph, an organization would be a member of more than one such group, that organization shall indicate in its timely filed return the group in which it is being included. If the organization does not so indicate, then the district director with audit jurisdiction of the organization's return will determine the group in which the organization is to be included.
(c) Parent-subsidiary group under common control—(1) In general. The term “parent-subsidiary group under common control” means one or more chains of organizations conducting trades or businesses that are connected through ownership of a controlling interest with a common parent organization if—
(i) A controlling interest in each of the organizations, except the common parent organization, is owned (directly and with the application of § 1.414(c)-4(b)(1), (2), and (3)) by one or more of the other organizations; and
(ii) The common parent organization owns (directly and with the application of § 1.414(c)-4(b)(1), (2), and (3)) a controlling interest in at least one of the other organizations, excluding, in computing the controlling interest, any direct ownership interest by the other organizations.
(2) Controlling interest defined. For purposes of this paragraph, the term “controlling interest” means:
(i) In the case of a corporation, ownership of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of the corporation;
(ii) In the case of a trust or estate, ownership of an actuarial interest (determined under paragraph (f) of this section) of more than 50 percent of the trust or estate;
(iii) In the case of a partnership, ownership of more than 50 percent of the profit interest or capital interest of the partnership; and
(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.
(d) Brother-sister group under common control—(1) In general. The term “brother-sister group under common control” means two or more organizations conducting trades or businesses if—
(i) The same five or fewer persons who are individuals, estates, or trusts own (directly and with the application of § 1.414(c)-4), a controlling interest of each organization; and
(ii) Taking into account the ownership of each person only to the extent that person's ownership is identical with respect to each organization, such persons are in effective control of each organization.
The five or fewer persons whose ownership is considered for purposes of the controlling interest requirement for each organization must be the same persons whose ownership is considered for purposes of the effective control requirement.
(2) Controlling interest defined. For purposes of this paragraph, the term “controlling interest” means:
(i) In the case of a corporation, ownership of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of the shares of all classes of stock of the corporation;
(ii) In case of a trust or estate, ownership of an actuarial interest (determined under paragraph (f) of this section) of a least 80 percent of the trust or estate;
(iii) In the case of a partnership, ownership of at least 80 percent of the profit interest or capital interest of the partnership; and
(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.
(3) Effective control defined. For purposes of this paragraph “effective control” means:
(i) In the case of a corporation, ownership of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of the shares of all classes of stock of the corporation;
(ii) In the case of a trust or estate, ownership of an actuarial interest (determined under paragraph (f) of this section) of more than 50 percent of the trust or estate;
(iii) In the case of a partnership, ownership of more than 50 percent of the profit interest or capital interest of the partnership; and
(iv) In the case of a sole proprietorship, ownership of the sole proprietorship.
(e) Combined group under common control. The term “combined group under common control” means a group of three or more organizations, in which (1) each organization is a member of either a parent-subsidiary group under common control or brother-sister group under common control, and (2) at least one organization is the common parent organization of a parent-subsidiary group under common control and also a member of a brother-sister group under common control.
(f) Actuarial interest. For purposes of this section, the actuarial interest of each beneficiary of a trust or estate shall be determined by assuming the maximum exercise of discretion by the fiduciary in favor of the beneficiary. The factors and method prescribed in § 20.2031-7 or, for certain prior periods, 20.2031-7A of this chapter (Estate Tax Regulations) for use in ascertaining the value of an interest in property for estate tax purposes will be used to determine a beneficiary's actuarial interest.
(g) Exclusion of certain interests and stock in determining control. In determining control under this paragraph, the term “interest” and the term “stock” do not include an interest that is treated as not outstanding under § 1.414(c)-3. In addition, the term “stock” does not include treasury stock or nonvoting stock that is limited and preferred regarding dividends.
(h) Transitional rule—(1) In general. Paragraph (d) of this section, as amended by T.D. 8179, applies to all taxable years to which section 52(b) applies.
(2) Election. In the case of taxable years ending before March 2, 1988.
(i) If, pursuant to paragraph (b) of this section, an organization indicated in a timely filed return that it chose to be a member of a brother-sister group under common control, and it is not a member of such group because of the amendments to paragraph (d) of this section made by T.D. 8179 such organization may make the choice described in paragraph (b) of this section by filing an amended return on or before September 2, 1988 if such organization would otherwise still be a member of more than one group of trades or businesses under common control, and
(ii) If an organization—
(A) Is a member of a brother-sister group of trades or businesses under common control under § 1.52-1(d)(1) as in effect before amendment by T.D. 8179 (“old group”), for such taxable year, and
(B) Is not such a member for such taxable year because of the amendments made by such Treasury decision,
such organization (whether or not a corporation) nevertheless will be treated as a member of such old group if all the organizations (whether or not corporations) that are members of the old group meet all the requirements of § 1.1563-1(d)(3) with respect to such taxable year.
(i) Applicability date. This section applies to taxable years beginning on or after January 1, 2025. See 26 CFR 1.52-1, as revised April 1, 2024, for taxable years beginning before January 1, 2025.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7553, 43 FR 31322, July 21, 1978, as amended by T.D. 7921, 48 FR 52904, Nov. 23, 1983; T.D. 7955, 49 FR 19975, May 11, 1984; T.D. 8179, 53 FR 6605, Mar. 2, 1988; 53 FR 8302, Mar. 14, 1988; 53 FR 16408, May 9, 1988; T.D. 8540, 59 FR 30102, June 10, 1994; T.D. 8179, 84 FR 33002, July 11, 2019; T.D. 10018, 89 FR 106851, Dec. 30, 2024]
§ 1.52-2 Adjustments for acquisitions and dispositions.
(a) General rule. The provisions in this section only apply to the computation of the new jobs credit. If, after December 31, 1975, an employer acquires the major portion of a trade or business or the major portion of a separate unit of a trade or business, then, for purposes of computing the new jobs credit for any calendar year ending after the acquisition, both the amount of unemployment insurance wages and the amount of total wages considered to have been paid by the acquiring employer, for both the year in which the acquisition occurred and the preceding year, must be increased, respectively, by the amount of unemployment insurance wages and the amount of total wages paid by the predecessor employer that are attributable to the acquired portion of the trade or business or separate unit. If the predecessor employer informs the acquiring employer in writing of the amount of unemployment insurance wages and the amount of total wages attributable to the acquired portion of the trade or business that have been paid during the periods preceding the acquisition, then, for purposes of computing the credit for any calendar year ending after the acquisition the amount of unemployment insurance wages and the amount of total wages considered paid by the predecessor employer shall be decreased by those amounts. Regardless of whether the predecessor employer so informs the acquiring employer, the predecessor employer shall not be allowed a credit for the amount of any increase in the employment insurance wages or the total wages in the calendar year of the acquisition attributable to the acquired portion of the trade or business over the amount of such wages in the calendar year preceding the acquisition.
(b) Meaning of terms—(1) Acquisition. (i) For the purposes of this section, the term “acquisition” includes a lease agreement if the effect of the lease is to transfer the major portion of the trade or business or of a separate unit of the trade or business for the period of the lease. For instance, if one company leases a factory (including equipment) to another company for a 2-year period, the employees are retained by the second company, and the factory is used for the same general purposes as before, then for purposes of this section the lessee has acquired the lessor's trade or business for the period of the lease.
(ii) Neither the major portion of a trade or business nor the major portion of a separate unit of a trade or business is acquired merely by acquiring physical assets. The acquisition must transfer a viable trade or business.
(iii) Subdivision (ii) of this subparagraph may be illustrated by the following examples:
Example 1.R Co., a restaurant, sells its building and all its restaurant equipment to S Co. and moves into a larger, more modern building across the street. R Co. purchases new equipment, retains its name and continues to operate as a restaurant. S Co. opens a new restaurant in the old R Co. building. S Co. has merely acquired the old R Co. assets; it has not acquired any portion of R Co.'s business.
Example 2.The facts are the same as in Example 1, except that R Co. also sells its name and goodwill to S Co. and ceases to operate a restaurant business. S Co. operates its restaurant using the old R Co. name. In this situation, S Co. has acquired R Co.'s business.
(2) Separate unit. (i) A separate unit is a segment of a trade or business capable of operating as a self-sustaining enterprise with minor adjustments. The allocation of a portion of the goodwill of a trade or business to one of its segments is a strong indication that that segment is a separate unit.
(ii) The following examples are illustrations of the acquisition of a separate unit of a trade or business:
Example 1.The M Corp., which has been engaged in the sale and repair of boats, leases the repair shop building and all the property used in its boat repair operations to the N Co. for four years and gives the N Co. a covenant not to compete in the boat repair business for the period of the lease. The N Co. is considered to have acquired a separate unit of M Corp.'s business for the period of the lease.
Example 2. (a) The P Co. is engaged in the operation of a chain of department stores. There are eight divisions, each division is located in a different metropolitan area of the country, and each division operates under a different name. Although certain buying and merchandising functions are centralized, each division's day-to-day operations are independent of the others. The Q Corp. acquires all of the physical and intangible assets of one of the divisions, including the division's name. Other than making those minor adjustments necessary to give the division buying and merchandising departments, the Q Corp. allows the division to continue doing business in the same manner as it had been operating prior to the acquisition. The Q Corp. has acquired a separate unit of the P Co.'s business.
(b) The facts are the same as in paragraph (a) of example 2, except that Q Corporation buys the division merely to obtain its store locations. Before the Q Corporation takes over, the division liquidates its inventory in a going-out-of-business sale. The Q Corporation has merely acquired assets in this transaction, not a separate unit of P Company's business.
Example 3.The R Company processes and distributes meat products. Both the processing division and the distributorship are self-sustaining, profitable operations. The acquisition of either the meat processing division or the distributorship would be an acquisition of a separate unit of the R Company's business.
Example 4.The S Corporation is engaged in the manufacture and sale of steel and steel products. S Corporation also owns a coal mine, which it operates for the sole purpose of supplying its coal requirements for its steel manufacturing operations. The acquisition of the coal mine would be an acquisition of a separate unit of the S company's business.
Example 5.The T Company, which is engaged in the business of operating a chain of drug stores, sells its only downtown drug store to the V Company and agrees not to open another T Company store in the downtown area for five years. Included in the purchase price is an amount that is charged for the goodwill of the store location. The V Company has acquired a separate unit of the T Company's business.
Example 6.The W Company, which is engaged in the business of operating a chain of drug stores sells one of its stores to the X Company, but continues to operate another drug store three blocks away. The X Company opens the store doing business under its own name. The X Company has not acquired a separate unit of the W Company's business.
Example 7. (a) The Y Corporation, which is engaged in the manufacture of mattresses, sells one of its three factories to the Z Company. At the time of the sale, the factory is capable of profitably manufacturing mattresses on its own. Z Company has acquired a separate unit of the Y Corporation.
(b) The facts are the same as in (a) above, except that a profitable manufacturing operation cannot be conducted in the factory standing on its own. Z Company has not acquired a separate unit of the Y Corporation.
Example 8.The O Construction Company is owned by A, B, and C, who are unrelated individuals. It owns equipment valued at 1.5 million dollars and construction contracts valued at 6 million dollars. A, wishing to start his own company, exchanges his interest in O Company for 2 million dollars of contracts and a sufficient amount of equipment to enable him to begin business immediately. A has acquired a separate unit of the O Company's business.
(3) Major portion. All the facts and circumstances surrounding the transaction shall be taken into account in determining what constitutes a major portion of a trade or business (or separate unit). Factors to be considered include:
(i) The fair market value of the assets in the portion relative to the fair market value of the other assets of the trade or business (or separate unit);
(ii) The proportion of goodwill attributable to the portion of the trade or business (or separate unit);
(iii) The proportion of the number of employees of the trade or business (or separate unit) attributable to the portion in the periods immediately preceding the transaction; and
(iv) The proportion of the sales or gross receipts, net income, and budget of the trade or business (or separate unit) attributable to the portion.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7553, 43 FR 31323, July 21, 1978, as amended by T.D. 7921, 48 FR 52906, Nov. 23, 1983]
§ 1.52-3 Limitations with respect to certain persons.
(a) Mutual savings institutions. In the case of an organization to which section 593 applies (that is, a mutual savings bank, a cooperative bank or a domestic building and loan association), the amount of the targeted jobs credit (new jobs credit in the case of wages paid before 1979) allowable under section 44B shall be 50 percent of the amount otherwise determined under section 51, or, in the case of an organization under common control, under § 1.52-1 (a) and (b).
(b) Regulated investment companies and real estate investment trusts. In the case of a regulated investment company or a real estate investment trust subject to taxation under subchapter M, chapter 1 of the Code, the amount of the targeted jobs credit (new jobs credit in the case of wages paid before 1979) allowable under section 44B shall be reduced to the company's or trust's ratable share of the credit. The ratable share shall be determined in accordance with rules similar to the rules provided in section 46(e)(2)(B) and the regulations thereunder. For purposes of computing the ratable share, the reduction of the deduction for wage or salary expenses under § 1.280C-1 shall not be taken into account.
(c) Cooperatives—(1) Taxable years ending after October 31, 1978. For taxable years ending after October 31, 1978, in the case of a cooperative organization described in section 1381(a), rules similar to rules provided in section 46(h) and the regulations thereunder shall apply in determining the distribution of the amount of the targeted jobs credit (new jobs credit in the case of wages paid before 1979) allowable to the cooperative organization and its patrons under section 44B.
(2) Taxable years ending before November 1, 1978. For taxable years ending before November 1, 1978, in the case of a cooperative organization described in section 1381(a), the amount of new jobs credit allowable under section 44B shall be reduced to the cooperative's ratable share of the credit. The ratable share shall be the ratio which the taxable income of the cooperative for the taxable year bears to its taxable income increased by the amount of the deductions allowed under section 1382 (b) and (c). For purposes of computing the ratable share, the reduction of the deduction for wage or salary expenses under § 1.280C-1 shall not be taken into account.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
§ 1.53-1 Limitation based on amount of tax.
(a) General rule—(1) Targeted jobs credit. For taxable years beginning after December 31, 1978, the amount of the targeted jobs credit allowed by section 44B (as amended by the Revenue Act of 1978) shall not exceed 90 percent of the tax imposed by chapter 1, reduced by the credits enumerated in section 53(a).
(2) New jobs credit. For taxable years beginning before January 1, 1979, the amount of the new jobs credit allowed by section 44B (as in effect prior to enactment of the Revenue Act of 1978) shall not exceed the tax imposed by chapter 1, reduced by the credits enumerated in section 53(a).
(b) Special rule for 1978-79 fiscal year. In the case of a taxable year beginning before January 1, 1979, and ending after that date, the sum of the targeted jobs credit (determined without regard to the tax liability limitation in paragraph (a)(1) of this section) and the new jobs credit (determined without regard to the tax liability limitation in (a)(2) of this section) shall not exceed the tax imposed by chapter 1, reduced by the credits enumerated in section 53(a).
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
§ 1.53-2 Carryback and carryover of unused credit.
(a) Allowance of unused credit as a carryback or carryover—(1) In general. Section 53(b) (formerly designated as section 53(c) for taxable years beginning before 1979) provides for carrybacks and carryovers of unused targeted jobs credit (new jobs credit in the case of wages paid before 1979). An unused credit is the excess of the credit determined under section 51 for the taxable year over the limitation provided by § 1.53-1 for such taxable year. Subject to the limitations contained in paragraph (b) of this section and paragraph (f) of § 1.53-3, an unused credit shall be added to the amount allowable as a credit under section 44B for the years to which an unused credit can be carried. The year with respect to which an unused credit arises shall be referred to in this section as the “unused credit year.”
(2) Taxable years to which unused credit may be carried. An unused targeted jobs credit (new jobs credit in the case of wages paid before 1979) shall be a new employee credit carryback to each of the 3 taxable years preceding the unused credit year and a new employee credit carryover to each of the 15 taxable years succeeding the unused credit year. An unused credit must be carried first to the earliest of the taxable years to which it may be carried, and then to each of the other taxable years (in order of time) to the extent that the unused credit may not be added (because of the limitation contained in paragraph (b) of this section) to the amount allowable as a credit under section 44B for a prior taxable year.
(b) Limitations on allowance of unused credit—(1) In general. The amount of the unused targeted jobs credit (new jobs credit in the case of wages paid before 1979) from any particular unused credit year which may be added under section 53(b)(1) (section 53(c)(1) in the case of a new jobs credit) to the amount allowable as a credit under section 44B for any of the preceding or succeeding taxable years to which such credit may be carried shall not exceed the amount by which the limitation in § 1.53-1 for such preceding or succeeding taxable year exceeds the sum of (i) the credit allowable under section 44B for such preceding or succeeding taxable year, and (ii) other unused credits carried to such preceding or succeeding taxable year which are attributable to unused credit years prior to the particular unused credit year. Thus, in determining the amount, if any, of an unused credit from a particular unused credit year which shall be added to the amount allowable as a credit for any preceding or succeeding taxable year, the credit earned for such preceding or succeeding taxable year, plus any unused credits originating in taxable years prior to the particular unused credit year, shall first be applied against the limitation based on amount of tax for such preceding or succeeding taxable year. To the extent the limitation based on amount of tax for the preceding or succeeding year exceeds the sum of the credit earned for such year and other unused credits attributable to years prior to the particular unused credit year, the unused credit from the particular unused credit year shall be added to the amount allowable as a credit under section 44B for such preceding or succeeding year. If any portion of the unused credit is a carryback to a taxable year beginning before January 1, 1977, section 44B shall be deemed to have been in effect for such taxable year for purposes of allowing such carryback as a credit under section 44B. To the extent that an unused credit cannot be added for a particular preceding or succeeding taxable year because of the limitation contained in this paragraph, such unused credit shall be available as a carryback or carryover to the next succeeding taxable year to which it may be carried.
(2) Special rules for an electing small business corporation. An unused targeted jobs credit (new jobs credit in the case of wages paid before 1979) under section 44B of a corporation which arises in an unused credit year for which the corporation is not an electing small business corporation (as defined in section 1371(b)) and which is a carryback or carryover to a taxable year for which the corporation is an electing small business corporation shall not be added to the amount allowable as a credit under section 44B to the shareholders of such corporation for any taxable year. However, a taxable year for which the corporation is an electing small business corporation shall be counted as a taxable year for purposes of determining the taxable years to which such unused credit may be carried.
(3) Corporate acquisitions. For the carryover of unused credits under section 44B in the case of certain corporate acquisitions, see section 381(c)(26) and § 1.381(c)(26)-1.
(4) Examples. This paragraph may be illustrated by the following examples.
Example 1.In 1978, A, a calendar year taxpayer, had an unused new jobs credit of $2,000. In 1979, A has a targeted jobs credit of $2,000 and a tax liability imposed by chapter 1 of the Code of $4,000 after all credits listed in section 53(a) have been taken into account. The amount of A's targeted jobs credit allowable under section 44B for 1979 is 90 percent of A's tax liability. The amount of the new jobs credit that may be carried to 1979 is limited to $1,600 ($3,600 [90% of $4,000]−$2,000).
Example 2.In 1979, B, a calendar year taxpayer, has a tax liability imposed by chapter 1 of the Code of $10,000 after all credits listed in section 53(a) have been taken. B's targeted jobs credit for that taxable year is limited to 90 percent of his income tax liability or $9,000. B had a $15,000 targeted jobs credit in 1979 resulting in an unused targeted jobs credit of $5,000 for that year. In 1976 and 1977 B had tax liabilities imposed by chapter 1 of the Code of $3,000 and $4,000 respectively after all credits listed in section 53(a) had been taken. For purposes of carrying back an unused targeted jobs credit to a taxable year beginning before January 1, 1977, section 44B as amended by the Revenue Act of 1978 is deemed to have been in effect for such taxable year. Accordingly, the applicable tax liability limitation for 1976 would be governed by section 53(a) (as amended by the Revenue Act of 1978) which limits the amount of targeted jobs credit allowed to 90 percent of the tax imposed by chapter 1 of the Code after all credits listed in section 53(a) have been taken. B may carry back $2,700 (90% of $3,000) of the 1979 unused targeted jobs credit to 1976. B may carry back $4,000 of the unused targeted jobs credit to 1977 because section 53(a) as it applied to the 1977 taxable year limited the amount of the credit to 100 percent of the taxpayer's tax liability imposed by chapter 1 of the Code after all credits listed in section 53(a) had been taken.
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7921, 48 FR 52906, Nov. 23, 1983]
§ 1.53-3 Separate rule for pass-through of jobs credit.
(a) In general. Under section 53(b), in the case of a new jobs credit or targeted jobs credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation, the amount of the credit that may be taken into account by a partner, beneficiary, or shareholder may not exceed a limitation under section 53(b) separately computed with respect to the partner's, beneficiary's, or shareholder's interest in the entity. A credit is subject to the limitation of section 53(b) with respect to a partner, beneficiary, or shareholder if it is earned by a partnership, estate or trust, or subchapter S corporation in a taxable year ending within, or ending before, a taxable year beginning before January 1, 1979 of the partner, beneficiary, or shareholder. See paragraph (f) of this section for rules on carryback or carryover of a credit subject to separate limitation. This section prescribes rules, under the authority of section 44B(b), relating to the computation of the separate limitation. For purposes of this section, references to section 53(a) and (b) are to that section as it existed before it was amended by the Revenue Act of 1978. This paragraph may be illustrated by the following examples:
Example 1.A, a calendar year taxpayer, is a partner in P, a calendar year partnership. A's pro rata portion of the credit earned by P in 1978 is $200. The $200 credit to be claimed on A's 1978 return is subject to the separate limitation in section 53(b) because the limitation applies to taxable years of the taxpayer beginning before January 1, 1979.
Example 2.B, a calendar year taxpayer, is a shareholder in Corporation M, a subchapter S corporation with a July to June fiscal year. B's pro rata portion of the credit earned by Corporation M in its taxable year beginning in 1978 is $100. The $100 credit to be claimed on B's 1979 return is not subject to the separate limitation requirement of section 53(b) because the limitation only applies to taxable years of the taxpayer beginning before 1979, notwithstanding the credit was earned by Corporation M before 1979.
(b) Application of credit earned. A credit earned under section 44B by a partnership, estate or trust, or subchapter S corporation shall be applied by a partner, beneficiary, or shareholder, to the extent allowed under section 53(b), before applying any other credit earned under section 44B. For example, if an individual has a new jobs credit from a proprietorship of $2,000 and from a partnership (after applying section 53(b)) of $1,800, but the credit must be limited under section 53(a) to $3,000, the entire $1,800 credit from the partnership would be applied before any part of the $2,000 amount is applied.
(c) Amount of separate limitation. The amount of the separate limitation is equal to the partner's, beneficiary's, or shareholder's limitation under section 53(a) for the taxable year multiplied by a fraction. The numerator of the fraction is the portion of the taxpayer's taxable income for the year attributable to the taxpayer's interest in the entity. The denominator of the fraction is the taxpayer's total taxable income for the year reduced by the zero bracket amount, if any.
(d) Portion of taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation—(1) General rule. The portion of a taxpayer's taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation is the amount of income from that entity the taxpayer is required to include in gross income, reduced by—
(i) The amount of the deductions allowed to the taxpayer that are attributable to the taxpayer's interest in the entity; and
(ii) A proportionate share of the deductions allowed to the taxpayer not attributable to a specific activity (as defined in paragraph (e)).
If a deduction comprises both an item that is attributable to the taxpayer's interest in the entity and an item or items that are not attributable to the interest in the entity, and if the deduction is limited by a provision of the Code (such as section 170(b), relating to limitations on charitable contributions), the deduction must be prorated among the items taken into account in computing the deduction. For example, if an individual makes a charitable contribution of $5,000 and his distributive share of a partnership includes $2,000 in charitable contributions made by the partnership, and if the charitable contribution deduction is limited to $3,500 under section 170(b), then the portion of the deduction allowed to the taxpayer that is not attributable to a specific activity is $2,500 ($3,500 × ($5,000 ÷ $7,000)) and the portion of the deduction allowed to the taxpayer that is attributable to the interest in the partnership is $1,000 ($3,500 × ($2,000 ÷ $7,000)).
(2) Deductions attributable to an interest in an entity. Examples of deductions that are attributable to the taxpayer's interest in an entity include (but are not limited to) a deduction under section 1202 attributable to a net capital gain passed through the entity, and a deduction attributable to a deductible item (such as a charitable contribution) that has been passed through the entity.
(3) Computation of the proportionate share of deductions not attributable to a specific activity. The proportionate share of a deduction of the taxpayer not attributable to a specific activity is obtained by multiplying the amount of the deduction by a fraction. The numerator of the fraction is the income from the entity that the taxpayer is required to include in gross income, reduced by the amount of the deductions of the taxpayer that are attributable to the taxpayer's interest in the entity. The denominator is the taxpayer's gross income reduced by the amount of all the deductions attributable to specific activities.
(4) Examples. The method of determining the amount of taxable income attributable to an interest in a partnership, estate or trust, or subchapter S corporation is illustrated by the following examples:
Example 1. (a) A, a single individual, is a shareholder in S Corporation, a subchapter S corporation. A is required to include the following amounts from S corporation is his gross income:
Salary | $3,000
Undistributed taxable income:
Ordinary income | 8,000
Net capital gain | 2,000
Total | 10,000
Total | 13,000
A has income from other activities:
Ordinary income | 6,000
Net capital gain | 4,000
Total | 10,000
(b) In order to determine the taxable income attributable to A's interest in S Corporation, it is necessary to reduce the amount of income from S Corporation that A is required to include in gross income by the amount of A's deductions attributable to the interest in S Corporation and by a proportionate share of A's deductions not attributable to a specific activity. These computations are made in paragraph (c) of this example. However, before the computation reducing A's income by a proportionate share of the deductions not attributable to a specific activity can be made, the ratio described in subparagraph (3) of this paragraph (d) must be determined. The numerator of the ratio (the amount of income from S Corporation that A is required to include in gross income, reduced by the amount of the deductions attributable to A's interest in S Corporation) is obtained in paragraph (c) of this example in the process of computing A's taxable income attributable to the interest in S Corporation. The determination of the denominator (A's gross income reduced by the amount of all deductions attributable to specific activities), however, require a separate computation, which follows:
Gross income:
Income from S Corporation | $13,000
Income from other sources | 10,000
Total | 23,000
Less: Deductions attributable to specific activities:
Section 1202 deduction (50 percent. of $6,000) | 3,000
A's gross income reduced by the amount of the deductions attributable to specific activities (denominator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) | 20,000
(c) Computation of the amount of A's taxable income attributable to the interest in S Corporation:
Income from S Corporation that A is required to include in gross income:
Ordinary income | $11,000
Net capital gain | 2,000
Total | 13,000
Less: Deductions of the taxpayer attributable to the interest in S Corporation:
Section 1202 deduction (50 pct. of $2,000) | 1,000
(Numerator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) | 12,000
Less: Proportionate share of the deductions of the taxpayer not attributable to a specific activity:
Personal exemption deduction ($750 × $12,000/$20,000) | 450
Zero bracket amount ($2,200 × $12,000/$20,000) | 1,320
Total | 1,770
Portion of A's taxable income attributable to interest in S Corporation. | 10,230
Example 2. (a) C, a married individual with two children, is a partner in the CD Company. C's distributive share of the CD Company consists of the following:
Ordinary income (other than guaranteed payment) | $38,420
Guaranteed payment | 20,000
Net long-term capital gain | 6,000
Net short-term capital loss | 2,000
Dividends qualifying for exclusion | 100
Charitable contributions | 500
C also has items of income from other sources and deductions, as follows:
Ordinary income | $21,680
Short-term capital gain | 2,000
Dividends qualifying for exclusion | 400
Deductions:
Deductible medical expenses | 16,000
Charitable contributions | 4,000
Alimony | 18,000
Interest and taxes on home | 8,000
Loss relating to another specific activity | 4,000
(b) In order to determine C's taxable income attributable to the interest in the partnership, it is necessary to reduce the amount of income from the partnership that C is required to include in gross income by the amount of C's deductions attributable to the interest in the partnership and by a proportionate share of C's deductions not attributable to a specific activity. These computations are made in paragraph (c) of this example. However, before the computation reducing C's income by a proportionate share of the deductions not attributable to a specific activity can be made, the ratio described in paragraph (d)(3) of this section must be determined. The numerator of the ratio is determined in paragraph (c) of this example in the process of computing C's taxable income attributable to the interest in the partnership. The denominator, however, requires a separate computation, reducing C's gross income by the amount of all deductions attributable to specific activities. This computation is as follows:
Gross income: Income from the partnership:
Ordinary income | $58,420
Net long-term capital gain | 6,000
Dividends | 100
Less: Proportionate share of dividend exclusion ($100 × $100/$500) | 20
80
64,500
Income from other sources:
Ordinary income | 21,680
Net short/term capital gain | 2,000
Dividends | 400
Less: Proportionate share of dividend exclusion ($100 × $400/$500) | $80
320
24,000
88,500
Less: Deductions attributable to specific activities:
Net short-term capital loss passed through the partnership | 2,000
Loss related to another specific activity | 4,000
Section 1202 deduction attributable to the interest in the partnership | 2,000
Charitable contribution deduction passed through the partnership | 500
8,500
C's gross income, reduced by the amount of the deductions attributable to specific activities (denominator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) | 80,000
(c) Computation of the amount of C's taxable income attributable to the interest in the partnership:
Distributive share of ordinary income (other than guaranteed payments) | $38,420
Guaranteed payment | 20,000
Distributive share of dividends less share of exclusion | 80
Distributive share of net long-term capital gain | 6,000
64,500
Section 1202 deduction (50 pct. of $4,000) | 2,000
Charitable contribution passed through the partnership | 500
Net short-term capital loss passed through the partnership | 2,000
4,500
(Numerator of the ratio for determining the proportionate share of deductions not attributable to a specific activity) | 60,000
Section 1202 deduction ($1,000 × $60,000/$80,000) | 750
Deductible medical expenses ($16,000 × $60,000/$80,000) | 12,000
Charitable contributions ($4,000 × $60,000/$80,000) | 3,000
Alimony ($18,000 × $60,000/$80,000) | 13,500
Interest and taxes on home ($8,000 × $60,000/$80,000) | 6,000
Personal exemption deduction ($3,000 × $60,000/$80,000) | 2,250
Total | 37,500
Portion of C's taxable income attributable to the interest in the partnership | 22,500
C has a deduction under section 1202 of $3,000. Of that deduction, $2,000 is attributable directly to C's interest in the partnership (50 percent of the net capital gain that would result from offsetting the $6,000 net long-term capital gain and the $2,000 net short-term capital loss that are attributable to C's interest in the partnership). Since the remaining $1,000 deduction under section 1202 cannot be attributed directly to either C's income from the partnership or any other specific activity, it must be treated as a deduction not attributable to a specific activity.
(e) Deductions not attributable to a specific activity—(1) Specific activity defined. A specific activity means a course of continuous conduct involving a particular line of endeavor, whether or not the activity is carried on for profit. Examples of a specific activity are:
(i) A trade or business carried on by the taxpayer;
(ii) A trade or business carried on by an entity in which the taxpayer has an interest;
(iii) An activity with respect to which the taxpayer is entitled to a deduction under section 212;
(iv) The operation of a farm as a hobby.
(2) Types of deductions not attributable to a specific activity. Examples of deductions not attributable to a specific activity include charitable contributions made by the partner, beneficiary, or shareholder; medical expenses; alimony; interest on personal debts of the partner, beneficiary, or shareholder; and real estate taxes on the personal residence of the partner, beneficiary, or shareholder. For purposes of this section, in cases in which deductions are not itemized, the zero bracket amount is considered to be a deduction not attributable to a specific activity.
(f) Carryback or carryover of credit subject to separate limitation. A credit subject to the separate limitation under section 53(b) that is carried back or carried over to a taxable year beginning before January 1, 1979, is also subject to the separate limitation in the carryback or carryover year. For purposes of the preceding sentence, a credit that is earned by a partnership, a trust, or estate, or a subchapter S corporation in a taxable year of such entity ending within, or after, the taxable year of a partner beneficiary or shareholder beginning after December 31, 1978, will not be subject to the separate limitation in section 53(b) with respect to such partner, beneficiary, or shareholder. The taxpayer to whom the credit has been passed through shall not be prevented from applying the unused portion in a carryback or carryover year merely because the entity that earned the credit changes its form of conducting business if the nature of its trade or business essentially remains the same. The computation of the separate limitation in such a case shall reflect the income attributable to the taxpayer's interest in the entity in its revised form. Thus, a shareholder carrying over a credit from a subchapter S corporation may include dividends declared by that corporation after the subchapter S election had been terminated as income attributable to that person's interest in the entity. Similarly, if a partnership incorporates in a carryover year, any income attributable to an interest in the corporation will be regarded, for purposes of computing the separate limitation under section 53(b), as income attributable to an interest in the entity. This paragraph may be illustrated by the following examples:
Example 1.A, a calendar year taxpayer, is a shareholder in Corporation M, a subchapter S corporation. In 1977, A's pro rata share of the new jobs credit earned by Corporation M was $10,000. A could only use $2,000 of the credit in 1977 because of the separate limitation under section 53(b). In 1978, A carries the unused credit over from 1977. The carryover credit is subject to the separate limitation under section 53(b).
Example 2.Assume the same facts as in example 1 except that the unused credit is carried over to 1979. The carryover credit is not subject to the separate limitation under section 53(b) because that limitation does not apply to taxable years of a taxpayer beginning after December 31, 1978.
Example 3.B, a calendar year taxpayer, is a shareholder in Corporation W, a subchapter S corporation. In 1979, B's pro rata share of the targeted jobs credit covered by Corporation W was $5,000 but B could only use $3,000 of the credit in 1979. B carries back the unused credit to 1978. The carryback credit is not subject to the separate limitation under section 53(b).
(Secs. 44B, 381, and 7805 of the Internal Revenue Code of 1954 (92 Stat. 2834, 26 U.S.C. 44B); 91 Stat. 148, 26 U.S.C. 381(c)(26); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 7560, 43 FR 60445, Dec. 28, 1978. Redesignated and amended by T.D. 7921, 48 FR 52906, 52907, Nov. 23, 1983]
§ 1.55-1 Alternative minimum taxable income.
(a) General rule for computing alternative minimum taxable income. Except as otherwise provided by statute, regulations, or other published guidance issued by the Commissioner, all Internal Revenue Code provisions that apply in determining the regular taxable income of a taxpayer also apply in determining the alternative minimum taxable income of the taxpayer.
(b) Items based on adjusted gross income or modified adjusted gross income. In determining the alternative minimum taxable income of a taxpayer other than a corporation, all references to the taxpayer's adjusted gross income or modified adjusted gross income in determining the amount of items of income, exclusion, or deduction must be treated as references to the taxpayer's adjusted gross income or modified adjusted gross income as determined for regular tax purposes.
(c) Effective date. These regulations are effective for taxable years beginning after December 31, 1993.
[T.D. 8569, 59 FR 60557, Nov. 25, 1994]
§ 1.56-0 Table of contents to § 1.56-1, adjustment for book income of corporations.
(a) Computation of the book income adjustment.
(1) In general.
(2) Taxpayers subject to the book income adjustment.
(3) Consolidated returns.
(4) Examples.
(b) Adjusted net book income.
(1) In general.
(2) Net book income.
(i) In general.
(ii) Measures of net book income.
(iii) Tax-free transactions and tax-free income.
(iv) Treatment of dividends and other amounts.
(3) Additional rules for consolidated groups.
(i) consolidated adjusted net book income.
(ii) Consolidated net book income.
(iii) Consolidated pre-adjustment alternative minimum taxable income.
(iv) Cross references.
(4) Computation of adjusted net book income when taxable year and financial accounting year differ.
(i) In general.
(ii) Estimating adjusted net book income.
(iii) Election to compute adjusted net book income based on the financial statement for the year ending within the taxable year.
(A) In general.
(B) Time of making election.
(C) Eligibility to make and manner of making election.
(D) Election or revocation of election made on an amended return.
(iv) Quarterly statement filed with the Securities and Exchange Commission (SEC).
(5) Computation of net book income using current earnings and profits.
(i) In general.
(ii) Current earnings and profits of a consolidated group.
(6) Additional rules for computation of net book income of a foreign corporate taxpayer.
(i) Adjusted net book income of a foreign taxpayer.
(ii) Effectively connected net book income of a foreign taxpayer.
(A) In general.
(B) Certain exempt amounts.
(iii) Computation of net book income of a foreign taxpayer using current earnings and profits.
(7) Examples.
(c) Applicable financial statement.
(1) In general.
(i) Statement required to be filed with the Securities and Exchange Commission (SEC).
(ii) Certified audited financial statement.
(iii) Financial statement provided to a government regulator.
(iv) Other financial statements.
(v) Required use of current earnings and profits.
(2) Election to treat net book income as equal to current earnings and profits for the taxable year.
(i) In general.
(ii) Time of making election.
(iii) Eligibility to make and manner of making election.
(iv) Election by common parent of consolidated group.
(v) Election or revocation of election made on an amended return.
(3) Priority among statements.
(i) In general.
(ii) Special priority rules for use of certified audited financial statements and other financial statements.
(iii) Priority among financial statements provided to a government regulator.
(iv) Statements of equal priority.
(A) In general.
(B) Exceptions to the general rule in paragraph (c)(3)(iv)(A).
(4) Use of financial statement for a substantial non-tax purpose.
(5) Special rules.
(i) Applicable financial statement of related corporations.
(A) Applicable financial statement of a consolidated group.
(B) Special rule for statements of equal priority.
(C) Special rule for related corporations.
(D) Anti-abuse rule.
(ii) Applicable financial statement of foreign corporation with a United States trade or business.
(A) In general.
(B) Special rules for applicable financial statement of a trade or business of a foreign taxpayer.
(C) Special rule for statements of equal priority.
(D) Anti-abuse rule.
(iii) Supplement or amendment to an applicable financial statement.
(A) Excluding a restatement of net book income.
(B) Restatement of net book income.
(6) Examples.
(d) Adjustments to net book income.
(1) In general.
(2) Definitions.
(i) Historic practice.
(ii) Accounting literature.
(3) Adjustments for certain taxes.
(i) In general.
(ii) Exception for certain foreign taxes.
(iii) Certain valuation adjustments.
(iv) Examples.
(4) Adjustments to prevent omission or duplication.
(i) In general.
(ii) Special rule for depreciating an asset below is cost.
(iii) Consolidated group using current earnings and profits.
(iv) Restatement of a prior year's applicable financial statement.
(A) In general.
(B) Reconciliation of owner's equity in applicable financial statements.
(B) Use of different priority applicable financial statements in consecutive taxable years.
(D) First successor year defined.
(E) Exceptions.
(v) Adjustment for items previously taxed as subpart F income.
(vi) Adjustment for pooling of interests.
(vii) Adjustment for certain deferred foreign taxes.
(viii) Examples.
(5) Adjustments resulting from disclosure.
(i) Adjustment for footnote disclosure or other supplementary information.
(A) In general.
(B) Disclosures not specifically authorized in the accounting literature.
(ii) Equity adjustments.
(A) In general.
(B) Definition of equity adjustment.
(iii) Amount disclosed in an accountant's opinion.
(iv) Accounting method changes that result in cumulative adjustments to the current year's applicable financial statement.
(A) In general.
(B) Exception.
(v) Examples.
(6) Adjustments applicable to related corporations.
(i) Consolidated returns.
(A) In general.
(B) Corporations included in the consolidated Federal income tax return but excluded from the applicable financial statement.
(C) Corporations included in the applicable financial statement but excluded from the consolidated tax return.
(ii) Adjustment under the principles of section 482.
(iii) Adjustment for dividends received from section 936 corporations.
(A) In general.
(B) Treatment as foreign taxes.
(C) Treatment of taxes imposed on section 936 corporations.
(iv) Adjustment to net book income on sale of certain investments.
(v) Examples.
(7) Adjustments for foreign taxpayers with a United States trade or business.
(i) In general.
(ii) Example.
(8) Adjustment for corporations subject to subchapter F.
(e) Special rules.
(1) Cooperatives.
(2) Alaska Native Corporations.
(3) Insurance companies.
(4) Estimating the net book income adjustment for purposes of estimated tax liability.
(5) Effective/applicability date.
[T.D. 8307, 55 FR 33675, Aug. 17, 1990, as amended by T.D. 9347, 72 FR 44347, Aug. 7, 2007]
11 Regulations Applicable to Taxable Years Beginning in 1969 and Ending in 1970
§ 1.56(g)-0 Table of Contents.
This section lists the paragraphs contained in § 1.56(g)-1.
§ 1.56(g)-1 Adjusted current earnings.
(a) Adjustment for adjusted current earnings.
(1) Positive adjustment.
(2) Negative adjustment.
(i) In general.
(ii) Limitation on negative adjustments.
(iii) Example.
(3) Negative amounts.
(4) Taxpayers subject to adjustment for adjusted current earnings.
(5) General rule for applying Internal Revenue Code provisions in determining adjusted current earnings.
(i) In general.
(ii) Example.
(6) Definitions.
(i) Pre-adjustment alternative minimum taxable income.
(ii) Adjusted current earnings.
(iii) Earnings and profits.
(7) Application to foreign corporations.
(b) Depreciation allowed.
(1) Property placed in service after 1989.
(2) Property subject to new ACRS.
(i) In general.
(ii) Rules for computing the depreciation deduction.
(iii) Example.
(3) Property subject to original ACRS.
(i) In general.
(ii) Rules for computing the depreciation deduction.
(iii) Example.
(4) Special rule for certain section 168(f) property.
(5) Certain property not subject to ACRS.
(c) Inclusion in adjusted current earnings of items included in earnings and profits.
(1) In general.
(2) Certain amounts not taken into account in determining whether an item is permanently excluded.
(3) Allowance of offsetting deductions.
(4) Special rules.
(i) Income from the discharge of indebtedness.
(ii) Federal income tax refunds.
(iii) Income earned on behalf of states and municipalities.
(5) Treatment of life insurance contracts.
(i) In general.
(ii) Inclusion of inside buildup.
(iii) Calculation of income on the contract.
(iv) Treatment of distributions under the life insurance contract.
(v) Treatment of death benefits.
(vi) Other rules.
(A) Term life insurance contracts without net surrender values.
(B) Life insurance contracts involving divided ownership.
(vii) Examples.
(6) Partial list of income items excluded from gross income but included in earnings and profits.
(7) Partial list of items excluded from both pre-adjustment alternative minimum taxable income and adjusted current earnings.
(d) Disallowance of items not deductible in computing earnings and profits.
(1) In general.
(2) Deductions for certain dividends received.
(i) Certain amounts deducted under sections 243 and 245.
(ii) Special rules.
(A) Dividends received from a foreign sales corporation.
(B) Dividends received from a section 936 corporation.
(iii) Special rule for certain dividends received by certain cooperatives.
(3) Partial list of items not deductible in computing earnings and profits.
(4) Partial list of items deductible for purposes of computing both pre-adjustment alternative minimum taxable income and adjusted current earnings.
(e) Treatment of income items included, and deduction items not allowed, in computing pre-adjustment alternative minimum taxable income.
(f) Certain other earnings and profits adjustments.
(1) Intangible drilling costs.
(2) Certain amortization provisions do not apply.
(3) LIFO recapture adjustment.
(i) In general.
(ii) Beginning LIFO and FIFO inventory.
(iii) Definitions.
(A) LIFO recapture amount.
(1) Definition.
(2) Assets included.
(B) FIFO method.
(C) LIFO method.
(D) Inventory amounts.
(iv) Exchanges under sections 351 and 721.
(v) Examples.
(vi) Effective date.
(4) Installment sales.
(i) In general.
(ii) Exception for prior dispositions.
(iii) Special rules for obligations to which section 453A applies.
(A) In general.
(B) Limitation on application of installment method.
(C) Treatment of the ineligible portion.
(D) Treatment of the eligible portion.
(E) Coordination with the pledge rule.
(F) Example.
(g) Disallowance of loss on exchange of debt pools. [Reserved]
(h) Policy acquisition expenses of life insurance companies.
(1) In general.
(2) Reasonably estimated life.
(3) Reasonable allowance for amortization.
(4) Safe harbor for public financial statements.
(i) [Reserved]
(j) Depletion.
(k) Treatment of certain ownership changes.
(1) In general.
(2) Definition of ownership change.
(3) Determination of net unrealized built-in loss immediately before an ownership change.
(4) Example.
(l) [Reserved]
(m) Adjusted current earnings of a foreign corporation.
(1) In general.
(2) Definitions.
(i) Effectively connected pre-adjustment alternative minimum taxable income.
(ii) Effectively connected adjusted current earnings.
(3) Rules to determine effectively connected pre-adjustment alternative minimum taxable income and effectively connected adjusted current earnings.
(4) Certain exempt amounts.
(n) Adjustment for adjusted current earnings of consolidated groups.
(1) Positive adjustments.
(2) Negative adjustments.
(i) In general.
(ii) Limitation on negative adjustments.
(3) Definitions.
(i) Consolidated pre-adjustment alternative minimum taxable income.
(ii) Consolidated adjusted current earnings.
(4) Example.
(o) [Reserved]
(p) Effective dates for corporate partners in partnerships.
(1) In general.
(2) Application of effective dates.
(3) Example.
(q) Treatment of distributions of property to shareholders.
(1) In general.
(2) Examples.
(r) Elections to use simplified inventory methods to compute alternative minimum tax.
(1) In general.
(2) Effect of election.
(i) Inventories.
(ii) Modifications required.
(A) In general.
(B) Negative modifications allowed.
(iii) LIFO recapture adjustment.
(3) Time and manner of making election.
(i) Prospective election.
(ii) Retroactive election.
(iii) Taxpayers under examination.
(A) In general.
(1) Year of change under examination.
(2) Other open years under examination.
(B) Statement required.
(C) Year of change.
(D) Treatment of additional tax liability.
(iv) Election as method of accounting.
(v) Untimely election to use simplified inventory method.
(4) Example.
(5) Election to use alternative minimum tax inventories to compute adjusted current earnings.
(s) Adjustment for alternative tax energy preference deduction.
(1) In general.
(2) Example.
[T.D. 8340, 56 FR 11083, Mar. 15, 1991, as amended by T.D. 8454, 57 FR 60476, Dec. 21, 1992]
§ 1.56(g)-1 Adjusted current earnings.
(a) Adjustment for adjusted current earnings—(1) Positive adjustment. For taxable years beginning after December 31, 1989, the alternative minimum taxable income of any taxpayer described in paragraph (a)(4) of this section is increased by the adjustment for adjusted current earnings. The adjustment for adjusted current earnings is 75 percent of the excess, if any, of—
(i) The adjusted current earnings (as defined in paragraph (a)(6)(ii) of this section) of the taxpayer for the taxable year over.
(ii) The pre-adjustment alternative minimum taxable income (as defined in paragraph (a)(6)(i) of this section) of the taxpayer for the taxable year.
(2) Negative adjustment—(i) In general. For taxable years beginning after December 31, 1989, the alternative minimum taxable income of any taxpayer is decreased, subject to the limitation of paragraph (a)(2)(ii) of this section, by 75 percent of the excess, if any, of pre-adjustment alternative minimum taxable income (as defined in paragraph (a)(6)(i) of this section), over adjusted current earnings (as defined in paragraph (a)(6)(ii) of this section).
(ii) Limitation on negative adjustments. The amount of the negative adjustment for any taxable year is limited to the excess, if any, of—
(A) The aggregate increases in alternative minimum taxable income in prior years under paragraph (a)(1) of this section over
(B) The aggregate decreases in alternative minimum taxable income in prior years under this paragraph (a)(2).
Any excess of pre-adjustment alternative minimum taxable income over adjusted current earnings that is not allowed as a negative adjustment for the taxable year because of the limitation in this paragraph (a)(2)(ii) is not applied to reduce any positive adjustment in any other taxable year.
(iii) Example. The following example illustrates the provisions of this paragraph (a)(2):
(A) Corporation P is a calendar-year taxpayer and has pre-adjustment alternative minimum taxable income and adjusted current earnings in the following amounts for 1990 through 1993:
Year | Pre-adjustment alternative minimum taxable income | Adjusted current earnings
1990 | $800,000 | $700,000
1991 | 600,000 | 900,000
1992 | 500,000 | 400,000
1993 | 500,000 | 100,000
(B) Under these facts, corporation P has the following positive and negative adjustments for adjusted current earnings:
Year | Negative adjustment | Positive adjustment
1990 | 0 | 0
1991 | 0 | $225,000
1992 | $75,000 | 0
1993 | 150,000 | 0
(C) In 1990, P has a potential negative adjustment (before the cumulative limitation) of $75,000 (75 percent of the $100,000 excess of pre-adjustment alternative minimum taxable income over adjusted current earnings). Nonetheless, P is not permitted a negative adjustment because P had no prior increases in its alternative minimum taxable income due to an adjustment for adjusted current earnings.
(D) In 1991, P has a positive adjustment of $225,000 (75 percent of the $300,000 excess of adjusted current earnings over pre-adjustment alternative minimum taxable income). P is not allowed to use the prior year's excess of pre-adjustment alternative minimum taxable income over adjusted current earnings to reduce its 1991 positive adjustment.
(E) In 1992, P is permitted a negative adjustment of $75,000, the full amount of 75 percent of the $100,000 excess of pre-adjustment alternative minimum taxable income over adjusted current earnings for the taxable year. This is because P's prior cumulative increases in alternative minimum taxable income due to the positive adjustments for adjusted current earnings exceed the negative adjustment for the year.
(F) In 1993, P has a potential negative adjustment (before the cumulative limitation) of $300,000 (75 percent of the $400,000 excess of pre-adjustment alternative minimum taxable income over adjusted current earnings). P's net cumulative increases in alternative minimum taxable income due to the adjustment for adjusted current earnings are $150,000 ($225,000 increase in 1991, less $75,000 decrease in 1992). Thus, P's negative adjustment in 1993 is limited to $150,000. P may not use the remaining portion ($150,000) of the negative adjustment for 1993 to reduce positive adjustments in other taxable years.
(3) Negative amounts. In determining whether an excess exists under paragraph (a)(1) or (a)(2) of this section, a positive amount exceeds a negative amount by the sum of the absolute numbers, and a smaller negative amount exceeds a larger negative amount by the difference between the absolute numbers. Thus, for example, a positive amount of adjusted current earnings of $30 exceeds a negative amount (or loss) of pre-adjustment AMTI of $10 by the sum of the absolute numbers, or $40 (30 + 10). Accordingly, the adjustment for adjusted current earnings would be 75 percent of $40, or $30. In contrast, a negative amount of adjusted current earnings of $10 exceeds a negative amount (or loss) of pre-adjustment alternative minimum taxable income of $30 by the difference between the absolute numbers, or $20 (30−10). Accordingly, the adjustment for adjusted current earnings would be 75 percent of $20, or $15.
(4) Taxpayers subject to adjustment for adjusted current earnings. The adjustment for adjusted current earnings applies to any corporation other than—
(i) An S corporation as defined in section 1361,
(ii) A regulated investment company as defined in section 851,
(iii) A real estate investment trust as defined in section 856, or
(iv) A real estate mortgage investment conduit as defined in section 860A.
(5) General rule for applying Internal Revenue Code provisions in determining adjusted current earnings—(i) In general. Except as otherwise provided by regulations or other guidance issued by the Internal Revenue Service, all Internal Revenue Code provisions that apply in determining the regular taxable income of a taxpayer also apply in determining adjusted current earnings. For example, the rules of part V of subchapter P (relating to original issue discount and similar matters) of the Code apply in determining the amount (and the timing) of any interest income included in adjusted current earnings under this section. In applying Code provisions, however, the adjustments of section 56(g) and this section are also taken into account. For example, in applying the capitalization provisions of section 263A, the amount of depreciation to be capitalized is based on the amount of depreciation allowed in computing adjusted current earnings.
(ii) Example. The following example illustrates the provisions of this paragraph (a)(5):
(A) Corporation N is a calendar year manufacturer of golf clubs. N places new manufacturing equipment in service in 1990. The regular tax depreciation allowable for this equipment is $80,000; the pre-adjustment alternative minimum taxable income depreciation is $60,000; and the adjusted current earnings depreciation is $40,000. All of the golf clubs N produces in 1990 are unsold and are in ending inventory.
(B) Pursuant to section 263A and § 1.263A-1(e)(3)(ii)(I), N must capitalize the depreciation allowed for the year for the new manufacturing equipment in the ending inventory of golf clubs. Thus, when N sells the golf clubs (or is deemed to have sold them under its normal method of accounting), the cost of goods sold attributable to the capitalized depreciation will be $80,000 in computing regular taxable income; $60,000 in computing pre-adjustment alternative minimum taxable income; and $40,000 in computing adjusted current earnings.
(6) Definitions. The following terms have the following meanings for purpose of this section.
(i) Pre-adjustment alternative minimum taxable income. Pre-adjustment alternative minimum taxable income is the alternative minimum taxable income of the taxpayer for the taxable year, determined under section 55(b)(2), but without the adjustment for adjusted current earnings under section 56(g) and this section, without the alternative tax net operating loss deduction under section 56(a)(4), and without the alternative tax energy preference deduction under section 56(h).
(ii) Adjusted current earnings. Adjusted current earnings is the pre-adjustment alternative minimum taxable income of the taxpayer for the taxable year, adjusted as provided in section 56(g) and this section. To the extent an amount is included (or deducted) in computing pre-adjustment alternative minimum taxable income for the taxable year (whether because an adjustment is made under section 56 or 58, because of a tax preference item under section 57, or because the item is reflected in taxable income), that amount is not again included (or deducted) in computing adjusted current earnings for the taxable year.
(iii) Earnings and profits. Earnings and profits means current earnings and profits within the meaning of section 316(a)(2), that is, earnings and profits for the taxable year computed as of the close of the taxable year of the corporation without diminution by reason of any distributions made during the taxable year.
(7) Application to foreign corporations. See paragraph (m) of this section for rules relating to the application of this section to foreign corporations.
(b) Depreciation allowed. The depreciation deduction allowed in computing adjusted current earnings is determined under the rules of this paragraph (b). Generally, the rules for computing the adjusted current earnings depreciation deduction differ depending on the taxable year in which the property is placed in service and the method used in computing the depreciation deduction for taxable income purposes. See § 1.168(i)-1(k) for an election to use general asset accounts.
(1) Property placed in service after 1989. The depreciation deduction for property placed in service in a taxable year beginning after December 31, 1989, is the amount determined by using the alternative depreciation system of section 168(g). This paragraph (b)(1) does not apply to property to which paragraph (b)(4) of this section applies (relating to certain property described in sections 168 (f)(1) through (f)(4)).
(2) Property subject to new ACRS—(i) In general. This paragraph (b)(2) provides the rules for computing the depreciation deduction for property to which the amendments made by section 201 of the Tax Reform Act of 1986 (new ACRS) apply (generally property placed in service after December 31, 1986), and that is placed in service in a taxable year beginning before January 1, 1990. This paragraph (b)(2) does not apply to property described in paragraph (b)(4) of this section (relating to certain property described in sections 168 (f)(1) through (f)(4)) or to property described in paragraph (b)(5)(i) of this section (relating to certain churning transactions described in section 168(f)(5)).
(ii) Rules for computing the depreciation deduction. The depreciation deduction for property described in this paragraph (b)(2) is the amount determined by using—
(A) The adjusted basis of the property as determined in computing alternative minimum taxable income as of the close of the last taxable year beginning before January 1, 1990,
(B) The straight-line method, and
(C) The recovery period that consists of the remainder of the recovery period applicable to the property under the alternative depreciation system of section 168(g).
Thus, the recovery period begins on the first day of the first taxable year beginning after December 31, 1989, and ends on the last day of the recovery period that would have applied had the recovery period for the property originally been determined under section 168(g). In determining the recovery period that would have applied, the property is deemed placed in service on the date it was considered placed in service under the depreciation convention that would have applied to the property under section 168(d).
(iii) Example. The following example illustrates the provisions of this paragraph (b)(2).
Example.Corporation X, a calendar-year taxpayer, purchases and places in service on August 1, 1987, computer-based telephone central office switching equipment. This is the only item of depreciable property X places in service during 1987. Thus, the applicable convention under section 168(d) is the half-year convention. As of December 31, 1989, the adjusted basis of the property used in computing alternative minimum taxable income is $42,000. The recovery period that would have applied to the property under section 168(g)(2) is 9.5 years (from July 1, 1987 to December 31, 1996). Thus, the recovery period for computing adjusted current earnings under section 56(g)(4)(A)(ii) and this paragraph (b)(2) begins on January 1, 1990, and ends on December 31, 1996. X's 1990 depreciation deduction for computing adjusted current earnings is $6,000, determined under the straight-line method by dividing $42,000 (adjusted basis) by 7 (recovery period).
(3) Property subject to original ACRS—(i) In general. This paragraph (b)(3) provides the rules for computing the depreciation deduction for property to which section 168 as in effect on the day before the date of enactment of the Tax Reform Act of 1986 (original ACRS) applies and that is placed in service in a taxable year beginning before January 1, 1990 (generally property that was placed in service after December 31, 1980 and before January 1, 1987). In determining whether original ACRS applies to property, the fact that the unadjusted basis of the property is reduced or eliminated under section 168(d)(4)(A)(i) of original ACRS is not taken into account. This paragraph (b)(3) does not apply to property described in paragraph (b)(4) or (b)(5)(i) of this section (relating to certain section 168(f) property).
(ii) Rules for computing the depreciation deduction. The depreciation deduction for property described in this paragraph (b)(3) is the amount determined by using—
(A) The adjusted basis of the property as determined in computing taxable income as of the close of the last taxable year beginning before January 1, 1990,
(B) The straight-line method, and
(C) The recovery period that consists of the remainder of the recovery period applicable to the property under the alternative depreciation system of section 168(g). Thus, the recovery period begins on the first day of the first taxable year beginning after December 31, 1989, and ends on the last day of the recovery period that would have applied had the recovery period for the property originally been determined under section 168(g)(2). In determining the recovery period that would have applied, the property is deemed placed in service on the date it was considered placed in service under the depreciation convention that would have applied to the property under section 168(d) (without regard to section 168(d)(3)).
(iii) Example. The following example illustrates the provisions of this paragraph (b)(3).
Example.Corporation Y, a calendar-year taxpayer, purchases and places in service on December 1, 1986, computer-based telephone central office switching equipment. The depreciation convention that would have applied to this property under section 168(d) (without regard to section 168(d)(3)) is the half-year convention. As of December 31, 1989, the adjusted basis of the property used in computing taxable income is $21,000. The recovery period for the property under section 168(g)(2) is 9.5 years (from July 1, 1986 to December 31, 1995). Thus, the recovery period for computing adjusted current earnings under section 56(g)(4)(A)(iii) and this paragraph (b)(3) begins on January 1, 1990, and ends on December 31, 1995. Y's 1990 depreciation deduction for computing adjusted current earnings is $3,500, determined under the straight-line method by dividing $21,000 (adjusted basis) by 6 (recovery period).
(4) Special rule for certain section 168(f) property. The depreciation or amortization deduction for property described in section 168(f) (1) through (4) is determined in the same manner as used in computing taxable income, without regard to when the property is placed in service.
(5) Certain property not subject to ACRS. The depreciation or amortization deduction for property not described in paragraphs (b) (1) through (4) of this section is determined in the same manner as used in computing taxable income. Thus, this paragraph (b)(5) applies to—
(i) Property placed in service after December 31, 1980, in a taxable year beginning before January 1, 1990, and that is excluded from the application of original ACRS or new ACRS by section 168(e)(4) of original ACRS or section 168(f)(5)(A)(i) of new ACRS, and
(ii) Property placed in service before January 1, 1981.
(c) Inclusion in adjusted current earnings of items included in earnings and profits—(1) In general. Except as otherwise provided in paragraph (c)(4) of this section, adjusted current earnings includes all income items that are permanently excluded from (i.e., not taken into account in determining) pre-adjustment alternative minimum taxable income but that are taken into account in determining earnings and profits. An income item is considered taken into account in determining pre-adjustment alternative minimum taxable income without regard to the timing of its inclusion. Thus, this paragraph (c)(1) does not apply to any income item that is, has been, or will be included in pre-adjustment alternative minimum taxable income. For example, a taxpayer eligible to use the completed contract method of accounting for long-term construction contracts does not take income (or expenses) into account in determining pre-adjustment alternative minimum taxable income for taxable years before the taxable year the contract is completed. The taxpayer is required under section 312(n)(6) to include income (and expenses) in earnings and profits throughout the term of the contract under the percentage of completion method. This paragraph (c)(1) does not require the income on the contract to be included in adjusted current earnings, however, because the income will be taken into account in the taxable year the contract is completed and therefore is considered to be taken into account in determining pre-adjustment alternative minimum taxable income.
(2) Certain amounts not taken into account in determining whether an item is permanently excluded. The fact that proceeds from an income item may eventually be reflected in pre-adjustment alternative minimum taxable income of another taxpayer on the liquidation or disposal of a business, or similar circumstances, is not taken into account in determining whether the item is permanently excluded from pre-adjustment alternative minimum taxable income. Thus, for example, a corporation's adjusted current earnings include interest excluded from pre-adjustment alternative minimum taxable income under section 103 even though the interest might eventually be reflected in the pre-adjustment alternative minimum taxable income of a corporate shareholder as gain on the liquidation of the corporation.
(3) Allowance of offsetting deductions. In determining adjusted current earnings under this paragraph (c), a deduction is allowed for all items that relate to income required to be included in adjusted current earnings under this paragraph (c) and that would be deductible in computing pre-adjustment alternative minimum taxable income if the income items to which the items of deduction relate were included in pre-adjustment alternative minimum taxable income for any taxable year. For example, deductions disallowed under section 265(a)(2) for the costs of carrying tax-exempt obligations, the interest on which is excluded from pre-adjustment alternative minimum taxable income under section 103 but is included in adjusted current earnings under this paragraph (c), are generally allowed as deductions in computing adjusted current earnings. Amounts deductible under this paragraph (c)(3) are taken into account using the taxpayer's method of accounting and are subject to any provisions or limitations of the Code that would have applied if the amounts had been deductible in determining pre-adjustment alternative minimum taxable income. For example, section 267(a)(2) may affect the timing of a deduction otherwise disallowed under section 265(a)(2).
(4) Special rules. Adjusted current earnings does not include the following amounts.
(i) Income from the discharge of indebtedness. Amounts that are excluded from gross income under section 108 of the Internal Revenue Code of 1986 or any corresponding provision of prior law (including the Bankruptcy Tax Act of 1980, case law, income tax regulations and administrative pronouncements).
(ii) Federal income tax refunds. Refunds of federal income taxes.
(iii) Income earned on behalf of states and municipalities. Amounts that are excluded from gross income under section 115.
(5) Treatment of life insurance contracts—(i) In general. This paragraph (c)(5) addresses the treatment of life insurance contracts in determining adjusted current earnings. These rules apply to life insurance contracts as defined in section 7702. Generally, death benefits under a life insurance contract are included in adjusted current earnings, and all other distributions (including surrenders) are taxed in accordance with the principles of section 72(e), taking into account the taxpayer's basis in the contract for purposes of adjusted current earnings. If the adjusted basis in the contract for purposes of adjusted current earnings exceeds the amount of death benefits received or the amount received when the contract is surrendered (increased by the amount of any outstanding policy loan), the resulting loss is allowed as a deduction under paragraph (c)(3) of this section in computing adjusted current earnings for the taxable year. In addition, undistributed income on the contract is included in adjusted current earnings as provided in paragraph (c)(5)(ii) of this section. Paragraph (c)(5)(vi)(A) of this section provides special rules for term insurance that has no net surrender value.
(ii) Inclusion of inside buildup. Income on a life insurance contract with respect to a taxable year (or any shorter period either ending or beginning with the date of a distribution from the contract) is included in adjusted current earnings for the taxable year. Thus, income on the contract is calculated from the beginning of a taxable year to the date of any distribution, from immediately after any distribution to the date of the next distribution, and from the last distribution during the taxable year through the end of the taxable year. Income on a life insurance contract is not included in adjusted current earnings for any taxable year in which the insured dies or the contract is completely surrendered for its entire net surrender value. Solely for purposes of computing adjusted current earnings, the taxpayer's adjusted basis in the contract (as determined under section 72(e)(6)) is increased to reflect any positive income on the contract included in adjusted current earnings under this paragraph (c)(5)(ii). The manner in which the income on the contract is determined for adjusted current earnings purposes is prescribed in paragraph (c)(5)(iii) of this section. If the income on the contract determined under paragraph (c)(5)(iii) of this section is a negative amount, income on the contract is not included in adjusted current earnings and no deduction from adjusted current earnings is allowed for the negative amount.
(iii) Calculation of income on the contract. For purposes of determining adjusted current earnings, the income on a life insurance contract for any period, including a taxable year, is the excess, if any, of—
(A) The sum of the contract's net surrender value (as defined in section 7702(f)(2)(B)) at the end of the period, and any distributions under the contract during the period that, in accordance with the principles of section 72(e), are not taxed because they represent recoveries of the taxpayer's basis in the contract for adjusted current earnings, over
(B) The sum of the contract's net surrender value at the end of the preceding period, and any premiums paid under the contract during the period.
(iv) Treatment of distributions under the life insurance contract. Any distribution under a life insurance contract (whether a partial withdrawal or an amount received on complete surrender of the contract) is included in adjusted current earnings in accordance with the principles of section 72(e), taking into account the taxpayer's basis in the contract for purposes of computing adjusted current earnings. The taxpayer's basis in the contract is equal to the basis at the end of the immediately preceding period plus any premiums paid before the distribution. The taxpayer's basis in the contract for purposes of adjusted current earnings is reduced, in accordance with the principles of section 72(e), to the extent that the distribution is not included in adjusted current earnings because it represents a recovery of that basis.
(v) Treatment of death benefits. The excess of the contractual death benefit of a life insurance contract over the taxpayer's adjusted basis in the contract for purposes of computing adjusted current earnings at the time of the insured's death is included in adjusted current earnings as provided by paragraph (c)(6)(i) of this section. The amount of the death benefit that is taken into account for adjusted current earnings includes the amount of any outstanding policy loan treated as forgiven or discharged by the insurance company upon the death of the insured.
(vi) Other rules—(A) Term life insurance contract without net surrender values. Except as provided in this paragraph (c)(5)(vi), the requirements of paragraph (c)(5) of this section do not apply to term life insurance contracts that provide no net surrender value. Adjusted current earnings are reduced by any premiums paid under such a contract that are allocable to the taxable year. Any premiums paid that are not allocable to the taxable year must be included in the basis of the contract. The death benefit under such a term insurance contract is included in adjusted current earnings as provided by paragraph (c)(5)(v) of this section.
(B) Life insurance contracts involving divided ownership. If the ownership of a life insurance contract is divided between different persons (for example, a split-dollar arrangement), the requirements of paragraph (c)(5) of this section apply to the separate ownership interests as though each interest were a separate contract.
(vii) Examples. The following examples illustrate the provisions of this paragraph (c)(5).
Example 1. (i) On January 1, 1987, corporation X, a calendar year taxpayer, purchased a flexible premium life insurance contract with a death benefit of $100,000 and planned annual gross premiums of $2,200 payable on January 1 of each year. The net surrender value of the contract at the end of 1987 and subsequent years, together with the cumulative premiums for the contract at the end of each year, are set forth in the following table:
Year | Cumulative premiums paid | Year-end net surrender value
1987 | $2,200 | $2,420
1988 | 4,400 | 5,082
1989 | 6,600 | 8,010
1990 | 8,800 | 11,231
1991 | 11,000 | 14,774
(ii) Under paragraph (c)(5)(ii) of this section, X must include $1,021 in adjusted current earnings for 1990. The inclusion is computed by subtracting from the net surrender value of the contract at the end of the taxable year ($11,231) the sum of the net surrender value of the contract at the end of the preceding taxable year ($8,010) plus the premiums paid during the taxable year ($2,200). See paragraph (c)(5)(iii) of this section. For purposes of determining adjusted current earnings, X's adjusted basis in the contract would be increased at the end of 1990 from $8,800 to $9,821 to reflect the $1,021 inclusion. See paragraph (c)(5)(ii) of this section. The income under the contract attributable to taxable years prior to 1990 does not increase X's adjusted basis in the contract.
(iii) For 1991, the income on the contract included in adjusted current earnings is determined in the same manner as the preceding year, and there is a corresponding increase in X's adjusted basis in the contract. Thus, for 1991, the income on the contract is $1,343, which is determined by subtracting from the net surrender value of the contract at the end of the taxable year ($14,774) the sum of the net surrender value at the end of the preceding taxable year ($11,231) plus the premiums paid during the taxable year ($2,200). At the end of 1991, X's adjusted basis in the contract for adjusted current earnings is $13,364, which reflects the basis of the contract at the beginning of 1991, increased by the premium paid during the year ($2,200) and the income on the contract that has been included in adjusted current earnings for the taxable year ($1,343).
Example 2.The facts are the same as in example 1, except that, after the payment of the premium for 1991, the insured dies and X receives the $100,000 death benefit under the contract. Under paragraph (c)(5)(ii) of this section, no amount is included in adjusted current earnings for income on the contract for the taxable year in which the insured dies. Instead, under paragraph (c)(5)(v) of this section, X must include the adjusted current earnings for 1991 the excess of the death benefit ($100,000) over the adjusted basis in the contract for purposes of computing adjusted current earnings at the time of the insured's death ($12,021), which equals X's adjusted basis in the contract at the end of 1990 ($9,821), increased by X's premium payment for 1991 ($2,200).
Example 3. (i) The facts are the same as in example 1, except that in addition to making the $2,200 planned premium payment for 1992, X receives a $16,200 distribution under the contract on February 1, 1992, leaving a net surrender value of $915 immediately following the distribution. On March 1, 1992, X pays an additional premium of $5,000 under the contract. The net surrender value of the contract at the end of 1992 is $6,417.
(ii) Treatment of the distribution. Under paragraph (c)(5)(iv) of this section, the $16,200 distribution in 1992 is included in adjusted current earnings as an amount taxable in accordance with the principles of section 72(e) to the extent that the distribution ($16,200) exceeds X's adjusted basis for adjusted current earnings, as determined at the end of the immediately preceding period, and including premiums paid through the period ending on the date of the distribution ($15,564). Thus, X must include $636 in adjusted current earnings for 1992 as an amount taxable in accordance with the principles of section 72(e).
(iii) Determination of the income on the contract. Under paragraph (c)(5)(iii) of this section, for 1992, the income on the contract must be separately determined for the period beginning with the first day of the taxable year to the date of the distribution and for the period beginning immediately after the distribution to the end of the taxable year, using the contract's net surrender values at the beginning and end of each of these periods. The income on the contract for the period beginning on January 1, 1992 and ending on February 1, 1992 (the date of the distribution) is equal to the excess, if any, of (A) the sum of the net surrender value at the end of the period ($915) and the amount of the distribution that is allocable to X's basis in the contract for adjusted current earnings ($15,564), over (B) the sum of the net surrender value at the end of the preceding taxable year ($14,774) plus any premiums paid on the contract during the period ($2,200). Because the net result of this computation is a negative amount (($915 + $15,564)−($14,774 + $2,200)=−495), no income on the contract for the period ending with the date of the distribution is included in adjusted current earnings for 1992.
(iv) Under paragraph (c)(5)(ii), X must also determine the income on the contract for the period beginning immediately after the distribution through the end of the taxable year. The income on the contract for this period is $502, which is equal to the excess of the net surrender value at the end of the taxable year ($6,417) over the sum of the net surrender value at the end of the preceding period ($915), plus any premiums paid during the period ($5,000). At the end of 1992, X's adjusted basis in the contract for adjusted current earnings is $5,502, determined by adding the income on the contract ($502) and the premiums paid during the period ($5,000) to the basis at the end of the preceding period ($0).
(v) Thus, X must include a total of $1,138 ($636 + 502) in adjusted current earnings for 1992. This inclusion reflects both the undistributed income on the contract for the taxable year plus the amount of income from distributions under the contract that is taxed in accordance with the principles of section 72(e) using X's adjusted basis in the contract for adjusted current earnings.
(6) Partial list of income items excluded from gross income but included in earnings and profits. The following is a partial list of items that are permanently excluded from pre-adjustment alternative minimum taxable income but that are included in earnings and profits, and are therefore included in adjusted current earnings under this paragraph (c).
(i) Proceeds of life insurance contracts that are excluded under section 101, to the extent provided in paragraph (c)(5)(v) or (c)(5)(vi) of this section.
(ii) Interest that is excluded under section 103.
(iii) Amounts received as compensation for injuries or sickness that are excluded under section 104.
(iv) Income taxes of a lessor of property that are paid by a lessee and are excluded under section 110.
(v) Income attributable to the recovery of an item deducted in computing earnings and profits in a prior year that is excluded under section 111.
(vi) Amounts received as proceeds from sports programs that are excluded under section 114.
(vii) Cost-sharing payments that are excluded under section 126, to the extent section 126(e) does not apply.
(viii) Interest on loans used to acquire employer securities that is excluded under section 133.
(ix) Financial assistance that is excluded under section 597.
(x) Amounts that are excluded from pre-adjustment alternative minimum taxable income as a result of an election under section 831(b) (allowing certain insurance companies to compute their pre-adjustment alternative minimum taxable income using only their investment income).
Items described in paragraph (c)(1) of this section must be included in earnings and profits (and therefore in adjusted current earnings) even if they are not identified in this paragraph (c)(6). The Commissioner may identify additional items described in paragraph (c)(1) in other published guidance.
(7) Partial list of items excluded from both pre-adjustment alternative minimum taxable income and adjusted current earnings. The following is a partial list of items that are excluded from both pre-adjustment alternative minimum taxable income and adjusted current earnings, and for which no adjustment is allowed under this section.
(i) The value of improvements made by a lessee to a lessor's property that is excluded from the lessor's income under section 109.
(ii) contributions to the capital of a corporation by a non-shareholder that are excluded from the corporation's income under section 118.
The Commissioner may identify additional items described in this paragraph (c)(7) in other published guidance.
(d) Disallowance of items not deductible in computing earnings and profits—(1) In general. Except as otherwise provided in this paragraph (d), no deduction is allowed in computing adjusted current earnings for any items that are not taken into account in determining earnings and profits for any taxable year, even if the items are taken into account in determining pre-adjustment alternative minimum taxable income. These items therefore increase adjusted current earnings to the extent they are deducted in computing pre-adjustment alternative minimum taxable income. An item of deduction is considered taken into account without regard to the timing of its deductibility in computing earnings and profits. Thus, to the extent an item is, has been, or will be deducted for purposes of determining earnings and profits, it does not increase adjusted current earnings in the taxable year in which it is deducted for purposes of determining pre-adjustment alternative minimum taxable income. For example, a deduction allowed (in determining pre-adjustment alternative minimum taxable income) under section 196 for unused research credits allowable under section 41 is taken into account in computing earnings and profits because the costs that gave rise to the credit were deductible in computing earnings and profits when incurred. Therefore, the deduction does not increase adjusted current earnings. As a further example, payments by a United States parent corporation with respect to employees of certain foreign subsidiaries, which are deductible under section 176, are considered contributions to the capital of the foreign subsidiary for purposes of computing earnings and profits. Although the payments are not deductible in computing the earnings and profits of the United States parent corporation in the year incurred, the payments do increase the parent's basis in its stock in the foreign subsidiary. This basis increase will reduce any gain the parent may later realize for purposes of computing earnings and profits on the disposition of the stock of the foreign subsidiary. Therefore, the amount of the payment by the parent is considered taken into account in computing the earnings and profits of the parent and does not increase adjusted current earnings. Thus, only deduction items that are never taken into account in computing earnings and profits are disallowed in computing adjusted current earnings under this paragraph (d).
(2) Deductions for certain dividends received—(i) Certain amounts deducted under sections 243 and 245. Paragraph (d)(1) of this section does not apply to, and adjusted current earnings therefore are not increased by, amounts deducted under sections 243 and 245 that qualify as 100-percent deductible dividends under sections 243(a), 245(b) or 245(c), or to any dividend received from a 20-percent owned corporation (as defined in section 243(c)(2)), to the extent that the dividend giving rise to the deductions is attributable to earnings of the paying corporation that are subject to federal income tax. Earnings are considered subject to federal income tax return (that is filed or, if not, that should be filed) of an entity subject to United States taxation, even if there is no resulting United States tax liability (e.g., because of net operating losses or tax credits, other than the credit provided for in section 936).
(ii) Special rules—(A) [Reserved]
(B) Dividends received from a section 936 corporation. For example, assume that a section 936 corporation earns $100 of income in its current taxable year, $10 of which is not eligible for the credit under section 936. If the section 936 corporation makes a distribution of $50 during that year, $5 of that distribution ($10 of income not eligible for the section 936 credit divided by $100 of income, times $50 distributed) is deemed to be attributable to earnings of the paying corporation that are subject to federal income tax.
(iii) Special rule for certain dividends received by certain cooperatives. Paragraph (d)(1) of this section does not apply to, and adjusted current earnings do not include, any dividend received by any organization to which part I of subchapter T of the Code applies and that is engaged in the marketing of agricultural or horticultural products, if the dividend is paid by a FSC and is allowable as a deduction under section 245(c).
(3) Partial list of items not deductible in computing earnings and profits. The following is a partial list of items that are not taken into account in computing earnings and profits and thus are not deductible in computing adjusted current earnings.
(i) Unrecovered losses attributable to certain damages that are deductible under section 186, to the extent those damages were previously deducted in computing earnings and profits.
(ii) The deduction for small life insurance companies allowed under section 806.
(iii) Dividends deductible under the following sections of the Code:
(A) Dividends received by corporations that are deductible under section 243, to the extent paragraph (d)(2)(i) of this section does not apply.
(B) Dividends received on certain preferred stock that are deductible under section 244.
(C) Dividends received from certain foreign corporations that are deductible under section 245, to the extent neither paragraph (d)(2)(i) nor (d)(2)(iii) of this section applies.
(D) Dividends paid on certain preferred stock of public utilities that are deductible under section 247.
(E) Dividends paid to an employee stock ownership plan that are deductible under section 404(k).
(F) Non-patronage dividends that are paid and deductible under section 1382(c)(1).
Items described in paragraph (d)(1) of this section are not taken into account in computing earnings and profits (and thus are not deductible in computing adjusted current earnings) even if they are not identified in this paragraph (d)(3). The Commissioner may identify additional items described in paragraph (d)(1) of this section in other published guidance.
(4) Partial list of items deductible for purposes of computing both pre-adjustment alternative minimum taxable income and adjusted current earnings. The following is a partial list of items that are deductible for purposes of computing both pre-adjustment alternative minimum taxable income and adjusted current earnings, and for which no adjustment is allowed under this section.
(i) Payments by a United States corporation with respect to employees of certain foreign corporations that are deductible under section 176.
(ii) Dividends paid on deposits by thrift institutions that are deductible under section 591.
(iii) Life insurance policyholder dividends that are deductible under section 808.
(iv) Dividends paid by cooperatives that are deductible under sections 1382(b) or 1382(c)(2) and that are not paid with respect to stock.
The Commissioner may identify additional items described in this paragraph (d)(4) in other published guidance.
(e) Treatment of income items included, and deduction items not allowed, in computing pre-adjustment alternative minimum taxable income. Adjusted current earnings includes any income item that is included in pre-adjustment alternative minimum taxable income, even if that income item is not included in earnings and profits for the taxable year. Except as specifically provided in paragraph (c)(3) or (c)(5) of this section, no deduction is allowed for an item in computing adjusted current earnings if the item is not deductible in computing pre-adjustment alternative minimum taxable income for the taxable year, even if the item is deductible in computing earnings and profits for the year. Thus, for example, capital losses in excess of capital gains for the taxable year are not deductible in computing adjusted current earnings for the taxable year.
(f) Certain other earnings and profits adjustments—(1) Intangible drilling costs. For purposes of computing adjusted current earnings, the amount allowable as a deduction for intangible drilling costs (as defined in section 263(c)) for amounts paid or incurred in taxable years beginning after December 31, 1989, is determined as provided in section 312(n)(2)(A). See section 56(h) for an additional adjustment to alternative minimum taxable income based on energy preferences for taxable years beginning after 1990.
(2) Certain amortization provisions do not apply. For purposes of computing adjusted current earnings, sections 173 (relating to circulation expenditures) and 248 (relating to organizational expenditures) do not apply to amounts paid or incurred in taxable years beginning after December 31, 1989. If an election is made under section 59(e) to amortize circulation expenditures described in section 173 over a three-year period, the expenditures to which the election applies are deducted ratably over the three-year period for purposes of computing taxable income, pre-adjustment alternative minimum taxable income, and adjusted current earnings.
(3) LIFO recapture adjustment—(i) In general. Adjusted current earnings are generally increased or decreased by the increase or decrease in the taxpayer's LIFO recapture amount (as defined in paragraph (f)(3)(iii)(A) of this section) as of the close of each taxable year.
(ii) Beginning LIFO and FIFO inventory. For purposes of computing the increase or decrease in the LIFO recapture amount, the beginning LIFO and FIFO inventory amounts for the first taxable year beginning after December 31, 1989, are—
(A) The ending LIFO inventory amount used in computing pre-adjustment alternative minimum taxable income for the last year beginning before January 1, 1990; and
(B) The ending FIFO inventory amount for the last year beginning before January 1, 1990, computed with the adjustments described in section 56 (other than the adjustment described in section 56(g)) and section 58, the items of tax preference described in section 57 and using the methods used in computing pre-adjustment alternative minimum taxable income.
(iii) Definitions—(A) LIFO recapture amount—(1) Definition. The taxpayer's LIFO recapture amount is the excess, if any, of—
(i) the inventory amount of its assets under the FIFO method, computed using the rules of this section; over
(ii) the inventory amount of its assets under the LIFO method, computed using the rules of this section.
(2) Assets included. Only the assets for which the taxpayer uses the LIFO method to compute pre-adjustment alternative minimum taxable income are taken into account in determining the LIFO recapture amount.
(B) FIFO Method. For purposes of this paragraph, the LIFO method is the first in, first out method described in section 471, determined by using—
(1) The retail method if that is the method the taxpayer uses in computing pre-adjustment alternative minimum taxable income; or
(2) The lower of cost or market method for all other taxpayers.
(C) LIFO method. The LIFO method is the last in, first out method authorized by section 472.
(D) Inventory amounts. Except as otherwise provided, inventory amounts are computed using the methods used in computing pre-adjustment alternative minimum taxable income. To the extent inventory is treated as produced or acquired during taxable years beginning after December 31, 1989, the inventory amount is determined with the adjustments described in sections 56 and 58 and the items of tax preference described in section 57. Thus, for example, the amount of depreciation to be capitalized under section 263A with respect to inventory produced in taxable years beginning after December 31, 1989, is based on the depreciation allowed under the rules of paragraph (b) of this section. See paragraph (a)(5) of this section.
(iv) Exchanges under sections 351 and 721. For purposes of this section, any decrease in a transferor's LIFO recapture amount that occurs as a result of a transfer of inventories in an exchange to which section 351 or section 721 applies cannot be used to decrease the adjusted current earnings of the transferor. A decrease that is disallowed under the preceding sentence is instead carried over to reduce any LIFO recapture adjustment that the transferee (or its corporate partners, if section 721 applies) would otherwise make (in the absence of this paragraph (f)(3)(iv)) solely by reason of its carryover basis in inventories received in the section 351 or section 721 exchange. Nothing in this paragraph (f)(3)(iv), however, alters the computation of the LIFO recapture amount of the transferor or transferee as of the close of any taxable year.
(v) Examples. The following examples illustrate the provisions of this paragraph (f)(3).
Example 1. M Corporation, a calendar-year taxpayer, uses the LIFO method of accounting for its inventory for purposes of computing pre-adjustment alternative minimum taxable income. M's ending LIFO inventory for all of its pools for purposes of computing pre-adjustment alternative minimum taxable income on December 31, 1989, is $300. M computes a $500 FIFO inventory amount on that date, after applying the provisions of section 263A along with the adjustments and preferences required in computing pre-adjustment alternative minimum taxable income. M's FIFO and LIFO ending inventory amounts at the close of its taxable years, its LIFO reserves, and its adjustment under this paragraph (f)(3), are as follows:
1989 | 1990 | 1991 | 1992
Ending inventory:
A. FIFO | 1 $500 | $360 | $560 | $600
B. LIFO | 2 300 | 180 | 320 | 440
LIFO recapture amount:
A−B | 200 | 180 | 240 | 160
Change in LIFO recapture amount and adjustment under paragraph (f)(3) | (20) | 60 | (80)
1 Beginning FIFO inventory amount under paragraph (f)(3)(ii).
2 Beginning LIFO inventory amount under paragraph (f)(3)(ii).
Example 2. (A) X Corporation, a calendar-year taxpayer, uses the LIFO method for purposes of computing pre-adjustment alternative minimum taxable income. X's LIFO recapture amount is $300 as of December 31, 1992, and is $200 as of December 31, 1993. Immediately prior to calculating its LIFO recapture amount as of December 31, 1993, X transfers inventory with an adjusted current earnings (ACE) basis of $500 to Y Corporation in an exchange to which section 351 applies. X determines that the $100 decrease in its LIFO recapture amount occurred as a result of its transfer of inventories to Y in the section 351 exchange. Thus, under paragraph (f)(3)(iv) of this section, X cannot decrease its adjusted current earnings by that amount. In computing its 1994 LIFO recapture adjustment, X will use $200 as its LIFO recapture amount as of December 31, 1993, even though it was not entitled to reduce adjusted current earnings by the $100 decrease in its LIFO recapture amount in 1993.
(B) For purposes of computing its ACE, Y takes a $500 carryover basis in the inventories received from X. If Y, a newly formed calendar-year taxpayer, engages in no other inventory transactions in 1993 and adopts the LIFO inventory method on its 1993 tax return, it will have a LIFO recapture amount of $0 as of December 31, 1993 (because its FIFO inventory amount and its LIFO inventory amount are both $500). Assume that at December 31, 1994, Y has a LIFO recapture amount of $200 ($1,000 FIFO inventory amount−$800 LIFO inventory amount). Under paragraph (f)(3)(i) of this section, Y computes a LIFO recapture adjustment for 1994 of $200 ($200−$0). If any portion of Y's $200 LIFO recapture adjustment occurs solely by reason of its carryover basis in the inventories it received from X, Y reduces its $200 LIFO recapture adjustment by that portion under paragraph (f)(3)(iv). In any event, however, Y will use its $200 LIFO recapture amount as of December 31, 1994, in computing its 1995 LIFO recapture adjustment.
(vi) Effective date. Paragraph (f)(3) is effective for taxable years beginning after December 18, 1992. A taxpayer may choose to apply this paragraph, however, to all taxable years beginning after December 31, 1989.
(4) Installment sales—(i) In general. Adjusted current earnings are computed without regard to the installment method, except as provided in this paragraph (f)(4).
(ii) Exception for prior dispositions. Paragraph (f)(4)(i) of this section does not apply to any disposition in a taxable year beginning before January 1, 1990, that is taken into account under the installment method for purposes of computing pre-adjustment alternative minimum taxable income. Thus, for any disposition in a taxable year beginning before January 1, 1990, the installment method applies in computing adjusted current earnings for taxable years beginning after December 31, 1989, to the same extent it applies in determining pre-adjustment alternative minimum taxable income for the taxable year.
(iii) Special rules for obligations to which section 453A applies—(A) In general. The following special rules apply to any installment sale occurring in a taxable year beginning after December 31, 1989, that results in an installment obligation to which section 453A(a)(1) applies and with respect to which preadjustment alternative minimum taxable income is determined under the installment method. As explained in paragraph (f)(4)(iii)(B) of this section, for purposes of computing adjusted current earnings, a portion of the contract price is eligible for the installment method, and the remainder of the contract price is not eligible for the installment method. Payments under the obligation are allocated pro-rata between the two accounting methods.
(B) Limitation on application of installment method. Only a portion of the contract price of an installment sale described in paragraph (f)(4)(iii)(A) of this section is eligible to be accounted for under the installment method for purposes of computing adjusted current earnings. The portion eligible for the installment method is equal to the total contract price of the sale multiplied by the applicable percentage (as determined under section 453A(c)(4)) for the taxable year of the sale. The remainder of the contract price is not eligible to be accounted for under the installment method for purposes of computing adjusted current earnings. The gross profit ratio is determined without regard to this bifurcated treatment of the sale.
(C) Treatment of the ineligible portion. The gain on the sale that is taken into account in the taxable year of the sale for purposes of computing adjusted current earnings is equal to the gross profit ratio multiplied by the entire portion of the contract price that is ineligible for the installment method.
(D) Treatment of the eligible portion. For purposes of calculating adjusted current earnings, the amount of gain recognized in a taxable year on the portion of the contract price that is eligible for the installment method is equal to—
(1) The amount of payments received during the taxable year, multiplied by
(2) The applicable percentage for the taxable year of the sale, multiplied by
(3) The gross profit ratio.
(E) Coordination with the pledge rule. For purposes of determining the amount of payments received during the taxable year under paragraph (f)(4)(iii)(D), the rules of section 453A(d) (relating to the treatment of certain pledge proceeds as payments) apply. This includes the rules under section 453A(d)(3) that relate to treating later payments as receipts of amounts on which tax has already been paid.
(F) Example. The following example illustrates the provisions of this paragraph (f)(4)(iii):
(1) On January 1, 1990, corporation A, a calendar-year taxpayer, sells a building with an adjusted basis for purposes of computing adjusted current earnings of $10 million, for $5 million and an installment obligation bearing adequate stated interest with a principal amount of $20 million. The installment obligation calls for 4 annual payments of $5 million on January 1 of 1991, 1992, 1993, and 1994. A does not elect out of the installment method, and disposes of no other property under the installment method during 1990. No gain with respect to the sale is recaptured pursuant to section 1250.
(2) The gross profit percentage for purposes of computing adjusted current earnings on the sale is 60 percent, computed as follows: gross profit of $15 million ($25 million contract price less $10 million adjusted basis) divided by $25 million contract price. The applicable percentage on the sale is 75 percent, computed as follows: $15 million ($20 million of installment obligations arising during and outstanding at the end of 1990 less $5 million) divided by $20 million of installment obligations arising during and outstanding at the end of 1990. See section 453A(c)(4). The portion of the contract price eligible for accounting under the installment method for purposes of computing adjusted current earnings is $18.75 million, or $25 million total contract price times applicable percentage of 75 percent. The portion of the contract price ineligible for the installment method is $6.25 million, or $25 million less $18.75 million.
(3) In computing adjusted current earnings for 1990, A must include $3.75 million of the gain on the sale. This amount is equal to the portion of the contract price that is ineligible for the installment method times the gross profit ratio, or $6.25 million times 60 percent. A must also include $2.25 million of gain from the $5 million payment received in 1990. This amount is computed as follows: the eligible portion of the payment, $3.75 million ($5 million payment times the applicable percentage of 75 percent), times the gross profit ratio of 60 percent. Thus, the total amount of gain from the sale that A must include in adjusted current earnings for 1990 is $6 million ($3.75 million of gain from the portion of the contract price that is not eligible for the installment method, plus $2.25 million of gain from the 1990 payment).
(4) A does not pledge or otherwise accelerate payments on the note in any other taxable year. In computing adjusted current earnings for 1991, 1992, 1993, and 1994, A therefore includes $2.25 million of gain on the installment sale, computed as follows: $5 million payment times the applicable percentage of 75 percent, times the gross profit ratio of 60 percent.
(g) Disallowance of loss on exchange of debt pools. [Reserved]
(h) Policy acquisition expenses of life insurance companies—(1) In general. This paragraph (h) addresses the treatment of policy acquisition expenses of life insurance companies in determining adjusted current earnings. Policy acquisition expenses are those expenses that, under generally accepted accounting principles in effect at the time the expenses are incurred, are considered to vary with and to be primarily related to the acquisition of new and renewal insurance policies. Generally, these acquisition expenses must be capitalized and amortized for purposes of adjusted current earnings over the reasonably estimated life of the acquired policy, using a method that provides a reasonable allowance for amortization. This method of amortization is treated as if it applied to all taxable years in determining the amount of policy acquisition expenses deducted for adjusted current earnings. The rules in this paragraph (h) apply to any life insurance company, as defined in section 816(a).
(2) Reasonably estimated life. The reasonably estimated life of an acquired policy is determined based on the facts with respect to each policy (such as the age, sex, and health of the insured), and the company's experience (such as mortality, lapse rate and renewals) with similar policies. A company may treat as the reasonably estimated life of an acquired policy the period for amortizing expenses of the acquired policy that would be required by the Financial Accounting Standards Board (FASB) at the time the acquisition expenses are incurred. If the FASB has not established such a period, the period for amortizing acquisition expense of an acquired policy under guidelines issued by the American Institute of Certified Public Accountants in effect at the time the acquisition expenses are incurred may be treated as the reasonably estimated life of the acquired policy.
(3) Reasonable allowance for amortization. For purposes of determining a reasonable allowance for amortization, a company may use a method that amortizes acquisition expenses in the same proportion that gross premiums and gross investment income for the taxable year bear to total anticipated receipts of gross premiums (including anticipated renewal premiums) and gross investment income to be realized over the reasonably estimated life of the policy.
(4) Safe harbor for public financial statements. Any company that is required to file with the Securities and Exchange Commission (SEC) a financial statement with respect to the taxable year will be treated as having complied with paragraph (h)(1) of this section if it accounts for acquisition expenses for adjusted current earnings purposes in the same manner as it accounts for those expenses on its financial statements filed with the SEC.
(i) [Reserved]
(j) Depletion. For purposes of computing adjusted current earnings, the allowance for depletion with respect to any property placed in service in a taxable year beginning after December 31, 1989 is determined under the cost depletion method of section 611.
(k) Treatment of certain ownership changes—(1) In general. In the case of any corporation that has an ownership change as defined in paragraph (k)(2) of this section in a taxable year beginning after December 31, 1989, and that also has a net unrealized built-in loss (as defined in paragraph (k)(3) of this section) immediately before the ownership change, the adjusted basis of each asset of the corporation for purposes of computing adjusted current earnings following the ownership change shall be its proportionate share (determined on the basis of the respective fair market values of each asset) of the fair market value of the assets of the corporation immediately before the ownership change. The rules of § 1.338-6(b), if otherwise applicable to the transaction, are applied in making this allocation of basis. If such rules apply, the limitations of §§ 1.338-6(c) (1) and (2) also apply in allocating basis under this paragraph (k)(1).
(2) Definition of ownership change. A corporation has an ownership change for purposes of section 56(g)(4)(G)(i) and this paragraph (k) if there is an ownership change under section 382(g) for purposes of computing the corporation's amount of taxable income that may be offset by pre-change losses or the regular tax liability that may be offset by pre-change credits. See § 1.382-2T for rules to determine whether a corporation has an ownership change. Accordingly, in order for an ownership change to occur for purposes of this paragraph (k), a corporation must be a loss corporation as defined in § 1.382-2(a)(1). In determining whether the corporation is a loss corporation, the determination of whether there is a net unrealized built-in loss is made by using the aggregate adjusted basis of the assets of the corporation used in computing taxable income. The aggregate adjusted basis of the corporation's assets for purposes of computing adjusted current earnings is not relevant in determining whether the corporation is a loss corporation. See part (iv) of the example in paragraph (k)(4) of this section.
(3) Determination of net unrealized built-in loss immediately before an ownership change. In order to determine whether it has a net unrealized built-in loss for purposes of section 56(g)(4)(G)(ii) and paragraph (k)(1) of this section, a corporation that has an ownership change as defined in paragraph (k)(2) of this section must use the aggregate adjusted basis of its assets that it uses in computing its adjusted current earnings. The rules of section 382 (including sections 382(h)(3)(B)(i) and 382(h)(8)) otherwise apply in determining whether the corporation has a net unrealized built-in loss.
(4) Example. The following example illustrates the provisions of this paragraph (k):
(i) Individual A has owned all the issued and outstanding stock of corporation L for the past 5 years. A sells all of his stock in L to unrelated individual B. On the date of the sale, L owns the following assets (all numbers are in millions):
Asset | Adjusted basis for computing taxable income | Adjusted basis for computing adjusted current earnings | Fair market value
x | $45 | $50 | $50
y | 55 | 60 | 30
z | 10 | 10 | 20
$110 | $120 | $100
For purposes of computing taxable income, L has a $500 million net operating loss carryforward to the taxable year in which the sale occurs. Therefore, L is a loss corporation. As a result of the transfer of shares of L from A to B, L has had an ownership change.
(ii) L has no net unrealized built-in loss for purposes of computing taxable income because the amount by which the aggregate adjusted basis of its assets for that purpose exceeds their fair market value is $10 million, which is less than 15 percent of their fair market value and is not greater than $10 million. See section 381(h)(3)(B)(i). L, however, does have a net unrealized built-in loss for purposes of computing adjusted current earnings because the aggregate adjusted basis of its assets for the purpose exceeds their fair market value by $20 million, and that amount is greater than $10 million.
(iii) Under paragraph (k)(1) of this section, L must restate the adjusted basis of its assets for purposes of computing adjusted current earnings to their fair market values, as follows (all numbers are in millions):
Asset | New adjusted basis
x | $50
y | 30
z | 20
L must use these new adjusted bases for all purposes in determining adjusted current earnings, including computing depreciation and any gain or loss on disposition.
(iv) If L did not have the net operating loss carryforward, and had no other loss or credit carryovers or other attributes described in § 1.382-2(a)(1) for purposes of computing the amount of its taxable income that may be offset by pre-change losses or its regular tax liability that may be offset by pre-change credits, it would not have been a loss corporation on the date of the sale and therefore would not be treated as having had an ownership change for purposes of computing adjusted current earnings. This would be true even though L had a net unrealized built-in loss for purposes of computing adjusted current earnings. Therefore, this paragraph (k) would not have applied.
(l) [Reserved]
(m) Adjusted current earnings of a foreign corporation—(1) In general. The alternative minimum taxable income of a foreign corporation is increased by 75 percent of the excess of—
(i) Its effectively connected adjusted current earnings for the taxable year; over
(ii) Its effectively connected pre-adjustment alternative minimum taxable income for the taxable year.
(2) Definitions—(i) Effectively connected pre-adjustment alternative minimum taxable income. Effectively connected pre-adjustment alternative minimum taxable income is the effectively connected taxable income of the foreign corporation for the taxable year, determined with the adjustments under sections 56 and 58 (except for the adjustment for adjusted current earnings, the alternative tax net operating loss and the alternative tax energy preference deduction) and increased by the tax preference items of section 57, but taking into account only items of income of the foreign corporation that are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States, and any expense, loss or deduction that is properly allocated and apportioned to that income.
(ii) Effectively connected adjusted current earnings. Effectively connected adjusted current earnings is the effectively connected pre-adjustment alternative minimum taxable income of the foreign corporation for the taxable year, adjusted under section 56(g) and this section, but taking into account only items of income of the foreign corporation that are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States, and any expense, loss or deduction that is properly allocated and apportioned to that income.
(3) Rules to determine effectively connected pre-adjustment alternative minimum taxable income and effectively connected adjusted current earnings. The principles of section 864 (c) (and the regulations thereunder) and any other applicable provision of the Internal Revenue Code apply to determine whether items of income of the foreign corporation are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States, and whether any expense, loss or deduction is properly allocated and apportioned to that income.
(4) Certain exempt amounts. Effectively connected adjusted current earnings and effectively connected pre-adjustment alternative minimum taxable income do not include any item of income, or any expense, loss or deduction that is properly allocated and apportioned to income that is exempt from United States taxation under section 883 or an applicable income tax treaty. See section 894.
(n) Adjustment for adjusted current earnings of consolidated groups—(1) Positive adjustments. For taxable years beginning after December 31, 1989, the alternative minimum taxable income of a consolidated group (as defined in § 1.1502-1T) is increased by 75 percent of the excess, if any, of—
(i) The consolidated adjusted current earnings for the taxable year, over
(ii) The consolidated pre-adjustment alternative minimum taxable income for the taxable year.
(2) Negative adjustments—(i) In general. The alternative minimum taxable income of a consolidated group is decreased, subject to the limitation of paragraph (n)(2)(ii) of this section, by 75 percent of the excess, if any, of the consolidated pre-adjustment alternative minimum taxable income over consolidated adjusted current earnings.
(ii) Limitation on negative adjustments. The amount of the negative adjustment for any taxable year shall be limited to the excess, if any, of—
(A) The aggregate increases in the alternative minimum taxable income of the group in prior years under this section, over
(B) The aggregate decreases in the alternative minimum taxable income of the group in prior years under this section.
(3) Definitions—(i) Consolidated pre-adjustment alternative minimum taxable income. Consolidated pre-adjustment alternative minimum taxable income is the consolidated taxable income (as defined in § 1.1502-11) of a consolidated group for the taxable year, determined with the adjustments provided in sections 56 and 58 (except for the adjustment for adjusted current earnings and the alternative tax net operating loss determined under section 56(a)(4)) and increased by the preference items described in section 57.
(ii) Consolidated adjusted current earnings. The consolidated adjusted current earnings of a consolidated group is the consolidated pre-adjustment alternative minimum taxable income of the consolidated group for the taxable year, adjusted as provided in section 56(g) and this section.
(4) Example. The following example illustrates the provisions of this paragraph (n):
(i) P is the common parent of a consolidated group. In 1990, the group has consolidated pre-adjustment alternative minimum taxable income of $1,400,000 and consolidated adjusted current earnings of $1,600,000. Thus, the group has a consolidated adjustment for adjusted current earnings for 1990 of $150,000 (75 percent of the $200,000 excess of consolidated adjusted current earnings over consolidated pre-adjustment alternative minimum taxable income), and alternative minimum taxable income of $1,550,000 ($1,400,000 plus $150,000).
(ii) In 1991, the group has consolidated pre-adjustment alternative minimum taxable income of $1,500,000 and consolidated adjusted current earnings of $1,100,000. Thus, the group can reduce its alternative minimum taxable income by $150,000. The potential negative adjustment of $300,000 (75 percent of the $400,000 excess of consolidated pre-adjustment alternative minimum taxable income over consolidated adjusted current earnings) is limited to the $150,000 consolidated adjustment for adjusted current earnings taken into account in 1990.
(o) [Reserved]
(p) Effective dates for corporate partners in partnerships—(1) In general. The provisions of this section apply to a corporate partner's distributive share of items of income and expense from a partnership for any taxable year of the partnership ending within or with any taxable year of the corporate partner beginning after December 31, 1989.
(2) Application of effective dates. Solely for purposes of the effective date provisions of this section, a partnership event (such as placing property in service, paying or incurring a cost, or closing an installment sale) is deemed to occur on the last day of the partnership's taxable year.
(3) Example. The following example illustrates the provisions of this paragraph (p):
(i) X is a calendar-year corporation that is a partner in P, an accrual-basis partnership with a taxable year ending March 31. During P's taxable year ending March 31, 1990, P earned ratably throughout the year interest income on tax-exempt obligations. In addition, P incurred intangible drilling costs in November 1989 and in February 1990.
(ii) X's adjusted current earnings for 1990 includes X's distributive share of the interest on the tax-exempt obligations earned by P for its taxable year ending March 31, 1990. This is true even though P earned a portion of the interest prior to January 1, 1990.
(iii) For purposes of computing X's adjusted current earnings for 1990, the adjustment provided in paragraph (f)(1) of this section applies to X's distributive share of P's November 1989 and February 1990 intangible drilling costs.
(q) Treatment of distributions of property to shareholders—(1) In general. If a distribution of an item of property by a corporation with respect to its stock gives rise to more than one adjustment to earnings and profits under section 312, all of the adjustments with respect to that item of property (including the adjustment described in section 312(c) with respect to liabilities to which the item is subject or which are assumed in connection with the distribution) are combined for purposes of determining the corporation's adjusted current earnings for the taxable year. If the amount included in pre-adjustment alternative minimum taxable income with respect to a distribution of an item of property exceeds the net increase in earnings and profits caused by the distribution, pre-adjustment alternative minimum taxable income is not reduced in computing adjusted current earnings. If the net increase in earnings and profits caused by a distribution of an item of property exceeds the amount included in pre-adjustment alternative minimum taxable income with respect to the distribution, that excess is added to pre-adjustment alternative minimum taxable income in computing adjusted current earnings.
(2) Examples. The following examples illustrate the provisions of this paragraph (q).
(i) Example 1. K corporation distributes property with a fair market value of $150 and an adjusted basis of $100. The adjusted basis is the same for purposes of computing taxable income, pre-adjustment alternative minimum taxable income, adjusted current earnings, and earnings and profits. Under section 312(a)(3), as modified by section 312(b)(2), K decreases its earnings and profits by the fair market value of the property, or $150. Under section 312(b)(1), K increases its earnings and profits by the excess of the fair market value of the property over its adjusted basis, or $50. As a result of the distribution, there is a net decrease in K's earnings and profits of $100. K recognizes $50 of gain under section 311(b) as a result of the distribution as if K sold the property for $150. K thus has no amount permanently excluded from pre-adjustment alternative minimum taxable income that is taken into account in determining current earnings and profits, and thus has no adjustment under paragraph (c)(1) of this section.
(ii) Example 2. The facts are the same as in example 1, except that the distribution shareholder assumes a $190 liability in connection with the disribution. Under section 312(c)(1), K must adjust the adjustments to its earnings and profits under section 312 (a) and (b) to account for the liability the shareholder assumes. K adjusts the $100 net decrease in its earnings and profits to reflect the $190 liability, resulting in an increase in its earnings and profits of $90. Because section 311(b)(2) makes the rules of section 336(b) apply, the fair market value of the property is not less than the amount of the liability, or $190. K therefore is treated as if it sold the property for $190, recognizing $90 of gain. K thus has no amount permanently excluded from pre-adjustment alternative minimum taxable income that is taken into account in determining current earnings and profits, and thus has no adjustment under paragraph (c)(1) of this section.
(r) Elections to use simplified inventory methods to compute alternative minimum tax—(1) In general. If a taxpayer makes an election under this paragraph (r) (and does not make the election in paragraph (r)(5) of this section), the rules of paragraph (r)(2) of this section apply in computing the taxpayer's pre-adjustment alternative minimum taxable income and adjusted current earnings.
(2) Effect of election—(i) Inventories. The taxpayer's inventory amounts as determined for purposes of computing taxable income are used for purposes of computing pre-adjustment alternative minimum taxable income and adjusted current earnings. Subject to the further modification described in paragraph (r)(2)(ii) of this section, the taxpayer's cost of sales as determined for purposes of computing taxable income is also used for purposes of computing pre-adjustment alternative minimum taxable income and adjusted current earnings.
(ii) Modifications required—(A) In general. If a taxpayer makes an election under this paragraph (r), pre-adjustment alternative minimum taxable income and adjusted current earnings are computed with the modifications described in this paragraph. The items of adjustment under sections 56 and 58 and the items of tax preference under section 57 are computed without regard to the portion of those adjustments and preferences which, but for the election described in this paragraph, would have been capitalized in ending inventory. For example, pre-adjustment alternative minimum taxable income is increased by the excess of the depreciation allowable for the taxable year under section 168 for purposes of computing taxable income (determined without regard to section 263A) over the depreciation allowable for the taxable year under section 56(a)(1) and section 57 for purposes of computing pre-adjustment alternative minimum taxable income (determined without regard to section 263A). Similarly, adjusted current earnings is further increased by the excess of the depreciation allowable for the taxable year under section 56(a)(1) and section 57 for purposes of computing pre-adjustment alternative minimum taxable income (determined without regard to section 263A) over the depreciation allowable for the taxable year under section 56(g)(4)(A) for purposes of computing adjusted current earnings (determined without regard to section 263A). Thus, the modifications described in the preceding sentence do not duplicate amounts that are taken into account in computing pre-adjustment alternative minimum taxable income. See paragraph (a)(6)(ii) of this section.
(B) Negative modifications allowed. An election under this paragraph (r) does not affect the taxpayer's ability to make negative adjustments. Thus, if an election is made under this paragraph (r) and the amount of any adjustment under section 56 or 58, determined after modification under paragraph (r)(2)(ii)(A) of this section, is a negative amount, then this amount reduces pre-adjustment alternative minimum taxable income or adjusted current earnings. However, no negative adjustment under this paragraph (r)(2)(ii)(B) is allowed for the items of tax preference under section 57.
(iii) LIFO recapture adjustment. If a taxpayer makes an election under this paragraph (r) and uses the LIFO method for some assets, for purposes of computing the LIFO recapture adjustment under paragraph (f)(3) of this section for taxable years beginning after December 31, 1989—
(A) The LIFO inventory amount as determined for purposes of computing taxable income is used in lieu of the LIFO inventory amount as determined under paragraph (f)(3)(iii) of this section;
(B) The FIFO inventory amount is computed without regard to the adjustments under sections 56 (including the adjustments of section 56(g)(4)) and 58 and the items of tax preference of section 57; and
(C) The beginning LIFO and FIFO inventory amounts under paragraph (f)(3)(ii) of this section are the ending LIFO inventory amount as determined for purposes of computing taxable income and the ending FIFO inventory amount computed without regard to the adjustments under sections 56 (including the adjustments of sections 56(g)(4)) and 58 and the items of tax preference of section 57 for the last taxable year beginning before January 1, 1990.
(3) Time and manner of making election—(i) Prospective election. (A) A prospective election under this paragraph (r) may be made by any taxpayer—
(1) That has computed pre-adjustment alternative minimum taxable income and adjusted current earnings for all prior taxable years in accordance with the method described in this paragraph (r); or
(2) That has not computed pre-adjustment alternative minimum taxable income and adjusted current earnings for all prior tax years in accordance with the method described in this paragraph (r), but for which the use of the method described in this paragraph (r) for all prior taxable years would not have changed the taxpayer's tax liability (as shown on returns filed as of the date the election is made) for any prior taxable year for which the period of limitations under section 6501(a) has not expired (as of the date the election is made).
(B) A prospective election under this paragraph (r) may only be made by attaching a statement to the taxpayer's timely filed (including extensions) original Federal income tax return for any taxable year that is no later than its first taxable year to which this paragraph (r) applies and in which the taxpayer's tentative minimum tax (computed under the provisions of this paragraph (r)) exceeds its regular tax. However, in the case of a taxpayer described in paragraph (r)(3)(i)(A)(1) of this section that had tentative minimum tax in excess of its regular tax for any prior taxable year, the election may only be made by attaching a statement to its timely filed (including extensions) original Federal income tax return for the first taxable year ending after December 18, 1992. The statement must—
(1) Give the name, address and employer identification number of the taxpayer; and
(2) Identify the election as made under this paragraph (r).
(C) The determination of whether a taxpayer is described in paragraph (r)(3)(i)(A)(2) of this section is to be made as of the time the taxpayer makes a prospective election in accordance with the procedures in paragraph (r)(3)(i)(B) of this section.
(D) Any taxpayer described in paragraph (r)(3)(i)(A)(2) of this section that makes a prospective election will be deemed to have used the method described in this paragraph (r) in computing pre-adjustment alternative minimum taxable income and adjusted current earnings for all prior taxable years.
(ii) Retroactive election—(A) A retroactive election under this paragraph (r) may be made by any taxpayer not described in paragraph (r)(3)(i)(A) (1) or (2) of this section. Except as provided in paragraph (r)(3)(iii) of this section, a retroactive election may only be made by attaching a statement to the taxpayer's amended Federal income tax return for the earliest taxable year for which the period of limitations under section 6501(a) has not expired and which begins after December 31, 1986. The amended return to which the election under this paragraph (r)(3)(ii) is attached must be filed no later than June 21, 1993.
(B) The amended return must contain the statement described in paragraph (r)(3)(i)(B) of this section. In addition, the statement must contain a representation that the taxpayer will modify its pre-adjustment alternative minimum taxable income and adjusted current earnings for all open taxable years in accordance with paragraph (r)(2) of this section. Upon this change in method of accounting, the taxpayer must include the entire adjustment required under section 481(a), if any, in preadjustment alternative minimum taxable income and adjusted current earnings on the amended return for the year of the election. The taxpayer must also reflect the method of accounting described in paragraph (r)(2) of this section on amended returns filed for all taxable years after the year of the election for which returns were originally filed before making the election (and for which the period of limitations under section 6501(a) has not expired).
(C) Provided a taxpayer meets the requirements of this paragraph (r), any change in method of accounting arising as a result of making a retroactive election will be treated as made with the advance consent of the Commissioner.
(D) Any retroactive election under this paragraph (r) that is made without filing amended returns required under this paragraph (r)(3)(ii) shall constitute a change in method of accounting made without the consent of the Commissioner.
(iii) Taxpayers under examination—(A) In general. A taxpayer that wishes to make a retroactive election under section (r)(3)(ii) of this section may use the procedures in paragraph (r)(3)(iii)(A) (1) or (2) in lieu of filing an amended return for any taxable year that is under examination by the Internal Revenue Service.
(1) Year of change under examination. If the year of the change is under examination at the time the taxpayer timely makes the election, the taxpayer may (in lieu of filing an amended return for the year of the change) furnish the written statement described in paragraph (r)(3)(iii)(B) of this section to the revenue agent responsible for examining the taxpayer's return no later than June 21, 1993. It is the taxpayer's responsibility to make a timely election either by furnishing the statement to the revenue agent or by filing amended returns by June 21, 1993.
(2) Other open years under examination. If any other year for which the taxpayer must modify its pre-adjustment alternative minimum taxable income and adjusted current earnings (see paragraph (r)(3)(ii)(B) of this section) is examined, the taxpayer may (in lieu of filing an amended return) furnish the amount of the conforming adjustment to the revenue agent responsible for examining the taxpayer's return. It is the taxpayer's responsibility to timely modify its pre-adjustment alternative minimum taxable income and adjusted current earnings for each year other than the year of change, either by furnishing the amount of the adjustment to the revenue agent or by filing amended returns.
(B) Statement required. The statement required under paragraph (r)(3)(iii)(A)(1) of this section must include all of the items required under paragraph (r)(3)(ii)(B) of this section, as well as—
(1) The caption “Election to use regular tax inventories for AMT purposes;”
(2) A description of the nature and amount of all items that would result in adjustments and that the taxpayer would have reported if the taxpayer had used the method described in this paragraph (r) for all prior taxable years for which the period of limitations under section 6501(a) has not expired and which begin after December 31, 1986; and
(3) The following declaration signed by the person authorized to sign the return for the taxpayer: “Under penalties of perjury, I declare that I have examined this written statement, and to the best of my knowledge and belief this written statement is true, correct, and complete.”
(C) Year of change. The year of change is the earliest taxable year for which the period of limitations under section 6501(a) has not expired at the time the statement is submitted to the appropriate revenue agent and that begins after December 31, 1986. Thus, the adjustments required to be included on the statement must include any adjustment under section 481(a) determined as if the method described in this paragraph (r) had been used in all taxable years prior to the year of change that begin after December 31, 1986.
(D) Treatment of additional tax liability. Any additional tax liability that results from the adjustments identified in the written statement described in paragraph (r)(3)(iii)(B) of this section is treated as an additional amount of tax shown on an amended return.
(iv) Election as method of accounting. The elections provided in paragraphs (r)(3) (i) and (ii) of this section constitute either adoptions of, or changes in, methods of accounting. These elections, once made, may be revoked only with the consent of the Commissioner in accordance with the rules of section 446(e) and § 1.446-1(e).
(v) Untimely election to use simplified inventory method. If a taxpayer makes an election described in this paragraph (r) after the times set forth in paragraph (r)(3) (i) or (ii) of this section, the taxpayer must comply with the requirements of § 1.446-1(e)(3) in order to secure the consent of the Commissioner to change to the method of accounting prescribed in this paragraph (r). The taxpayer generally will be subject to terms and conditions designed to place the taxpayer in a position no more favorable than a taxpayer that timely complied with paragraph (r)(3) (i) and (ii) of this section, whichever is applicable.
(4) Example. The following example illustrates the provisions of this paragraph (r).
Example. (i) Corporation L is a calendar year manufacturer of baseball bats and uses the LIFO method of accounting for inventories. During 1987, 1988, and 1989, L's cost of goods sold in computing taxable income was as follows:
1987 | 1988 | 1989
Beginning LIFO inventory | $3,000 | $4,000 | $5,000
Purchases and other costs | 9,000 | 9,000 | 9,000
Ending LIFO inventory | (4,000) | (5,000) | (6,000)
Cost of goods sold | 8,000 | 8,000 | 8,000
(ii) L has no preferences under section 57 during 1987, 1988, and 1989. L's sole adjustment in computing alternative minimum tax during 1987, 1988, and 1989 was the depreciation adjustment under section 56(a)(1). Depreciation determined for both production and non-production assets under section 168 and under section 56(a)(1) during 1987, 1988, and 1989 was as follows:
1987 | 1988 | 1989
Section 168 depreciation | $1,800 | $1,800 | $1,800
Section 56(a)(1) depreciation | (900) | (900) | (900)
Depreciation difference | 900 | 900 | 900
Portion of difference capitalized in the increase in inventory | (100) | (100) | (100)
Adjustment required under section 56(a)(1) | 800 | 800 | 800
(iii) In computing taxable income, a portion of each year's section 168 depreciation attributable to production assets is deducted currently and a portion is capitalized into the increase in ending inventory. For 1987, 1988, and 1989, L computed alternative minimum tax by deducting the cost of goods sold which was reflected in taxable income ($8,000) in accordance with paragraph (r)(2)(i) of this section. For 1987, 1988, and 1989, L also modified its adjustments under sections 56 and 58 and its preferences under section 57 to disregard the portion of any adjustment or preference that was capitalized in inventory. Thus, under section 56(a)(1), L increased alternative minimum taxable income during each year by $900.
(iv) L is eligible to make the election under paragraph (r)(1) of this section in accordance with paragraph (r)(3)(i) of this section (a prospective election).
(v) L must compute its LIFO recapture adjustment for each year by reference to—
(A) The FIFO inventory amount after applying the provisions of section 263A but before applying the adjustments of sections 56 and 58 and the items of preference in section 57; and
(B) The LIFO inventory amount used in computing taxable income.
(5) Election to use alternative minimum tax inventories to compute adjusted current earnings. A taxpayer may elect under this paragraph (r)(5) to use the inventory amounts used to compute pre-adjustment alternative minimum taxable income in computing its adjusted current earnings. Rules similar to those of paragraphs (r)(2) and (r)(3) of this section apply for purposes of this election.
(s) Adjustment for alternative tax energy preference deduction—(1) In general. For purposes of computing adjusted current earnings, any taxpayer claiming a deduction under section 56(h) must properly decrease basis by the portion of the deduction allowed under section 56(h) which is attributable to adjustments under section 56(g)(4). In taxable years following the taxable year in which the section 56(h) deduction is claimed, basis recovery (including amortization, depletion, and gain on sale) must properly take into account this basis reduction.
(2) Example. The following example illustrates the provisions of this paragraph (s):
Example.Corporation A, a calendar year taxpayer, incurs $100 of intangible drilling costs on January 1, 1994 and as a result of these intangible drilling costs A claims a deduction under section 56(h) of $40. Assume that $20 of A's deduction under section 56(h) is attributable to the adjustment under paragraph (f)(1) of this section. A must reduce by $20 the amount of intangible drilling costs to be amortized under paragraph (f)(1) of this section in 1995 through 1998 (the balance of the 60-month amortization period).
[T.D. 8340, 56 FR 11084, Mar. 15, 1991, as amended by T.D. 8352, 56 FR 29433, June 27, 1991; T.D. 8454, 57 FR 60477, Dec. 21, 1992; T.D. 8482, 58 FR 42207, Aug. 9, 1993; T.D. 8566, 59 FR 51371, Oct. 11, 1994; T.D. 8858, 65 FR 1237, Jan. 7, 2000; T.D. 8940, 66 FR 9929, Feb. 13, 2001; T.D. 9849, 84 FR 9232, Mar. 14, 2019]
12 Tax Preference Regulations
§ 1.57-0 Scope.
For purposes of the minimum tax for tax preferences (subtitle A, chapter I, part VI), the items of tax preference are:
(a) Excess investment interest,
(b) The excess of accelerated depreciation on section 1250 property over straight line depreciation,
(c) The excess of accelerated depreciation on section 1245 property subject to a net lease over straight line depreciation,
(d) The excess of the amortization deduction for certified pollution control facilities over the depreciation otherwise allowable,
(e) The excess of the amortization deduction for railroad rolling stock over the depreciation otherwise allowable,
(f) The excess of the fair market value of a share of stock received pursuant to a qualified or restricted stock option over the exercise price,
(g) The excess of the addition to the reserve for losses on bad debts of financial institutions over the amount which have been allowable based on actual experience,
(h) The excess of the percentage depletion deduction over the adjusted basis of the property, and
(i) The capital gains deduction allowable under section 1202 or an equivalent amount in the case of corporations.
Accelerated depreciation on section 1245 property subject to a net lease and excess investment interest are not items of tax preference in the case of a corporation, other than a personal holding company (as defined in section 542) and an electing small business corporation (as defined in section 1371(b)). In addition, excess investment interest is an item of tax preference only for taxable years beginning before January 1, 1972. Rules for the determination of the items of tax preference are contained in §§ 1.57-1 through 1.57-5. Generally, in the case of a nonresident alien or foreign corporation, the application of §§ 1.57-1 through 1.57-5 will be limited to cases in which the taxpayer has income effectively connected with the conduct of a trade or business within the United States. Special rules for the treatment of items of tax preference in the case of certain entities and the treatment of items of tax preference relating to income from sources outside the United States are provided in section 58 and in §§ 1.58-1 through 1.58-8.
[T.D. 7564, 43 FR 40470, Sept. 12, 1978]
§ 1.57-1 Items of tax preference defined.
(a) [Reserved]
(b) Accelerated depreciation on section 1250 property—(1) In general. Section 57(a)(2) provides that, with respect to each item of section 1250 property (as defined in section 1250(c)), there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year for depreciation or amortization exceeds the deduction which would have been allowable for the taxable year if the taxpayer had depreciated the property under the straight line method for each year of its useful life for which the taxpayer has held the property. The determination of the excess under section 57(a)(2) is made with respect to each separate item of section 1250 property. Accordingly, where the amount of depreciation which would have been allowable with respect to one item of section 1250 property if the taxpayer had originally used the straight line method exceeds the allowable depreciation or amortization with respect to such property, such excess may not be used to reduce the amount of the item of tax preference resulting from another item of section 1250 property.
(2) Separate items of section 1250 property. The determination of what constitutes a separate item of section 1250 property is to be made on the facts and circumstances of each individual case. In general, each building (or component thereof, if the taxpayer uses the component method of computing depreciation) is a separate item of section 1250 property. However, for purposes of this section, assets placed in a group, classified, or composite account are to be treated as a single item by a taxpayer, provided that such account contains only property placed in service during a single taxable year. In addition, two or more items may be treated as one item of section 1250 property for purposes of this paragraph where, with respect to each such item:
(i) The period for which depreciation is taken begins on the same date, (ii) the same estimated useful life has continually been used for purposes of taking depreciation or amortization, and (iii) the same method (and rate) of depreciation or amortization has continually been used. For example, assume a taxpayer constructed a 40-unit rental townhouse development and began taking declining balance depreciation on all 40 units as of January 1, 1970, at a uniform rate and has consistently taken depreciation on all 40 units on this same basis. Although each townhouse is a separate item of section 1250 property, all 40 townhouses may be treated as one item of section 1250 property for purposes of the minimum tax since the conditions of subdivisions (i), (ii), and (iii) of this subparagraph are met. This would be true even if the 40 townhouses comprised two 20-unit developments located apart from each other. However, if the taxpayer constructed an additional development or new section on the existing development for which he began taking depreciation on July 1, 1970, at a uniform rate for all the additional units, the additional units and the original units may not be treated as one item of section 1250 property since the condition of subdivision (i) of this subparagraph is not met. Where a portion of an item of section 1250 property has been depreciated or amortized under a method (or rate) which is different from the method (or rate) under which the other portion or portions of such item have been depreciated or amortized, such portion is considered a separate item of section 1250 property for purposes of this paragraph.
(3) Allowable depreciation or amortization. The phrase “deduction allowable for the taxable year for exhaustion, wear and tear, obsolescence, or amortization” and references in this paragraph to “allowable depreciation or amortization” include deductions allowable for the taxable year under sections 162, 167, 212, or 611 for the depreciation or amortization of section 1250 property. Such phrase does not include depreciation allowable in the year in which the section 1250 property is disposed of. For the determination of “allowable depreciation or amortization” for taxable years in which the taxpayer has taken no deduction, see § 1.1016-3(a)(2).
(4) Straight line depreciation. (i) For purposes of computing the depreciation which would have been allowable for the taxable year if the taxpayer had depreciated the property under the straight line method for each taxable year of its useful life, the taxpayer must use the same useful life and salvage value as was used for the first taxable year in which the taxpayer depreciated or amortized the property (subject to redeterminations made pursuant to § 1.167(a)-1 (b) and (c)). If, however, for any taxable year, no useful life was used under the method of depreciation or amortization used or an artificial period was used, such as, for example, by application of section 167(k), or salvage value was not taken into account in determining the annual allowances, such as, for example, under the declining balance method, then, for purposes of computing the depreciation which would have been allowable under the straight line method for the taxable year—
(a) There is to be used the useful life and salvage value which would have been proper if depreciation had actually been determined under the straight line method (without reference to an artificial life) throughout the period the property was held, and
(b) Such useful life and such salvage value is to be determined by taking into account for each taxable year the same facts and circumstances as would have been taken into account if the taxpayer had used such method throughout the period the property was held.
If an election under § 1.167(a)-11(f), § 1.167(a)-12(e), or § 1.167(a)-12(f) is applicable to the property, the salvage value of the property shall be determined in accordance with such election, and the asset depreciation period (or asset guideline period) applicable to the property pursuant to such election shall be considered to be the useful life of the property for the purposes of this section.
(ii) Where the taxpayer acquires property in a transaction to which section 381(a) applies or from another member of an affiliated group during a consolidated return year and an “accelerated” method of depreciation as described in section 167(b)(2), (3), or (4) or section 167(j)(1)(B) or (C) is permitted (see § 1.381(c)(6)-1), the depreciation which would have been allowable under the straight line method is determined as if the property had been depreciated under the straight line method since depreciation was first taken on the property by the transferor of such property. In such cases, references in this paragraph to the period for which the property is held or useful life of the property are treated as including the period beginning with the commencement of the original use of the property.
(iii) For purposes of section 57(a)(2), the straight line method includes the method of depreciation described in § 1.167(b)-1 or any other method which provides for a uniform proration of the cost or other basis (less salvage value) of the property over the estimated useful life of the property to the taxpayer (in terms of years, hours of use, or other similar time units) or estimated number of units to be produced over the life of the property to the taxpayer. If a method other than the method described in § 1.167(b)-1 is used, the estimated useful life or estimated units of production shall be determined in a manner consistent with subdivision (i) of this subparagraph.
(iv) In the case of property constructed by or improvements made by a lessee, the useful life is to be determined in accordance with § 1.167(a)-4.
(5) Application for partial period. If an item is section 1250 property for less than the entire taxable year, the allowable depreciation or amortization includes only the depreciation or amortization for that portion of the taxable year during which the item is section 1250 property and the amount of the depreciation which would have been allowable under the straight line method is determined only with regard to such portion of the taxable year.
(6) No section 1250 and basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of section 1250 property or with respect to computations under section 1250.
(7) Example. The principles of this paragraph may be illustrated by the following example:
Example. The taxpayer's only item of section 1250 property is an office building with respect to which operations were commenced on January 1, 1971. The taxpayer depreciates the component parts of the building on the declining balance method. The useful life and costs of the component parts for depreciation purposes are as follows:
Asset | Useful life | Cost | Salvage value
Building shell | 50 | $400,000 | $50,000
Partitions and walls | 10 | 40,000
Ceilings | 10 | 20,000
Electrical system | 25 | 40,000 | 2,500
Heating and air-conditioning system | 25 | 60,000 | 2,500
For purposes of computing the item of tax preference under this paragraph for the taxpayer, the partitions, walls, and ceilings may be grouped together and the electrical, heating, and air-conditioning systems may be grouped together since the period for which depreciation is taken began with respect to the assets within these two groups on the same date and the assets within each group have continually had the same useful life and have continually been depreciated under the same method (and rate). (a) The taxpayer's 1971 item of tax preference under this paragraph would be determined as follows:
(1) (2) (3) (4)
Item of 1250 property | Declining balance depreciation | Straight line depreciation | Excess of (2) over (3)
1. Shell | $12,000 | $7,000 | $5,000
2. Partitions, walls, ceilings | 9,000 | 6,000 | 3,000
3. Electrical, heating and air-conditioning systems | 6,000 | 3,800 | 2,200
1971 preference | 10,200
(b) Assuming the above facts are the same for 1974, the taxpayer's 1974 item of tax preference under this paragraph would be determined as follows:
(1) (2) (3) (4)
Item of 1250 property | Declining balance depreciation | Straight line depreciation | Excess of (2) over (3)
1. Shell | $10,952 | $7,000 | $3,952
2. Partitions, walls, ceilings | 5,529 | 6,000 | None
3. Electrical, heating and air-conditioning systems | 4,983 | 3,800 | 1,183
1974 preference | 5,135
(c) Accelerated depreciation on section 1245 property subject to a net lease—(1) In general. Section 57(a)(3) provides that, with respect to each item of section 1245 property (as defined in section 1245(a)(3)) which is the subject of a net lease for the taxable year, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year for depreciation or amortization exceeds the deduction which would have been allowable for the taxable year if the taxpayer had depreciated the property under the straight line method for each year of its useful life for which the taxpayer has held the property. Except as provided in paragraph (b)(1)(ii) of this section, the determination of the excess under section 57(a)(3) is made with respect to each separate item of section 1245 property. Accordingly, where the amount of depreciation which would have been allowable with respect to one item of section 1245 property if the taxpayer had originally used the straight line method exceeds the allowable depreciation or amortization with respect to such property, such excess may not be used to reduce the amount of the item of tax preference resulting from another item of section 1245 property.
(2) Separate items of property. The determination of what constitutes a separate item of section 1245 property must be made on the facts and circumstances of each individual case. Such determination shall be made in a manner consistent with the principles expressed in paragraph (b)(2) of this section.
(3) Allowable depreciation or amortization. The phrase “deduction allowable for the taxable year for exhaustion, wear and tear, obsolescence, or amortization” and references in this paragraph to “allowable depreciation or amortization” include deductions allowable for the taxable year under sections 162, 167 (including depreciation allowable under section 167 by reason of section 179), 169, 184, 185, 212, or 611 for the depreciation or amortization of section 1245 property. Such phrase does not include depreciation allowable in the year in which the section 1245 property is disposed of. Amortization of certified pollution control facilities under section 169, and amortization of railroad rolling stock under section 184 are not to be treated as amortization for purposes of section 57(a)(3) to the extent such amounts are treated as an item of tax preference under section 57(a) (4) or (5) (see paragraphs (d) and (e) of this section). For the determination of “allowable depreciation or amortization” for taxable years in which the taxpayer has taken no deduction, see § 1.1016-3(a)(2).
(4) Straight line method of depreciation. The determination of the depreciation which would have been allowable under the straight line method shall be made in a manner consistent with paragraph (b)(4) of this section. Such amount shall include any amount allowable under section 167 by reason of section 179 (relating to additional first-year depreciation for small business).
(5) Application for partial period. If an item is section 1245 property for less than the entire taxable year or subject to a net lease for less than the entire taxable year the allowable depreciation or amortization includes only the depreciation or amortization for that portion of the taxable year during which the item was both section 1245 property and subject to a net lease and the amount of the depreciation which would have been allowable under the straight line method is to be determined only with regard to such portion of the taxable year.
(6) Net lease. Section 57(a)(3) applies only if the section 1245 property is the subject of a net lease for all or part of the taxable year. See § 1.57-3 for the determination of when an item is considered the subject of a net lease. p
(7) No section 1245 and basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of section 1245 property or with respect to computations under section 1245.
(8) Nonapplicability to corporations. Section 57(a)(3) does not apply to a corporation other than an electing small business corporation (as defined in section 1371(b)) and a personal holding company (as defined in section 542).
(d) Amortization of certified pollution control facilities—(1) In general. Section 57(a)(4) provides that, with respect to each certified pollution control facility for which an election is in effect under section 169, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year under such section exceeds the depreciation deduction which would otherwise be allowable under section 167. The determination under section 57(a)(4) is made with respect to each separate certified pollution control facility. Accordingly, where the amount of the depreciation deduction which would otherwise be allowable under section 167 with respect to one facility exceeds the allowable amortization deduction under section 169 with respect to such facility, such excess may not be used to offset an item of tax preference resulting from another facility.
(2) Separate facilities. The determination of what constitutes a separate facility must be made on the facts and circumstances of each individual case. Generally, each facility with respect to which a separate election is in effect under section 169 shall be treated as a separate facility for purposes of this paragraph. However, if the depreciation or amortization which would have been allowable without regard to section 169 with respect to any part of a facility is based on a different useful life, date placed in service, or method of depreciation or amortization from the other part or parts of such facility, such part is considered a separate facility for purposes of this paragraph. For example, if a building constitutes a certified pollution control facility and various component parts of the building have different useful lives, each group of component parts with the same useful life would be treated as a separate facility for purposes of this paragraph. Two or more facilities may be treated as one facility for purposes of this paragraph where, with respect to each such facility: (i) The initial amortization under section 169 commences on the same date, (ii) the facility is placed in service on the same date, (iii) the estimated useful life which would be the basis for depreciation or amortization other than under section 169 has continually been the same, and (iv) the method of depreciation or amortization which could have been used without regard to section 169 could have continually been the same.
(3) Amount allowable under section 169. For purposes of the determination of the amount of the deduction allowable under section 169, see section 169 and the regulations thereunder. Such amount, however, does not include amortization allowable in the year in which the pollution control facility is disposed of.
(4) Otherwise allowable deduction. (i) The determination of the amount of the depreciation deduction otherwise allowable under section 167 is made as if the taxpayer had depreciated the property under section 167 for each year of its useful life for which the property has been held. This amount may be determined under § 1.167(a)-(11)(c) if the property is eligible property (as defined in § 1.167(a)-11(b)(2)) and, during the taxable year in which the property was first placed in service, the taxpayer—
(a) Has made an election under § 1.167(a)-11(f) with respect to eligible property first placed in service in such taxable year, or
(b) Has placed no eligible property in service other than property described in § 1.167(a)-11(b)(5) (iii), (iv), or (v).
The amount determined pursuant to the preceding sentence shall be determined as if the taxpayer had depreciated the property in accordance with § 1.167(a)-11 for all years to which such section applies and during which the taxpayer held the property. This amount may be determined under § 1.167(a)-12(a)(5) if the property is qualified property (as defined in § 1.167(a)-12(a)(3)) and the taxpayer has made an election with respect to such property under § 1.167(a)-12(e). If the taxpayer has made an election under § 1.167(a)-12(f)(1) for a taxable year ending before January 1, 1971, this amount shall be determined for such year in accordance with such election. For purposes of this determination, any method selected by the taxpayer which would have been permissible under section 167 for such taxable year, including accelerated methods, may be used. Any additional amount which would have been allowable by reason of section 179 (relating to additional first-year depreciation for small business) may be included provided such amount is reflected in the determination made under this paragraph in subsequent years.
(ii) If a deduction for depreciation has not been taken by the taxpayer in any taxable year under section 167 with respect to the facility—
(a) There is to be used the useful life and salvage value which would have been proper under section 167.
(b) Such useful life and salvage value is determined by taking into account for each taxable year the same facts and circumstances as would have been taken into account if the taxpayer had used such method throughout the period the property has been held, and
(c) The date the property is placed in service is, for purposes of this section, deemed to be the first day of the first month for which the amortization deduction is taken with respect to the facility under section 169.
If, prior to the date amortization begins under section 169, a deduction for depreciation has been taken by the taxpayer in any taxable year under section 167 with respect to the facility, the useful life, salvage value, etc., used for that purpose is deemed to be the appropriate useful life, salvage value, etc., for purposes of this paragraph, with such adjustments as are appropriate in light of the facts and circumstances which would have been taken into account since the time the last such depreciation deduction was taken, unless it is established by clear and convincing evidence that some other useful life, salvage value, or date the property is placed in service is more appropriate.
(iii) For purposes of section 57(a)(4) and this paragraph, if the deduction for amortization or depreciation which would have been allowable had no election been made under section 169 would have been—
(a) An amortization deduction based on the term of a leasehold or
(b) A depreciation deduction determined by reference to section 611,
such deduction is to be deemed to be a deduction allowable under section 167.
(iv) If a facility is subject to amortization under section 169 for less than the entire taxable year, the otherwise allowable depreciation deduction under section 167 shall be determined only with regard to that portion of the taxable year during which the election under section 169 is in effect.
(v) If less than the entire adjusted basis of a facility is subject to amortization under section 169, the otherwise allowable depreciation deduction under section 167 shall be determined only with regard to that portion of the adjusted basis subject to amortization under section 169.
(5) No section 1245 and basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of a certified pollution control facility or with respect to computations under sections 1245.
(6) Relationship to section 57(a)(3). See paragraph (c)(3) with respect to an adjustment in the amount treated as amortization under that provision where both paragraphs (3) and (4) of section 57(a) are applicable to the same item of property.
(7) Example. The principles of this paragraph may be illustrated by the following example:
Example. A calendar year taxpayer has a certified pollution control facility on which an election is in effect under section 169 commencing with January 1, 1971. No part of the facility is section 1250 property. The original basis of the facility is $100,000 of which $75,000 constitutes amortizable basis. The useful life of the facility is 20 years. The taxpayer depreciates the $25,000 portion of the facility which is not amortizable basis under the double declining method and began taking depreciation on January 1, 1971.
(a) The taxpayer's 1971 item of tax preference under this paragraph would be determined as follows:
1. Amortization deduction | $15,000
2. Depreciation deduction on amortizable basis (double declining method) | 7,500
1971 preference (excess of 1 over 2) | 7,500
(b) If the taxpayer terminated his election under section 169 in 1972 effective as of July 1, 1972, the taxpayer's 1972 item of tax preference would be determined as follows:
1. Amortization deduction | $7,500
2. Depreciation deduction on amortizable basis:
Full year ($75,000 (original basis) less $7,500 (“depreciation” to 1-1-72) equals adjusted basis of $67,500; multiplied by 0.10 (double declining rate)) | 6,750
Portion of full year's depreciation attributable to amortization period (one-half) | 3,375
1972 preference (excess of 1 over 2) | 4,125
(e) Amortization of railroad rolling stock—(1) In general. Section 57(a)(5) provides that, with respect to each unit of railroad rolling stock for which an election is in effect under section 184, there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year under such section exceeds the depreciation deduction which would otherwise be allowable under section 167. The determination under section 57(a)(5) is made with respect to each separate unit of rolling stock. Accordingly, where the amount of the depreciation deduction which would otherwise be allowable under section 167 with respect to one unit exceeds the allowable amortization deduction under section 184 with respect to such unit, such excess may not be used to offset an item of tax preference resulting from another unit.
(2) Separate units of rolling stock. The determination of what constitutes a separate unit of rolling stock must be made on the facts and circumstances of each individual case. Such determination shall be made in a manner consistent with the manner in which the comparable determination is made with respect to separate certified pollution control facilities under paragraph (d) (2) of this section.
(3) Amount allowable under section 184. For purposes of the determination of the amount of the deduction allowable under section 184, see section 184. Such amount, however, does not include amortization allowable in the year in which the rolling stock is disposed of.
(4) Otherwise allowable deduction. The determination of the amount of the depreciation deduction otherwise allowable under section 167 is to be made in a manner consistent with the manner in which the comparable deduction with respect to certified pollution control facilities is determined under paragraph (d)(4) of this section.
(5) No section 1245 or basis adjustment. No adjustment is to be made as a result of the minimum tax either to the basis of a unit of railroad rolling stock or with respect to computations under section 1245.
(6) Relationship to section 57(a)(3). See paragraph (c)(3) of this section with respect to an adjustment in the amount treated as amortization under that provision where both paragraphs (3) and (5) of section 57(a) are applicable to the same item.
(f) Stock options—(1) In general. Section 57(a)(6) provides that with respect to each transfer of a share of stock pursuant to the exercise of a qualified stock option or a restricted stock option, there shall be included by the transferee as an item of tax preference the amount by which the fair market value of the share at the time of exercise exceeds the option price. The stock option item of tax preference is subject to tax under section 56(a) in the taxable year of the transferee in which the transfer is made.
(2) Definitions. See generally § 1.421-7 (e), (f), and (g) for the definitions of “option price,” “exercise,” and “transfer,” respectively; however, in the case of a transfer of a share of stock pursuant to the exercise of a qualified stock option or a restricted stock option after the death of an employee by the estate of the decedent (or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent), the term “option price” shall, for purposes of this paragraph, include both the consideration paid by the estate (or such person) for such share of stock and so much of the basis of the option as is attributable to such share of stock. For the definition of a qualified stock option see section 422(b) and § 1.422-2. For the definition of a restricted stock option see section 424(b) and § 1.424-2. The definitions and special rules contained in section 425 and the regulations thereunder are applicable to this paragraph.
(3) Fair market value. In accordance with the principles of section 83(a)(1), the fair market value of a share of stock received pursuant to the exercise of a qualified or restricted stock option is to be determined without regard to restrictions (other than nonlapse restrictions within the meaning of § 1.83-3(h)). Notwithstanding any valuation date given in section 83(a)(1), for purposes of this section, fair market value is determined as of the date the option is exercised.
(4) Foreign source options. In the case of an option attributable to sources within any foreign country or possession, see section 58(g) and § 1.58-8.
(5) Inapplicability in certain cases. (i) Section 57(a)(6) is inapplicable if during the same taxable year in which stock is transferred pursuant to the exercise of an option, the transferee makes a disposition (within the meaning of section 425(c)) of such stock. In the case of a nonresident alien, section 57(a)(6) is inapplicable to the extent the stock option is attributable (in accordance with the principles of sections 861 through 863 and the regulations thereunder) to sources without the United States.
(ii) Section 57(a)(6) is inapplicable if section 421(a) does not apply to the transfer because of employment requirements of section 422(a)(2) or 424(a)(2).
(6) Proportionate applicability. Where, by reason of section 422 (b)(7) and (c)(3) (relating to percentage ownership limitations), only a portion of a transfer qualifies for application of section 421, the fair market value and option price shall be determined only with regard to that portion of the transfer which so qualifies.
(7) No basis adjustment. No adjustment shall be made to the basis of the stock received pursuant to the exercise of a qualified or restricted stock option as a result of the minimum tax.
(g) Reserves for losses on bad debts of financial institutions—(1) In general. Section 57(a)(7) provides that, in the case of a financial institution to which section 585 or 593 (both relating to reserves for losses on loans) applies, there shall be included as an item of tax preference the amount by which the deduction allowable for the taxable year for a reasonable addition to a reserve for bad debts exceeds the amount that would have been allowable had the institution maintained its bad debt reserve for all taxable years on the basis of the institution's actual experience.
(2) Taxpayers covered. Section 57(a)(7) applies only to an institution (or organization) to which section 585 or 593 applies. See sections 585(a) and 593(a) and the regulations thereunder for a description of those institutions.
(3) Allowable deduction. For purposes of this paragraph, the amount of the deduction allowable for the taxable year for a reasonable addition to a reserve for bad debts is the amount of the deduction allowed under section 166(c) by reference to section 585 or 593.
(4) Actual experience. (i) For purposes of this paragraph, the determination of the amount which would have been allowable had the institution maintained its reserve for bad debts on the basis of actual experience is the amount determined under section 585(b)(3)(A) and the regulations thereunder. For this purpose, the beginning balance for the first taxable year ending in 1970 is the amount which bears the same ratio to loans outstanding at the beginning of the taxable year as (a) the total bad debts sustained during the 5 preceding taxable years, adjusted for recoveries of bad debts during such period, bears to (b) the sum of the loans outstanding at the close of such 5 taxable years. The taxpayer may, however, select a more appropriate balance based on its actual experience during a shorter period subject to the approval of the district director upon examination of the return provided there are unusual circumstances which indicate that such period is more indicative of the taxpayer's actual loss experience. Any such selection and approval shall be made in a manner consistent with the selection and approval of a bad debt reserve method under § 1.166-1(b). In the case of an institution which has been in existence for less than 5 taxable years as of the beginning of the first taxable year ending in 1970, the above formula for determining the beginning balance is applied by substituting the number of taxable years for which the institution has been in existence as of the beginning of the taxable year for “5” each time it appears. If any taxable year utilized in the above formula for determining the beginning balance is a short taxable year the amount of the bad debts, adjusted for recoveries, for such taxable year is modified by dividing such amount by the number of days in the taxable year and multiplying the resulting amount by 365. The beginning balance for any subsequent taxable year is the amount of the beginning balance of the preceding taxable year, decreased by bad debt losses during such year, increased by recoveries of bad debts during such year and increased by the lower of the maximum amount determined under section 585(b)(3)(A) for such year or the amount of the deduction allowed for such year. The application of this subdivision (i) may be illustrated by the following example:
Example. The Y Bank, a calendar year taxpayer, uses the reserve method of acounting for bad debts. On December 31, 1969, Y determines the balance of its reserve for bad debts to be $70,000 under the percentage method. On the same date Y's 5-year moving average is $52,000. Y incurs net bad debt losses (bad debt losses less recoveries of bad debts) of $3,000 for each of the years 1970, 1971, and 1972, which it charges to its reserve for bad debts. Y's 6-year moving averages computed under section 585(b)(3)(A) at the close of 1970, 1971, and 1972 are $50,000, $49,000, and $51,000, respectively. Y's preference items are computed as follows based upon additional facts assumed:
1970 | 1971 | 1972
1. Bad debt reserve—percentage method:
(a) Balance beginning of year (closing balance prior year) | $70,000 | $70,000 | $68,000
(b) Net bad debts charged to reserve | 3,000 | 3,000 | 3,000
(c) Subtotal | 67,000 | 67,000 | 65,000
(d) Deduction allowed | 3,000 | 1,000 | 4,000
(e) Balance end of year | 70,000 | 68,000 | 69,000
2. Bad debt reserve—“actual experience”:
(a) Beginning balance (for 1970, 5-year moving average; for other years, closing balance prior year) | 52,000 | 50,000 | 48,000
(b) Net bad debts charged to reserve | 3,000 | 3,000 | 3,000
(c) Subtotal | 49,000 | 47,000 | 45,000
(d) Maximum amount under section 585 (b)(3)(A) (6-year moving average minus (c)) | 1,000 | 2,000 | 6,000
(e) Deduction allowed (line 1(d)) | 3,000 | 1,000 | 4,000
(f) Lower of (d) or (e) | 1,000 | 1,000 | 4,000
(g) Closing balance (line (c) + (f)) | 50,000 | 48,000 | 49,000
3. Preference item under section 57(a)(7):
(a) Deduction allowed | 3,000 | 1,000 | 4,000
(b) Maximum amount under section 585(b)(3)(A) | 1,000 | 2,000 | 6,000
(c) Preference item (excess of (a) over (b)) | 2,000 | 0 | 0
(ii) In the case of a new institution whose first taxable year ends after 1969, its beginning balance for its reserve for bad debts, for purposes of this paragraph, is zero and its reasonable addition to the reserve for such taxable year is determined on the basis of the actual experience of similar institutions located in the area served by the taxpayer.
(h) Depletion—(1) In general. Section 57(a)(8) provides that with respect to each property (as defined in section 614), there is to be included as an item of tax preference the amount by which the deduction allowable for the taxable year under section 611 for depletion for the property exceeds the adjusted basis of the property at the end of the taxable year (determined without regard to the depletion deduction for that taxable year). The determination under section 57(a)(8) is made with respect to each separate property. Thus, for example, if one mineral property has an adjusted basis remaining at the end of the taxable year, such basis may not be used to reduce the amount of an item of tax preference resulting from another mineral property.
(2) Allowable depletion. For the determination of the amount of the deduction for depletion allowable for the taxable year see section 611 and the regulations thereunder.
(3) Adjusted basis. For the determination of the adjusted basis of the property at the end of the taxable year see section 1016 and the regulations thereunder.
(4) No basis adjustment. No adjustment is to be made to the basis of property subject to depletion as a result of the minimum tax.
(i) Capital gains—(1) Taxpayers other than corporations. Section 57(a)(9)(A) provides that, in the case of a taxpayer other than a corporation, there is to be included as an item of tax preference one-half of the amount by which the taxpayer's net long-term capital gain for the taxable year exceeds the taxpayer's net short-term capital loss for the taxable year. For this purpose, for taxable years beginning after December 31, 1971, the taxpayer's net long-term capital gain does not include an amount equal to the deduction allowable under section 163 (relating to interest expense) by reason of subsection (d)(1)(C) of that section, and the excess described in the preceding sentence is reduced by an amount equal to the reduction of disallowed interest expense by reason of section 163(d)(2)(B). Furthermore, the net long-term capital gain of an estate or trust does not include capital gains described in section 642(c)(4). Included in the computation of the taxpayer's capital gains item of tax preference are amounts reportable by the taxpayer as distributive shares of gain or loss from partnerships, estates or trusts, electing small business corporations, common trust funds, etc. See section 58 and the regulations thereunder with respect to the above entities.
Example. For 1971, A, a calendar year individual taxpayer, recognized $50,000 from the sale of securities held for more than 6 months. In addition, A received a $15,000 dividend from X Fund, a regulated investment company, $12,000 of which was designated as a capital gain dividend by the company pursuant to section 852(b)(3)(C). The AB partnership recognized a gain of $20,000 from the sale of section 1231 property held by the partnership. The AB partnership agreement provides that A is entitled to 50 percent of the income and gains of the partnership. A had net short-term capital loss for the year of $10,000. A's 1971 capital gains item of tax preference is computed as follows:
Capital gain recognized from securities | $50,000
Capital gain dividend from regulated investment company | 12,000
Distributive share of partnership capital gain | 10,000
Total net long-term capital gain | 72,000
Less: net short-term capital loss | (10,000)
Excess of net long-term capital gain over net short-term capital loss | 62,000
One-half of above excess | 31,000
(2) Corporations. (i) Section 57(a)(9)(B) provides that in the case of corporations there is to be included as an item of tax preference with respect to a corporation's net section 1201 gain an amount equal to the product obtained by multiplying the excess of the net long-term capital gain over the net short-term capital loss by a fraction. The numerator of this fraction is the sum of the normal tax rate and the surtax rate under section 11 minus the alternative tax rate under section 1201(a) for the taxable year, and the denominator of the fraction is the sum of the normal tax rate and the surtax rate under section 11 for the taxable year. Included in the above computation are amounts reportable by the taxpayer as distributive shares of gain or loss from partnerships, estates or trusts, common trust funds, etc. In certain cases the amount of the net section 1201 gain which results in preferential treatment will be less than the amount determined by application of the statutory formula. Therefore, in lieu of the statutory formula, the capital gains item of tax preference for corporations may in all cases be determined by dividing—
(a) The amount of tax which would have been imposed under section 11 if section 1201(a) did not apply minus—
(b) The amount of the taxes actually imposed
by the sum of the normal tax rate plus the surtax rate under section 11. In case of foreign source capital gains and losses which are not taken into account pursuant to sections 58(g)(2)(B) and 1.58-8, the amount determined in the preceding sentence shall be multiplied by a fraction the numerator of which is the corporation's net section 1201 gain without regard to such gains and losses which are not taken into account and the denominator of which is the corporation's net section 1201 gain. The computation of the corporate capital gains item of tax preference may be illustrated by the following examples:
Example 1. For 1971, A, a calendar year corporate taxpayer, has ordinary income of $10,000 and net section 1201 gain of $50,000, none of which is subsection (d) gain (as defined in sec. 1201(d)) and none of which is attributable to foreign sources. A's 1971 capital gain item of tax preference may be computed as follows:
1. Tax under section 11:
Normal tax (0.22 × $60,000) | $13,200
Surtax (0.26 × $35,000) | 9,100
22,300
2. Tax under section 1201:
(a) Normal tax on ordinary income (0.22 × $10,000) | $2,200
Tax on net section 1201 gain (0.30 × $50,000) | $15,000 | $17,200
3. Excess | 5,100
4. Normal tax rate plus surtax rate | .48
5. Capital gains preference (line 3 divided by line 4) | 10,625
Example 2. For 1971, A, a calendar year corporate taxpayer, has a loss from operations of $30,000 and net section 1201 gain of $150,000, none of which is subsection (d) gain (as defined in section 1201(d)) and none of which is attributable to foreign sources. A's 1971 capital gain item of tax preference may be computed as follows:
1. Tax under section 11:
Normal tax (0.22 × $120,000) | $26,400
Surtax (0.26 × $95,000) | 24,700
51,100
2. Tax under section 1201(a):
Normal tax on ordinary income | None
Tax on net section 1201 gain (0.30 × $150,000) | 45,000 | 45,000
3. Excess | 6,100
4. Normal tax rate plus surtax rate | .48
5. Capital gain preference (line 3 divided by line 4) | 12,708
(ii) In the case of organizations subject to the tax imposed by section 511(a), mutual savings banks conducting a life insurance business (see section 594), life insurance companies (as defined in section 801), mutual insurance companies to which part II of subchapter L applies, insurance companies to which part III of subchapter L applies, regulated investment companies subject to tax under part I of subchapter M, real estate investment trusts subject to tax under part II of subchapter M, or any other corporation not subject to the taxes imposed by sections 11 and 1201(a), the capital gains item of tax preference may be computed in accordance with subdivision (i) of this subparagraph except that, in lieu of references to section 11, there is to be substituted the section which imposes the tax comparable to the tax imposed by section 11 and, in lieu of references to section 1201(a), there is to be substituted the section which imposes the alternative or special tax applicable to the capital gains of such corporation.
(iii) For purposes of this paragraph, where the net section 1201 gain is not in any event subject to the tax comparable to the normal tax and the surtax under section 11, such as in the case of regulated investment companies subject to tax under subchapter M, such comparable tax shall be computed as if it were applicable to net section 1201 gain to the extent such gain is subject to the tax comparable to the alternative tax under section 1201(a). Thus, in the case of a regulated investment company subject to tax under subchapter M, the tax comparable to the normal tax and the surtax would be the tax computed under section 852(b)(1) determined as if the amount subject to tax under section 852(b)(3) were included in investment company taxable income. The principles of this subdivision (iii) may be illustrated by the following example:
Example. M, a calendar year regulated investment company, in 1971, has investment company taxable income (subject to tax under sec. 852(b)(1)) of $125,000 and net long-term capital gain of $800,000. M company has no net short-term capital loss but has a deduction for dividends paid (determined with reference to capital gains only) of $700,000, M's 1971 capital gains item of tax preference is computed as follows:
1. Section 852(b)(1) tax computed as if it were applicable to all income including capital gains:
Amount subject to section 852(b)(1) | $125,000
Net section 1201 gain | $800,000
Less: Dividends paid deduction | 700,000
Net section 1201 gain subject to tax at the company level | 100,000
225,000
Normal tax (0.22 × $225,000) | $49,500
Surtax (0.26 × 200,000) | 52,000
101,500
2. Tax comparable to section 1201(a) tax section 852(b)(1) tax:
Normal tax (0.22 × 125,000) | $27,500
Surtax (0.26 × 100,000) | 26,000 | $53,500
Section 852(b)(3) tax (0.30 × 100,000) | 30,000
$83,500
3. Excess | 18,000
4. Normal tax rate plus surtax rate | .48
5. Capital gains preference (line 3 divided by line 4) | 37,500
(iv) For the computation of the capital gains item of tax preference in the case of an electing small business corporation (as defined in section 1371(b)), see § 1.58-4(c).
(3) Nonresident aliens, foreign corporations. In the case of a nonresident alien individual or foreign corporation, there shall be included in computing the capital gains item of tax preference under section 57(a)(9) only those capital gains and losses included in the computation of income effectively connected with the conduct of a trade or business within the United States as provided in section 871(b) or 882.
[T.D. 7564, 43 FR 40470, Sept. 12, 1978, as amended by T.D. 10018, 89 FR 106851, Dec. 30, 2024]
§§ 1.57-2--1.57-3 [Reserved]
§ 1.57-4 Limitation on amounts treated as items of tax preference for taxable years beginning before January 1, 1976.
(a) In general. If in any taxable year beginning before January 1, 1976, a taxpayer has deductions in excess of gross income and all or a part of any item of tax preference described in § 1.57-1 results in no tax benefit due to modifications required under section 172(c) or section 172(b)(2) in computing the amount of the net operating loss or the net operating loss to be carried to a succeeding taxable year, then, for purposes of section 56(a)(1), the sum of the items of tax preference determined under section 57(a) (and § 1.57-1) is to be limited as provided in paragraph (b) of this section.
(b) Limitation. The sum of the items of tax preference, for purposes of section 56(a)(1) and § 1.56A-1(a), is limited to an amount determined under subparagraphs (1) and (2) of this paragraph.
(1) Loss year. If the taxpayer has no taxable income for the taxable year without regard to the net operating loss deduction, the amount of the limitation is equal to—
(i) In cases where the taxpayer does not have a net operating loss for the taxable year, the amount of the recomputed income (as defined in paragraph (c) of this section) or
(ii) In cases where the taxpayer has a net operating loss for the taxable year, the amount of the net operating loss (expressed as a positive amount) increased by the recomputed income or decreased by the recomputed loss for the taxable year (as defined in paragraph (c) of this section,
plus the amount of the taxpayer's stock option item of tax preference (as described in § 1.57-1(f)).
(2) Loss carryover and carryback years. Except in cases to which subparagraph (1)(ii) of this paragraph applies, if, in any taxable year to which a net operating loss is carried, a capital gains deduction is disallowed under section 172(b)(2) in computing the amount of such net operating loss which may be carried to succeeding taxable years, the amount of the limitation is equal to the amount, if any, by which the sum of the items of tax preference (computed with regard to subparagraph (1)(i) of this paragraph) exceeds the lesser of—
(i) The amount by which such loss is reduced because of a disallowance of the capital gains deduction in such taxable year, or
(ii) The capital gains deduction.
The amount determined pursuant to the preceding sentence shall be increased by the amount, if any, that such reduction is attributable to that portion of such a net operating loss described in section 56(b)(1)(B) and § 1.56A-2(a)(2) (relating to excess tax preferences).
(c) Recomputed income or loss. For purposes of this section, the phrase “recomputed income or loss” means the taxable income or net operating loss for the taxable year computed without regard to the amounts described in § 1.57-1 except paragraph (i)(2) of that section (relating to corporate capital gains) and without regard to the net operating loss deduction. For this purpose, the reference to the amounts described in § 1.57-1 is a reference to that portion of the deduction allowable in computing taxable income under the appropriate section equal to the amount which is determined in each paragraph of § 1.57-1. For example, the amount described in § 1.57-1(h) (relating to excess of percentage depletion over basis) is that portion of the deduction allowable for depletion under section 611 which is equal to the amount determined under § 1.57-1(h). For purposes of this paragraph, the amount described in § 1.57-1(i)(1) (relating to capital gains) is to be considered as the amount of the deduction allowable for the taxable year under section 1202.
(d) Determination of preferences reduced. When, pursuant to paragraph (b)(1) of this section, the sum of the items of tax preference (determined without regard to this section) are reduced, such reduction is first considered to be from the capital gains item of tax preference (described in § 1.57-1(i)(1)) and each item of tax preference relating to a deduction disallowed in computing the net operating loss pursuant to section 172(d), pro rata. The balance of the reduction, if any, is considered to be from the remaining items of tax preference, pro rata. For purposes of this subparagraph, deductions not attributable to the taxpayer's trade or business which do not relate to items of tax preference are considered as being applied in reducing gross income not derived from such trade or business before such deductions which do relate to items of tax preferences.
(e) Examples. The principles of this section may be illustrated by the following examples in each of which the deduction for the personal exemption is disregarded and the taxpayer is an individual who is a calendar year taxpayer.
Example 1. The taxpayer has the following items of income and deduction for 1970:
Gross income (all business income) | $120,000
Deductions:
Nonbusiness deductions | 30,000
Items of tax preference (excess accelerated depreciation on real property held in taxpayer's business) | 80,000
Other business deductions | 50,000
Based on the above figures, the taxpayer has a net operating loss of $10,000 (business deductions of $130,000 less business income of $120,000, the nonbusiness deductions having been disallowed by reason of section 172(d)(4)). The limitation on the amount treated as items of tax preference is computed as follows:
Tax preferences | $80,000
Net operating loss | $10,000
Recomputed income or loss:
Gross income | $120,000
Deductions other than tax preference items | 80,000
Recomputed income | 40,000
Sum of net operating loss and recomputed income | 50,000
Stock options preference | 0
Limitation | 50,000
Thus, the minimum tax computed under section 56(a) would be 10 percent of $20,000 (items of tax preference of $50,000 less the minimum tax exemption of $30,000), $1,000 of which would be deferred tax liability pursuant to section 56(b).
Example 2. Assume the same facts as in example 1 except that the other business deductions are $130,000, resulting in a net operating loss of $90,000. The limitation on the amount treated as items of tax preference is computed as follows:
Tax preferences | $80,000
Net operating loss | $90,000
Recomputed income or loss:
Gross income | $120,000
Deductions other than tax preference items | 160,000
(40,000)
Disallowance of nonbusiness deductions under sec. 172(d) | 30,000
Recomputed loss | 10,000
Net operating loss less recomputed loss | 80,000
Stock options preference | 0
Limitation | 80,000
Thus, the minimum tax computed under section 56(a) would be 10 percent of $50,000 (items of tax preference of $80,000 less the minimum tax exemption of $30,000), all of which will be deferred tax liability pursuant to section 56(b).
Example 3. The taxpayer has the following items of income and deduction for 1970:
Gross income (all from business):
Ordinary | $50,000
Net section 1201 gains | 120,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution control facilities | $45,000
Capital gains deduction | 60,000 | 105,000
Other business deductions | 75,000
In addition, the taxpayer has a $55,000 item of tax preference resulting from qualified stock options. Based on the above figures, the taxpayer has no taxable income and no net operating loss as the capital gains deduction is disallowed in determining the net operating loss pursuant to section 172(d). The limitation on the amount treated as items of tax preference is computed as follows:
Tax preferences | $160,000
Net operating loss | 0
Recomputed income or loss:
Gross income | $170,000
Deductions other than tax preference items | 75,000
Recomputed income | $95,000
Plus: Stock options preference | 55,000
Limitation | 150,000
Thus, the minimum tax computed under section 56 would be 10 percent of $120,000 (items of tax preference of $150,000 less the minimum tax exemption of $30,000).
Example 4. Assume the same facts as in example (3) except that the taxpayer has a net operating loss carryover from 1969 of $80,000. The taxpayer has $160,000 of tax preferences which are limited to $150,000 pursuant to § 1.57-4(b)(1). In order to determine the amount of the 1969 net operating loss which remains as a carryover to 1971, the 1970 taxable income is redetermined in accordance with section 172(b)(2) and the regulations thereunder, as follows:
Gross income—1970 | $170,000
Deductions:
Capital gains deduction disallowed business deductions | $120,000 | 120,000
Taxable income for section 172(b)(2) | 50,000
Thus, the 1969 net operating loss which remains as a carryover to 1971 is $30,000. Pursuant to paragraph (b)(2) of this section, the limitation on the amount treated as items of tax preference is computed as follows:
Items of tax preference computed with regard to § 1.57-4(b)(1) (per example (3)) | $150,000
Less: Lesser of capital gains deduction ($60,000) or amount of reduction in carryover due to its disallowance ($50,000) | 50,000
Limitation | 100,000
Thus, the minimum tax computed under section 56 would be 10 percent of $70,000 (items of tax preference of $100,000 less the minimum tax exemption of $30,000).
Example 5. The taxpayer has the following items of income and deduction for the taxable year 1970 without regard to any net operating loss deduction:
Gross income (all from business):
Ordinary | $50,000
Net section 1201 gain | 40,000
$90,000
Deductions:
Capital gains deduction | 20,000
Medical expenses ($4,100 actually paid but allowable only to the extent in excess of 3 percent of adjusted gross income of $70,000) | 2,000
Other itemized deductions | 40,000
62,000
Taxable income (before net operating loss deduction) | 28,000
In addition, the taxpayer has an item of tax preference of $35,000 resulting from qualified stock options. In 1973, the taxpayer has a net operating loss of $60,000 (no portion of which is attributable to excess tax preferences pursuant to § 1.56A-2) which is carried back to 1970 resulting in no taxable income in 1970. In order to determine the amount of the 1973 net operating loss which remains as a carryover to 1971, the 1970 taxable income is redetermined, in accordance with section 172(b)(2) and the regulations thereunder, as follows:
Gross income | $90,000
Deductions:
Capital gains deduction disallowed
Medical expenses ($4,100 actually paid but allowable only to the extent in excess of 3 percent of adjusted gross income of $90,000) | $1,400
Other itemized deductions | 40,000
$41,400
Taxable income for section 172(b)(2) | 48,600
The limitation on the amount treated as items of tax preference is computed as follows:
Items of tax preference:
Capital gains | $20,000
Stock options | 35,000
55,000
Less:
Lesser of capital gains deduction ($20,000) or amount of reduction in carryover due to its disallowance ($20,600) | (20,000)
Limitation | 35,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent of $5,000 (items of tax preference of $35,000 less the minimum tax exemption of $30,000).
Example 6. Assume the same facts as in example (5) except that the 1973 net operating loss was $45,000. In this case, the $20,600 increase in the 1970 taxable income as redetermined, results in a decrease of $17,000 (i.e., the remaining 1973 net operating loss after an initial decrease of $28,000 resulting from the 1970 taxable income before redetermination). The limitation on the amount treated as items of tax preference is computed as follows:
Items of tax preference computed without regard to this section | $55,000
Less: Lesser of capital gains deduction ($20,000) or amount of reduction in carryover due to its disallowance ($17,000) | (17,000)
Limitation | 38,000
Thus, the minimum tax for 1970 under section 56 would be 10 percent of $8,000 (items of tax preference of $38,000 less the minimum tax exemption of $30,000).
Example 7. The taxpayer has the following items of income and deduction for 1973 without regard to any net operating loss deduction:
Gross income (all from business):
Ordinary | $100,000
Net section 1201 gains | 120,000
$220,000
Deductions:
Items of tax preference:
Excess amortization of certified pollution control facilities | 45,000
Capital gains deduction | 60,000
105,000
Other business deductions | 75,000
$180,000
Taxable income (before net operating loss deduction) | 40,000
In 1972, the taxpayer had a net operating loss of $70,000 which is carried forward to 1973; $20,000 of this net operating loss is attributable to excess tax preferences. In order to determine the amount of the 1972 net operating loss which remains as a carryover to 1974, the 1973 taxable income is redetermined, in accordance with section 172(b)(2) and the regulations thereunder, as follows:
Gross income | $220,000
Deductions:
Capital gains deduction | Disallowed
Business deductions | 120,000
Taxable income per section 172(b)(2) | 100,000
In this case, the $60,000 increase in the 1972 taxable income as redetermined and the $30,000 decrease in the amount of the 1973 net operating loss remaining as a carryover to 1974 (i.e., the remaining 1972 net operating loss after an initial decrease of $40,000 resulting from the 1973 taxable income before redetermination) is entirely attributable to the disallowance of the capital gains deduction. The limitation on the amount treated as items of tax preference is computed as follows:
Items of tax preference computed without regard to this section:
Capital gains | $60,000
Excess amortization of certified pollution control facilities | 45,000
105,000
Less: Lesser of capital gains deduction (60,000) or amount of reduction in carryover due to its disallowance ($30,000) | (30,000)
75,000
Plus: Amount of reduction of carryover (due to disallowance of capital gains deduction) attributable to excess tax preferences | 20,000
Limitation | 95,000
[T.D. 7564, 43 FR 40476, Sept. 12, 1978, as amended by T.D. 8138, 52 FR 15309, Apr. 28, 1987]
§ 1.57-5 Records to be kept.
(a) In general. The taxpayer shall have available permanent records of all the facts necessary to determine with reasonable accuracy the amounts described in § 1.57-1. Such records shall include:
(1) In the case of amounts described in paragraph (a) of § 1.57-1: the amount and nature of indebtedness outstanding for the taxable year and the date or dates on which each such indebtedness was incurred or renewed in any form; the amount expended for property held for investment during any taxable year during which such indebtedness was incurred or renewed; and the manner in which it was determined that property was or was not held for investment.
(2) In the case of amounts described in paragraphs (b), (c), (d), (e), and (h) of § 1.57-1:
(i) The dates, and manner in which, the property was acquired and placed in service,
(ii) The taxpayer's basis on the date the property was acquired and the manner in which the basis was determined,
(iii) An estimate of the useful life (in terms of months, hours of use, etc., whichever is appropriate) of the property on the date placed in service or an estimate of the number of units to be produced by the property on the date the property is placed in service, whichever is appropriate, and the manner in which such estimate was determined,
(iv) The amount and date of all adjustments by the taxpayer to the basis of the property and an explanation of the nature of such adjustments, and
(v) In the case of property which has an adjusted basis reflecting adjustments taken by another taxpayer with respect to the property or taken by the taxpayer with respect to other property, the information described in paragraph (a)(2)(i) through (iv) of this section, with respect to such other property or other taxpayer.
(3) In the case of amounts described in paragraph (f) of § 1.57-1, the fair market value of the shares of stock at the date of exercise of the option and the option price and the manner in which each was determined.
(4) In the case of amounts described in paragraph (g) of § 1.57-1, the amount of debts written off and the amount of the loans outstanding for the taxable year and the 5 preceding taxable years or such shorter or longer period as is appropriate.
(b) Net operating losses. The taxpayer shall have available permanent records for the first taxable year in which a portion of a net operating loss was attributable to items of tax preference (within the meaning of § 1.56A-2 (b)) and each succeeding taxable year in which there is a net operating loss or a net operating loss carryover a portion of which is so attributable. Such records shall include all the facts necessary to determine with reasonable accuracy the amount of deferred tax liability under section 56, including the amount of the net operating loss in each taxable year in which there are items of tax preference in excess of the minimum tax exemption (as determined under § 1.58-1), the amount of the items of tax preference for each such taxable year, the amount by which each such net operating loss reduces taxable income in any taxable year, and the amount by which each such net operating loss is reduced in any taxable year.
[T.D. 7564, 43 FR 40479, Sept. 12, 1978, as amended by T.D. 8138, 52 FR 15309, Apr. 28, 1987]
§ 1.58-1 [Reserved]
§ 1.58-2 General rules for conduit entities; partnerships and partners.
(a) General rules for conduit entities. Sections 1.58-3 through 1.58-6 provide rules under which items of tax preference of an estate, trust, electing small business corporation, common trust fund, regulated investment company, or real estate investment trust (referred to in this paragraph as the “conduit entity”) are treated as items of tax preference of the beneficiaries, shareholders, participants, etc. (referred to in this paragraph as the “distributees”). Where an item of tax preference of a conduit entity is so apportioned to a distributee, the item of tax preference retains its character in the hands of the distributee and is adjusted to reflect:
(1) The separate items of income and deduction of the distributee and (2) the tax status of the distributee as an individual, corporation, etc. For example, if a trust has $100,000 of capital gains for the taxable year, all of which are distributed to A, an individual, the item of tax preference apportioned to A under section 57(a)(9) (and § 1.57-1(i)(1)) is $50,000. If, however, A had a net capital loss for the taxable year of $60,000 without regard to the distribution from the trust, the trust tax preference would be adjusted in the hands of A to reflect the separate items of income and deduction passed through to the distributee, or, in this case, to reflect the net section 1201 gain to A of $40,000. Thus, A's capital gains items of tax preference would be $20,000. By application of this rule, A, in effect, treats capital gains distributed to him from the trust the same as his other capital gains in computing his capital gains item of tax preference. If A had been a corporation, the trust tax preference would be adjusted both to reflect the capital loss and to reflect A's tax status by recomputing the capital gains item of tax preference (after adjustment for the capital loss) under section 57(a)(9)(B) and § 1.57-1(i)(2). Similarly, if depreciation on section 1245 property subject to a net lease (as defined in section 57(a)(3) and § 1.57-1(c)) is apportioned from a conduit entity to a corporation (other than a personal holding company or electing small business corporation), the amount so apportioned to the corporation is not treated as an item of tax preference to such corporation since such item is not an item of tax preference in the case of a corporation (other than a personal holding company or an electing small business corporation).
(b) Partnerships and partners. (1) Section 701 provides that a partnership as such is not subject to the income tax imposed by chapter 1. Thus, a partnership as such is not subject to the minimum tax for tax preferences. Section 702 provides that, in determining his income tax, each partner is to take into account separately his distributive share of certain items of income, deductions, etc. of the partnership and other items of income, gain, loss, deduction, or credit of the partnership to the extent provided by regulations prescribed by the Secretary or his delegate. Accordingly, each partner, in computing his items of tax preference, must take into account separately those items of income and deduction of the partnership which enter into the computation of the items of tax preference in accordance with subparagraph (2) of this paragraph.
(2) Pursuant to section 702, each partner must, solely for purposes of the minimum tax for tax preferences (to the extent not otherwise required to be taken into account separately under section 702 and the regulations thereunder), take into account separately in the manner provided in subchapter K and the regulations thereunder those items of income and deduction of the partnership which enter into the computation of the items of tax preference specified in section 57 and the regulations thereunder. A partner must, for this purpose, take into account separately his distributive share of:
(i) Investment interest expense (as defined in section 57(b)(2)(D) determined at the partnership level;
(ii) Investment income (as defined in section 57(b)(2)(B) determined at the partnership level;
(iii) Investment expenses (as defined in section 57(b)(2)(C)) determined at the partnership level;
(iv) With respect to each section 1250 property (as defined in section 1250(c)), the amount of the deduction allowable for the taxable year for exhaustion, wear and tear, obsolescence, or amortization and the deduction which would have been allowable for the taxable year had the property been depreciated under the straight line method each taxable year of its useful life (determined without regard to section 167(k)) for which the partnership has held the property;
(v) With respect to each item of section 1245 property (as defined in section 1245(a)(3)) which is subject to a net lease, the amount of the deduction allowable for exhaustion, wear and tear, obsolescence, or amortization and the deduction which would have been allowable for the taxable year had the property been depreciated under the straight line method for each taxable year of its useful life for which the partnership has held the property;
(vi) With respect to each certified pollution control facility for which an election is in effect under section 169, the amount of the deduction allowable for the taxable year under such section and the deduction which would have been allowable under section 167 had no election been in effect under section 169;
(vii) With respect to each unit of railroad rolling stock for which an election is in effect under section 184, the amount of the deduction allowable for the taxable year under such section and the deduction which would have been allowable under section 167 had no election been in effect under section 184;
(viii) In the case of a partnership which is a financial institution to which section 585 or 593 applies, the amount of the deduction allowable for the taxable year for a reasonable addition to a reserve for bad debts and the amount of the deduction that would have been allowable for the taxable year had the institution maintained its bad debt reserve for all taxable years on the basis of actual experience; and
(ix) With respect to each mineral property, the deduction for depletion allowable under section 611 for the taxable year and the adjusted basis of the property at the end of the taxable year (determined without regard to the depreciation deduction for the taxable year).
If, pursuant to section 743 (relating to optional adjustment to basis), the basis of partnership property is adjusted with respect to a transferee partner due to an election being in effect under section 754 (relating to manner of electing optional adjustment), items representing amortization, depreciation, depletion, gain or loss, and the adjusted basis of property subject to depletion, described above, shall be adjusted to reflect the basis adjustment under section 743.
(3) The minimum tax is effective for taxable years ending after December 31, 1969. Thus, subparagraph (2) of this paragraph is inapplicable in the case of items of income or deduction paid or accrued in a partnership's taxable year ending on or before December 31, 1969.
[T.D. 7564, 43 FR 40481, Sept. 12, 1978]
§ 1.58-3 Estates and trusts.
(a) In general. (1) Section 58(c)(1) provides that the sum of the items of tax preference of an estate or trust shall be apportioned between the estate or trust and the beneficiary on the basis of the income of the estate or trust allocable to each. Income for this purpose is the income received or accrued by the trust or estate which is not subject to current taxation either in the hands of the trust or estate or the beneficiary by reason of an item of tax preference. The character of the amounts distributed is determined under section 652(b) or 662(b) and the regulations thereunder.
(2) Additional computations required by reason of excess distributions are to be made in accordance with the principles of sections 665 through 669 and the regulations thereunder.
(3) In the case of a charitable remainder annuity trust (as defined in section 664(d)(1) and § 1.664-2) or a charitable remainder unitrust (as defined in section 664(d)(2) and § 1.664-3), the determination of the income not subject to current taxation by reason of an item of tax preference is to be made as if such trust were generally subject to taxation. Where income of such a trust is not subject to current taxation in accordance with this section and is distributed to a beneficiary in a taxable year subsequent to the taxable year in which the trust received or accrued such income, the items of tax preference relating to such income are apportioned to the beneficiary in such subsequent year (without credit for minimum tax paid by the trust with respect to items of tax preference which are subject to the minimum tax by reason of section 664(c)).
(4) Items of tax preference apportioned to a beneficiary pursuant to this section are to be taken into account by the beneficiary in his taxable year within or with which ends the taxable year of the estate or trust during which it has such items of tax preference.
(5) Where a trust or estate has items of income or deduction which enter into the computation of the excess investment interest item of tax preference, but such items do not result in an item of tax preference at the trust or estate level, each beneficiary must take into account, in computing his excess investment interest, the portion of such items distributed to him. The determination of the portion of such items distributed to each beneficiary is made in accordance with the character rules of section 652(b) or 662(b) and the regulations thereunder.
(6) Where, pursuant to subpart E of part 1 of subchapter J (sections 671 through 678), the grantor of a trust or another person is treated as the owner of any portion of the trust, there shall be included in computing the items of tax preference of such person those items of income, deductions, and credits against tax of the trust which are attributable to that portion of the trust to the extent such items are taken into account under section 671 and the regulations thereunder. Any remaining portion of the trust is subject to the provisions of this section.
(b) Examples. The principles of this section may be illustrated by the following examples in each of which it is assumed that none of the distributions are accumulation distributions (see sections 665 through 669 and the regulations thereunder):
Example 1. Trust A, with one income beneficiary, has the following items of income and deduction without regard to the deduction for distributions:
Income:
Business income | $200,000
Investment income | 20,000
220,000
Deductions:
Business deductions (nonpreference) | 100,000
Investment interest expense | 80,000
180,000
Based on the above figures, the trust has $100,000 of taxable income without regard to items which enter into the computation of excess investment interest and the deduction for distributions. The trust also has $60,000 of excess investment interests, resulting in $40,000 of distributable net income. Thus, $60,000 of the $100,000 of noninvestment income is not subject to current taxation by reason of the excess investment interest. (a) If $40,000 is distributed to the beneficiary, the beneficiary will normally be subject to tax on the full amount received and the “sheltered” portion of the income will remain at the trust level. Thus, none of the excess investment interest item of tax preference is apportioned to the beneficiary.
(b) If the beneficiary receives $65,000 from the trust, the beneficiary is still subject to tax on only $40,000 (the amount of the distributable net income) and thus, is considered to have received $25,000 of business income “sheltered” by excess investment interest. Thus, $25,000 of the $60,000 of excess investment interest of the trust is apportioned to the beneficiary.
Example 2. Trust B has $150,000 of net section 1201 gain.
(a) If none of the gain is distributed to the beneficiaries, none of the capital gains item of tax preference is apportioned to the beneficiaries.
(b) If all or a part of the gain is distributed to the beneficiaries, a proportionate part of the capital gains item of tax preference is apportioned to the beneficiaries. If any of the beneficiaries are corporations the capital gains item of tax preference is adjusted in the hands of the corporations as provided in § 1.58-2(a).
Example 3.Trust C has taxable income of $200,000 computed without regard to depreciation on section 1250 property and the deduction for distributions. The depreciation on section 1250 property held by the trust is $160,000. The trust instrument provides for income to be retained by the trust in an amount equal to the depreciation on the property determined under the straight line method (which method has been used for this purpose for the entire period the trust has held the property) which, in this case is equal to $100,000. The $60,000 excess of the accelerated depreciation of $160,000 over the straight line amount which would have resulted had the property been depreciated under that method for the entire period for which the trust has held the property is an item of tax preference pursuant to section 57(a)(2). Of the remaining $100,000 of net income of the trust (after the reserve for depreciation), 80 percent is distributed to the beneficiaries. Pursuant to sections 167(h) and 642(e), 80 percent of the remaining $60,000 of depreciation deduction (or $48,000) is taken as a deduction directly by the beneficiaries and “shelters” the income received by the beneficiaries. Thus, the full $48,000 deduction taken by the beneficiaries is “excess accelerated depreciation” on section 1250 property and is an item of tax preference in the hands of the beneficiaries. None of the remaining $12,000 of “excess accelerated depreciation” is apportioned to the beneficiaries since this amount “shelters” income retained at the trust level.
Example 4.G creates a trust the ordinary income of which is payable to his adult son. Ten years from the date of the transfer, corpus is to revert to G. G retains no other right or power which would cause him to be treated as an owner under subpart E of part 1 of subchapter J (section 671 and following). Under the terms of the trust instrument and applicable local law capital gains must be applied to corpus. During the taxable year 1970 the trust has $200,000 income from dividends and interest and a net long-term capital gain of $100,000. Since the capital gain is held or accumulated for future distribution to G, he is treated under section 677(a)(2) as an owner of a portion of the trust to which the gain is attributable. Therefore, he must include the capital gain in the computation of his taxable income in 1970 and the capital gain item of tax preference is treated as being directly received by G. Accordingly, no adjustment is made to the trust's minimum tax exemption by reason of the capital gain.
Example 5.For its taxable year 1971 the trust referred to in example (4) has taxable income of $200,000 computed without regard to depreciation on section 1250 property and the deduction for distributions. The depreciation on section 1250 property held by the trust is $160,000. The trust instrument provides for income to be retained by the trust in an amount equal to the depreciation on the property determined for purposes of the Federal income tax. If the property had been depreciated under the straight line method for the entire period for which the trust held the property the resulting depreciation deduction would have been $100,000. The $60,000 excess is, therefore, an item of tax preference pursuant to section 57(a)(2) and § 1.57-1(d). Since this amount of “income” is held or accumulated for future distributions to G, he is treated under section 677(a)(2) as an owner of a portion of the trust to which such income is attributable. Therefore, section 671 requires that in computing the tax liability of the grantor the income, deductions, and credits against tax of the trust which are attributable to such portion shall be taken into account. Thus, the grantor has received $160,000 of income and is entitled to a depreciation deduction in the same amount. The $60,000 item of tax preference resulting from the excess depreciation is treated as being directly received by G as he has directly received the income sheltered by that preference. Accordingly, no adjustment is made to the trust's minimum tax exemption by reason of such depreciation.
[T.D. 7564, 43 FR 40482, Sept. 12, 1978]
§ 1.58-3T Treatment of non-alternative tax itemized deductions by trusts and estates and their beneficiaries in taxable years beginning after December 31, 1982 (temporary).
For purposes of section 58(c), in taxable years beginning after December 31, 1982, itemized deductions of a trust or estate which are not alternative tax itemized deductions (as defined in section 55(e)(1)), shall be treated as items of tax preference and apportioned between trusts and their beneficiaries, and estates and their beneficiaries.
[T.D. 8083, 51 FR 15320, Apr. 23, 1986]
§ 1.58-4 Electing small business corporations.
(a) In general. Section 58(d)(1) provides rules for the apportionment of the items of tax preference of an electing small business corporation among the shareholders of such corporation. Section 58(d)(2) provides rules for the imposition of the minimum tax on an electing small business corporation with respect to certain capital gains. For purposes of section 58(d) and this section, the items of tax preference are computed at the corporate level as if section 57 generally applied to the corporation. However, the items of tax preference so computed are treated as items of tax preference of the shareholders of such corporation and not as items of tax preference of such corporation (except as provided in paragraph (c) of this section). The items of tax preference specified in section 57(a)(1) and § 1.57-1(a) (excess investment interest) and section 57(a)(3) and § 1.57-1(c) (accelerated depreciation on section 1245 property subject to a net lease), while generally inapplicable to corporations, are included as items of tax preference in the case of an electing small business corporation.
(b) Apportionment to shareholders. (1) The items of tax preference of an electing small business corporation, other than the capital gains item of tax preference described in paragraph (c) of this section, are apportioned pro rata among the shareholders of such corporation in a manner consistent with section 1374(c)(1). Thus, with respect to the items of tax preference of the electing small business corporation, there is to be treated as items of tax preference of each shareholder a pro rata share of such items computed as follows:
(i) Divide the total amount of such items of tax preference of the corporation by the number of days in the taxable year of the corporation, thus determining the daily amount of such items of tax preference.
(ii) Determine for each day the shareholder's portion of the daily amount of each such item of tax preference by applying to such amount the ratio which the stock owned by the shareholder on that day bears to the total stock outstanding on that day.
(iii) Total the shareholder's daily portions of each such item of tax preference of the corporation for it taxable year.
Amounts taken into account by shareholders in accordance with this paragraph are considered to consist of a pro rata share of each item of tax preference of the corporation. Thus, for example, if the corporation has $50,000 of excess investment interest and $150,000 of excess accelerated depreciation on section 1250 property and a shareholder, in accordance with this paragraph, takes into account $60,000 of the total $200,000 of tax preference items of the corporation, one-fourth ($50,000 ÷ $200,000) of the $60,000, or $15,000, taken into account by the shareholder is considered excess investment interest and three-fourths of the $60,000, or $45,000, is considered excess accelerated depreciation on section 1250 property.
(2) Items of tax preference apportioned to a shareholder pursuant to subparagraph (1) of this paragraph are taken into account by the shareholder for the shareholder's taxable year in which or with which the taxable year of the corporation ends, except that, in the case of the death of a shareholder during any taxable year of the corporation (during which the corporation is an electing small business corporation), the items of tax preference of the corporation for such taxable year are taken into account for the final taxable year of the shareholder.
(c) Capital gains. (1) Capital gains of an electing small business corporation, other than those capital gains subject to tax under section 1378, do not result in an item of tax preference at the corporate level since, in applying the formula specified in sections 57(a)(9)(B) and § 1.57-1(i)(2), the rate of tax on capital gains (and the resulting tax) at the corporate level is zero. Under section 1375 (a) shareholders of an electing small business corporation take into account the capital gains of the corporation (including capital gains subject to tax under section 1378). Therefore, the computation of the capital gains item of tax preference at the shareholder level, with respect to such capital gains, is taken into account automatically by operation of section 57(a)(9) and § 1.57-1(i). To avoid double inclusion of the capital gains item of tax preference by a shareholder with respect to capital gains subject to tax under section 1378, the capital gains item of tax preference which results at the corporate level by reason of section 58 (d)(2) is not treated under section 58 (d)(1) as an item of tax preference of the shareholders of the corporation.
(2) The capital gains item of tax preference of an electing small business corporation subject to the tax imposed by section 1378 is the excess of the amount of tax computed under section 1378(b)(2) over the sum of—
(i) The amount of tax that would be computed under section 1378(b)(2) if the following amount were excluded:
(a) That portion of the net section 1201 gain of the corporation described in section 1378(b)(1), or
(b) If section 1378(c)(3) applies, that portion of the net section 1201 gain attributable to the property described in section 1378(c)(3), and
(ii) The amount of tax imposed under section 1378 divided by the sum of the normal tax rate and the surtax rate under section 11 for the taxable year.
(3) The principles of this paragraph may be illustrated by the following example.
Example. Corporation X is a calendar year taxpayer and an electing small business corporation. For its taxable year 1971 the corporation has net section 1201 gain of $650,000 and taxable income of $800,000 (including the net section 1201 gain). Although X's election under section 1372(a) has been in effect for its three immediately preceding taxable years, X is subject to the tax imposed by section 1378 for 1971 since it has net section 1201 gain (in the amount of $200,000) attributable to property with a substituted basis. The tax computed under section 1378(b)(1) is $187,500 (30 percent of ($650,000 minus $25,000)) and under section 1378(b)(2) is $377,500 (22 percent of $800,000 plus 26 percent of $775,000). By reason of the limitation imposed by section 1378(c) the tax actually imposed by section 1378 is $60,000 (30 percent of $200,000, the net section 1201 gain). The tax computed under section 1378(b)(2) with the modification required under subparagraph (2)(i) of this paragraph is $281,500 (22 percent of $600,000 plus 26 percent of $575,000). Thus, the 1971 capital gains item of tax preference X is $75,000 computed as follows:
1. Tax computed under 1378(b) (2) | $377,500
2. Tax computed under 1378(b) (2) with modification | 281,500
3. Excess | 96,000
4. Tax actually imposed under 1378 | 60,000
5. Difference | 36,000
6. Normal tax rate plus surtax rate | .48
7. Tax preference (line 5 divided by line 6) | $75,000
In addition each shareholder of X will take into account his distributive share of the $650,000 of net section 1201 gain of X less the taxes paid by X under sections 56 and 1378 on the gain
[T.D. 7564, 43 FR 40483, Sept. 12, 1978]
§ 1.58-5 Common trust funds.
Section 58(e) provides that each participant in a common trust fund (as defined in section 584 and the regulations thereunder) is to treat as items of tax preference his proportionate share of the items of tax preference of the fund computed as if the fund were an individual subject to the minimum tax. The participant's proportionate share of the items of tax preference of the fund is determined as if the participant had realized, or incurred, his pro rata share of items of income, gain, loss, or deduction of the fund directly from the source from which realized or incurred by the fund. The participant's pro rata share of such items is determined in a manner consistent with section 1.584-2(c). Items of tax preference apportioned to a participant pursuant to this paragraph are taken into account by the participant for the participant's taxable year in which or with which the taxable year of the trust ends.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978]
§ 1.58-6 Regulated investment companies; real estate investment trusts.
(a) In general. Section 58(f) provides rules with respect to the determination of the items of tax preference of regulated investment companies (as defined in section 851) and their shareholders and real estate investment trusts (as defined in section 856) and their shareholders, or holders of beneficial interest. In general, the items of tax preference of such companies and such trusts are determined at the company or trust level and the items of tax preference so determined (other than the capital gains item of tax preference (sections 57(a)(9) and § 1.57-1(i)) and, in the case of a real estate investment trust, accelerated depreciation on section 1250 property (sections 57(a)(2) and § 1.57-1(b)) are treated as items of tax preference of the shareholders, or holders of beneficial interest, in the same proportion that the dividends (other than capital gains dividends) paid to each such shareholder, or holder of beneficial interest, bear to the taxable income of such company or such trust determined without regard to the deduction for dividends paid. In no case, however, is such proportion to be considered in excess of 100 percent. For example, if a regulated investment company has items of tax preference of $500,000 for the taxable year, none of which resulted from capital gains, and distributes dividends in an amount equal to 90 percent of its taxable income, each shareholder treats his share of 90 percent of the company's items of tax preference, or (a proportionate share of) $450,000, as items of tax preference of the shareholder. The remaining $50,000 constitutes items of tax preference of the company. Amounts treated under this paragraph as items of tax preference of the shareholders, or holders of beneficial interest, are deemed to be derived proportionately from each item of tax preference of the company or trust, other than the capital gains item of tax preference and, in the case of a real estate investment trust, accelerated depreciation on section 1250 property. Such amounts are taken into account by the shareholders, or holders of beneficial interest, in the same taxable year in which the dividends on which the apportionment is based are includible in income. The minimum tax exemption of the trust or company shall not be reduced because a portion of the trust's or company's items of tax preference are allocated to the shareholders or holders of beneficial interests.
(b) Capital gains. Section 58(g)(1) provides that a regulated investment company or real estate investment trust does not treat as an item of tax preference the capital gains item of tax preference under section 57(a)(9) (and § 1.57-1(i)) to the extent that such item is attributable to amounts taken into income by the shareholders of such company under section 852(b)(3) or by the shareholders or holders of beneficial interest of such trust under section 857(b)(3). Thus, such a company or trust computes its capital gains item of tax preference on the basis of its net section 1201 gain less the sum of (1) the capital gains dividend (as defined in section 852(b)(3)(C) or 857(b)(3)(C)) for the taxable year of the company or trust plus (2), in the case of a regulated investment company, that portion of the undistributed capital gains designated, pursuant to section 852(b)(3)(D) and the regulations thereunder, by the company to be includible in the shareholder's return as long-term capital gains for the shareholders's taxable year in which the last day of the company's taxable years falls. Amounts treated under section 852(b)(3) or 857(b)(3) as long-term capital gains of shareholders, or holders of beneficial interest, are automatically included, pursuant to sections 57(a)(9) and 1.57-1(i), in the computation of the capital gains item of tax preference of the shareholders, or holders of beneficial interest.
(c) Accelerated depreciation on section 1250 property. In the case of a real estate investment trust, all of the items of tax preference resulting from accelerated depreciation on section 1250 property held by the trust (section 57(a)(2) and § 1.57-1(b)) are treated as items of tax preference of the trust, and, thus, none are treated as items of tax preference of the shareholder, or holder of beneficial interest.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978]
§ 1.58-7 Tax preferences attributable to foreign sources; preferences other than capital gains and stock options.
(a) In general. Section 58(g)(1) provides that except in the case of the stock options item of tax preference (section 57(a)(6) and § 1.57-1(f)) and the capital gains item of tax preference (section 57(a)(9) and § 1.57-1(i)), items of tax preference which are attributable to sources within any foreign country or possession of the United States shall, for purposes of section 56, be taken into account only to the extent that such items reduce the tax imposed by chapter 1 (other than the minimum tax under section 56) on income derived from sources within the United States. Items of tax preference from sources within any foreign country or possession of the United States reduce the chapter 1 tax on income from sources within the United States to the extent the deduction relating to such preferences, in combination with other foreign deductions, exceed the income from such sources and, in effect, offset income from sources within the United States. Items of tax preference, for this purpose, are determined after application of § 1.57-4 (relating to limitation on amounts treated as items of tax preference). In the case of a taxpayer who deducted foreign taxes under section 164 for a taxable year, the provisions of this section shall be applied (without regard to section 275(a)(4)) as if he had elected the overall foreign tax credit limitation under section 904(a) (2) for such year.
(b) Preferences attributable to foreign sources—(1) Preferences other than excess investment interest. Except in the case of excess investment interest (see subparagraph (2) of this paragraph), an item of tax preference to which this section applies is attributable to sources within a foreign country or possession of the United States to the extent such item is attributable to a deduction properly allocable or apportionable to an item or class of gross income from sources within a foreign country or possession of the United States under the principles of section 862(b), or section 863, and the regulations thereunder. Where, in the case of income partly from sources within the United States and partly from sources within a foreign country or possession of the United States, taxable income is computed before apportionment to domestic and foreign sources, and is then apportioned by processes or formulas of general apportionment (pursuant to section 863(b) and the regulations thereunder), deductions attributable to such taxable income are considered to be proportionately from sources within the United States and within the foreign country or possession of the United States on the same basis as taxable income.
(2) Excess investment interest—(i) Per-country limitation. (a) In the case of a taxpayer on the per-country foreign tax credit limitation under section 904(a) for the taxable year, excess investment interest (as defined in section 57(b)(1)), and the resulting item of tax preference, is attributable to sources within a foreign country or a possession of the United States to the extent that investment interest expense attributable to income from sources within such foreign country or possession of the United States exceeds the net investment income from sources within such foreign country or such possession. For this purpose, net investment income from within a foreign country or possession of the United States is the excess (if any) of the investment income from sources within such country or possession over the investment expenses attributable to income from sources within such country or such possession. For the definition of investment interest expense see section 57(b)(2)(D); for the definition of investment income see section 57(b)(2)(B); for the definition of investment expense see section 57(b)(2)(C).
(b) If the taxpayer's excess investment interest computed on a worldwide basis is less than the taxpayer's total separately determined excess investment interest (as defined in this subdivision (b)), the amount of the taxpayer's excess investment interest from each foreign country or possession is the amount which bears the same relationship to the taxpayer's excess investment interest from each such country or possession, determined without regard to this subdivision (b), as the taxpayer's worldwide excess investment interest bears to the taxpayer's total separately determined excess investment interest. For purposes of this subdivision (b), the taxpayer's total separately determined excess investment interest is the sum of the total excess investment interest determined without regard to this subdivision (b) plus the taxpayer's excess investment interest from sources within the United States determined in a manner consistent with (a) of this subdivision (i).
(ii) Overall limitation. In the case of a taxpayer who has elected the overall foreign tax credit limitation under section 904(a)(2) for the taxable year, excess investment interest (as defined in section 57(b)(1)), and the resulting item of tax preference, is attributable to sources within any foreign country or possession of the United States to the extent that investment interest expense attributable to income from such sources exceeds the sum of (a) the net investment income from such sources plus (b) the excess, if any, of net investment income from sources within the United States over investment interest expense attributable to sources within the United States. For this purpose, net investment income from sources within any foreign country or possession of the United States is the excess (if any) of the investment income from all such sources over the investment expenses attributable to income from such sources. For the definition of investment interest expense see section 57(b)(2)(D) for the definition of investment income see section 57(b)(2)(B); for the definition of investment expense see section 57(b)(2)(C).
(iii) Allocation of expenses. The determination of the investment interest expense and investment expenses attributable to a foreign country or possession of the United States is made in a manner consistent with subparagraph (1) of this paragraph.
(iv) Attribution of certain interest deductions to foreign sources. Where net investment income from sources within any foreign country or possession has the effect of offsetting investment interest expense attributable to income from sources within the United States, the deductions for the investment interest expense so offset are, for purposes of § 1.58-7(c) (relating to reduction in taxes on United States source income), treated as deductions attributable to income from sources within the foreign country or possession from which such net investment income is derived. Such an offset will occur where there is an excess of investment interest expense attributable to income from sources within the United States over net investment income from such sources and (a) in the case of a taxpayer on the per-country foreign tax credit limitation, an excess of net investment income from sources within a foreign country or possession of the United States over investment interest expense from within such foreign country or possession, or (b) in the case of a taxpayer who has elected the overall foreign tax credit limitation, there is an excess of net investment income from sources within foreign countries or possessions of the United States over investment interest expense attributable to income from within such sources.
(v) Separate limitation on interest income. Where a taxpayer has income described in section 904(f)(2) (relating to interest income subject to the separate foreign tax credit limitation) or expenses attributable to such income, the determination of the excess investment interest resulting therefrom must be determined separately with respect to such income and the expenses properly allocable or apportionable thereto in the same manner as such determination is made in the case of a taxpayer on the per-country foreign tax credit limitation for the taxable year (see subdivision (i) of this subparagraph).
(vi) Examples. The principles of this subparagraph may be illustrated by the following examples in each of which the taxpayer is an individual and a citizen of the United States:
Example 1. The taxpayer's only items of income and deduction relating to excess investment interest are as follows:
United States | France | Germany | Total
Investment income from sources within | $150,000 | $120,000 | $180,000 | $450,000
Investment expenses relating to income from sources within | (100,000) | (90,000) | (120,000) | (310,000)
Net investment income | 50,000 | 30,000 | 60,000 | 140,000
Investment interest expense relating to income from sources within | (110,000) | (70,000) | (50,000) | (230,000)
(Excess) of investment interest expense over net investment income | (60,000) | (40,000) | *10,000 | (90,000)
*Excess of net investment income over investment interest expense.
(a) If the taxpayer has elected the overall foreign tax credit limitation, his excess investment interest from sources within any foreign countries or possessions of the United States determined under subdivision (ii) of this subparagraph is computed as follows:
Investment interest:
French | ($70,000)
German | (50,000) | ($120,000)
Net investment income:
Investment income:
French | 120,000
German | 180,000 | $300,000
Less:
Investment expenses:
French | (90,000)
German | (120,000) | (210,000) | 90,000
Excess of U.S. net income over investment interest expenses:
Total foreign excess investment interest | (30,000)
(b) If the taxpayer is on the per-country foreign tax credit limitation, his excess investment interest from France and Germany determined under subdivision (i)(a) of this subparagraph is $40,000 and zero, respectively. Since the taxpayer's worldwide excess investment interest ($90,000) is less than his total separately determined excess investment interest ($60,000 (United States) plus $40,000 (French) plus zero (German), or $100,000), the limitation in subdivision (i) (b) of this subparagraph applies and the excess investment interest attributable to France is limited as follows: Total worldwide excess ($90,000) / Total separately determined excess ($100,000) × French excess ($40,000) = $36,000 The taxpayer's total excess investment interest attributable to sources within any foreign country or possession of the United States is, thus, $36,000 ($36,000 (French) plus zero (German)). The taxpayer's excess investment interest attributable to sources within the United States is $54,000 ($90,000 / $100,000 × $60,000). Since, in making the latter determination, $6,000 of the $60,000 of U.S. investment interest expense in excess of U.S. net investment income is, in effect, offset by German net investment income, for purposes of § 1.58-7(c), $6,000 of interest deductions attributable to income from sources within the United States are, pursuant to subdivision (iv) of this subparagraph, treated as deductions attributable to income from sources within Germany.
Example 2. Assume the same facts as in example (1) except that the items of income and deduction in Germany and the United States are reversed. The worldwide excess investment interest, thus, remains $90,000 and the items of income and deduction relating to excess investment interest are as follows:
United States | France | Germany | Total
Investment income from sources within | $180,000 | $120,000 | $150,000 | $450,000
Investment expenses relating to income from sources within | (120,000) | (90,000) | (100,000) | (310,000)
Net investment income | 60,000 | 30,000 | 50,000 | 140,000
Investment interest expense relating to income from sources within | (50,000) | (70,000) | (110,000) | (230,000)
(Excess) of investment interest expense over net investment income | 10,000 | (40,000) | (60,000) | (90,000)
(a) If the taxpayer has elected the overall limitation, his excess investment interest from sources within any foreign countries or possessions of the United States determined under subdivision (ii) of this subparagraph is determined as follows:
Foreign investment interest:
French | ($70,000)
German | (110,000) | ($180,000)
Foreign net investment income:
French | 120,000
German | 150,000 | $270,000
Less:
Investment expenses:
French | (90,000)
German | (100,000) | (190,000) | 80,000
Excess of U.S. net investment income over U.S. investment interest expense | 10,000
Excess investment interest attributable to foreign sources | (90,000)
(b) If the taxpayer has not elected the overall foreign tax credit limitation, his excess investment interest from France and Germany determined under subdivision (i) of this subparagraph (without regard to the limitation to worldwide excess investment interest) is $40,000 and $60,000 respectively, and his total separately determined excess investment interest is, thus, $10,000. Since the total separately determined excess would exceed the worldwide excess, the limitation to the worldwide excess in subdivision (i) applies and the excess investment interest is determined as follows: France: $90,000 / $100,000 × $40,000 = $36,000 Germany: $90,000 / $100,000 × $60,000 = $54,000 Total excess investment interest attributable to sources within any foreign countries and possessions—$90,000.
Example 3. Assume the same facts as in example (1) except that the taxpayer, in addition has investment income, investment expenses, and investment interest subject to the separate limitation under section 904(f).
(a) If the taxpayer has elected the overall foreign tax credit limitation, his excess investment interest from sources within any foreign countries or possessions of the United States determined under subdivision (ii) of this subparagraph is the same as in (a) of example (1) of this subdivision (vi). He then treats such amount as separately determined excess investment interest attributable to a single foreign country as determined under subdivision (i) of this subparagraph and proceeds as in (b) of example (1) of this subdivision (vi) treating items of income and deduction subject to section 904(f) and from each separate foreign country or possession separately in making the additional determinations under subdivisions (i) and (iv) of this subparagraph.
(b) If the taxpayer has not elected the overall foreign tax credit limitation, his excess investment interest from sources within any foreign country or possession of the United States would be determined in the same manner as in (b) of example (1) treating items of income and deduction which are subject to section 904(f) and from each separate foreign country or possession separately in making the determinations under subdivisions (i) and (iv) of this subparagraph.
(c) Reduction in taxes on United States source income—(1) Overall limitation—(i) In general. If a taxpayer is on the overall foreign tax credit limitation under section 904(a)(2), the items of tax preference determined to be attributable to foreign sources under paragraph (b) of this section reduce the tax imposed by chapter 1 (other than the minimum tax imposed under section 56) on income from sources within the United States for the taxable year to the extent of the smallest of the following three amounts:
(a) Items of tax preference (other than stock options and capital gains) attributable to sources within a foreign country or possession of the United States,
(b) The excess (if any) of the total deductions properly allocable or apportionable to items or classes of gross income from sources within foreign countries and possessions of the United States over the gross income from such sources, or
(c) Taxable income from sources within the United States.
See § 1.58-7(b)(2)(iv) with respect to the attribution of certain interest deductions to foreign sources in cases involving the excess investment interest item of tax preference.
(ii) Net operating loss. Where there is an overall net operating loss for the taxable year, to the extent that the lesser of the amounts determined under (a) or (b) of subdivision (i) of this subparagraph exceeds the taxpayer's taxable income from sources within the United States (and, therefore do not offset taxable income from sources within the United States for the taxable year) the amount of such excess is treated as “suspense preferences.” Suspense preferences are converted to actual items of tax preference, arising in the loss year and subject to the provisions of section 56, as the net operating loss is used in other taxable years, in the form of a net operating loss deduction under section 172, to offset taxable income from sources within the United States. Suspense preferences which, in other taxable years, reduce taxable income from sources within any foreign country or possession of the United States lose their character as suspense preferences and, thus, are never converted into actual items of tax preference. The amount of the suspense preferences which are converted into actual items of tax preference is equal to that portion of the net operating loss attributable to the suspense preferences which offset taxable income from sources within the United States in taxable years other than the loss year. The determination of the component parts of the net operating loss and the determination of the amount by which the portion of the net operating loss attributable to suspense preferences offsets taxable income from sources within the United States is made on a year-by-year basis in the same order as the net operating loss is used in accordance with section 172(b). Such determination is made by applying deductions attributable to U.S. source income first against such income and deductions attributable to foreign source income first against such foreign source income and in accordance with the following principles:
(a) Deductions attributable to items or classes of gross income from sources within the United States offset taxable income from sources within the United States before any remaining portion of the net operating loss;
(b) Deductions attributable to items or classes of gross income from sources within foreign countries or possessions of the United States offset taxable income from such sources before any remaining portion of the net operating loss;
(c) Deductions described in (b) of the subdivision (ii) which are not suspense preferences (referred to in this subparagraph as “other foreign deductions”) offset taxable income from sources within foreign countries and possessions of the United States before suspense preferences; and
(d) Suspense preferences offset taxable income from sources within the United States before other foreign deductions.
For purposes of the above computations, taxable income is computed with the modifications specified in section 172(b)(2) or section 172(c), whichever is applicable. However, the amount of suspense preferences which are converted into actual items of tax preference in accordance with the above principles is reduced to the extent suspense preferences offset increases in taxable income from sources within the United States due to the modifications specified in section 172(b)(2) or section 172(c). For this purpose, suspense preferences are considered to offset an increase in taxable income due to the section 172(b)(2) modifications only after reducing taxable income computed before the section 172(b)(2) or section 172(c) modifications.
(iii) Examples. The principles of this subparagraph may be illustrated by the following examples. In each example the taxpayer is an individual citizen of the United States and has elected the overall foreign tax credit limitation. Personal deductions and exemptions are disregarded for purposes of these examples.
Example 1. In 1974, the taxpayer has the following items of income and deduction:
United States taxable income:
Gross income | $750,000
Deductions | (250,000) | $500,000
Foreign source loss:
Gross income | 200,000
Deductions:
Preference items (excess of percentage depletion over basis) | $550,000
Other | 50,000 | (600,000) | (400,000)
Overall taxable income | 100,000
Pursuant to subdivision (i) of this subparagraph the smallest of (a) the items of tax preference attributable to the foreign sources ($550,000), (b) the foreign source loss ($400,000), or (c) the taxable income from sources within the United States ($500,000) reduces the tax imposed by chapter 1 (other than the minimum tax) on income from sources within the United States. Thus, $400,000 of the $550,000 of excess depletion is treated as an item of tax preference in 1974 subject to the minimum tax.
Example 2. Assume the same facts as in example (1) except that the gross income from sources within the United States is $350,000 resulting in U.S. taxable income of $100,000 and an overall net operating loss of $300,000. Pursuant to subdivision (i) of this subparagraph, $100,000 of the $550,000 excess depletion would be treated as an item of tax preference in 1974 subject to the minimum tax. In addition, pursuant to subdivision (ii) of this subparagraph, the excess of the items of tax preference from foreign sources ($550,000) or the foreign source loss ($400,000), whichever is less, over the U.S. taxable income ($100,000), or, in this example, $300,000, is treated as suspense preferences.
(a) If, in 1971, the taxpayer's total items of income and deduction result in $350,000 of taxable income all of which is from sources within the United States, the entire $300,000 net operating loss, all of which is attributable to suspense preferences, is used to offset U.S. taxable income. Accordingly, the full $300,000 of suspense preferences are converted into actual items of tax preference arising in 1974 and are subject to tax under section 56.
(b) If the $350,000 in 1971 is modified taxable income resulting from the denial of a section 1202 capital gains deduction of $175,000 by reason of section 172(b)(2), the $300,000, otherwise treated as actual items of tax preference, is reduced by $125,000, i.e., the extent to which the suspense preferences offset U.S. taxable income attributable to the increase in taxable income resulting from the denial of the section 1202 deduction.
Example 3. In 1974, the taxpayer has the following items of income and deduction:
United States loss:
Gross income | $75,000
Deductions | (225,000)
($150,000)
Foreign loss:
Gross income | 400,000
Deductions:
Preference items (excess of accelerated depreciation on sec. 1250 property over straight-line amount) | $200,000
Other | 550,000 | (750,000) | (350,000)
Overall net operating loss | (500,000)
Since the nonpreference deductions reduce the foreign source income before the preference portion, the $350,000 foreign source loss consists of $200,000 of suspense preferences and $150,000 of other deductions. In 1971, 1972, and 1973 the taxpayer had taxable income from sources within the United States of $100,000, $200,000, and $300,000, respectively and taxable income from sources within foreign countries of $80,000 each year. Of the $200,000 of suspense preferences, $150,000 are converted into actual items of tax preference, subject to the minimum tax in 1974, determined as follows:
[In thousands of dollars]
Year—Explanation | Taxable income | U.S. deductions | Foreign deductions
U.S. source | Foreign source | Suspense preferences | Other
1971 End of year balance before section 58(g) computations | 100 | 80 | 150 | 200 | 150
1. U.S. deductions against U.S. income | (100)
(100)
2. Other foreign deductions against foreign income | (80) | (80)
1972 End of year balance before section 58(g) computations | 200 | 80 | 50 | 200 | 70
1. U.S. deductions against U.S. income | (50) | (50)
2. Other foreign deductions against foreign income | (70) | (70)
3. Suspense preferences against foreign income | (10) | (10)
4. Suspense preferences against U.S. income | *(150) | *(150)
1973 End of year balance before section 58(g) computations | 300 | 80 | 40
1. U.S. deductions against U.S. income | Not applicable
2. Other foreign deductions against foreign income | Not applicable
3. Suspense preference against foreign income | (40) | (40)
4. Suspense preferences against U.S. income | Not applicable
Balances | 300 | 40
*Suspense preferences converted to actual items of tax preference.
Example 4. In 1970, the taxpayer's total items of income and deduction, all of which are attributable to foreign sources, are as follows:
Foreign loss:
Gross income | $400,000
Deductions:
Preferences (excess of accelerated depreciation on section 1250 property over straight-line) | $200,000
Net operating loss | 350,000
Pursuant to subdivision (i) of this subparagraph, none of the preferences attributable to foreign sources reduce the tax imposed by chapter 1 (other than the minimum tax) on taxable income from sources within the United States. Pursuant to subdivision (ii) of this subparagraph, the $200,000 portion of the net operating loss resulting from the excess accelerated depreciation constitutes suspense preferences. No part of the net operating loss that is carried back to previous years is reduced in such previous years. In 1971 and 1972, the taxpayer's income (before the net operating loss deduction) consists of the following:
1971 taxable income:
United States | $160,000
Foreign | 70,000
Total | 230,000
1972 taxable income:
United States | 25,000
Foreign | 105,000
Total | 130,000
(a) In 1971, the conversion of suspense preferences into actual items of tax preference under section 58(g) (and this paragraph) and the imposition of the minimum tax on 1970 items of tax preference under section 56(b) and (§ 1.56A-2) are determined as follows: Conversion of suspense preferences:
1970 Net Operating Loss
[In thousands of dollars]
U.S. taxable income | Foreign taxable income | U.S. deductions | Suspense preferences | Other foreign deductions
$160 | $70 | $200 | $150
1. U.S. deductions against U.S. income | Not applicable
2. Other foreign deductions against foreign income | 70 | (70)
3. Suspense preference against foreign income | Not applicable
4. Suspense preference against U.S. income | *(160) | (160)
Balance to 1972 | 40 | 80
*Suspense preferences converted into actual items of tax preference.
Imposition of minimum tax on 1970 items of tax preference:
1970 Net Operating Loss
[In thousands of dollars]
1971 taxable income | Nonpreference portion | Preference portion | Suspense portion
$230 | $150 | $200
1. 1971 conversion of suspense preferences pursuant to sec. 58(g) | 1 30 | $130 | (160)
Adjusted NOL | 180 | 130 | 40
2. Nonpreference portion against taxable income | (180) | (180)
3. Preference portion against taxable income | 2 (50) | (50)
Balance to 1972 | 80 | 40
1 Represents the 1970 minimum tax exemption.
2 Imposition of 1970 minimum tax (10 pct × $50,000 = $5,000).
(b) In 1972, the conversion of suspense preferences into actual items of tax preferences under section 58(g) (and this paragraph) and the imposition of the minimum tax on 1970 items of tax preference under section 56(b) (and § 1.56A-2) are determined as follows: Conversion of suspense preferences:
1970 Net Operating Loss
[In thousands of dollars]
U.S. taxable income | Foreign taxable income | U.S. deductions | Suspense preferences | Other foreign deductions
$25 | $105 | $40 | $80
1. U.S. deduction against U.S. income | Not applicable
2. Other foreign deductions against foreign income | (80) | (80)
3. Suspense preferences against foreign income | (25) | (25)
4. Suspense preference against U.S. income | 1 (15) | (15)
Balance | 10
1 Suspense preferences converted into actual items of tax preference.
Imposition of minimum tax on 1970 items of tax preference:
1970 Net Operating Loss
[In thousands of dollars]
1972 taxable income | Nonpreference portion | Preference portion | Suspense portion
$130 | $80 | $40
1. 1972 conversion of suspense preferences pursuant to sec. 58(g) | $25 | 15 | (40)
Adjusted NOL | 25 | 95
2. Nonpreference portion against taxable income | (25) | (25)
3. Preference portion against taxable income | 1 (95) | (95)
Balance | 10
1 Imposition of 1970 minimum tax (10 pct × $95,000 = $9,500).
(2) Per-country limitation—(i) In general. If a taxpayer is on the per-country foreign tax credit limitation for the taxable year, the amount by which the items of tax preference to which this section applies reduce the tax imposed by chapter 1 (other than the minimum tax under section 56) on income from sources within the United States is determined separately with respect to each foreign country or possession of the United States. Such determination is made in a manner consistent with subparagraph (1) of this paragraph as modified in subdivision (ii) of this subparagraph. In applying subparagraph (1)(i) of this paragraph to a taxpayer on the per-country limitation, if the total potential preference amounts (as defined in this subdivision (i)) exceed the taxpayer's taxable income from sources within the United States, then, for purposes of subparagraph (1)(i)(c) of this paragraph (relating to the U.S. taxable income limitation on the amount treated as a reduction of U.S. taxable income), the taxable income from sources within the United States which is reduced by potential preference amounts with respect to each foreign country or possession is an amount which bears the same relationship to such income as the potential preference amount with respect to such foreign country or possession bears to the total of the potential preference amounts with respect to all foreign countries and possessions. For purposes of this subparagraph, the potential preference amount with respect to a foreign country or possession is the lesser of the amount of foreign source preference (described in subparagraph (1)(i)(a) of this paragraph) attributable to such country or possession or the amount of foreign source loss (described in subparagraph (1)(i)(b) of this paragraph) attributable to such country or possession.
(ii) Net operating loss. Where there is an overall net operating loss for the taxable year and the total of the potential preference amounts with respect to all foreign countries and possessions exceeds the taxpayer's taxable income from sources within the United States, the amount of such excess is treated as “suspense preferences”. The suspense preferences are converted into actual items of tax preference, arising in the loss year and subject to the provisions of section 56, as the net operating loss is used in other taxable years, in the form of a net operating loss deduction under section 172, to offset taxable income from sources within the United States. Suspense preferences attributable to a foreign country or possession which, in other taxable years, reduce taxable income from sources within such country or possession or offset taxable income from sources within any other foreign country or possession lose their character as suspense preferences and, thus, are never converted into actual items of tax preference. The amount of the suspense preferences which are converted into actual items of tax preference is equal to that portion of the net operating loss attributable to the suspense preferences which offsets taxable income from sources within the United States in taxable years other than the loss year. The determination of the component parts of the net operating loss and the determination of the amount by which the portion of the net operating loss attributable to the suspense preferences offsets taxable income from sources within the United States is made on a year-by-year basis in the same order as the net operating loss is used in accordance with section 172(b). Such determination is made by applying deductions attributable to United States source income first against such income and applying deductions attributable to income from sources within a foreign country or possession of the United States first against income from sources within such country or possession and in accordance with the following principles:
(a) Deductions attributable to items or classes of gross income from sources within the United States offset taxable income from sources within the United States before any remaining deductions;
(b) Deductions attributable to items or classes of gross income from sources within any foreign country or possession of the United States which are not suspense preferences (referred to in this paragraph as “other foreign deductions”) offset taxable income from sources within such country or possession before any remaining deductions;
(c) Suspense preferences attributable to items or classes of gross income from sources within a foreign country or possession offset any remaining taxable income from sources within such foreign country or possession after application of (b) of this subdivision (ii) before any remaining deductions;
(d) Suspense preferences from each foreign country and possession (remaining after application of (c) of this subdivision (ii)) offset taxable income from sources within the Unted States (remaining after application of (a) of this subdivision (ii)) before other foreign deductions pro rata on the basis of the total of such suspense preferences;
(e) Other foreign deductions from each foreign country and possession (remaining after application of (b) of this subdivision (ii)) offset taxable income from sources within the United States (remaining after application (a) and (b) of this subdivision (ii)) pro rata on the basis of the total of such other foreign deductions;
(f) Deductions attributable to income from sources within the United States (remaining after application of (a) of this subdivision (ii)) offset taxable income from sources within any foreign country or possession before any foreign deductions;
(g) Other foreign deductions from each foreign country and possession (remaining after application of (b) and (e) of this subdivision (ii)) offset taxable income from sources within any other foreign countries or possessions (remaining after application of (f) of this subdivision (ii)) pro rata on the basis of the total of such other foreign deductions; and
(h) Suspense preferences (remaining after the application of (c) and (d) of this subdivision (ii)) offset taxable income from sources within any foreign country or possession (remaining after the application of paragraphs (f) and (g) of this subdivision (ii)) pro rata on the basis of the total of such suspense preferences.
For purposes of the above computations, taxable income is computed with the modifications specifed in section 172(b)(2) or section 172(c), whichever is applicable. However, the amount of suspense preferences which are converted into actual items of tax preference in accordance with the above principles is reduced to the extent the suspense preferences offset increases in taxable income from sources within the United States due to the modifications specified in section 172(b)(2) or section 172(c). For this purpose, suspense preferences are considered to offset an increase in taxable income due to section 172(b)(2) or section 172(c) modifications only after reducing taxable income computed before such modifications.
(iii) Examples. The principles of this subparagraph may be illustrated by the following examples in each of which the per-country foreign tax credit limitation is applicable. For purposes of these examples, personal deductions and exemptions are disregarded.
Example (1). The taxpayer has the following items of income and deduction for the taxable year 1971:
United States | France | Germany | United Kingdom
Gross income | $180,000 | $165,000 | $50,000 | $75,000
Deductions:
Preference | (45,000)
Other | (120,000) | (125,000) | (80,000) | (100,000)
Taxable income (or loss) | 60,000 | 40,000 | (30,000) | (70,000)
(a) Pursuant to subdivision (i) of this subparagraph, the potential preference amount in the case of the United Kingdom is the lesser of the preferences attributable to the United Kingdom ($45,000) or the excess of deductions over gross income from sources within the United Kingdom ($70,000) and the potential preference amounts in the case of France and Germany are zero in both cases since the preferences attributable to both countries are zero. Since the total potential preference amounts ($45,000) is less than the taxable income from sources within the United States ($60,000), no modification of U.S. taxable income is required. Thus, the amount by which the U.K. preferences reduce the tax on taxable income from sources within the United States, determined in a manner consistent with subparagraph (1)(i) of this paragraph, is the smallest of (1) the items of tax preference attributable to the United Kingdom ($45,000), (2) the excess of deductions over gross income attributable to the United Kingdom ($70,000), or (3) taxable income from sources within the United States ($60,000). The full $45,000 of U.K. preference items are, therefore, taken into account as items of tax preference in 1971 and subject to the minimum tax. Since there is no net operating loss, subdivision (ii) of this subparagraph does not apply.
(b) If the French taxable income is $15,000 instead of $40,000, a $25,000 net operating loss (on a worldwide basis) results. The determination of the foreign preference items taken into account pursuant to subdivision (i) of this subparagraph is the same as in (a) of this example. Subdivision (ii) of this subparagraph again does not apply since the total potential preference amounts ($45,000) is less than the U.S. taxable income ($60,000).
Example 2. For the taxable year 1972, the taxpayer has a net operating loss of $35,000 consisting of the following items of income and deduction:
United States | France | Germany | United Kingdom | Belgium
Gross income | $250,000 | $50,000 | $60,000 | $5,000 | $45,000
Deductions:
Preferences | (35,000) | (70,000) | (95,000)
Other | (100,000) | (75,000) | (30,000) | (40,000)
Taxable income (or loss) | 150,000 | (60,000) | (40,000) | (90,000) | 5,000
(a) Pursuant to subdivision (i) of this subparagraph the potential preference amount with respect to each country is the lesser of the amount shown as preferences with respect to such country or the amount of the loss from such country. Thus, the potential preference amounts in this case are:
France | $35,000
Germany | 40,000
United Kingdom | 90,000
Belgium | 0
Total | 165,000
Since the total of the potential preference amounts exceeds the U.S. taxable income, in applying the principles of subparagraph (1)(i) of this paragraph, U.S. taxable income which is reduced by potential preference amounts with respect to each country is a pro-rata amount based on the total potential preference amounts as follows:
France | (35,000 / 165,000 × $150,000)—$31,818
Germany | (40,000 / 165,000 × $150,000)—$36,364
United Kingdom | (90,000 / 165,000 × $150,000)—$81,818
Belgium | (0 / 165,000 × $150,000)—$0
Total | $150,000
The amount by which the foreign preference items offset U.S. taxable income pursuant to subdivision (i) of this subparagraph is then determined as follows:
(a) (b) (c) (d)
Preferences | Loss | U.S. taxable income | Smallest of (a), (b), or (c)
France | $35,000 | $60,000 | $81,818 | $31,818
Germany | 70,000 | 40,000 | 36,364 | 36,364
United Kingdom | 95,000 | 90,000 | 81,818 | 81,818
Belgium
Total | 150,000
Thus, $150,000 of the total foreign preference items will be taken into account pursuant to subdivision (i) of this subparagraph as items of tax preference in 1972 and subject to the provisions of section 56. (b) Pursuant to subdivision (ii) of this subparagraph, the 1972 net operating loss of $35,000 will consist of suspense preferences of $15,000 and other foreign deductions of $20,000 attributable to each foreign country as shown below and determined as follows:
Explanation | Deductions
United States | France | Germany | United Kingdom preferences | Belgium other
Preferences | Other | Preferences | Other
$100,000 | $35,000 | $75,000 | $70,000 | $30,000 | $95,000 | $40,000
1. U.S. deductions against U.S. income ($250,000) | (100,000)
2. Other foreign deductions against foreign income (per-country) 1 | (50,000) | (30,000) | (40,000)
3. Suspense preferences against remaining foreign income (per-country) | (30,000) | (5,000)
4. Suspense preferences against remaining U.S. income:
France (35,000 / 165,000 × $150,000) | (31,818)
Germany (40,000 / 165,000 × $150,000) | (36,364)
U.K. (90,000 / 165,000 × $150,000) | (81,818)
5. Other foreign deductions against remaining U.S. income (0) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
6. U.S. deductions against other foreign income | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
7. Other foreign deductions against remaining foreign income ($5,000) | (5,000)
8. Suspense preferences against remaining foreign income (0): | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
Balance (components of NOL) | 3,182 | 20,000 | 3,636 | 8,182
1 Foreign income amounts before step 2 are: France—$50,000; Germany—$60,000; United Kingdom—$5,000; Belgium—$45,000.
2 Not applicable.
Example 3. In 1973, the taxpayer has taxable income (computed without regard to the net operating loss deduction) from the following sources and in the following amounts:
United States | France | Germany | United Kingdom
$100,000 | $60,000 | $20,000 | $30,000
In addition, the taxpayer has a net operating loss deduction of $235,000 resulting from a 1972 net operating loss consisting of the following amounts:
Deductions attributable to income from sources within the United States | $25,000
Suspense preferences attributable to income from sources within France | $75,000
Deductions other than suspense preferences attributable to income from sources within France | $85,000
Deductions other than suspense preferences attributable to sources within the Netherlands | $50,000
(a) Pursuant to subdivision (ii) of this subparagraph, the converted suspense preferences and the remaining portions of the 1972 net operating loss carried over to 1974 are computed as follows:
[In thousands of dollars]
1973 income | 1972 net operating loss
United States | France | Germany | United Kingdom | United States | French suspense preferences | French other deductions | Dutch other deductions
100 | 60 | 20 | 30 | 25 | 75 | 85 | 50
U.S. deductions against U.S. income | (25) | (25)
Other foreign deductions against foreign income (per-country) | (60) | (60)
Suspense preferences against remaining foreign income (per-country) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
Suspense preferences against remaining U.S. income | ( 1 75) | (75)
Other foreign deductions against remaining U.S. income | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
U.S. deductions against remaining foreign income | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
Other foreign deductions against remaining foreign income:
French (25,000/75,000 × $50,000) | (16.7) | (16.7)
Dutch (50,000/75,000 × $50,000) | (33.3) | (33.3)
Suspense preferences against remaining foreign income | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2) | ( 2)
Balance (1972 carryover to 1974) | 8.3 | 16.7
1 Suspense preferences converted to actual items of tax preference.
2 Not applicable.
(b) If, in 1972, there had been no items of tax preference without regard to the suspense preferences, the conversion of the suspense preferences in 1973 would result in a 1972 minimum tax liability under section 56(a) of $4,500 (10 percent × ($75,000−$30,000)), all of which would have been deferred by reason of section 56(b). Further, by application of section 56(b) and § 1.56A-2, $20,000 of the $45,000 preference portion of the 1972 net operating loss would be treated as having reduced taxable income in 1973 resulting in the imposition in 1973 of $2,000 of the deferred 1972 minimum tax liability.
(3) Separate limitation under section 904(f). In the case of a taxpayer subject to the separate limitation on interest income under section 904(f), the provisions of this paragraph shall be applied in the same manner as in subparagraph (2) of this paragraph. If the taxpayer has elected the overall foreign tax credit limitation, subparagraph (2) of this paragraph shall be applied as if all income from sources within any foreign countries or possessions of the United States and deductions relating to income from such sources other than income or deductions subject to the separate limitation under section 904(f) were from a single foreign country.
(4) Carryover of excess taxes. For rules relating to carryover of excess taxes described in paragraph (1) of section 56(c) when suspense preferences are converted to actual items of tax preference, see § 1.56A-5(f).
(5) Character of amounts. Where the amounts from sources within a foreign country or possession of the United States (or all such countries or possessions in the case of a taxpayer who has elected the overall foreign tax credit limitation) which are treated as reducing chapter 1 tax on income from sources within the United States or as suspense preferences are less than the total items of tax preference described in subparagraph (1)(i)(a) of this paragraph attributable to such sources, the amounts so treated are considered derived proportionately from each such item of tax preference.
[T.D. 7564, 43 FR 40484, Sept. 12, 1978, as amended by T.D. 8138, 52 FR 15309, Apr. 28, 1987]
§ 1.58-8 Capital gains and stock options.
(a) In general. Section 58(g)(2) provides that the items of tax preference specified in section 57(a)(6), and § 1.57-1(b) (stock options), and section 57(a)(9), and § 1.57-1(i) (capital gains), which are attributable to sources within any foreign country or possession of the United States shall not be taken into account as items of tax preference if, under the tax laws of such country or possession, preferential treatment is not accorded:
(1) In the case of stock options, to the gain, profit, or other income realized from the transfer of shares of stock pursuant to the exercise of an option which is under United States tax law a qualified or restricted stock option (under section 422 or section 424); and
(2) In the case of capital gains, to gain from the sale or exchange of capital assets (or property treated as capital assets under United States tax law).
Where capital gains are not accorded preferential treatment within a foreign country, capital losses as well as capital gains from such country are not taken into account for purposes of the minimum tax.
(b) Source of capital gains and stock options. Generally, in determining whether the capital gain or stock option item of tax preference is attributable to sources within any foreign country or possession of the United States, the principles of sections 861-863 and the regulations thereunder are applied. Thus, the stock option item of tax preference, representing compensation for personal services, is attributable, in accordance with § 1.861-4, to sources within the country in which the personal services were performed. Where the capital gain item of tax preference represents gain from the purchase and sale of personal property, such gain is attributable, in accordance with § 1.861-7, entirely to sources within the country in which the property is sold. In accordance with paragraph (c) of § 1.861-7, in any case in which the sales transaction is arranged in a particular manner for the primary purpose of tax avoidance, all factors of the transaction, such as negotiations, the execution of the agreement, the location of the property, and the place of payment, will be considered, and the sale will be treated as having been consummated at the place where the substance of the sale occurred.
(c) Preferential treatment. For purposes of this section, gain, profit, or other income is accorded preferential treatment by a foreign country or possession of the United States if (1) recognition of the income, for foreign tax purposes, is deferred beyond the taxpayer's taxable year or comparable period for foreign tax purposes which coincides with the taxpayer's U.S. taxable year in cases where other items of profit, gain, or other income may not be deferred; (2) it is subject to tax at a lower effective rate (including no rate of tax) than other items of profit, gain, or other income, by means of a special rate of tax, artifical deductions, exemptions, exclusions, or similar reductions in the amount subject to tax; (3) it is subject to no significant amount of tax; or (4) the laws of the foreign country or possession by any other method provide tax treatment for such profit, gain, or other income more beneficial than the tax treatment otherwise accorded income by such country or possession. For the purpose of the preceding sentence, gain, profit, or other income is subject to no significant amount of tax if the amount of taxes imposed by the foreign country or possession of the United States is equal to less than 2.5 percent of the gross amount of such income.
(d) Examples. The principles of this section may be illustrated by the following examples:
Example 1.The Bahamas imposes no income tax on individuals or corporations, whether resident or nonresident. Since capital gains are subject to no tax in the Bahamas, capital gains are considered to be accorded preferential treatment and will be taken into account for purposes of the minimum tax.
Example 2.In France, except in certain cases involving the sale of large blocks of stock, a nonresident individual is not subject to tax on isolated capital gains transactions. Since such capital gains are not subject to tax in France, they are considered to be accorded preferential treatment irrespective of the treatment accorded other capital gains in France and such gains will be taken into account for purposes of the minimum tax.
Example 3.In Germany, in the case of the sale within 1 taxable year of 1 percent or more of the shares of a corporation in which an individual taxpayer is regarded as holding a substantial interest, the gains on the sale of the large block of stock will be taxed as extraordinary income at one-half the ordinary income tax rate. Since these gains are taxed as a reduced rate of tax in comparison to other income, they are considered to be accorded preferential treatment and will be taken into account for purposes of the minimum tax.
Example 4.In Belgium, gains derived by an individual in the course of regular speculative transactions are taxed as ordinary income, but with an upper limit of 30 percent. Rates of tax on individuals in Belgium range from approximately 30 percent to approximately 60 percent. Since the gains on speculative transactions are taxed at a maximum rate which is more beneficial then the rates accorded to other income, such gains are considered to be accorded preferential treatment and will be taken into account for purposes of the minimum tax.
Example 5.In France, gains derived by a company on the sale of fixed assets held for less than 2 years are treated as short-term gains. The excess of short-term gains in any fiscal year is taxed at the full company tax rate of 50 percent. However, this tax may be paid in equal portions over the 5 years immediately following the realization of such short-term gains. Since recognition of the short-term gains for tax purposes is subject to deferral over a 5-year period, such gains are considered to be accorded preferential treatment and will be taken into account for purposes of the minimum tax.
Example 6.Also in France, in the case of the sale or exchange by a company of depreciable assets and nondepreciable asset owned for at least 2 years, the excess of long-term capital gains over long-term capital losses in a fiscal year is subject to an immediate tax at the reduced rate of 10 percent. Such excess, reduced by the 10-percent tax, is carried in a special reserve account on the taxpayer's books. If the excess is reinvested in other fixed asset within a stated period, no further tax is due. If the amounts in the special reserve are distributed, they will be treated as ordinary income for the fiscal year in which the distribution is made. Since such gains (other than those distributed in the same fiscal year they are realized) are subject to deferral or a reduced rate of tax, they are (except to the extent distributed in the year of realization) considered to be accorded preferential treatment and are taken into account for purposes of the minimum tax.
Example 7.In Sweden, in the case of gains derived by an individual on the sale of shares or bonds held for 5 years or less, 25 percent of the gains are taxed if the holding period is 4 to 5 years, 50 percent of the gain is taxed if the holding period is 3 to 4 years, and 75 percent of the gain is taxed if the holding period is 2 to 3 years. The gain is fully taxable at ordinary income rates if held for less than 2 years. Thus, gains on shares or bonds held for 2 years or more are considered accorded preferential treatment in Sweden since they are either subject to exemption or treatment comparable to the U.S. capital gains deduction and are taxed at a reduced rate. Thus, such gains are taken into account for purposes of the minimum tax.
Example 8.Pursuant to Article XIV of the United States-United Kingdom Income Tax Convention, a resident of the United States is exempt from United Kingdom tax on most capital gains. Since such capital gains are exempt from United Kingdom taxation, they are considered to be accorded preferential treatment and are taken into account for purposes of the minimum tax.
Example 9.An individual resident of the United States, is desirous of selling his stock in a corporation listed on the New York Stock Exchange. He requests the stock certificates from his broker in the United States, travels to a foreign country, delivers the certificates to a broker in that country, and has the foreign broker execute the sale which takes place on the New York Stock Exchange. Since the sale was consummated in the United States, pursuant to paragraph (b) of this section and § 1.861-7, the resulting capital gain item of tax preference is attributable to sources within the United States.
Example 10.Two individuals, both residing in the United States, negotiate and reach agreement in New York City for the sale of stock of a closed corporation. Prior to the transfer of the stock, in order to avoid imposition of the minimum tax, both individuals travel to a foreign country which does not accord preferential treatment to capital gains, but imposes a 5-percent rate of income tax which would be fully creditable against U.S. tax under sections 901 and 904 if the capital gains were sourced in that country. The stock is actually transferred and consideration paid in the foreign country. Since the primary purpose of consummating the sale in the foreign country was the avoidance of tax, pursuant to paragraph (b) of this section, and § 1.861-7(c), the resulting capital gain item of tax preference will be considered attributable to sources within the country in which the substance of sale took place or, in this case, the United States.
[T.D. 7564, 43 FR 40492, Sept. 12, 1978]
§ 1.59-1 Optional 10-year writeoff of certain tax preferences.
(a) In general. Section 59(e) allows any qualified expenditure to which an election under section 59(e) applies to be deducted ratably over the 10-year period (3-year period in the case of circulation expenditures described in section 173) beginning with the taxable year in which the expenditure was made (or, in the case of intangible drilling and development costs deductible under section 263(c), over the 60-month period beginning with the month in which the expenditure was paid or incurred).
(b) Election—(1) Time and manner of election. An election under section 59(e) shall only be made by attaching a statement to the taxpayer's income tax return (or amended return) for the taxable year in which the amortization of the qualified expenditures subject to the section 59(e) election begins. The statement must be filed no later than the date prescribed by law for filing the taxpayer's original income tax return (including any extensions of time) for the taxable year in which the amortization of the qualified expenditures subject to the section 59(e) election begins. Additionally, the statement must include the following information—
(i) The taxpayer's name, address, and taxpayer identification number; and
(ii) The type and amount of qualified expenditures identified in section 59(e)(2) that the taxpayer elects to deduct ratably over the applicable period described in section 59(e)(1).
(2) Elected amount. A taxpayer may make an election under section 59(e) with respect to any portion of any qualified expenditure paid or incurred by the taxpayer in the taxable year to which the election applies. An election under section 59(e) must be for a specific dollar amount and the amount subject to an election under section 59(e) may not be made by reference to a formula. The amount elected under section 59(e) is properly chargeable to a capital account under section 1016(a)(20), relating to adjustments to basis of property.
(c) Revocation—(1) In general. An election under section 59(e) may be revoked only with the consent of the Commissioner. Such consent will only be granted in rare and unusual circumstances. The revocation, if granted, will be effective in the first taxable year in which the section 59(e) election was applicable. However, if the period of limitations for the first taxable year the section 59(e) election was applicable has expired, the revocation, if granted, will be effective in the earliest taxable year for which the period of limitations has not expired.
(2) Time and manner for requesting consent. A taxpayer requesting the Commissioner's consent to revoke a section 59(e) election must submit the request prior to the end of the taxable year the applicable amortization period described in section 59(e)(1) ends. The application for consent to revoke the election must be submitted to the Internal Revenue Service in the form of a letter ruling request.
(3) Information to be provided. A request to revoke a section 59(e) election must contain all of the information necessary to demonstrate the rare and unusual circumstances that would justify granting revocation.
(4) Treatment of unamortized costs. The unamortized balance of the qualified expenditures subject to the revoked section 59(e) election as of the first day of the taxable year the revocation is effective is deductible in the year the revocation is effective (subject to the requirements of any other provision under the Code, regulations, or any other published guidance) and the taxpayer will be required to amend any federal income tax returns affected by the revocation.
(d) Effective date. These regulations apply to a section 59(e) election made for a taxable year ending, or a request to revoke a section 59(e) election submitted, on or after December 22, 2004.
[T.D. 9168, 69 FR 76616, Dec. 22, 2004]
§ 1.59A-0 Table of contents.
This section contains a listing of the headings for §§ 1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7, 1.59A-8, 1.59A-9, and 1.59A-10.
§ 1.59A-1 Base erosion and anti-abuse tax.
(a) Purpose.
(b) Definitions.
(1) Aggregate group.
(2) Applicable section 38 credits.
(3) Applicable taxpayer.
(4) Bank.
(5) Base erosion and anti-abuse tax rate.
(6) Business interest expense.
(7) Deduction.
(8) Disallowed business interest expense carryforward.
(9) Domestic related business interest expense.
(10) Foreign person.
(11) Foreign related business interest expense.
(12) Foreign related party.
(13) Gross receipts.
(14) Member of an aggregate group.
(15) Registered securities dealer.
(16) Regular tax liability.
(17) Related party.
(i) In general.
(ii) 25-percent owner.
(iii) Application of section 318.
(18) TLAC long-term debt required amount.
(19) TLAC securities amount.
(20) TLAC security.
(21) Unrelated business interest expense.
§ 1.59A-2 Applicable taxpayer.
(a) Scope.
(b) Applicable taxpayer.
(c) Aggregation rules.
(1) In general.
(2) Aggregate group determined with respect to each taxpayer.
(i) In general.
(ii) Change in the composition of an aggregate group.
(3) Taxable year of members of an aggregate group.
(4) Periods before and after a corporation is a member of an aggregate group.
(i) In general.
(ii) Deemed taxable year-end.
(iii) Items allocable to deemed taxable years before and after deemed taxable year-end.
(5) Short taxable year.
(i) Short period of the taxpayer.
(A) In general.
(B) Determining the gross receipts and base erosion percentage of the aggregate group of a taxpayer for a short period.
(ii) Short period of a member of the taxpayer's aggregate group.
(A) Multiple taxable years of a member of the taxpayer's aggregate group comprised of more than 12 months.
(B) Short period or periods of a member of the taxpayer's aggregate group comprised of fewer than 12 months from change in taxable year.
(iii) Anti-abuse rule.
(6) Treatment of predecessors.
(i) In general.
(ii) No duplication.
(7) Partnerships.
(8) Transition rule for aggregate group members with different taxable years.
(9) Consolidated groups.
(d) Gross receipts test.
(1) Amount of gross receipts.
(2) Taxpayer not in existence for entire three-year period.
(3) Gross receipts of foreign corporations.
(4) Gross receipts of an insurance company.
(5) Reductions in gross receipts.
(e) Base erosion percentage test.
(1) In general.
(2) Base erosion percentage test for banks and registered securities dealers.
(i) In general.
(ii) Aggregate groups.
(iii) De minimis exception for banking and registered securities dealer activities.
(3) Computation of base erosion percentage.
(i) In general.
(ii) Certain items not taken into account in denominator.
(iii) Effect of treaties on base erosion percentage determination.
(iv) Amounts paid or accrued between members of a consolidated group.
(v) Deductions and base erosion tax benefits from partnerships.
(vi) Mark-to-market positions.
(vii) Reinsurance losses incurred and claims payments.
(viii) Certain payments that qualify for the effectively connected income exception and another base erosion payment exception.
(f) Examples.
(1) Example 1: Mark-to-market.
(i) Facts.
(ii) Analysis.
(2) Example 2: Member leaving an aggregate group.
(i) Facts.
(ii) Analysis.
§ 1.59A-3 Base erosion payments and base erosion tax benefits.
(a) Scope.
(b) Base erosion payments.
(1) In general.
(2) Operating rules.
(i) In general.
(ii) Amounts paid or accrued in cash and other consideration.
(iii) Transactions providing for net payments.
(iv) Amounts paid or accrued with respect to mark-to-market position.
(v) Coordination among categories of base erosion payments.
(vi) Certain domestic passthrough entities.
(A) In general.
(B) Amount of base erosion payment.
(C) Specified domestic passthrough.
(D) Specified foreign related party.
(vii) Transfers of property to related taxpayers.
(viii) Reductions to determine gross income.
(ix) Losses recognized on the sale or transfer of property.
(3) Exceptions to base erosion payment.
(i) Certain services cost method amounts.
(A) In general.
(B) Eligibility for the services cost method exception.
(C) Adequate books and records.
(D) Total services cost.
(ii) Qualified derivative payments.
(iii) Effectively connected income.
(A) In general.
(B) Application to certain treaty residents.
(C) Application to partnerships.
(iv) Exchange loss on a section 988 transaction.
(v) Amounts paid or accrued with respect to TLAC securities and foreign TLAC securities.
(A) In general.
(B) Limitation on exclusion for TLAC securities.
(C) Scaling ratio.
(D) Average domestic TLAC securities amount.
(E) Average TLAC long-term debt required amount.
(F) Limitation on exclusion for foreign TLAC securities.
(1) In general.
(2) Foreign TLAC long-term debt required amount.
(3) No specified minimum provided by local law.
(4) Foreign TLAC security.
(vi) Amounts paid or accrued in taxable years beginning before January 1, 2018.
(vii) Business interest carried forward from taxable years beginning before January 1, 2018.
(viii) Specified nonrecognition transactions.
(A) In general.
(B) Other property transferred to a foreign related party in a specified nonrecognition transaction.
(C) Other property received from a foreign related party in certain specified nonrecognition transactions.
(D) Definition of other property.
(E) Allocation of other property.
(ix) Reinsurance losses incurred and claims payments.
(A) In general.
(B) Regulated foreign insurance company.
(4) Rules for determining the amount of certain base erosion payments.
(i) Interest expense allocable to a foreign corporation's effectively connected income.
(A) Methods described in § 1.882-5.
(B) U.S.-booked liabilities determination.
(C) U.S.-booked liabilities in excess of U.S.-connected liabilities.
(D) Election to use financial statements.
(E) Coordination with certain tax treaties.
(1) In general.
(2) Hypothetical § 1.882-5 interest expense defined.
(3) Consistency requirement.
(F) Coordination with exception for foreign TLAC securities.
(ii) Other deductions allowed with respect to effectively connected income.
(iii) Depreciable property.
(iv) Coordination with ECI exception.
(v) Coordination with certain tax treaties.
(A) Allocable expenses.
(B) Internal dealings under certain income tax treaties.
(vi) Business interest expense arising in taxable years beginning after December 31, 2017.
(c) Base erosion tax benefit.
(1) In general.
(2) Exception to base erosion tax benefit.
(i) In general.
(ii) Branch-level interest tax.
(3) Effect of treaty on base erosion tax benefit.
(4) Application of section 163(j) to base erosion payments.
(i) Classification of payments or accruals of business interest expense based on the payee.
(A) Classification of payments or accruals of business interest expense of a corporation.
(B) Classification of payments or accruals of business interest expense by a partnership.
(C) Classification of payments or accruals of business interest expense paid or accrued to a foreign related party that is subject to an exception.
(1) ECI exception.
(2) TLAC interest and interest subject to withholding tax.
(ii) Ordering rules for business interest expense that is limited under section 163(j)(1) to determine which classifications of business interest expense are deducted and which classifications of business interest expense are carried forward.
(A) In general.
(B) Ordering rules for treating business interest expense deduction and disallowed business interest expense carryforwards as foreign related business interest expense, domestic related business interest expense, and unrelated business interest expense.
(1) General ordering rule for allocating business interest expense deduction between classifications.
(2) Ordering of business interest expense incurred by a corporation.
(3) Ordering of business interest expense incurred by a partnership and allocated to a corporate partner.
(5) Allowed deduction.
(6) Election to waive allowed deductions.
(i) In general.
(ii) Time and manner for election to waive deduction.
(A) In general.
(B) Information required to make the election to waive allowed deductions.
(iii) Effect of election to waive deduction.
(A) In general.
(1) Consistent treatment.
(2) No allocation and apportionment of waived deductions.
(3) Effect of waiver of deductions described in §§ 1.861-10 and 1.861-10T.
(4) Effect of the election to waive deductions on the stock basis of a consolidated group member.
(B) Effect of the election to waive deductions disregarded for certain purposes.
(C) Not a method of accounting.
(D) Effect of the election in determining section 481(a) adjustments.
(iv) Rules applicable to partners and partnerships.
(A) In general.
(B) Rule for determining the adjusted basis of a partner's interest in a partnership.
(C) Rule for applying section 163(j).
(D) Limited application of election to waive deductions with respect to adjustments made pursuant to audit procedures under sections 6221 through 6241.
(v) Rule applicable to premium and other consideration paid or accrued by the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A).
(d) Examples.
(1) Example 1: Determining a base erosion payment.
(i) Facts.
(ii) Analysis.
(2) Example 2: Interest allocable under § 1.882-5.
(i) Facts.
(ii) Analysis.
(3) Example 3: Interaction with section 163(j).
(i) Facts.
(ii) Analysis.
(A) Classification of business interest.
(B) Ordering rules for disallowed business interest expense carryforward.
(4) Example 4: Interaction with section 163(j); carryforward.
(i) Facts.
(ii) Analysis.
(A) Classification of business interest.
(B) Ordering rules for disallowed business interest expense carryforward.
(5) Example 5: Interaction with section 163(j); carryforward.
(i) Facts.
(ii) Analysis.
(6) Example 6: Interaction with section 163(j); partnership.
(i) Facts.
(ii) Partnership level analysis.
(iii) Partner level allocations analysis.
(iv) Partner level allocations for determining base erosion tax benefits.
(v) Computation of modified taxable income.
(7) Example 7: Transfers of property to related taxpayers.
(i) Facts.
(ii) Analysis.
(A) Year 1.
(B) Year 2.
(8) Example 8: Effect of election to waive deduction on method of accounting.
(i) Facts.
(ii) Analysis.
(9) Example 9: Change of accounting method when taxpayer has waived a deduction.
(i) Facts.
(ii) Analysis.
(A) Computation of the section 481(a) adjustment.
(B) Computation of basis adjustments.
§ 1.59A-4 Modified taxable income.
(a) Scope.
(b) Computation of modified taxable income.
(1) In general.
(2) Modifications to taxable income.
(i) Base erosion tax benefits.
(ii) Certain net operating loss deductions.
(3) Rule for holders of a residual interest in a REMIC.
(c) Examples.
(1) Example 1: Current year loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Net operating loss deduction.
(i) Facts.
(ii) Analysis.
§ 1.59A-5 Base erosion minimum tax amount.
(a) Scope.
(b) Base erosion minimum tax amount.
(1) In general.
(2) Calculation of base erosion minimum tax amount.
(3) Credits that do not reduce regular tax liability.
(i) Taxable years beginning on or before December 31, 2025.
(ii) Taxable years beginning after December 31, 2025.
(c) Base erosion and anti-abuse tax rate.
(1) In general.
(i) Calendar year 2018.
(ii) Calendar years 2019 through 2025.
(iii) Calendar years after 2025.
(2) Increased rate for banks and registered securities dealers.
(i) In general.
(ii) De minimis exception to increased rate for banks and registered securities dealers.
(3) Application of section 15 to tax rates in section 59A.
(i) New tax.
(ii) Change in tax rate pursuant to section 59A(b)(1)(A).
(iii) Change in rate pursuant to section 59A(b)(2).
§ 1.59A-6 Qualified derivative payment.
(a) Scope.
(b) Qualified derivative payment.
(1) In general.
(2) Reporting requirements.
(i) In general.
(ii) Failure to satisfy the reporting requirement.
(iii) Reporting of aggregate amount of qualified derivative payments.
(iv) Transition period for qualified derivative payment reporting.
(3) Amount of any qualified derivative payment.
(i) In general.
(ii) Net qualified derivative payment that includes a payment that is a base erosion payment.
(c) Exceptions for payments otherwise treated as base erosion payments.
(d) Derivative defined.
(1) In general.
(2) Exceptions.
(i) Direct interest.
(ii) Insurance contracts.
(iii) Securities lending and sale-repurchase transactions.
(A) Multi-step transactions treated as financing.
(B) Special rule for payments associated with the cash collateral provided in a securities lending transaction or substantially similar transaction.
(C) Anti-abuse exception for certain transactions that are the economic equivalent of substantially unsecured cash borrowing.
(3) American depository receipts.
(e) Examples.
(1) Example 1: Notional principal contract as QDP.
(i) Facts.
(ii) Analysis.
(2) Example 2: Securities lending anti-abuse rule.
(i) Facts.
(ii) Analysis.
§ 1.59A-7 Application of base erosion and anti-abuse tax to partnerships.
(a) Scope.
(b) Application of section 59A to partnerships.
(c) Base erosion payment.
(1) Payments made by or to a partnership.
(2) Transfers of certain property.
(3) Transfers of a partnership interest.
(i) In general.
(ii) Transfers of a partnership interest by a partner.
(iii) Certain issuances of a partnership interest by a partnership.
(iv) Partnership interest transfers defined.
(4) Increased basis from a distribution.
(5) Operating rules applicable to base erosion payments.
(i) Single payment characterized as separate transactions.
(ii) Ordering rule with respect to transfers of a partnership interest.
(iii) Consideration for base erosion payment or property resulting in base erosion tax benefits.
(iv) Non-cash consideration.
(v) Allocations of income in lieu of deductions.
(d) Base erosion tax benefit for partners.
(1) In general.
(2) Exception for base erosion tax benefits of certain small partners.
(i) In general.
(ii) Attribution.
(e) Other rules for applying section 59A to partnerships.
(1) Partner's distributive share.
(2) Gross receipts.
(i) In general.
(ii) Foreign corporation.
(3) Registered securities dealers.
(4) Application of sections 163(j) and 59A(c)(3) to partners.
(5) Tiered partnerships.
(f) Foreign related party.
(g) Examples.
(1) Facts.
(2) Examples.
(i) Example 1: Contributions to a partnership on partnership formation.
(A) Facts.
(B) Analysis.
(ii) Example 2: Section 704(c) and remedial allocations.
(A) Facts.
(B) Analysis.
(iii) Example 3: Sale of a partnership interest without a section 754 election.
(A) Facts.
(B) Analysis.
(iv) Example 4: Sale of a partnership interest with section 754 election.
(A) Facts.
(B) Analysis.
(v) Example 5: Purchase of depreciable property from a partnership.
(A) Facts.
(B) Analysis.
(vi) Example 6: Sale of a partnership interest to a second partnership.
(A) Facts.
(B) Analysis.
(vii) Example 7: Distribution of cash by a partnership to a foreign related party.
(A) Facts.
(B) Analysis.
(viii) Example 8: Distribution of property by a partnership to a taxpayer.
(A) Facts.
(B) Analysis.
(ix) Example 9: Distribution of property by a partnership in liquidation of a foreign related party's interest.
(A) Facts.
(B) Analysis.
(x) Example 10: Section 704(c) and curative allocations.
(A) Facts.
(B) Analysis.
§ 1.59A-8 [Reserved]. § 1.59A-9 Anti-abuse and recharacterization rules.
(a) Scope.
(b) Anti-abuse rules.
(1) Transactions involving unrelated persons, conduits, or intermediaries.
(2) Transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(3) Transactions to avoid the application of rules applicable to banks and registered securities dealers.
(4) Nonrecognition transactions.
(5) Transactions involving derivatives on a partnership interest.
(6) Allocations to eliminate or reduce a base erosion payment.
(c) Examples.
(1) Facts.
(2) Example 1: Substitution of payments that are not base erosion payments for payments that otherwise would be base erosion payments through a conduit or intermediary.
(i) Facts.
(ii) Analysis.
(3) Example 2: Alternative transaction to base erosion payment.
(i) Facts.
(ii) Analysis.
(4) Example 3: Alternative financing source.
(i) Facts.
(ii) Analysis.
(5) Example 4: Alternative financing source that is a conduit.
(i) Facts.
(ii) Analysis.
(6) Example 5: Intermediary acquisition.
(i) Facts.
(ii) Analysis.
(7) Example 6: Offsetting transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(i) Facts.
(ii) Analysis.
(8) Example 7: Ordinary course transactions that increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(i) Facts.
(ii) Analysis.
(9) Example 8: Transactions to avoid the application of rules applicable to banks and registered securities dealers.
(i) Facts.
(ii) Analysis.
(10) Example 9: Transactions that do not avoid the application of rules applicable to banks and registered securities dealers.
(i) Facts.
(ii) Analysis.
(11) Example 10: Acquisition of depreciable property in a nonrecognition transaction.
(i) Facts.
(ii) Analysis.
(12) Example 11: Transactions between related parties with a principal purpose of increasing the adjusted basis of property.
(i) Facts.
(ii) Analysis.
§ 1.59A-10 Applicability date.
(a) General applicability date.
(b) Exception.
This section contains a listing of the headings for §§ 1.59A-1, 1.59A-2, 1.59A-3, 1.59A-4, 1.59A-5, 1.59A-6, 1.59A-7, 1.59A-8, 1.59A-9, and 1.59A-10.
§ 1.59A-1 Base erosion and anti-abuse tax.
(a) Purpose.
(b) Definitions.
(1) Aggregate group.
(2) Applicable section 38 credits.
(3) Applicable taxpayer.
(4) Bank.
(5) Base erosion and anti-abuse tax rate.
(6) Business interest expense.
(7) Deduction.
(8) Disallowed business interest expense carryforward.
(9) Domestic related business interest expense.
(10) Foreign person.
(11) Foreign related business interest expense.
(12) Foreign related party.
(13) Gross receipts.
(14) Member of an aggregate group.
(15) Registered securities dealer.
(16) Regular tax liability.
(17) Related party.
(i) In general.
(ii) 25-percent owner.
(iii) Application of section 318.
(18) TLAC long-term debt required amount.
(19) TLAC securities amount.
(20) TLAC security.
(21) Unrelated business interest expense.
§ 1.59A-2 Applicable taxpayer.
(a) Scope.
(b) Applicable taxpayer.
(c) Aggregation rules.
(1) In general.
(2) Aggregate group determined with respect to each taxpayer.
(i) In general.
(ii) Change in the composition of an aggregate group.
(3) Taxable year of members of an aggregate group.
(4) Periods before and after a corporation is a member of an aggregate group.
(i) In general.
(ii) Deemed taxable year-end.
(iii) Items allocable to deemed taxable years before and after deemed taxable year-end.
(5) Short taxable year.
(i) Short period of the taxpayer.
(A) In general.
(B) Determining the gross receipts and base erosion percentage of the aggregate group of a taxpayer for a short period.
(ii) Short period of a member of the taxpayer's aggregate group.
(A) Multiple taxable years of a member of the taxpayer's aggregate group comprised of more than 12 months.
(B) Short period or periods of a member of the taxpayer's aggregate group comprised of fewer than 12 months from change in taxable year.
(iii) Anti-abuse rule.
(6) Treatment of predecessors.
(i) In general.
(ii) No duplication.
(7) Partnerships.
(8) Transition rule for aggregate group members with different taxable years.
(9) Consolidated groups.
(d) Gross receipts test.
(1) Amount of gross receipts.
(2) Taxpayer not in existence for entire three-year period.
(3) Gross receipts of foreign corporations.
(4) Gross receipts of an insurance company.
(5) Reductions in gross receipts.
(e) Base erosion percentage test.
(1) In general.
(2) Base erosion percentage test for banks and registered securities dealers.
(i) In general.
(ii) Aggregate groups.
(iii) De minimis exception for banking and registered securities dealer activities.
(3) Computation of base erosion percentage.
(i) In general.
(ii) Certain items not taken into account in denominator.
(iii) Effect of treaties on base erosion percentage determination.
(iv) Amounts paid or accrued between members of a consolidated group.
(v) Deductions and base erosion tax benefits from partnerships.
(vi) Mark-to-market positions.
(vii) Reinsurance losses incurred and claims payments.
(viii) Certain payments that qualify for the effectively connected income exception and another base erosion payment exception.
(f) Examples.
(1) Example 1: Mark-to-market.
(i) Facts.
(ii) Analysis.
(2) Example 2: Member leaving an aggregate group.
(i) Facts.
(ii) Analysis.
§ 1.59A-3 Base erosion payments and base erosion tax benefits.
(a) Scope.
(b) Base erosion payments.
(1) In general.
(2) Operating rules.
(i) In general.
(ii) Amounts paid or accrued in cash and other consideration.
(iii) Transactions providing for net payments.
(iv) Amounts paid or accrued with respect to mark-to-market position.
(v) Coordination among categories of base erosion payments.
(vi) Certain domestic passthrough entities.
(A) In general.
(B) Amount of base erosion payment.
(C) Specified domestic passthrough.
(D) Specified foreign related party.
(vii) Transfers of property to related taxpayers.
(viii) Reductions to determine gross income.
(ix) Losses recognized on the sale or transfer of property.
(3) Exceptions to base erosion payment.
(i) Certain services cost method amounts.
(A) In general.
(B) Eligibility for the services cost method exception.
(C) Adequate books and records.
(D) Total services cost.
(ii) Qualified derivative payments.
(iii) Effectively connected income.
(A) In general.
(B) Application to certain treaty residents.
(C) Application to partnerships.
(iv) Exchange loss on a section 988 transaction.
(v) Amounts paid or accrued with respect to TLAC securities and foreign TLAC securities.
(A) In general.
(B) Limitation on exclusion for TLAC securities.
(C) Scaling ratio.
(D) Average domestic TLAC securities amount.
(E) Average TLAC long-term debt required amount.
(F) Limitation on exclusion for foreign TLAC securities.
(1) In general.
(2) Foreign TLAC long-term debt required amount.
(3) No specified minimum provided by local law.
(4) Foreign TLAC security.
(vi) Amounts paid or accrued in taxable years beginning before January 1, 2018.
(vii) Business interest carried forward from taxable years beginning before January 1, 2018.
(viii) Specified nonrecognition transactions.
(A) In general.
(B) Other property transferred to a foreign related party in a specified nonrecognition transaction.
(C) Other property received from a foreign related party in certain specified nonrecognition transactions.
(D) Definition of other property.
(E) Allocation of other property.
(ix) Reinsurance losses incurred and claims payments.
(A) In general.
(B) Regulated foreign insurance company.
(4) Rules for determining the amount of certain base erosion payments.
(i) Interest expense allocable to a foreign corporation's effectively connected income.
(A) Methods described in § 1.882-5.
(B) U.S.-booked liabilities determination.
(C) U.S.-booked liabilities in excess of U.S.-connected liabilities.
(D) Election to use financial statements.
(E) Coordination with certain tax treaties.
(1) In general.
(2) Hypothetical § 1.882-5 interest expense defined.
(3) Consistency requirement.
(F) Coordination with exception for foreign TLAC securities.
(ii) Other deductions allowed with respect to effectively connected income.
(iii) Depreciable property.
(iv) Coordination with ECI exception.
(v) Coordination with certain tax treaties.
(A) Allocable expenses.
(B) Internal dealings under certain income tax treaties.
(vi) Business interest expense arising in taxable years beginning after December 31, 2017.
(c) Base erosion tax benefit.
(1) In general.
(2) Exception to base erosion tax benefit.
(i) In general.
(ii) Branch-level interest tax.
(3) Effect of treaty on base erosion tax benefit.
(4) Application of section 163(j) to base erosion payments.
(i) Classification of payments or accruals of business interest expense based on the payee.
(A) Classification of payments or accruals of business interest expense of a corporation.
(B) Classification of payments or accruals of business interest expense by a partnership.
(C) Classification of payments or accruals of business interest expense paid or accrued to a foreign related party that is subject to an exception.
(1) ECI exception.
(2) TLAC interest and interest subject to withholding tax.
(ii) Ordering rules for business interest expense that is limited under section 163(j)(1) to determine which classifications of business interest expense are deducted and which classifications of business interest expense are carried forward.
(A) In general.
(B) Ordering rules for treating business interest expense deduction and disallowed business interest expense carryforwards as foreign related business interest expense, domestic related business interest expense, and unrelated business interest expense.
(1) General ordering rule for allocating business interest expense deduction between classifications.
(2) Ordering of business interest expense incurred by a corporation.
(3) Ordering of business interest expense incurred by a partnership and allocated to a corporate partner.
(5) Allowed deduction.
(6) Election to waive allowed deductions.
(i) In general.
(ii) Time and manner for election to waive deduction.
(A) In general.
(B) Information required to make the election to waive allowed deductions.
(iii) Effect of election to waive deduction.
(A) In general.
(1) Consistent treatment.
(2) No allocation and apportionment of waived deductions.
(3) Effect of waiver of deductions described in §§ 1.861-10 and 1.861-10T.
(4) Effect of the election to waive deductions on the stock basis of a consolidated group member.
(B) Effect of the election to waive deductions disregarded for certain purposes.
(C) Not a method of accounting.
(D) Effect of the election in determining section 481(a) adjustments.
(iv) Rules applicable to partners and partnerships.
(A) In general.
(B) Rule for determining the adjusted basis of a partner's interest in a partnership.
(C) Rule for applying section 163(j).
(D) Limited application of election to waive deductions with respect to adjustments made pursuant to audit procedures under sections 6221 through 6241.
(v) Rule applicable to premium and other consideration paid or accrued by the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A).
(d) Examples.
(1) Example 1: Determining a base erosion payment.
(i) Facts.
(ii) Analysis.
(2) Example 2: Interest allocable under § 1.882-5.
(i) Facts.
(ii) Analysis.
(3) Example 3: Interaction with section 163(j).
(i) Facts.
(ii) Analysis.
(A) Classification of business interest.
(B) Ordering rules for disallowed business interest expense carryforward.
(4) Example 4: Interaction with section 163(j); carryforward.
(i) Facts.
(ii) Analysis.
(A) Classification of business interest.
(B) Ordering rules for disallowed business interest expense carryforward.
(5) Example 5: Interaction with section 163(j); carryforward.
(i) Facts.
(ii) Analysis.
(6) Example 6: Interaction with section 163(j); partnership.
(i) Facts.
(ii) Partnership level analysis.
(iii) Partner level allocations analysis.
(iv) Partner level allocations for determining base erosion tax benefits.
(v) Computation of modified taxable income.
(7) Example 7: Transfers of property to related taxpayers.
(i) Facts.
(ii) Analysis.
(A) Year 1.
(B) Year 2.
(8) Example 8: Effect of election to waive deduction on method of accounting.
(i) Facts.
(ii) Analysis.
(9) Example 9: Change of accounting method when taxpayer has waived a deduction.
(i) Facts.
(ii) Analysis.
(A) Computation of the section 481(a) adjustment.
(B) Computation of basis adjustments.
§ 1.59A-4 Modified taxable income.
(a) Scope.
(b) Computation of modified taxable income.
(1) In general.
(2) Modifications to taxable income.
(i) Base erosion tax benefits.
(ii) Certain net operating loss deductions.
(3) Rule for holders of a residual interest in a REMIC.
(c) Examples.
(1) Example 1: Current year loss.
(i) Facts.
(ii) Analysis.
(2) Example 2: Net operating loss deduction.
(i) Facts.
(ii) Analysis.
§ 1.59A-5 Base erosion minimum tax amount.
(a) Scope.
(b) Base erosion minimum tax amount.
(1) In general.
(2) Calculation of base erosion minimum tax amount.
(3) Credits that do not reduce regular tax liability.
(i) Taxable years beginning on or before December 31, 2025.
(ii) Taxable years beginning after December 31, 2025.
(c) Base erosion and anti-abuse tax rate.
(1) In general.
(i) Calendar year 2018.
(ii) Calendar years 2019 through 2025.
(iii) Calendar years after 2025.
(2) Increased rate for banks and registered securities dealers.
(i) In general.
(ii) De minimis exception to increased rate for banks and registered securities dealers.
(3) Application of section 15 to tax rates in section 59A.
(i) New tax.
(ii) Change in tax rate pursuant to section 59A(b)(1)(A).
(iii) Change in rate pursuant to section 59A(b)(2).
§ 1.59A-6 Qualified derivative payment.
(a) Scope.
(b) Qualified derivative payment.
(1) In general.
(2) Reporting requirements.
(i) In general.
(ii) Failure to satisfy the reporting requirement.
(iii) Reporting of aggregate amount of qualified derivative payments.
(iv) Transition period for qualified derivative payment reporting.
(3) Amount of any qualified derivative payment.
(i) In general.
(ii) Net qualified derivative payment that includes a payment that is a base erosion payment.
(c) Exceptions for payments otherwise treated as base erosion payments.
(d) Derivative defined.
(1) In general.
(2) Exceptions.
(i) Direct interest.
(ii) Insurance contracts.
(iii) Securities lending and sale-repurchase transactions.
(A) Multi-step transactions treated as financing.
(B) Special rule for payments associated with the cash collateral provided in a securities lending transaction or substantially similar transaction.
(C) Anti-abuse exception for certain transactions that are the economic equivalent of substantially unsecured cash borrowing.
(3) American depository receipts.
(e) Examples.
(1) Example 1: Notional principal contract as QDP.
(i) Facts.
(ii) Analysis.
(2) Example 2: Securities lending anti-abuse rule.
(i) Facts.
(ii) Analysis.
§ 1.59A-7 Application of base erosion and anti-abuse tax to partnerships.
(a) Scope.
(b) Application of section 59A to partnerships.
(c) Base erosion payment.
(1) Payments made by or to a partnership.
(2) Transfers of certain property.
(3) Transfers of a partnership interest.
(i) In general.
(ii) Transfers of a partnership interest by a partner.
(iii) Certain issuances of a partnership interest by a partnership.
(iv) Partnership interest transfers defined.
(4) Increased basis from a distribution.
(5) Operating rules applicable to base erosion payments.
(i) Single payment characterized as separate transactions.
(ii) Ordering rule with respect to transfers of a partnership interest.
(iii) Consideration for base erosion payment or property resulting in base erosion tax benefits.
(iv) Non-cash consideration.
(v) Allocations of income in lieu of deductions.
(d) Base erosion tax benefit for partners.
(1) In general.
(2) Exception for base erosion tax benefits of certain small partners.
(i) In general.
(ii) Attribution.
(e) Other rules for applying section 59A to partnerships.
(1) Partner's distributive share.
(2) Gross receipts.
(i) In general.
(ii) Foreign corporation.
(3) Registered securities dealers.
(4) Application of sections 163(j) and 59A(c)(3) to partners.
(5) Tiered partnerships.
(f) Foreign related party.
(g) Examples.
(1) Facts.
(2) Examples.
(i) Example 1: Contributions to a partnership on partnership formation.
(A) Facts.
(B) Analysis.
(ii) Example 2: Section 704(c) and remedial allocations.
(A) Facts.
(B) Analysis.
(iii) Example 3: Sale of a partnership interest without a section 754 election.
(A) Facts.
(B) Analysis.
(iv) Example 4: Sale of a partnership interest with section 754 election.
(A) Facts.
(B) Analysis.
(v) Example 5: Purchase of depreciable property from a partnership.
(A) Facts.
(B) Analysis.
(vi) Example 6: Sale of a partnership interest to a second partnership.
(A) Facts.
(B) Analysis.
(vii) Example 7: Distribution of cash by a partnership to a foreign related party.
(A) Facts.
(B) Analysis.
(viii) Example 8: Distribution of property by a partnership to a taxpayer.
(A) Facts.
(B) Analysis.
(ix) Example 9: Distribution of property by a partnership in liquidation of a foreign related party's interest.
(A) Facts.
(B) Analysis.
(x) Example 10: Section 704(c) and curative allocations.
(A) Facts.
(B) Analysis.
§ 1.59A-8 [Reserved]. § 1.59A-9 Anti-abuse and recharacterization rules.
(a) Scope.
(b) Anti-abuse rules.
(1) Transactions involving unrelated persons, conduits, or intermediaries.
(2) Transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(3) Transactions to avoid the application of rules applicable to banks and registered securities dealers.
(4) Nonrecognition transactions.
(5) Transactions involving derivatives on a partnership interest.
(6) Allocations to eliminate or reduce a base erosion payment.
(c) Examples.
(1) Facts.
(2) Example 1: Substitution of payments that are not base erosion payments for payments that otherwise would be base erosion payments through a conduit or intermediary.
(i) Facts.
(ii) Analysis.
(3) Example 2: Alternative transaction to base erosion payment.
(i) Facts.
(ii) Analysis.
(4) Example 3: Alternative financing source.
(i) Facts.
(ii) Analysis.
(5) Example 4: Alternative financing source that is a conduit.
(i) Facts.
(ii) Analysis.
(6) Example 5: Intermediary acquisition.
(i) Facts.
(ii) Analysis.
(7) Example 6: Offsetting transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(i) Facts.
(ii) Analysis.
(8) Example 7: Ordinary course transactions that increase the amount of deductions taken into account in the denominator of the base erosion percentage computation.
(i) Facts.
(ii) Analysis.
(9) Example 8: Transactions to avoid the application of rules applicable to banks and registered securities dealers.
(i) Facts.
(ii) Analysis.
(10) Example 9: Transactions that do not avoid the application of rules applicable to banks and registered securities dealers.
(i) Facts.
(ii) Analysis.
(11) Example 10: Acquisition of depreciable property in a nonrecognition transaction.
(i) Facts.
(ii) Analysis.
(12) Example 11: Transactions between related parties with a principal purpose of increasing the adjusted basis of property.
(i) Facts.
(ii) Analysis.
§ 1.59A-10 Applicability date.
(a) General applicability date.
(b) Exception.
[T.D. 9910, 85 FR 64340, Oct. 9, 2020]
§ 1.59A-1 Base erosion and anti-abuse tax.
(a) Purpose. This section and §§ 1.59A-2 through 1.59A-10 (collectively, the “section 59A regulations”) provide rules under section 59A to determine the amount of the base erosion and anti-abuse tax. Paragraph (b) of this section provides definitions applicable to the section 59A regulations. Section 1.59A-2 provides rules regarding how to determine whether a taxpayer is an applicable taxpayer. Section 1.59A-3 provides rules regarding base erosion payments and base erosion tax benefits. Section 1.59A-4 provides rules for calculating modified taxable income. Section 1.59A-5 provides rules for calculating the base erosion minimum tax amount. Section 1.59A-6 provides rules relating to qualified derivative payments. Section 1.59A-7 provides rules regarding the application of section 59A to partnerships. Section 1.59A-8 is reserved for rules regarding the application of section 59A to certain expatriated entities. Section 1.59A-9 provides anti-abuse rules to prevent avoidance of section 59A. Finally, § 1.59A-10 provides the applicability date for the section 59A regulations.
(b) Definitions. For purposes of this section and §§ 1.59A-2 through 1.59A-10, the following terms have the meanings provided in this paragraph (b).
(1) Aggregate group. The term aggregate group means the group of corporations determined by—
(i) Identifying a controlled group of corporations as defined in section 1563(a), except that the phrase “more than 50 percent” is substituted for “at least 80 percent” each place it appears in section 1563(a)(1) and the determination is made without regard to sections 1563(a)(4) and (e)(3)(C), and
(ii) Once the controlled group of corporations is determined, excluding foreign corporations except with regard to income that is, or is treated as, effectively connected with the conduct of a trade or business in the United States under an applicable provision of the Internal Revenue Code or regulations published under 26 CFR chapter I. Notwithstanding the foregoing, if a foreign corporation is subject to tax on a net basis pursuant to an applicable income tax treaty of the United States, it is excluded from the controlled group of corporations except with regard to income taken into account in determining its net taxable income.
(2) Applicable section 38 credits. The term applicable section 38 credits means the credits allowed under section 38 for the taxable year that are properly allocable to—
(i) The low-income housing credit determined under section 42(a),
(ii) The renewable electricity production credit determined under section 45(a), and
(iii) The investment credit determined under section 46, but only to the extent properly allocable to the energy credit determined under section 48.
(3) Applicable taxpayer. The term applicable taxpayer means a taxpayer that meets the requirements set forth in § 1.59A-2(b).
(4) Bank. The term bank has the meaning provided in section 581.
(5) Base erosion and anti-abuse tax rate. The term base erosion and anti-abuse tax rate means the percentage that the taxpayer applies to its modified taxable income for the taxable year to calculate its base erosion minimum tax amount. See § 1.59A-5(c) for the base erosion and anti-abuse tax rate applicable for the relevant taxable year.
(6) Business interest expense. The term business interest expense, with respect to a taxpayer and a taxable year, has the meaning provided in § 1.163(j)-1(b)(3).
(7) Deduction. The term deduction means any deduction allowable under chapter 1 of subtitle A of the Internal Revenue Code.
(8) Disallowed business interest expense carryforward. The term disallowed business interest expense carryforward has the meaning provided in § 1.163(j)-1(b)(11).
(9) Domestic related business interest expense. The term domestic related business interest expense for any taxable year is the taxpayer's business interest expense paid or accrued to a related party that is not a foreign related party.
(10) Foreign person. The term foreign person means any person who is not a United States person. For purposes of the preceding sentence, a United States person has the meaning provided in section 7701(a)(30), except that any individual who is a citizen of any possession of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States is not a United States person. See § 1.59A-7(b) for rules applicable to partnerships.
(11) Foreign related business interest expense. The term foreign related business interest expense for any taxable year is the taxpayer's business interest expense paid or accrued to a foreign related party.
(12) Foreign related party. The term foreign related party means a foreign person, as defined in paragraph (b)(10) of this section, that is a related party, as defined in paragraph (b)(17) of this section, with respect to the taxpayer. In addition, for purposes of § 1.59A-3(b)(4)(v)(B) (relating to internal dealings under certain income tax treaties), a foreign related party also includes the foreign corporation's home office or a foreign branch of the foreign corporation. See § 1.59A-7(b), (c), and (f) for rules applicable to partnerships.
(13) Gross receipts. The term gross receipts has the meaning provided in § 1.448-1T(f)(2)(iv).
(14) Member of an aggregate group. The term member of an aggregate group means a corporation that is included in an aggregate group, as defined in paragraph (b)(1) of this section.
(15) Registered securities dealer. The term registered securities dealer means any dealer as defined in section 3(a)(5) of the Securities Exchange Act of 1934 that is registered, or required to be registered, under section 15 of the Securities Exchange Act of 1934.
(16) Regular tax liability. The term regular tax liability has the meaning provided in section 26(b).
(17) Related party—(i) In general. A related party, with respect to an applicable taxpayer, is—
(A) Any 25-percent owner of the taxpayer;
(B) Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the taxpayer or any 25-percent owner of the taxpayer; or
(C) A controlled taxpayer within the meaning of § 1.482-1(i)(5) together with, or with respect to, the taxpayer.
(ii) 25-percent owner. With respect to any corporation, a 25-percent owner means any person who owns at least 25 percent of—
(A) The total voting power of all classes of stock of the corporation entitled to vote; or
(B) The total value of all classes of stock of the corporation.
(iii) Application of section 318. Section 318 applies for purposes of paragraphs (b)(17)(i) and (ii) of this section, except that—
(A) “10 percent” is substituted for “50 percent” in section 318(a)(2)(C); and
(B) Section 318(a)(3)(A) through (C) are not applied so as to consider a United States person as owning stock that is owned by a person who is not a United States person.
(18) TLAC long-term debt required amount. The term TLAC long-term debt required amount means the specified minimum amount of debt that is required pursuant to 12 CFR 252.162(a).
(19) TLAC securities amount. The term TLAC securities amount is the sum of the adjusted issue prices (as determined for purposes of § 1.1275-1(b)) of all TLAC securities issued and outstanding by the taxpayer, without regard to whether interest thereunder would be a base erosion payment absent § 1.59A-3(b)(3)(v).
(20) TLAC security. The term TLAC security means an eligible internal debt security, as defined in 12 CFR 252.161.
(21) Unrelated business interest expense. The term unrelated business interest expense for any taxable year is the taxpayer's business interest expense paid or accrued to a party that is not a related party.
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended by T.D. 9910, 85 FR 64363, Oct. 9, 2020]
§ 1.59A-2 Applicable taxpayer.
(a) Scope. This section provides rules for determining whether a taxpayer is an applicable taxpayer. Paragraph (b) of this section defines an applicable taxpayer. Paragraph (c) of this section provides rules for determining whether a taxpayer is an applicable taxpayer by reference to the aggregate group of which the taxpayer is a member. Paragraph (d) of this section provides rules regarding the gross receipts test. Paragraph (e) of this section provides rules regarding the base erosion percentage test. Paragraph (f) of this section provides examples illustrating the rules of this section.
(b) Applicable taxpayer. For purposes of section 59A, a taxpayer is an applicable taxpayer with respect to any taxable year if the taxpayer—
(1) Is a corporation, but not a regulated investment company, a real estate investment trust, or an S corporation;
(2) Satisfies the gross receipts test of paragraph (d) of this section; and
(3) Satisfies the base erosion percentage test of paragraph (e) of this section.
(c) Aggregation rules—(1) In general. Solely for purposes of this section and § 1.59A-4, a taxpayer that is a member of an aggregate group determines its gross receipts and its base erosion percentage on the basis of the aggregate group. For these purposes, transactions that occur between members of the taxpayer's aggregate group that were members of the aggregate group as of the time of the transaction are not taken into account. In the case of a foreign corporation that is a member of an aggregate group, only transactions that occur between members of the aggregate group and that relate to income effectively connected with, or treated as effectively connected with, the conduct of a trade or business in the United States are not taken into account for this purpose. In the case of a foreign corporation that is a member of an aggregate group and that is subject to tax on a net basis pursuant to an applicable income tax treaty of the United States, only transactions that occur between members of the aggregate group and that relate to income that is taken into account in determining its net taxable income are not taken into account for this purpose. For purposes of this paragraph (c)(1), each payment or accrual is treated as a separate transaction.
(2) Aggregate group determined with respect to each taxpayer—(i) In general. Solely for purposes of this section, an aggregate group is determined with respect to each taxpayer. As a result, the aggregate group of one taxpayer may be different than the aggregate group of another member of the taxpayer's aggregate group.
(ii) Change in the composition of an aggregate group. A change in ownership of the taxpayer (for example, a sale of the taxpayer to a third party) does not cause the taxpayer to leave its own aggregate group. Instead, any members of the taxpayer's aggregate group before the change in ownership that are no longer members following the change in ownership are treated as having left the taxpayer's aggregate group, and any new members that become members of the taxpayer's aggregate group following the change in ownership are treated as having joined the taxpayer's aggregate group. A change in ownership of another member of the aggregate group of the taxpayer (for example, a sale of the member to a third party) may result in the member joining or leaving the aggregate group of the taxpayer. See paragraph (c)(4) of this section for the treatment of members joining or leaving the aggregate group of a taxpayer.
(3) Taxable year of members of an aggregate group. Solely for purposes of this section, a taxpayer that is a member of an aggregate group measures the gross receipts and base erosion percentage of the aggregate group for a taxable year by reference to the taxpayer's gross receipts, base erosion tax benefits, and deductions for the taxable year and the gross receipts, base erosion tax benefits, and deductions of each member of the aggregate group for the taxable year of the member that ends with or within the taxpayer's taxable year.
(4) Periods before and after a corporation is a member of an aggregate group—(i) In general. Solely for purposes of this section, to determine the gross receipts and the base erosion percentage of the aggregate group of a taxpayer, the taxpayer takes into account only the portion of another corporation's taxable year during which the corporation is a member of the aggregate group of the taxpayer. The gross receipts, base erosion tax benefits, and deductions of a corporation that are properly included in the gross receipts and base erosion percentage of the aggregate group of a taxpayer are not reduced as a result of the member leaving the aggregate group of the taxpayer.
(ii) Deemed taxable year-end. Solely for purposes of this paragraph (c), if a corporation leaves or joins the aggregate group of a taxpayer, the corporation is treated as ceasing to be a member of the aggregate group at the time of its taxable year-end, or becoming a member of the aggregate group immediately after the time of its taxable year-end, resulting from the transaction. For purposes of this paragraph (c), if a corporation joins or leaves an aggregate group in a transaction that does not result in the corporation having a taxable year-end, the corporation is treated as having a taxable year-end (“deemed taxable year-end”) at the end of the day on which the transaction occurs.
(iii) Items allocable to deemed taxable years before and after deemed taxable year-end. Solely for purposes of this paragraph (c), a corporation that has a deemed taxable year-end determines gross receipts, base erosion tax benefits, and deductions attributable to the deemed taxable year ending upon, or beginning immediately after, the deemed taxable year-end by either treating the corporation's books as closing (“deemed closing of the books”) at the deemed taxable year-end or, in the case of items other than extraordinary items, allocating those items on a pro-rata basis without a closing of the books. Extraordinary items are allocated to the deemed taxable year ending upon, or beginning immediately after, the deemed taxable year-end based on the day that they are taken into account. For purposes of applying this paragraph (c)(4)(iii), extraordinary items that are attributable to a transaction that occurs during the portion of the corporation's day after the event resulting in the corporation joining or leaving the aggregate group are treated as taken into account at the beginning of the following day. Additionally, for purposes of applying this paragraph (c)(4)(iii), “extraordinary items” include the items enumerated in § 1.1502-76(b)(2)(ii)(C) as well as any other payment not made in the ordinary course of business that would be treated as a base erosion payment.
(5) Short taxable year—(i) Short period of the taxpayer—(A) In general. Solely for purposes of this section, if a taxpayer has a taxable year of fewer than 12 months (a short period), the gross receipts, base erosion tax benefits, and deductions of the taxpayer are annualized by multiplying the total amount for the short period by 365 and dividing the result by the number of days in the short period.
(B) Determining the gross receipts and base erosion percentage of the aggregate group of a taxpayer for a short period. When a taxpayer has a taxable year that is a short period and a member of the taxpayer's aggregate group does not have a taxable year that ends with or within the taxpayer's taxable year as a result of the taxpayer's short period, the taxpayer must use a reasonable approach to determine the gross receipts and base erosion percentage of its aggregate group for the short period. A reasonable approach should neither over-count nor under-count the gross receipts, base erosion tax benefits, and deductions of the aggregate group of the taxpayer. A reasonable approach does not include an approach that does not take into account the gross receipts, base erosion tax benefits, or deductions of the member. The taxpayer must consistently apply the reasonable approach. Examples of a reasonable approach may include an approach that takes into account 12 months of gross receipts, base erosion tax benefits, and deductions of the member by reference to—
(1) The 12-month period ending on the last day of the short period;
(2) The member's taxable year that ends nearest to the last day of the short period or that begins nearest to the first day of the short period; or
(3) An average of the two taxable years of the member ending before and after the short period.
(ii) Short period of a member of the taxpayer's aggregate group—(A) Multiple taxable years of a member of the taxpayer's aggregate group comprised of more than 12 months. If a member of a taxpayer's aggregate group has more than one taxable year ending with or within the taxpayer's taxable year, and the member's taxable years ending with or within the taxpayer's taxable year are comprised of more than 12 months in total, then the aggregate group member's gross receipts, base erosion tax benefits, and deductions are annualized for purposes of determining the gross receipts and base erosion percentage of the taxpayer's aggregate group. The aggregate group member's gross receipts, base erosion tax benefits, and deductions are annualized by multiplying the total amount for the member's taxable years by 365 and dividing the result by the total number of days in the multiple taxable years.
(B) Short period or periods of a member of the taxpayer's aggregate group comprised of fewer than 12 months from change in taxable year. If, as a result of a member of a taxpayer's aggregate group changing its taxable year-end (other than as a result of the application of § 1.1502-76(a)), the member's taxable year or years ending with or within the taxpayer's taxable year are comprised of fewer than 12 months in total, then the aggregate group member's gross receipts, base erosion tax benefits, and deductions are annualized for purposes of determining the gross receipts and base erosion percentage of the taxpayer's aggregate group. The aggregate group member's gross receipts, base erosion tax benefits, and deductions are annualized by multiplying the total amount for the member's taxable year or years by 365 and dividing the result by the total number of days in the taxable year or years.
(iii) Anti-abuse rule. If a taxpayer or a member of a taxpayer's aggregate group enters into a transaction (or series of transactions), plan, or arrangement with another corporation that is a member of the aggregate group or a foreign related party that has a principal purpose of changing the period taken into account under the gross receipts test or the base erosion percentage test to avoid applicable taxpayer status under paragraph (b) of this section, then the gross receipts test or base erosion percentage test, respectively, applies as if that transaction (or series of transactions), plan, or arrangement had not occurred.
(6) Treatment of predecessors—(i) In general. Solely for purposes of this section, in determining gross receipts under paragraph (d) of this section, any reference to a taxpayer includes a reference to any predecessor of the taxpayer. For this purpose, a predecessor is the distributor or transferor corporation in a transaction described in section 381(a) in which the taxpayer is the acquiring corporation. For purposes of determining the gross receipts of a predecessor that are taken into account by a taxpayer, the operating rules set forth in this paragraph (c) and in paragraph (d) of this section are applied to the same extent they were applied to the predecessor.
(ii) No duplication. If the taxpayer or any member of its aggregate group is also a predecessor of the taxpayer or any member of its aggregate group, the gross receipts of each member are taken into account only once.
(7) Partnerships. For the treatment of partnerships for purposes of determining gross receipts and base erosion tax benefits, see § 1.59A-7(e)(2) and (d), respectively.
(8) Transition rule for aggregate group members with different taxable years. If the taxpayer has a different taxable year than another member of the taxpayer's aggregate group (other member), and the other member is eligible for the exception in § 1.59A-3(b)(3)(vi) (amounts paid or accrued in taxable years beginning before January 1, 2018) with respect to a taxable year ending with or within the taxpayer's taxable year (“excepted taxable year”), the excepted taxable year of the other member is not taken into account for purposes of paragraph (e) of this section. This rule applies solely for purposes of determining whether a taxpayer is an applicable taxpayer under this section.
(9) Consolidated groups. For the treatment of consolidated groups for purposes of determining gross receipts and base erosion tax benefits, see § 1.1502-59A(b).
(d) Gross receipts test—(1) Amount of gross receipts. A taxpayer, or the aggregate group of which the taxpayer is a member, satisfies the gross receipts test of this section if it has average annual gross receipts of at least $500,000,000 for the three-taxable-year period ending with the preceding taxable year.
(2) Taxpayer not in existence for entire three-year period. If a taxpayer was not in existence for the entire three-year period referred to in paragraph (d)(1) of this section, the taxpayer determines a gross receipts average for the period that it was in existence (which includes gross receipts in the current year).
(3) Gross receipts of foreign corporations. With respect to any foreign corporation, only gross receipts that are taken into account in determining income that is, or is treated as, effectively connected with the conduct of a trade or business within the United States are taken into account for purposes of paragraph (d)(1) of this section. In the case of a foreign corporation that is a member of an aggregate group and that is subject to tax on a net basis pursuant to an applicable income tax treaty of the United States, the foreign corporation includes only gross receipts that are attributable to transactions taken into account in determining its net taxable income.
(4) Gross receipts of an insurance company. Solely for purposes of this section, for any corporation that is subject to tax under subchapter L or any corporation that would be subject to tax under subchapter L if that corporation were a domestic corporation, gross receipts are reduced by return premiums (within the meaning of section 803(a)(1)(B) and section 832(b)(4)(A)), but are not reduced by any reinsurance premiums paid or accrued.
(5) Reductions in gross receipts. For purposes of this section, gross receipts for any taxable year are reduced by returns and allowances made during that taxable year.
(6) Gross receipts of consolidated groups. For purposes of this section, the gross receipts of a consolidated group are determined by aggregating the gross receipts of all of the members of the consolidated group. See § 1.1502-59A(b).
(e) Base erosion percentage test—(1) In general. A taxpayer, or the aggregate group of which the taxpayer is a member, satisfies the base erosion percentage test if its base erosion percentage is three percent or higher.
(2) Base erosion percentage test for banks and registered securities dealers—(i) In general. A taxpayer that is a member of an affiliated group (as defined in section 1504(a)(1)) that includes a bank (as defined in § 1.59A-1(b)(4)) or a registered securities dealer (as defined in section § 1.59A-1(b)(15)) satisfies the base erosion percentage test if its base erosion percentage is two percent or higher.
(ii) Aggregate groups. An aggregate group of which a taxpayer is a member and that includes a bank or a registered securities dealer that is a member of an affiliated group (as defined in section 1504(a)(1)) is subject to the base erosion percentage threshold described in paragraph (e)(2)(i) of this section.
(iii) De minimis exception for banking and registered securities dealer activities. An aggregate group that includes a bank or a registered securities dealer that is a member of an affiliated group (as defined in section 1504(a)(1)) is not treated as including a bank or registered securities dealer for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, for that taxable year, the total gross receipts of the aggregate group attributable to the bank or the registered securities dealer (or attributable to all of the banks and registered securities dealers in the group, if more than one) represent less than two percent of the total gross receipts of the aggregate group, as determined under paragraph (d) of this section. When there is no aggregate group, a consolidated group that includes a bank or a registered securities dealer is not treated as including a bank or registered securities dealer for purposes of paragraph (e)(2)(i) of this section for a taxable year, if, for that taxable year, the total gross receipts of the consolidated group attributable to the bank or the registered securities dealer (or attributable to all of the banks or registered securities dealers in the group, if more than one) represent less than two percent of the total gross receipts of the consolidated group, as determined under paragraph (d) of this section.
(3) Computation of base erosion percentage—(i) In general. The taxpayer's base erosion percentage for any taxable year is determined by dividing—
(A) The aggregate amount of the taxpayer's (or in the case of a taxpayer that is a member of an aggregate group, the aggregate group's) base erosion tax benefits (as defined in § 1.59A-3(c)(1)) for the taxable year, by
(B) The sum of—
(1) The aggregate amount of the deductions (including deductions for base erosion tax benefits described in § 1.59A-3(c)(1)(i) and base erosion tax benefits described in § 1.59A-3(c)(1)(ii)) allowable to the taxpayer (or in the case of a taxpayer that is a member of an aggregate group, any member of the aggregate group) under chapter 1 of Subtitle A for the taxable year;
(2) The base erosion tax benefits described in § 1.59A-3(c)(1)(iii) with respect to any premiums or other consideration paid or accrued by the taxpayer (or in the case of a taxpayer that is a member of an aggregate group, any member of the aggregate group) to a foreign related party for any reinsurance payment taken into account under sections 803(a)(1)(B) or 832(b)(4)(A) for the taxable year; and
(3) Any amount paid or accrued by the taxpayer (or in the case of a taxpayer that is a member of an aggregate group, any member of the aggregate group) resulting in a reduction of gross receipts described in § 1.59A-3(c)(1)(iv) for the taxable year.
(ii) Certain items not taken into account in denominator. Except as provided in paragraph (e)(3)(viii) of this section, the amount under paragraph (e)(3)(i)(B) of this section is determined by not taking into account—
(A) Any deduction allowed under section 172, 245A, or 250 for the taxable year;
(B) Any deduction for amounts paid or accrued for services to which the exception described in § 1.59A-3(b)(3)(i) applies;
(C) Any deduction for qualified derivative payments that are not treated as base erosion payments by reason of § 1.59A-3(b)(3)(ii);
(D) Any exchange loss within the meaning of § 1.988-2 from a section 988 transaction as described in § 1.988-1(a)(1) that is not treated as a base erosion payment by reason of § 1.59A-3(b)(3)(iv);
(E) Any deduction for amounts paid or accrued to foreign related parties with respect to TLAC securities and foreign TLAC securities that are not treated as base erosion payments by reason of § 1.59A-3(b)(3)(v);
(F) Any reinsurance losses incurred and claims payments described in § 1.59A-3(b)(3)(ix); and
(G) Any deduction not allowed in determining taxable income for the taxable year.
(iii) Effect of treaties on base erosion percentage determination. See § 1.59A-3(c)(2) and (3).
(iv) Amounts paid or accrued between members of a consolidated group. See § 1.1502-59A(b).
(v) Deductions and base erosion tax benefits from partnerships. See § 1.59A-7(b), (d), and (e).
(vi) Mark-to-market positions. For any position with respect to which the taxpayer (or in the case of a taxpayer that is a member of an aggregate group, a member of the aggregate group) applies a mark-to-market method of accounting for U.S. federal income tax purposes, the taxpayer must determine its gain or loss with respect to that position for any taxable year by combining all items of income, gain, loss, or deduction arising with respect to the position during the taxable year, regardless of how each item arises (including from a payment, accrual, or mark) for purposes of paragraph (e)(3) of this section. See paragraph (f)(1) of this section (Example 1) for an illustration of this rule. For purposes of section 59A, a taxpayer computes its losses resulting from positions subject to a mark-to-market regime under the Internal Revenue Code based on a single mark for the taxable year on the earlier of the last business day of the taxpayer's taxable year and the disposition (whether by sale, offset, exercise, termination, expiration, maturity, or other means) of the position, regardless of how frequently a taxpayer marks to market for other purposes. See 1.59A-3(b)(2)(iv) for the application of this rule for purposes of determining the amount of base erosion payments.
(vii) Reinsurance losses incurred and claims payments. Except as provided in paragraph (e)(3)(ii)(F) of this section, amounts paid for losses incurred (as defined in section 832(b)(5)) and claims and benefits under section 805(a)(1) are taken into account for purposes of paragraph (e)(3)(i)(B)(1) of this section.
(viii) Certain payments that qualify for the effectively connected income exception and another base erosion payment exception. Subject to paragraph (c) of this section (transactions that occur between members of the taxpayer's aggregate group), a payment that qualifies for the effectively connected income exception described in § 1.59A-3(b)(3)(iii) and either the service cost method exception described in § 1.59A-3(b)(3)(i), the qualified derivative payment exception described in § 1.59A-3(b)(3)(ii), or the TLAC exception described in § 1.59A-3(b)(3)(v) is not subject to paragraph (e)(3)(ii)(B), (C), or (E) of this section and those amounts are included in the denominator of the base erosion percentage if the foreign related party who received the payment is not a member of the aggregate group.
(f) Examples. The following examples illustrate the rules of this section.
(1) Example 1: Mark-to-market—(i) Facts. (A) Foreign Parent (FP) is a foreign corporation that owns all of the stock of domestic corporation (DC). FP is a foreign related party of DC under § 1.59A-1(b)(12). DC is a registered securities dealer that does not hold any securities for investment. On January 1 of year 1, DC enters into two interest rate swaps for a term of two years, one with unrelated Customer A as the counterparty (position A) and one with unrelated Customer B as the counterparty (position B). Each of the swaps provides for semiannual periodic payments to be made or received on June 30 and December 31. No party makes any payment to any other party upon initiation of either of the swaps (that is, they are entered into at-the-money). DC is required to mark-to-market positions A and B for U.S. federal income tax purposes. DC is a calendar year taxpayer.
(B) For position A in year 1, DC makes a payment of $150x on June 30, and receives a payment of $50x on December 31. There are no other payments in year 1. On December 31, position A has a value to DC of $110x (that is, position A is in-the-money by $110x).
(C) For position B in year 1, DC receives a payment of $120x on June 30, and makes a payment of $30x on December 31. There are no other payments in year 1. On December 31, position B has a value to DC of ($130x) (that is, position B is out-of-the-money by $130x).
(ii) Analysis. (A) With respect to position A, based on the total amount of payments made and received in year 1, DC has a net deduction of $100x. In addition, DC has a mark-to-market gain of $110x. As described in paragraph (e)(3)(vi) of this section, the mark-to-market gain of $110x is combined with the net deduction of $100x resulting from the payments. Therefore, with respect to position A, DC has a gain of $10x, and thus has no deduction in year 1 for purposes of section 59A.
(B) With respect to position B, based on the total amount of payments made and received in year 1, DC has net income of $90x. In addition, DC has a mark-to-market loss of $130x. As described in paragraph (e)(3)(vi) of this section, the mark-to-market loss of $130x is combined with the net income of $90x resulting from the payments. Therefore, with respect to position B, DC has a loss of $40x, and thus has a $40x deduction in year 1 for purposes of section 59A.
(2) Example 2: Member leaving an aggregate group—(i) Facts. Parent Corporation wholly owns Corporation 1 and Corporation 2. Each corporation is a domestic corporation and a calendar-year taxpayer that does not file a consolidated return. The aggregate group of Corporation 1 includes Parent Corporation and Corporation 2. At noon on June 30, Year 1, Parent Corporation sells the stock of Corporation 2 to Corporation 3, an unrelated domestic corporation, in exchange for cash consideration. Before the acquisition, Corporation 3 was not a member of an aggregate group. Corporation 2 and Corporation 3 do not file a consolidated return.
(ii) Analysis. (A) For purposes of section 59A, to determine the gross receipts and base erosion percentage of the aggregate group of Corporation 1 for calendar Year 1, Corporation 2 is treated as having a taxable year-end at the end of the day on June 30, Year 1, as a result of the sale. Corporation 2 leaves the aggregate group of Corporation 1 and Parent Corporation at the end of the day on June 30, Year 1. The aggregate group of Corporation 1 takes into account only the gross receipts, base erosion tax benefits, and deductions of Corporation 2 allocable to the period from January 1 to the end of the day on June 30, Year 1, in accordance with paragraph (c)(4)(ii) and (iii) of this section. The same results apply to the aggregate group of Parent Corporation for calendar Year 1. See paragraph (d)(1) and (2) of this section for the periods taken into account in determining whether the taxpayer or its aggregate group satisfies the gross receipts test.
(B) For purposes of section 59A, to determine the gross receipts and base erosion percentage of the aggregate group of Corporation 2 for calendar Year 1, each of Parent Corporation, Corporation 1, and Corporation 3 are treated as having a taxable year-end at the end of the day on June 30, Year 1. Because Corporation 2 does not have a short taxable year, paragraph (c)(5)(i) of this section does not apply. The aggregate group of Corporation 2 takes into account the gross receipts, base erosion tax benefits, and deductions of Parent Corporation and Corporation 1 allocable to the period from January 1 to the end of the day on June 30, Year 1, and the gross receipts, base erosion tax benefits, and deductions of Corporation 3 allocable to the period from July 1 to December 31, Year 1 in accordance with paragraph (c)(4)(ii) and (iii) of this section. See paragraph (d)(1) and (2) of this section for the periods taken into account in determining whether the taxpayer or its aggregate group satisfies the gross receipts test.
(2) Example 2: Member leaving an aggregate group—(i) Facts. Parent Corporation wholly owns Corporation 1 and Corporation 2. Each corporation is a domestic corporation and a calendar-year taxpayer that does not file a consolidated return. The aggregate group of Corporation 1 includes Parent Corporation and Corporation 2. At noon on June 30, Year 1, Parent Corporation sells the stock of Corporation 2 to Corporation 3, an unrelated domestic corporation, in exchange for cash consideration. Before the acquisition, Corporation 3 was not a member of an aggregate group. Corporation 2 and Corporation 3 do not file a consolidated return.
(ii) Analysis. (A) For purposes of section 59A, to determine the gross receipts and base erosion percentage of the aggregate group of Corporation 1 for calendar Year 1, Corporation 2 is treated as having a taxable year-end at the end of the day on June 30, Year 1, as a result of the sale. Corporation 2 leaves the aggregate group of Corporation 1 and Parent Corporation at the end of the day on June 30, Year 1. The aggregate group of Corporation 1 takes into account only the gross receipts, base erosion tax benefits, and deductions of Corporation 2 allocable to the period from January 1 to the end of the day on June 30, Year 1, in accordance with paragraph (c)(4)(ii) and (iii) of this section. The same results apply to the aggregate group of Parent Corporation for calendar Year 1. See paragraph (d)(1) and (2) of this section for the periods taken into account in determining whether the taxpayer or its aggregate group satisfies the gross receipts test.
(B) For purposes of section 59A, to determine the gross receipts and base erosion percentage of the aggregate group of Corporation 2 for calendar Year 1, each of Parent Corporation, Corporation 1, and Corporation 3 are treated as having a taxable year-end at the end of the day on June 30, Year 1. Because Corporation 2 does not have a short taxable year, paragraph (c)(5)(i) of this section does not apply. The aggregate group of Corporation 2 takes into account the gross receipts, base erosion tax benefits, and deductions of Parent Corporation and Corporation 1 allocable to the period from January 1 to the end of the day on June 30, Year 1, and the gross receipts, base erosion tax benefits, and deductions of Corporation 3 allocable to the period from July 1 to December 31, Year 1 in accordance with paragraph (c)(4)(ii) and (iii) of this section. See paragraph (d)(1) and (2) of this section for the periods taken into account in determining whether the taxpayer or its aggregate group satisfies the gross receipts test.
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended by T.D. 9910, 85 FR 64343, Oct. 9, 2020; T.D. 10041, 90 FR 59049, Dec. 18, 2025]
§ 1.59A-3 Base erosion payments and base erosion tax benefits.
(a) Scope. This section provides definitions and related rules regarding base erosion payments and base erosion tax benefits. Paragraph (b) of this section provides definitions and rules regarding base erosion payments. Paragraph (c) of this section provides rules for determining the amount of base erosion tax benefits. Paragraph (d) of this section provides examples illustrating the rules described in this section.
(b) Base erosion payments—(1) In general. Except as provided in paragraph (b)(3) of this section, a base erosion payment means—
(i) Any amount paid or accrued by the taxpayer to a foreign related party of the taxpayer and with respect to which a deduction is allowable under chapter 1 of subtitle A of the Internal Revenue Code;
(ii) Any amount paid or accrued by the taxpayer to a foreign related party of the taxpayer in connection with the acquisition of property by the taxpayer from the foreign related party if the character of the property is subject to the allowance for depreciation (or amortization in lieu of depreciation);
(iii) Any premium or other consideration paid or accrued by the taxpayer to a foreign related party of the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A); or
(iv) Any amount paid or accrued by the taxpayer that results in a reduction of the gross receipts of the taxpayer if the amount paid or accrued is with respect to—
(A) A surrogate foreign corporation, as defined in section 59A(d)(4)(C)(i), that is a related party of the taxpayer (but only if the corporation first became a surrogate foreign corporation after November 9, 2017); or
(B) A foreign person that is a member of the same expanded affiliated group, as defined in section 59A(d)(4)(C)(ii), as the surrogate foreign corporation.
(2) Operating rules—(i) In general. The determination of the amount paid or accrued, and the identity of the payor and recipient of any amount paid or accrued, is made under general U.S. federal income tax law.
(ii) Amounts paid or accrued in cash and other consideration. For purposes of paragraph (b)(1) of this section, an amount paid or accrued includes an amount paid or accrued using any form of consideration, including cash, property, stock, a partnership interest, or the assumption of a liability, including any exchange transaction. A distribution of property that is not part of an exchange (such as a distribution under section 301, without regard to whether section 301(c)(1), (c)(2), or (c)(3) applies), is not received with respect to an amount paid or accrued and does not give rise to a base erosion payment. In contrast, a redemption of stock by a corporation within the meaning of section 317(b) (such as a redemption described in section 302(a) or (d) or section 306(a)(2)), or a transaction in which there is an exchange for stock (such as a section 304 or section 331 transaction), is an amount paid or accrued by the shareholder to the corporation (or by the acquiring corporation to the transferor in a section 304 transaction), without regard to the treatment of such transaction for U.S. federal income tax purposes. See paragraph (b)(3)(viii) of this section for an exception for specified nonrecognition transactions (as defined in paragraph (b)(3)(viii)(A) of this section).
(iii) Transactions providing for net payments. Except as otherwise provided in paragraph (b)(2)(iv) of this section or as permitted by the Internal Revenue Code or the regulations, the amount of any base erosion payment is determined on a gross basis, regardless of any contractual or legal right to make or receive payments on a net basis. For this purpose, a right to make or receive payments on a net basis permits the parties to a transaction or series of transactions to settle obligations by offsetting any amounts to be paid by one party against amounts owed by that party to the other party. For example, any premium or other consideration paid or accrued by a taxpayer to a foreign related party for any reinsurance payments is not reduced by or netted against other amounts owed to the taxpayer from the foreign related party or by reserve adjustments or other returns.
(iv) Amounts paid or accrued with respect to mark-to-market positions—(A) In general. For any transaction with respect to which the taxpayer applies the mark-to-market method of accounting for U.S. Federal income tax purposes, the rules set forth in § 1.59A-2(e)(3)(vi) apply to determine the amount of the base erosion payment.
(B) Application of the base erosion and anti-abuse tax (“BEAT”) netting rule to securities lending transactions. Notwithstanding paragraph (b)(2)(iv)(A) of this section, mark-to-market gains and losses from the securities leg of a securities lending transaction as defined in §§ 1.861-2(a)(7) and 1.861-3(a)(6) are not taken into account when applying § 1.59A-2(e)(3)(vi) for purposes of determining the amount of a taxpayer's base erosion payment. Mark-to market gains and losses from the securities leg of a securities lending transaction are the ordinary gains and losses that a taxpayer recognizes with respect to the transaction by treating the taxpayer's position in the transaction as having been sold for its fair market value on the last business day of the taxable year (and any additional times as required by the Internal Revenue Code or the taxpayer's method of accounting). See § 1.59A-6(b)(1)(i). When determining the amount of the taxpayer's base erosion payment, items of income, gain, loss, or deduction that relate to the securities leg of a securities lending transaction, such as substitute payments defined in §§ 1.861-2(a)(7) and 1.861-3(a)(6) and borrow fees, must be taken into account on a consistent basis that does not result in the duplication or omission of these amounts. For purposes of the immediately preceding sentence, the term items of income, gain, loss, or deduction that relate to the securities leg of a securities lending transaction does not include delivery of the securities to, or receipt of securities from, the lender. This paragraph (b)(2)(iv)(B) applies to a taxpayer that is either the borrower or lender with respect to the securities lending transaction.
(v) Coordination among categories of base erosion payments. A payment that does not satisfy the criteria of one category of base erosion payment may be a base erosion payment described in one of the other categories.
(vi) Certain domestic passthrough entities—(A) In general. If a taxpayer pays or accrues an amount that would be a base erosion payment except for the fact that the payment is made to a specified domestic passthrough, then the taxpayer will be treated as making a base erosion payment to each specified foreign related party for purposes of section 59A and §§ 1.59A-2 through 1.59A-10. This rule has no effect on the taxation of the specified domestic passthrough under subchapter J or subchapter M of the Code (as applicable).
(B) Amount of base erosion payment. The amount of the base erosion payment is equal to the lesser of the amount paid or accrued by the taxpayer to or for the benefit of the specified domestic passthrough and the amount of the deduction allowed under section 561, 651, or 661 to the specified domestic passthrough with respect to amounts paid, credited, distributed, deemed distributed, or required to be distributed to a specified foreign related party.
(C) Specified domestic passthrough. For purposes of this paragraph (b)(2)(vi), specified domestic passthrough means:
(1) A domestic trust that is not a grantor trust under subpart E of subchapter J of chapter 1 of the Code (“domestic trust”) and which domestic trust is allowed a deduction under section 651 or section 661 with respect to amounts paid, credited, or required to be distributed to a specified foreign related party;
(2) A real estate investment trust (as defined in § 1.856-1(a)) that pays, or is deemed to pay, a dividend to a specified foreign related party for which a deduction is allowed under section 561; or
(3) A regulated investment company (as defined in § 1.851-1(a)) that pays, or is deemed to pay, a dividend to a specified foreign related party for which a deduction is allowed under section 561.
(D) Specified foreign related party. For purposes of this paragraph (b)(2)(vi), specified foreign related party means, with respect to a specified domestic passthrough, any foreign related party of a taxpayer that is a direct or indirect beneficiary or shareholder of the specified domestic passthrough.
(vii) Transfers of property to related taxpayers. If a taxpayer owns property of a character subject to the allowance for depreciation (or amortization in lieu of depreciation) with respect to which paragraph (c)(1)(ii) of this section applies, and the taxpayer sells, exchanges, or otherwise transfers the property to another taxpayer that is a member of an aggregate group that includes the taxpayer (taking into account § 1.59A-7), any deduction for depreciation (or amortization in lieu of depreciation) by the transferee taxpayer remains subject to paragraph (c)(1)(ii) of this section to the same extent the amounts would have been so subject in the hands of the transferor. See paragraph (d)(7) of this section (Example 7) for an illustration of this rule.
(viii) Reductions to determine gross income. For purposes of paragraphs (b)(1)(i) and (ii) of this section, any amount resulting in a reduction to determine gross income under section 61, including an amount properly treated as cost of goods sold under the Code, is not a base erosion payment.
(ix) Losses recognized on the sale or transfer of property. If a taxpayer recognizes a loss on a sale or transfer of property to a foreign related party, the loss recognized with respect to the sale or transfer is not a deduction that would cause the payment to be treated as a base erosion payment under paragraph (b)(1)(i) of this section. However, if a taxpayer uses property to make a payment to a foreign related party and the payment otherwise meets the requirements of paragraph (b)(1) of this section, the amount of the payment that is treated as a base erosion payment equals the fair market value of the property at the time of the transfer.
(3) Exceptions to base erosion payment. Paragraph (b)(1) of this section does not apply to the types of payments or accruals described in paragraphs (b)(3)(i) through (ix) of this section.
(i) Certain services cost method amounts—(A) In general. Amounts paid or accrued by a taxpayer to a foreign related party for services that meet the requirements in paragraph (b)(3)(i)(B) of this section, but only to the extent of the total services cost of those services. Thus, any amount paid or accrued to a foreign related party in excess of the total services cost of services eligible for the services cost method exception (the mark-up component) remains a base erosion payment. For this purpose, services are an activity as defined in § 1.482-9(l)(2) performed by a foreign related party (the renderer) that provides a benefit as defined in § 1.482-9(l)(3) to the taxpayer (the recipient).
(B) Eligibility for the services cost method exception. To be eligible for the services cost method exception, all of the requirements of § 1.482-9(b) must be satisfied, except that:
(1) The requirements of § 1.482-9(b)(5) do not apply for purposes of determining eligibility for the service cost method exception in this section; and
(2) Adequate books and records must be maintained as described in paragraph (b)(3)(i)(C) of this section, instead of as described in § 1.482-9(b)(6).
(C) Adequate books and records. Permanent books of account and records must be maintained for as long as the costs with respect to the services are incurred by the renderer. The books and records must be adequate to permit verification by the Commissioner of the amount charged for the services and the total services costs incurred by the renderer, including a description of the services in question, identification of the renderer and the recipient of the services, calculation of the amount of profit mark-up (if any) paid for the services, and sufficient documentation to allow verification of the methods used to allocate and apportion the costs to the services in question in accordance with § 1.482-9(k). For example, where a renderer incurs costs that are attributable to performing a service for the taxpayer that includes services eligible for the services cost method exception under this section (regardless of whether the taxpayer determined its payments for those services based on the services cost method) and another service that is not eligible for the services cost method exception, books and records must be maintained that show, among other things: the total amount of costs that are attributable to each of those services, the method chosen under § 1.482-9(k) to apportion the costs between the service eligible for the services cost method under this section and the other service, and the application of that method in calculating the amount eligible for the services cost method exception. This paragraph (b)(3)(i)(C) does not affect the recordkeeping requirements imposed by any other provision, including § 1.6001-1.
(D) Total services cost. For purposes of this section, total services cost has the same meaning as total services costs in § 1.482-9(j).
(ii) Qualified derivative payments. Any qualified derivative payment as described in § 1.59A-6.
(iii) Effectively connected income—(A) In general. Except as provided in paragraph (b)(3)(iii)(B) of this section, amounts paid or accrued to a foreign related party that are subject to U.S. federal income taxation as income that is, or is treated as, effectively connected with the conduct of a trade or business in the United States under an applicable provision of the Internal Revenue Code or regulations. Paragraph (b)(3)(iii) of this section applies only if the taxpayer receives a withholding certificate on which the foreign related party claims an exemption from withholding under section 1441 or 1442 because the amounts are effectively connected income.
(B) Application to certain treaty residents. If a foreign related party determines its taxable income pursuant to the business profits provisions of an applicable income tax treaty, amounts paid or accrued to the foreign related party that are taken into account in determining its taxable income.
(C) Application to partnerships. To the extent that paragraph (b)(3)(iii)(A) or (B) of this section would apply to a payment or accrual made directly by a taxpayer to a foreign related party, paragraph (b)(3)(iii)(A) or (B) of this section apply to an amount treated as paid or accrued by a taxpayer to a foreign related party under § 1.59A-7(b) or (c) (generally applying aggregate principles to treat partnership transactions as partner-level transactions for purposes of section 59A). The certification requirement in paragraph (b)(3)(iii)(A) of this section is met if the taxpayer receives a written statement from the foreign related party that is comparable to the certification provided in paragraph (b)(3)(iii)(A) of this section but based on the deemed transaction under § 1.59A-7(b) or (c) and the extent to which paragraph (b)(3)(iii)(A) or (B) of this section would have applied to that deemed transaction. The taxpayer may rely on the written statement unless it has reason to know or actual knowledge that the statement is incorrect.
(iv) Exchange loss on a section 988 transaction. Any exchange loss within the meaning of § 1.988-2 from a section 988 transaction described in § 1.988-1(a)(1) that is an allowable deduction and that results from a payment or accrual by the taxpayer to a foreign related party.
(v) Amounts paid or accrued with respect to TLAC securities and foreign TLAC securities—(A) In general. Except as provided in paragraph (b)(3)(v)(B) and (F) of this section, amounts paid or accrued to foreign related parties with respect to TLAC securities and foreign TLAC securities.
(B) Limitation on exclusion for TLAC securities. The amount excluded under paragraph (b)(3)(v)(A) of this section is no greater than the product of the scaling ratio and amounts paid or accrued to foreign related parties with respect to TLAC securities for which a deduction is allowed.
(C) Scaling ratio. For purposes of this paragraph (b)(3)(v), the scaling ratio for a taxable year of a taxpayer is a fraction the numerator of which is 115 percent of the average TLAC long-term debt required amount and the denominator of which is the average TLAC securities amount. The scaling ratio may in no event be greater than one.
(D) Average TLAC securities amount. The average TLAC securities amount for a taxable year is the average of the TLAC securities amounts for the year, computed at regular time intervals in accordance with this paragraph. The TLAC securities amount used in calculating the average TLAC securities amount is computed on a monthly basis.
(E) Average TLAC long-term debt required amount. The average TLAC long-term debt required amount for a taxable year is the average of the TLAC long-term debt required amounts, computed on a monthly basis.
(F) Limitation on exclusion for foreign TLAC securities—(1) In general. The amount excluded under paragraph (b)(3)(v)(A) of this section for foreign TLAC securities is limited to the extent that interest deducted by a U.S. trade or business or permanent establishment with respect to foreign TLAC securities exceeds the interest expense associated with the foreign TLAC long-term debt required amount, applying the scaling ratio principles set forth under paragraphs (b)(3)(v)(B) through (E) of this section.
(2) Foreign TLAC long-term debt required amount. For purposes of paragraph (b)(3)(v) of this section, the term foreign TLAC long-term debt required amount means in the case of a trade or business or a permanent establishment in the United States, the lesser of—
(i) The specified minimum amount of debt, if any, required pursuant to a bank regulatory requirement imposed under the laws or regulations of a foreign country that are comparable to 12 CFR 252.160-167; or
(ii) The specified minimum amount of debt, if any, that would be required pursuant to 12 CFR 252.162(a) if the trade or business or permanent establishment were a U.S. person (as determined under Federal Reserve regulations).
(3) No specified minimum provided by local law. For purposes of paragraph (b)(3)(v)(F)(2)(ii) of this section, if the bank regulatory requirements imposed under the laws or regulations of a foreign country do not specify a minimum amount, the limitation for purposes of paragraph (b)(3)(v)(F)(2) of this section is determined by reference solely to paragraph (b)(3)(v)(F)(2)(ii) of this section.
(4) Foreign TLAC security. For purposes of paragraph (b)(3)(v) of this section, the term foreign TLAC security means an internal debt security issued under a bank regulatory requirement imposed under the laws or regulations of a foreign country that is comparable to 12 CFR 252.160-167. The laws or regulations of a foreign country are comparable to 12 CFR 252.160-167 if the requirement is imposed by a Financial Stability Board member state and those laws or regulations are substantially consistent with TLAC standards of the Financial Stability Board.
(vi) Amounts paid or accrued in taxable years beginning before January 1, 2018. Any amount paid or accrued in taxable years beginning before January 1, 2018.
(vii) Business interest carried forward from taxable years beginning before January 1, 2018. Any disallowed business interest described in section 163(j)(2) that is carried forward from a taxable year beginning before January 1, 2018.
(viii) Specified nonrecognition transactions—(A) In general. Subject to paragraph (b)(3)(viii)(B) and (C) of this section, any amount transferred to, or exchanged with, a foreign related party pursuant to a transaction to which sections 332, 351, 355, or 368 apply (“specified nonrecognition transaction”). See § 1.59A-9(b)(4) for anti-abuse rules.
(B) Other property transferred to a foreign related party in a specified nonrecognition transaction. If a taxpayer transfers other property (as defined in paragraph (b)(3)(viii)(D) of this section) to a foreign related party pursuant to a specified nonrecognition transaction, the other property is treated as an amount paid or accrued to which paragraph (b)(3) of this section does not apply, regardless of whether gain is recognized on the transaction.
(C) Other property received from a foreign related party in certain specified nonrecognition transactions. If, in a transaction described in section 351, 355, or 368, the taxpayer transfers property and receives other property (as defined in paragraph (b)(3)(viii)(D) of this section) from a foreign related party, the property transferred by the taxpayer is treated as an amount paid or accrued to which paragraph (b)(3) of this section does not apply, regardless of whether gain is recognized on the transaction.
(D) Definition of other property. Solely for purposes of this paragraph (b)(3)(viii), the term other property has the meaning of the phrase “other property or money” as used in section 351(b), with respect to a transaction to which section 351 applies, and as used in sections 356(a)(1)(B) and 361(b), with respect to a transaction to which sections 355 or 368 apply, as applicable, including liabilities treated as money under section 357(b). However, the term other property does not include the sum of any money and the fair market value of any other property to which section 361(b)(3) applies. The term other property also includes liabilities that are assumed by the taxpayer in the specified nonrecognition transaction, but only to the extent of the amount of gain recognized under section 357(c).
(E) Allocation of other property. Other property is treated as exchanged for property in a specified nonrecognition transaction in a manner consistent with U.S. federal income tax law. For purposes making the allocation under this paragraph (b)(3)(viii)(E), liabilities described in paragraph (b)(3)(viii)(D) of this section are treated as money received.
(ix) Reinsurance losses incurred and claims payments—(A) In general. Any amounts paid by a taxpayer subject to tax under subchapter L to a foreign related party that is a regulated insurance company under a reinsurance contract between the taxpayer and the regulated foreign insurance company for losses incurred (as defined in section 832(b)(5)) and claims and benefits under section 805(a)(1), to the extent that the amounts paid or accrued are properly allocable to amounts required to be paid by the regulated foreign insurance company (or indirectly through another regulated foreign insurance company), pursuant to an insurance, annuity, or reinsurance contract, to a person other than a related party. For purposes of this paragraph (b)(3)(ix), the determination of whether a contract is an insurance contract or an annuity contract is made without regard to sections 72(s), 101(f), 817(h), and 7702, provided that the contract is regulated as a life insurance or annuity contract in its jurisdiction of issuance and no policyholder, insured, annuitant or beneficiary with respect to the contract is a United States person.
(B) Regulated foreign insurance company. The term regulated foreign insurance company means any foreign corporation which—
(1) Is subject to regulation as an insurance (or reinsurance) company by the country in which the corporation is created, organized, or maintains its registered office, and is licensed, authorized, or regulated by the applicable insurance regulatory body for that country to sell insurance, annuity, or reinsurance contracts to persons other than related parties in that country, and
(2) Would be subject to tax under subchapter L if it were a domestic corporation.
(4) Rules for determining the amount of certain base erosion payments. The following rules apply in determining the amount that is a base erosion payment.
(i) Interest expense allocable to a foreign corporation's effectively connected income—(A) Methods described in § 1.882-5. A foreign corporation that has interest expense allocable under section 882(c) to income that is, or is treated as, effectively connected with the conduct of a trade or business within the United States applying the method described in § 1.882-5(b) through (d) or the method described in § 1.882-5(e) has base erosion payments under paragraph (b)(1)(i) of this section for the taxable year equal to the sum of—
(1) The interest expense on a liability described in § 1.882-5(a)(1)(ii)(A) or (B) (direct allocations) that is paid or accrued by the foreign corporation to a foreign related party;
(2) The interest expense on U.S.-booked liabilities, as described in § 1.882-5(d)(2), determined by taking into account paragraph (b)(4)(i)(B) of this section, that is paid or accrued by the foreign corporation to a foreign related party; and
(3) The interest expense on U.S.-connected liabilities, as described in § 1.882-5(d) or 1.882-5(e), in excess of interest expense on U.S.-booked liabilities as described in § 1.882-5(d)(2), if any (hereafter, excess U.S.-connected liabilities), multiplied by a fraction, the numerator of which is the foreign corporation's average worldwide interest expense due to a foreign related party, and the denominator of which is the foreign corporation's average total worldwide interest expense. The numerator and denominator of this fraction are determined by translating interest expense into the functional currency of the foreign corporation using any reasonable method, consistently applied. Any interest expense that is interest expense on a U.S.-booked liability or is subject to a direct allocation is excluded from both the numerator and the denominator of the fraction.
(B) U.S.-booked liabilities determination. For purposes of paragraph (b)(4)(i)(A) of this section, the determination of the interest expense on U.S.-booked liabilities, as described in § 1.882-5(d)(2), is made without regard to whether the foreign corporation applies the method described in § 1.882-5(b) through (d) or the method described in § 1.882-5(e) for purposes of determining interest expense.
(C) U.S.-booked liabilities in excess of U.S.-connected liabilities. For purposes of paragraph (b)(4)(i)(A)(2) of this section, if a foreign corporation has U.S.-booked liabilities, as described in § 1.882-5(d)(2), in excess of U.S.-connected liabilities, as described in § 1.882-5(d) or § 1.882-5(e), the foreign corporation applies the scaling ratio pro-rata to all interest expense on U.S.-booked liabilities consistent with § 1.882-5(d)(4) for purposes of determining the amount of allocable interest expense on U.S.-booked liabilities that is a base erosion payment. This paragraph (b)(4)(i)(C) applies without regard to whether the foreign corporation applies the method described in § 1.882-5(b) through (d) or the method described in § 1.882-5(e) for purposes of determining its interest expense.
(D) Election to use financial statements. A foreign corporation may elect to calculate the fraction described in paragraph (b)(4)(i)(A)(3) of this section on the basis of its applicable financial statement rather than U.S. tax principles. For purposes of this section, an applicable financial statement has the meaning provided in section 451(b)(3). The applicable financial statement must be the applicable financial statement of the foreign corporation, not a consolidated applicable financial statement. A foreign corporation makes this election in accordance with the requirements of Form 8991 (or successor).
(E) Coordination with certain tax treaties—(1) In general. If a foreign corporation elects to determine its taxable income pursuant to business profits provisions of an income tax treaty rather than provisions of the Internal Revenue Code, or the regulations published under 26 CFR chapter I, for determining effectively connected income, and the foreign corporation does not apply § 1.882-5 to allocate interest expense to a permanent establishment, then paragraph (b)(4)(i)(A) through (D) of this section applies to determine the amount of hypothetical § 1.882-5 interest expense that is a base erosion payment under paragraph (b)(1) of this section. Interest expense allowed to the permanent establishment in excess of the hypothetical § 1.882-5 interest expense, if any, is treated as an amount paid or accrued by the permanent establishment to the foreign corporation's home office or to another branch of the foreign corporation and is a base erosion payment to the extent that the payment or accrual is described under paragraph (b)(1) of this section.
(2) Hypothetical § 1.882-5 interest expense defined. The hypothetical § 1.882-5 interest expense is equal to the amount of interest expense that would have been allocable under section 882(c) to income that is, or is treated as, effectively connected with the conduct of a trade or business within the United States if the foreign corporation determined interest expense in accordance with section § 1.882-5. However, the hypothetical § 1.882-5 interest expense shall not exceed the amount of interest expense allowed to the permanent establishment.
(3) Consistency requirement. For purposes of determining the amount described in paragraph (b)(4)(i)(E)(2) of this section and applying paragraph (b)(4)(i)(A) through (D) of this section, the elections of § 1.882-5 must be applied consistently and are subject to the rules and limitations of § 1.882-5, including limitations on the time period in which an election may be made or revoked. If a foreign corporation otherwise meets the requirements for making or revoking an election under § 1.882-5, then solely for purposes of this section, the foreign corporation is treated as making or revoking the election in accordance with the requirements of Form 8991 (or successor) and its instructions.
(F) Coordination with exception for foreign TLAC securities. For purposes of paragraph (b)(4)(i)(A) of this section, amounts paid or accrued to a foreign related party with respect to securities that are eligible for the foreign TLAC exception in paragraph (b)(3)(v) of this section are not treated as paid to a foreign related party.
(ii) Other deductions allowed with respect to effectively connected income. A deduction allowed under § 1.882-4 for an amount paid or accrued by a foreign corporation to a foreign related party (including a deduction for an amount apportioned in part to effectively connected income and in part to income that is not effectively connected income) is a base erosion payment under paragraph (b)(1) of this section.
(iii) Depreciable property. Any amount paid or accrued by a foreign corporation to a foreign related party of the taxpayer in connection with the acquisition of property by the foreign corporation from the foreign related party if the character of the property is subject to the allowance for depreciation (or amortization in lieu of depreciation) is a base erosion payment to the extent the property so acquired is used, or held for use, in the conduct of a trade or business within the United States.
(iv) Coordination with ECI exception. For purposes of paragraph (b)(4) of this section, amounts paid or accrued to a foreign related party treated as effectively connected income (or, in the case of a foreign related party that determines taxable income pursuant to the business profits provisions of an applicable income tax treaty, such amounts that are taken into account in determining taxable income) are not treated as paid to a foreign related party.
(v) Coordination with certain tax treaties—(A) Allocable expenses. Except as provided in paragraph (b)(4)(i)(E) of this section with respect to interest, if a foreign corporation determines its taxable income on a net basis pursuant to an applicable income tax treaty rather than provisions of the Internal Revenue Code, or the regulations published under 26 CFR chapter I, for determining effectively connected income, then the foreign corporation must determine whether each allowable deduction is a base erosion payment under paragraph (b)(1) of this section.
(B) Internal dealings under certain income tax treaties. Except as provided in paragraph (b)(4)(i)(E) of this section with respect to interest, if, pursuant to the terms of an applicable income tax treaty, a foreign corporation determines the profits attributable to a permanent establishment based on the assets used, risks assumed, and functions performed by the permanent establishment, then any deduction attributable to any amount paid or accrued (or treated as paid or accrued) by the permanent establishment to the foreign corporation's home office or to another branch of the foreign corporation (an “internal dealing”) is a base erosion payment to the extent that the payment or accrual is described under paragraph (b)(1) of this section.
(vi) Business interest expense arising in taxable years beginning after December 31, 2017. Any disallowed business interest expense described in section 163(j)(2) that resulted from a payment or accrual to a foreign related party that first arose in a taxable year beginning after December 31, 2017, is treated as a base erosion payment under paragraph (b)(1)(i) of this section in the year that the business interest expense initially arose. See paragraph (c)(4) of this section for rules that apply when business interest expense is limited under section 163(j)(1) in order to determine whether the disallowed business interest is attributed to business interest expense paid to a person that is not a related party, a foreign related party, or a domestic related party.
(c) Base erosion tax benefit—(1) In general. Except as provided in paragraph (c)(2) of this section, a base erosion tax benefit means:
(i) In the case of a base erosion payment described in paragraph (b)(1)(i) of this section, any deduction that is allowed under chapter 1 of subtitle A of the Internal Revenue Code for the taxable year with respect to that base erosion payment;
(ii) In the case of a base erosion payment described in paragraph (b)(1)(ii) of this section, any deduction allowed under chapter 1 of subtitle A of the Internal Revenue Code for the taxable year for depreciation (or amortization in lieu of depreciation) with respect to the property acquired with that payment;
(iii) In the case of a base erosion payment described in paragraph (b)(1)(iii) of this section, any reduction under section 803(a)(1)(B) in the gross amount of premiums and other consideration on insurance and annuity contracts for premiums and other consideration arising out of indemnity reinsurance, or any deduction under section 832(b)(4)(A) from the amount of gross premiums written on insurance contracts during the taxable year for premiums paid for reinsurance; or
(iv) In the case of a base erosion payment described in paragraph (b)(1)(iv) of this section, any reduction in gross receipts with respect to the payment in computing gross income of the taxpayer for the taxable year for purposes of chapter 1 of subtitle A of the Internal Revenue Code.
(2) Exception to base erosion tax benefit—(i) In general. Except as provided in paragraph (c)(3) of this section, any base erosion tax benefit attributable to any base erosion payment is not taken into account as a base erosion tax benefit if tax is imposed on that payment under section 871 or 881, and the tax has been deducted and withheld under section 1441 or 1442. If a payment is taken into account for purposes of the fraction described in paragraph (b)(4)(i)(A)(3) of this section, and tax is imposed on the payment under section 871 or 881, and the tax has been deducted and withheld under section 1441 or 1442, the payment is treated as not paid or accrued to a foreign related party.
(ii) Branch-level interest tax. Except as provided in paragraph (c)(3) of this section, any base erosion tax benefit of a foreign corporation attributable to any base erosion payment determined under paragraph (b)(4)(i)(A)(3) of this section or attributable to interest expense in excess of the hypothetical section 1.882-5 interest expense determined under paragraph (b)(4)(i)(E)(1) of this section is not taken into account as a base erosion tax benefit to the extent of the amount of excess interest, as defined in § 1.884-4(a)(2), if any, on which tax is imposed on the foreign corporation under section 884(f) and § 1.884-4, if the tax is properly reported on the foreign corporation's income tax return and paid in accordance with § 1.884-4(a)(2)(iv).
(3) Effect of treaty on base erosion tax benefit. If any treaty between the United States and any foreign country reduces the rate of tax imposed by section 871 or 881, the amount of base erosion tax benefit that is not taken into account under paragraph (c)(2) of this section is equal to the amount of the base erosion tax benefit before the application of paragraph (c)(2) of this section multiplied by a fraction of—
(i) The rate of tax imposed under the treaty; over
(ii) The rate of tax imposed without regard to the treaty.
(4) Application of section 163(j) to base erosion payments—(i) Classification of payments or accruals of business interest expense based on the payee. The following rules apply for corporations and partnerships:
(A) Classification of payments or accruals of business interest expense of a corporation. For purposes of this section, in the year that business interest expense of a corporation is paid or accrued the business interest expense is classified as foreign related business interest expense, domestic related business interest expense, or unrelated business interest expense.
(B) Classification of payments or accruals of business interest expense by a partnership. For purposes of this section, in the year that business interest expense of a partnership is paid or accrued, the business interest expense that is allocated to a partner is classified separately with respect to each partner in the partnership as foreign related business interest expense, domestic related business interest expense, or unrelated business interest expense.
(C) Classification of payments or accruals of business interest expense paid or accrued to a foreign related party that is subject to an exception—(1) ECI exception. For purposes of paragraph (c)(4)(i)(A) and (B) of this section, business interest expense paid or accrued to a foreign related party to which the exception in paragraph (b)(3)(iii) of this section (effectively connected income) applies is classified as domestic related business interest expense.
(2) TLAC interest and interest subject to withholding tax. For purposes of paragraph (c)(4)(i)(A) and (B) of this section, if the exception in paragraph (b)(3)(v) of this section (TLAC securities) or paragraph (c)(2) or (3) of this section (withholding tax) applies to business interest expense paid or accrued to a foreign related party, that business interest expense remains classified as foreign related business interest expense, and retains its classification as eligible for those exceptions, on a pro-rata basis with other foreign related business interest expense.
(ii) Ordering rules for business interest expense that is limited under section 163(j)(1) to determine which classifications of business interest expense are deducted and which classifications of business interest expense are carried forward—(A) In general. Section 163(j) and the regulations published under 26 CFR chapter I provide a limitation on the amount of business interest expense allowed as a deduction in a taxable year by a corporation or a partner in a partnership. In the case of a corporation with a disallowed business interest expense carryforward, the regulations under section 163(j) determine the ordering of the business interest expense deduction that is allowed on a year-by-year basis by reference first to business interest expense incurred in the current taxable year and then to disallowed business interest expense carryforwards from prior years. To determine the amount of base erosion tax benefit under paragraph (c)(1) of this section, this paragraph (c)(4)(ii) sets forth ordering rules that determine the amount of the deduction of business interest expense allowed under section 163(j) that is classified as paid or accrued to a foreign related party for purposes of paragraph (c)(1)(i) of this section. This paragraph (c)(4)(ii) also sets forth similar ordering rules that apply to disallowed business interest expense carryforwards for which a deduction is permitted under section 163(j) in a later year.
(B) Ordering rules for treating business interest expense deduction and disallowed business interest expense carryforwards as foreign related business interest expense, domestic related business interest expense, and unrelated business interest expense—(1) General ordering rule for allocating business interest expense deduction between classifications. For purposes of paragraph (c)(1) of this section, if a deduction for business interest expense is not subject to the limitation under section 163(j)(1) in a taxable year, the deduction is treated first as foreign related business interest expense and domestic related business interest expense (on a pro-rata basis), and second as unrelated business interest expense. The same principle applies to business interest expense of a partnership that is deductible at the partner level under § 1.163(j)-6(f).
(2) Ordering of business interest expense incurred by a corporation. If a corporation's business interest expense deduction allowed for any taxable year is attributable to business interest expense paid or accrued in that taxable year and to disallowed business interest expense carryforwards from prior taxable years, the ordering of business interest expense deduction provided in paragraph (c)(4)(ii)(B)(1) of this section among the classifications described therein applies separately for the carryforward amount from each taxable year, following the ordering set forth in § 1.163(j)-5(b)(2). Corresponding adjustments to the classification of disallowed business interest expense carryforwards are made consistent with this year-by-year approach. For purposes of section 59A and this section, an acquiring corporation in a transaction described in section 381(a) will succeed to and take into account the classification of any disallowed business interest expense carryforward. See § 1.381(c)(20)-1.
(3) Ordering of business interest expense incurred by a partnership and allocated to a corporate partner. For a corporate partner in a partnership that is allocated a business interest expense deduction under § 1.163(j)-6(f), the ordering rule provided in paragraph (c)(4)(ii)(B)(1) of this section applies separately to the corporate partner's allocated business interest expense deduction from the partnership; that deduction is not comingled with the business interest expense deduction addressed in paragraph (c)(4)(ii)(B)(1) or (2) of this section or the corporate partner's items from any other partnership. Similarly, when a corporate partner in a partnership is allocated excess business interest expense from a partnership under the rules set forth in § 1.163(j)-6(f) and the excess interest expense becomes deductible to the corporate partner, that partner applies the ordering rule provided in paragraph (c)(4)(ii)(B)(1) of this section separately to that excess interest expense on a year-by-year basis. Corresponding adjustments to the classification of disallowed business interest expense carryforwards are made consistent with this year-by-year and partnership-by-partnership approach.
(5) Allowed deduction. Solely for purposes of paragraph (c)(1) of this section, all deductions (and any premium or other consideration paid or accrued by the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A)) that could be properly claimed by a taxpayer for the taxable year (determined after giving effect to the taxpayer's permissible method of accounting and to any election, such as the election under section 173 to capitalize circulation expenditures or the election under section 168(g)(7) to use the alternative depreciation system of depreciation) are treated as allowed deductions under chapter 1 of subtitle A of the Internal Revenue Code.
(6) Election to waive allowed deductions—(i) In general. If a taxpayer elects to waive certain deductions, in whole or in part, pursuant to this paragraph (c)(6)(i), the amount of allowed deductions as described in paragraph (c)(5) of this section is reduced by the amounts that are properly waived. In order to make the election or increase the amount of the deduction waived, the taxpayer must determine that it could satisfy the requirements of § 1.59A-2(b) absent the election to waive certain deductions. For rules applicable to partners and partnerships, see paragraph (c)(6)(iv) of this section. For rules addressing waiver of premium or other consideration paid or accrued by a taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A), see paragraph (c)(6)(v) of this section.
(ii) Time and manner for election to waive deduction—(A) In general. A taxpayer may make the election described in paragraph (c)(6)(i) of this section on its original filed Federal income tax return. In addition, a taxpayer may elect to waive deductions or increase the amount of deductions waived pursuant to the election described in paragraph (c)(6)(i) of this section on an amended Federal income tax return filed within the later of three years from the date the original return was filed, taking into account section 6501(b)(1), for the taxable year for which the election is made or the period described in section 6501(c)(4), or during the course of an examination of the taxpayer's income tax return for the relevant taxable year pursuant to procedures prescribed by the Commissioner. However, a taxpayer may not decrease the amount of deductions waived by the election, or otherwise revoke the election that is described in paragraph (c)(6)(i) of this section on any amended Federal income tax return or during the course of an examination. To make the election, a taxpayer must complete the appropriate part of Form 8991, Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts (or successor), including the information described in paragraph (c)(6)(ii)(B) of this section and any other information required by the form or instructions. A taxpayer makes the election described in paragraph (c)(6)(i) of this section on an annual basis, and the taxpayer does not need the consent of the Commissioner if the taxpayer chooses not to make the election for a subsequent taxable year. The election described in paragraph (c)(6)(i) of this section may not be made in any other manner than as described in this paragraph (c)(6)(ii) (for example, by filing an application for a change in accounting method).
(B) Information required to make the election to waive allowed deductions. To make this election, a taxpayer must maintain contemporaneous documentation and provide information related to each deduction waived as required by applicable forms and instructions issued by the Commissioner, including—
(1) A description of the item or property to which the deduction relates, including sufficient information to identify that item or property on the taxpayer's books and records;
(2) The date on which, or period in which, the waived deduction was paid or accrued;
(3) The provision of the Internal Revenue Code (and regulations, as applicable) that allows the deduction for the item or property to which the election relates;
(4) The amount of the deduction that is claimed for the taxable year with respect to the item or property;
(5) The amount of the deduction being waived for the taxable year with respect to the item or property;
(6) A description of where the deduction is reflected (or would have been reflected) on the Federal income tax return (such as a line number); and
(7) The name, Taxpayer Identification Number (or, if the foreign person does not have a Taxpayer Identification Number, the foreign equivalent), and country of organization of the foreign related party that is or will be the recipient of the payment that generates the deduction.
(iii) Effect of election to waive deduction—(A) In general—(1) Consistent treatment. Except as otherwise provided in this paragraph (c)(6)(iii), any deduction waived under paragraph (c)(6)(i) of this section is treated as having been waived for all purposes of the Internal Revenue Code and regulations.
(2) No allocation and apportionment of waived deductions. The waiver of deductions described in paragraph (c)(6)(i) of this section is treated as occurring before the allocation and apportionment of deductions under §§ 1.861-8 through 1.861-14T and 1.861-17 (such as for purposes of section 904).
(3) Effect of waiver of deductions described in §§ 1.861-10 and 1.861-10T. To the extent that any waived deduction is interest expense that would have been directly allocated under the rules of § 1.861-10 or 1.861-10T and would have resulted in the reduction of value of any assets for purposes of allocating other interest expense under §§ 1.861-9 and 1.861-9T, the value of the assets is reduced to the same extent as if the taxpayer had not elected to waive the deduction.
(4) Effect of the election to waive deductions on the stock basis of a consolidated group member. For purposes of § 1.1502-32, any deduction waived under paragraph (c)(6)(i) of this section is a noncapital, nondeductible expense under § 1.1502-32(b)(2)(iii).
(B) Effect of the election to waive deductions disregarded for certain purposes. If a taxpayer makes the election to waive a deduction, in whole or in part, under paragraph (c)(6)(i) of this section, the election is disregarded for determining—
(1) The taxpayer's overall method of accounting, or the taxpayer's method of accounting for any item, under section 446;
(2) Whether a change in the taxpayer's overall plan of accounting or the taxpayer's treatment of a material item is a change in method of accounting under section 446(e) and § 1.446-1(e);
(3) The amount allowable under subtitle A of the Internal Revenue Code for depreciation or amortization for purposes of section 167(c) and section 1016(a)(2) or section 1016(a)(3) and any other adjustment to basis under section 1016(a);
(4) For purposes of applying the exclusive apportionment rule in § 1.861-17(b), the geographic source where the research and experimental activities which account for more than fifty percent of the amount of the deduction for research and experimentation was performed;
(5) The application of section 482;
(6) The amount of the taxpayer's earnings and profits; and
(7) Any other item as necessary to prevent a taxpayer from receiving the benefit of a waived deduction.
(C) Not a method of accounting. The election described in paragraph (c)(6)(i) of this section is not a method of accounting under section 446.
(D) Effect of the election in determining section 481(a) adjustments. A taxpayer making the election described in paragraph (c)(6)(i) of this section agrees that if the method of accounting for a waived deduction is changed, the amount of adjustment taken into account under section 481(a)(2) is determined without regard to the election described in paragraph (c)(6)(i) of this section. As a result, a waived deduction has no effect on the amount of a section 481(a) adjustment compared to what the adjustment would have been if the deduction had not been waived. See paragraph (d)(9) of this section (Example 9).
(iv) Rules applicable to partners and partnerships—(A) In general. Except as provided in paragraph (c)(6)(iv)(D) of this section, deductions allocated to a corporate partner by a partnership may only be waived by the partner and not by the partnership, and then only to the extent the partner otherwise qualifies for the waiver under paragraph (c)(6) of this section. For purposes of complying with the documentation requirements in paragraph (c)(6)(ii)(B) of this section, the partner is not required to report the information in paragraphs (c)(6)(ii)(B)(2) and (3) of this section, and in lieu of reporting the information in paragraphs (c)(6)(ii)(B)(1) of this section, the partner is required to report the partnership from which the item is allocated.
(B) Rule for determining the adjusted basis of a partner's interest in a partnership. If a partner elects to waive a deduction or increases the amount of deduction waived with respect to deductions allocated to it by a partnership, the partner treats the waived amount as a nondeductible expenditure under section 705(a)(2)(B).
(C) Rule for applying section 163(j). If a partner waives a deduction pursuant to paragraph (c)(6)(iv)(A) of this section that was taken into account by the partnership in determining the partnership's adjusted taxable income for purposes of section 163(j), then the increase in the partner's income resulting from the waiver is treated by the partner (but not the partnership) as a partner basis item (as defined in § 1.163(j)-6(b)(2)) for purposes of section 163(j).
(D) Limited application of election to waive deductions with respect to adjustments made pursuant to audit procedures under sections 6221 through 6241. Except as provided in this paragraph (c)(6)(iv)(D), a partner is not permitted to waive any adjustment by the Secretary to any partnership-related items that is made pursuant to subchapter C of chapter 63. A partner in a partnership subject to subchapter C of chapter 63 may only make an election to waive any increase in a deduction due to an adjustment made under subchapter C of chapter 63 that the partner takes into account under section 6225(c)(2)(A), 6226, or 6227 in a manner consistent with paragraph (c)(6) of this section. If the partner makes an election under paragraph (c)(6)(i) of this section, the partner will compute its additional reporting year tax (as described in § 301.6226-3 of this chapter) or amount due under § 301.6225-2(d)(2)(ii)(A) of this chapter taking into account the rules in paragraph (c)(6) of this section with respect to the increase in the deduction that is waived.
(v) Rule applicable to premium and other consideration paid or accrued by the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A). For purposes of paragraph (c)(6)(i) of this section, a taxpayer may elect to waive (or increase the amount waived of) any premium or other consideration paid or accrued by the taxpayer for any reinsurance payments that are taken into account under section 803(a)(1)(B) or 832(b)(4)(A) that would be a base erosion tax benefit within the meaning of section 59A(c)(2)(A)(iii), in accordance with the rules and principles of this paragraph (c)(6).
(d) Examples. The following examples illustrate the application of this section. For purposes of all the examples, assume that the taxpayer is an applicable taxpayer and all payments apply to a taxable year beginning after December 31, 2017.
(1) Example 1: Determining a base erosion payment—(i) Facts. FP is a foreign corporation that owns all of the stock of FC, a foreign corporation, and DC, a domestic corporation. FP has a trade or business in the United States with effectively connected income (USTB). DC owns FDE, a foreign disregarded entity. DC pays interest to FDE and FC. FDE pays interest to USTB. All interest paid by DC to FC and by FDE to USTB is deductible by DC in the current year for regular income tax purposes. FDE also acquires depreciable property from FP during the taxable year. FP's income from the sale of the depreciable property is not effectively connected with the conduct of FP's trade or business in the United States. DC and FP (based only on the activities of USTB) are applicable taxpayers under § 1.59A-2(b).
(ii) Analysis. The payment of interest by DC to FC is a base erosion payment under paragraph (b)(1)(i) of this section because the payment is made to a foreign related party and the interest payment is deductible. The payment of interest by DC to FDE is not a base erosion payment because the transaction is not a payment to a foreign person and the transaction is not a deductible payment. With respect to the payment of interest by FDE to USTB, if FP's USTB treats the payment of interest by FDE to USTB as income that is effectively connected with the conduct of a trade or business in the United States pursuant to section 864 or as profits attributable to a U.S. permanent establishment of a tax treaty resident, and if DC receives a withholding certificate from FP with respect to the payment, then the exception in paragraph (b)(3)(iii) of this section applies. Accordingly, the payment from DC, through FDE, to USTB is not a base erosion payment even though the payment is to the USTB of FP, a foreign related party. The acquisition of depreciable property by DC, through FDE, from FP is a base erosion payment under paragraph (b)(1)(ii) of this section because there is a payment to a foreign related party in connection with the acquisition by the taxpayer of property of a character subject to the allowance for depreciation and the exception in paragraph (b)(3)(iii) of this section does not apply because FP's income from the sale of the depreciable property is not effectively connected with the conduct of FP's trade or business in the United States. See § 1.59A-2 for the application of the aggregation rule with respect to DC and FP's USTB.
(2) Example 2: Interest allocable under § 1.882-5—(i) Facts. FC, a foreign corporation, has income that is effectively connected with the conduct of a trade or business within the United States. FC determines its interest expense under the three-step process described in § 1.882-5(b) through (d) with a total interest expense of $125x. The total interest expense is comprised of interest expense of $100x on U.S.- booked liabilities ($60x paid to a foreign related party and $40x paid to unrelated persons) and $25x of interest on excess U.S.-connected liabilities. FC has average worldwide interest expense (not including interest expense on U.S.-booked liabilities) of $500x, of which $100x is interest expense paid to a foreign related party. FC is an applicable taxpayer with respect to its effectively connected income. Assume all of the interest expense is deductible in the current taxable year and that none of the interest is subject to the effectively connected income exception in paragraph (b)(3)(iii) of this section.
(ii) Analysis. Under paragraph (b)(4)(i) of this section, the total amount of interest expense determined under § 1.882-5 that is a base erosion payment is $65x ($60x + 5x). FC has $60x of interest on U.S.-booked liabilities that is paid to a foreign related party and that is treated as a base erosion payment under paragraph (b)(4)(i)(A)(2) of this section. Additionally, $5x of the $25x of interest expense on excess U.S.-connected liabilities is treated as a base erosion payment under paragraph (b)(4)(i)(A)(3) of this section ($25x * ($100x/$500x)).
(3) Example 3: Interaction with section 163(j)—(i) Facts. Foreign Parent (FP) is a foreign corporation that owns all of the stock of DC, a domestic corporation that is an applicable taxpayer. DC does not conduct a utility trade or business as described in section 163(j)(7)(A)(iv), an electing real property trade or business as described in section 163(j)(7)(B), or an electing farming business as described in section 163(j)(7)(C). In Year 1, DC has adjusted taxable income, as defined in section 163(j)(8), of $1000x and pays the following amounts of business interest expense: $420x that is paid to unrelated Bank, and $360x that is paid to FP. DC does not earn any business interest income or incur any floor plan financing interest expense in Year 1. None of the exceptions in paragraph (b)(3) of this section apply, and the interest is not subject to withholding.
(ii) Analysis—(A) Classification of business interest. In Year 1, DC is permitted to deduct only $300x of business interest expense under section 163(j)(1) ($1000x × 30%). Paragraph (c)(4)(ii)(B) of this section provides that for purposes of paragraph (c)(1) of this section the deduction is treated first as foreign related business interest expense and domestic related business interest expense (here, only FP); and second as unrelated business interest expense (Bank). As a result, the $300x of business interest expense that is permitted under section 163(j)(1) is treated entirely as the business interest paid to the related foreign party, FP. All of DC's $300x deductible interest is treated as an add-back to modified taxable income in the Year 1 taxable year for purposes of § 1.59A-4(b)(2)(i).
(B) Ordering rules for disallowed business interest expense carryforward. Under section 163(j)(2), the $480x of disallowed business interest ($420x + $360x−$300x) is carried forward to the subsequent year. Under paragraph (c)(4)(ii)(B)(1) and (2) of this section, the disallowed business interest carryforward is correspondingly treated first as unrelated business interest expense, and second pro-rata as foreign related business interest expense and domestic related business interest expense. As a result, $420x of the $480x disallowed business interest expense carryforward is treated first as business interest expense paid to Bank and the remaining $60x of the $480x disallowed business interest expense carryforward is treated as interest paid to FP and as an add-back to modified taxable income.
(4) Example 4: Interaction with section 163(j); carryforward—(i) Facts. The facts are the same as in paragraph (d)(3) of this section (the facts in Example 3), except that in addition, in Year 2, DC has adjusted taxable income of $250x, and pays the following amounts of business interest expense: $50x that is paid to unrelated Bank, and $45x that is paid to FP. DC does not earn any business interest income or incur any floor plan financing interest expense in Year 2. None of the exceptions in paragraph (b)(3) of this section apply.
(ii) Analysis—(A) Classification of business interest. In Year 2, for purposes of section 163(j)(1), DC is treated as having paid or accrued total business interest expense of $575x, consisting of $95x business interest expense actually paid in Year 2 and $480x of business interest expense that is carried forward from Year 1. DC is permitted to deduct $75x of business interest expense in Year 2 under the limitation in section 163(j)(1) ($250x × 30%). Section 1.163(j)-5(b)(2) provides that, for purposes of section 163(j), the allowable business interest expense is first attributed to amounts paid or accrued in the current year, and then attributed to amounts carried over from earlier years on a first-in-first-out basis from the earliest year. Accordingly, the $75x of deductible business interest expense is deducted entirely from the $95x business interest expense incurred in Year 2 for section 163(j) purposes. Because DC's business interest expense deduction is limited under section 163(j)(1) and because DC's total business interest expense is attributable to more than one taxable year, paragraph (c)(4)(ii)(B)(2) of this section provides that the ordering rule in paragraph (c)(4)(ii)(B)(1) of this section is applied separately to each annual amount of section 163(j) disallowed business interest expense carryforward. With respect to the Year 2 layer, which is deducted first, paragraph (c)(4)(ii)(B) of this section provides that, for purposes of paragraph (c)(1) of this section, the Year 2 $75x deduction is treated first as foreign related business interest expense and domestic related business interest expense (here, only FP, $45x); and second as unrelated business interest expense (Bank, $30x). Consequentially, all of the $45x deduction of business interest expense that was paid to FP in Year 2 is treated as a base erosion tax benefit and an add-back to modified taxable income for the Year 2 taxable year for purposes of § 1.59A-4(b)(2)(i).
(B) Ordering rules for disallowed business interest expense carryforward. The disallowed business interest expense carryforward of $20x from Year 2 is correspondingly treated first as business interest expense paid to Bank under paragraph (c)(4)(i) of this section. The disallowed business interest expense carryforward of $480x from the Year 1 layer that is also not allowed as a deduction in Year 2 remains treated as $420x paid to Bank and $60 paid to FP.
(5) Example 5: Interaction with section 163(j); carryforward—(i) Facts. The facts are the same as in paragraph (d)(4) of this section (the facts in Example 4), except that in addition, in Year 3, DC has adjusted taxable income of $4000x and pays no business interest expense. DC does not earn any business interest income or incur any floor plan financing interest expense in Year 3.
(ii) Analysis. In Year 3, DC is treated as having paid or accrued total business interest expense of $500x, consisting of $480x of business interest expense that is carried forward from Year 1 and $20x of business interest expense that is carried forward from Year 2 for purposes of section 163(j)(1). DC is permitted to deduct $1200x of business interest expense in Year 3 under the limitation in section 163(j)(1) ($4000x × 30%). For purposes of section 163(j), DC is treated as first deducting the business interest expense from Year 1 then the business interest expense from Year 2. See § 1.163(j)-5(b)(2). Because none of DC's $500x business interest expense is limited under section 163(j), the stacking rule in paragraph (c)(4)(ii) of this section for allowed and disallowed business interest expense does not apply. For purposes of § 1.59A-4(b)(2)(i), DC's add-back to modified taxable income is $60x determined by the classifications in paragraph (c)(4)(i)(A) of this section ($60x treated as paid to FP from Year 1).
(6) Example 6: Interaction with section 163(j); partnership—(i) Facts. The facts are the same as in paragraph (d)(4) of this section (the facts in Example 4), except that in addition, in Year 2, DC forms a domestic partnership (PRS) with Y, a domestic corporation that is not related to DC within the meaning of § 1.59A-1(b)(17). PRS does not conduct a utility trade or business as described in section 163(j)(7)(A)(iv), an electing real property trade or business as described in section 163(j)(7)(B) or an electing farming business as described in section 163(j)(7)(C) subject to section 163(j). PRS is not a small business described in section 163(j)(3). DC and Y are equal partners in partnership PRS. In Year 2, PRS has ATI of $100x and $48x of business interest expense. $12x of PRS's business interest expense is paid to Bank, and $36x of PRS's business interest expense is paid to FP. PRS allocates the items comprising its $100x of ATI $50x to DC and $50x to Y. PRS allocates its $48x of business interest expense $24x to DC and $24x to Y. DC classifies its $24x of business interest expense as $6x unrelated business interest expense (Bank) and $18x as foreign related business interest expense (FP) under paragraph (c)(4)(i)(B) of this section. Y classifies its $24x of business interest expense as entirely unrelated business interest expense of Y (Bank and FP) under paragraph (c)(4)(i)(B) of this section. None of the exceptions in paragraph (b)(3) of this section apply.
(ii) Partnership level analysis. In Year 2, PRS's section 163(j) limit is 30 percent of its ATI, or $30x ($100x × 30 percent). Thus, PRS has $30x of deductible business interest expense and $18x of excess business interest expense ($48x−$30x). The $30x of deductible business interest expense is includible in PRS's non-separately stated income or loss, and is not subject to further limitation under section 163(j) at the partners' level.
(iii) Partner level allocations analysis. Pursuant to § 1.163(j)-6(f)(2), DC and Y are each allocated $15x of deductible business interest expense and $9x of excess business interest expense. At the end of Year 2, DC and Y each have $9x of excess business interest expense from PRS, which under § 1.163(j)-6 is not treated as paid or accrued by the partner until such partner is allocated excess taxable income or excess business interest income from PRS in a succeeding year. Pursuant to § 1.163(j)-6(e), DC and Y, in computing their limit under section 163(j), do not increase any of their section 163(j) items by any of PRS's section 163(j) items.
(iv) Partner level allocations for determining base erosion tax benefits. The $15x of deductible business interest expense allocated to DC is treated first as foreign related business interest expense (FP) under paragraph (c)(4)(ii)(B) of this section. DC's excess business interest expense from PRS of $9x is classified first as the unrelated business interest expense with respect to Bank ($6x) and then as the remaining portion of the business interest expense paid to FP ($3x, or $18x−$15x). Under paragraph (c)(4)(ii)(B)(3) of this section, these classifications of the PRS items apply irrespective of the classifications of DC's own interest expense as set forth in paragraph (d)(4) of this section (Example 4).
(v) Computation of modified taxable income. For Year 2, DC is treated as having incurred base erosion tax benefits of $60x, consisting of the $15x base erosion tax benefit with respect to its interest in PRS that is computed in paragraph (d)(6)(iii) of this section (Example 6) and $45x that is computed in paragraph (d)(4) of this section (Example 4).
(7) Example 7: Transfers of property to related taxpayers—(i) Facts. FP is a foreign corporation that owns all of the stock of DC1 and DC2, both domestic corporations. DC1 and DC2 are both members of the same aggregate group but are not members of the same consolidated tax group under section 1502. In Year 1, FP sells depreciable property to DC1. On the first day of the Year 2 tax year, DC1 sells the depreciable property to DC2.
(ii) Analysis—(A) Year 1. The acquisition of depreciable property by DC1 from FP is a base erosion payment under paragraph (b)(1)(ii) of this section because there is a payment to a foreign related party in connection with the acquisition by the taxpayer of property of a character subject to the allowance for depreciation.
(B) Year 2. The acquisition of the depreciable property in Year 2 by DC2 is not itself a base erosion payment because DC2 did not acquire the property from a foreign related party. However, under paragraph (b)(2)(viii) of this section any depreciation expense taken by DC2 on the property acquired from DC1 is a base erosion payment and a base erosion tax benefit under paragraph (c)(1)(ii) of this section because the acquisition of the depreciable property was a base erosion payment by DC1 and the property was sold to a member of the aggregate group; therefore, the depreciation expense continues as a base erosion tax benefit to DC2 as it would have been to DC1 if it continued to own the property.
(8) Example 8: Effect of election to waive deduction on method of accounting—(i) Facts. DC, a domestic corporation, purchased and placed in service a depreciable asset (Asset A) from a foreign related party on the first day of its taxable year 1 for $100x. DC elects to use the alternative depreciation system under section 168(g) to depreciate all properties placed in service during taxable year 1. Asset A is not eligible for the additional first year depreciation deduction. Beginning in taxable year 1, DC depreciates Asset A under the alternative depreciation system using the straight-line depreciation method, a 5-year recovery period, and the half-year convention. This depreciation method, recovery period, and convention are permissible for Asset A under section 168(g). On its timely filed original Federal income tax return for taxable year 1, DC does not elect to waive any deductions and DC claims a depreciation deduction of $10x for Asset A. On its timely filed original Federal income tax return for taxable year 2, DC does not elect to waive any deductions and DC claims a depreciation deduction of $20x for Asset A. During taxable year 3, DC files an amended return for taxable year 1 to elect to waive the depreciation deduction for Asset A and reports in accordance with paragraph (c)(6)(ii) of this section with its amended return for taxable year 1 that the amount of the waived depreciation deduction for Asset A is $10x and the amount of the claimed depreciation deduction is $0x.
(ii) Analysis. Pursuant to paragraph (c)(6)(iii)(B)(1) of this section, DC's election to waive the depreciation deduction for Asset A for taxable year 1 is disregarded for determining DC's method of accounting for Asset A. Accordingly, after DC's election to waive the depreciation deduction for Asset A for taxable year 1, DC's method of accounting for depreciation for Asset A continues to be the straight-line depreciation method, a 5-year recovery period, and the half-year convention. Pursuant to paragraph (c)(6)(iii)(C) of this section, the election made by DC in taxable year 3 on its amended return for taxable year 1 is not a method of accounting.
(9) Example 9: Change of accounting method when taxpayer has waived a deduction—(i) Facts. DC, a domestic corporation, purchased and placed in service a depreciable asset (Asset B) from a foreign related party on the first day of its taxable year 1 for $100x. DC elects to use the alternative depreciation system under section 168(g) to depreciate all properties placed in service during taxable year 1. Asset B is not eligible for the additional first year depreciation deduction. Beginning in taxable year 1, DC depreciates Asset B under the alternative depreciation system using the straight-line depreciation method, a 10-year recovery period, and the half-year convention. Under this method of accounting, the depreciation deductions for Asset B are $5x for taxable year 1 and $10x for taxable year 2. However, for taxable years 1 and 2, DC elects to waive $3x and $6x, respectively, of the depreciation deductions for Asset B and reports the information required under paragraph (c)(6)(ii) of this section with its returns. In taxable year 3, DC realizes that the correct recovery period for Asset B is 5 years. If DC had used the correct recovery period for Asset B, the depreciation deductions for Asset B would have been $10x for taxable year 1 and $20x for taxable year 2. DC timely files a Form 3115 to change its method of accounting for Asset B from a 10-year recovery period to a 5-year recovery period, beginning with taxable year 3. DC was not under examination as of the date on which it timely filed this Form 3115.
(ii) Analysis—(A) Computation of the section 481(a) adjustment. In determining the net negative section 481(a) adjustment for this method change, DC compares the depreciation deductions under its present method of accounting to the depreciation deductions under its proposed method of accounting. Pursuant to paragraph (c)(6)(iii)(D) of this section, DC agreed that, by making the election to waive depreciation deductions for Asset B, DC will not take into account the fact that depreciation deductions for Asset B were waived under paragraph (c)(6)(i) of this section. Accordingly, DC's net negative section 481(a) adjustment for this method change is $15x, which is calculated by determining the difference between the depreciation deductions for Asset B for taxable years 1 and 2 under DC's present method of accounting ($15x) and the depreciation deductions that would have been allowable for Asset B for taxable years 1 and 2 under DC's proposed method of accounting ($30x).
(B) Computation of basis adjustments. Pursuant to paragraph (c)(6)(iii)(B)(3) of this section, DC's elections to waive the depreciation deductions for Asset B for taxable years 1 and 2 are disregarded for determining the amount allowable for depreciation for purposes of section 1016(a)(2). The amount allowable for depreciation of Asset B is determined based on the proper method of computing depreciation for Asset B. Accordingly, Asset B's adjusted basis at the end of taxable year 1 is $90x ($100x−$10x) and at the end of taxable year 2 is $70x ($90x−$20x).
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended by T.D. 9910, 85 FR 64365, Oct. 9, 2020; T.D. 10041, 90 FR 59049, Dec. 18, 2025]
§ 1.59A-4 Modified taxable income.
(a) Scope. Paragraph (b)(1) of this section provides rules for computing modified taxable income. Paragraph (b)(2) of this section provides rules addressing how base erosion tax benefits and net operating losses affect modified taxable income. Paragraph (b)(3) of this section provides a rule for a holder of a residual interest in a REMIC. Paragraph (c) of this section provides examples illustrating the rules described in this section.
(b) Computation of modified taxable income—(1) In general. The term modified taxable income means a taxpayer's taxable income, as defined in section 63(a), determined with the additions described in paragraph (b)(2) of this section. Notwithstanding the foregoing, the taxpayer's taxable income may not be reduced to an amount less than zero as a result of a net operating loss deduction allowed under section 172. See paragraphs (c)(1) and (2) of this section (Examples 1 and 2).
(2) Modifications to taxable income. The amounts described in this paragraph (b)(2) are added back to a taxpayer's taxable income to determine its modified taxable income.
(i) Base erosion tax benefits. The amount of any base erosion tax benefit as defined in § 1.59A-3(c)(1).
(ii) Certain net operating loss deductions. The base erosion percentage, as described in § 1.59A-2(e)(3), of any net operating loss deduction allowed to the taxpayer under section 172 for the taxable year. For purposes of determining modified taxable income, the net operating loss deduction allowed does not exceed taxable income before taking into account the net operating loss deduction. See paragraph (c)(1) and (2) of this section (Examples 1 and 2). The base erosion percentage for the taxable year that the net operating loss arose is used to determine the addition under this paragraph (b)(2)(ii). For a net operating loss that arose in a taxable year beginning before January 1, 2018, the base erosion percentage for the taxable year is zero.
(3) Rule for holders of a residual interest in a REMIC. For purposes of paragraph (b)(1) of this section, the limitation in section 860E(a)(1) is not taken into account in determining the taxable income amount that is used to compute modified taxable income for the taxable year.
(c) Examples. The following examples illustrate the rules of paragraph (b) of this section.
(1) Example 1: Current year loss—(i) Facts. A domestic corporation (DC) is an applicable taxpayer that has a calendar taxable year. In 2020, DC has gross income of $100x, a deduction of $80x that is not a base erosion tax benefit, and a deduction of $70x that is a base erosion tax benefit. In addition, DC has a net operating loss carryforward to 2020 of $400x that arose in 2016.
(ii) Analysis. DC's starting point for computing modified taxable income is $(50x), computed as gross income of $100x, less a deduction of $80x (non-base erosion tax benefit) and a deduction of $70x (base erosion tax benefit). Under paragraph (b)(2)(ii) of this section, DC's starting point for computing modified taxable income does not take into account the $400x net operating loss carryforward because the allowable deductions for 2020, not counting the NOL deduction, exceed the gross income for 2020. DC's modified taxable income for 2020 is $20x, computed as $(50x) + $70x base erosion tax benefit.
(2) Example 2: Net operating loss deduction—(i) Facts. The facts are the same as in paragraph (c)(1)(i) of this section (the facts in Example 1), except that DC's gross income in 2020 is $500x.
(ii) Analysis. DC's starting point for computing modified taxable income is $0x, computed as gross income of $500x, less: A deduction of $80x (non-base erosion tax benefit), a deduction of $70x (base erosion tax benefit), and a net operating loss deduction of $350x (which is the amount of taxable income before taking into account the net operating loss deduction, as provided in paragraph (b)(2)(ii) of this section ($500x−$150x)). DC's modified taxable income for 2020 is $70x, computed as $0x + $70x base erosion tax benefit. DC's modified taxable income is not increased as a result of the $350x net operating loss deduction in 2020 because the base erosion percentage of the net operating loss that arose in 2016 is zero under paragraph (b)(2)(ii) of this section.
[T.D. 9885, 84 FR 67017, Dec. 6, 2019]
§ 1.59A-5 Base erosion minimum tax amount.
(a) Scope. Paragraph (b) of this section provides rules regarding the calculation of the base erosion minimum tax amount. Paragraph (c) of this section describes the base erosion and anti-abuse tax rate applicable to the taxable year.
(b) Base erosion minimum tax amount—(1) In general. For each taxable year, an applicable taxpayer must determine its base erosion minimum tax amount.
(2) Calculation of base erosion minimum tax amount. With respect to any applicable taxpayer, the base erosion minimum tax amount for any taxable year is, the excess (if any) of—
(i) An amount equal to the base erosion and anti-abuse tax rate multiplied by the modified taxable income of the taxpayer for the taxable year, over
(ii) An amount equal to the regular tax liability as defined in § 1.59A-1(b)(16) of the taxpayer for the taxable year, reduced (but not below zero) by the excess (if any) of—
(A) The credits allowed under chapter 1 of subtitle A of the Code against regular tax liability over
(B) The sum of the credits described in paragraph (b)(3) of this section.
(3) Credits that do not reduce regular tax liability. The sum of the following credits are used in paragraph (b)(2)(ii)(B) of this section to limit the amount by which the credits allowed under chapter 1 of subtitle A of the Internal Revenue Code reduce regular tax liability—
(i) Taxable years beginning on or before December 31, 2025. For any taxable year beginning on or before December 31, 2025—
(A) The credit allowed under section 38 for the taxable year that is properly allocable to the research credit determined under section 41(a);
(B) The portion of the applicable section 38 credits not in excess of 80 percent of the lesser of the amount of those applicable section 38 credits or the base erosion minimum tax amount (determined without regard to this paragraph (b)(3)(i)(B)); and
(C) Any credits allowed under sections 33, 37, and 53.
(ii) Taxable years beginning after December 31, 2025. For any taxable year beginning after December 31, 2025, any credits allowed under sections 33, 37, and 53.
(c) Base erosion and anti-abuse tax rate—(1) In general. For purposes of calculating the base erosion minimum tax amount, the base erosion and anti-abuse tax rate is—
(i) Calendar year 2018. For taxable years beginning in calendar year 2018, five percent.
(ii) Calendar years 2019 through 2025. For taxable years beginning after December 31, 2018, through taxable years beginning before January 1, 2026, 10 percent.
(iii) Calendar years after 2025. For taxable years beginning after December 31, 2025, 12.5 percent.
(2) Increased rate for banks and registered securities dealers—(i) In general. In the case of a taxpayer that is a member of an affiliated group (as defined in section 1504(a)(1)) that includes a bank or a registered securities dealer, the percentage otherwise in effect under paragraph (c)(1) of this section is increased by one percentage point.
(ii) De minimis exception to increased rate for banks and registered securities dealers. Paragraph (c)(2)(i) of this section does not apply to a taxpayer that is a member of an affiliated group (as defined in section 1504(a)(1)) that includes a bank or registered securities dealer if, in that taxable year, the total gross receipts of the affiliated group attributable to the bank or the registered securities dealer (or attributable to all of the banks and registered securities dealers in the group, if more than one) represent less than two percent of the total gross receipts of the affiliated group, as determined under § 1.59A-2(d).
(3) Application of section 15 to tax rates in section 59A—(i) New tax. Section 15 does not apply to any taxable year that includes January 1, 2018.
(ii) Change in tax rate pursuant to section 59A(b)(1)(A). Section 15 does not apply to any taxable year that includes January 1, 2019.
(iii) Change in rate pursuant to section 59A(b)(2). Section 15 applies to the change in tax rate pursuant to section 59A(b)(2)(A).
[T.D. 9885, 84 FR 67017, Dec. 6, 2019]
§ 1.59A-6 Qualified derivative payment.
(a) Scope. This section provides additional guidance regarding qualified derivative payments. Paragraph (b) of this section defines the term qualified derivative payment. Paragraph (c) of this section provides guidance on certain payments that are not treated as qualified derivative payments. Paragraph (d) defines the term derivative for purposes of section 59A. Paragraph (e) of this section provides examples illustrating the rules of this section.
(b) Qualified derivative payment—(1) In general. A qualified derivative payment means any payment made by a taxpayer to a foreign related party pursuant to a derivative with respect to which the taxpayer—
(i) Recognizes gain or loss as if the derivative were sold for its fair market value on the last business day of the taxable year (and any additional times as required by the Internal Revenue Code or the taxpayer's method of accounting);
(ii) Treats any gain or loss so recognized as ordinary; and
(iii) Treats the character of all items of income, deduction, gain, or loss with respect to a payment pursuant to the derivative as ordinary.
(2) Reporting requirements—(i) In general. No payment is a qualified derivative payment under paragraph (b)(1) of this section for any taxable year unless the taxpayer (whether or not the taxpayer is a reporting corporation as defined in § 1.6038A-1(c)) reports the information required in § 1.6038A-2(b)(7)(ix) for the taxable year. To report its qualified derivative payments, a taxpayer must include the payment in the aggregate amount of qualified derivative payments on Form 8991 (or successor).
(ii) Failure to satisfy the reporting requirement. If a taxpayer fails to satisfy the reporting requirement described in paragraph (b)(2)(i) of this section with respect to any payments, those payments are not eligible for the qualified derivative payment exception described in § 1.59A-3(b)(3)(ii) and are base erosion payments unless an exception in § 1.59A-3(b)(3) otherwise applies. A taxpayer's failure to report a payment as a qualified derivative payment does not impact the eligibility of any other payment which the taxpayer properly reported under paragraph (b)(2)(i) of this section from being a qualified derivative payment.
(iii) Reporting of aggregate amount of qualified derivative payments. The aggregate amount of qualified derivative payments is the sum of the amount described in paragraph (b)(3) of this section for each derivative. To the extent that the taxpayer is treated as receiving a payment, as determined in § 1.59A-2(e)(3)(vi), for the taxable year with respect to a derivative, the payment is not included in the aggregate qualified derivative payments.
(iv) Transition period for qualified derivative payment reporting. Before paragraph (b)(2)(i) of this section is applicable, a taxpayer will be treated as satisfying the reporting requirement described section 59A(h)(2)(B) to the extent that the taxpayer reports the aggregate amount of qualified derivative payments on Form 8991 (or successor). See § 1.6038A-2(g) (applicability date for § 1.6038A-2(b)(7)(ix)). Until paragraph (b)(2)(i) of this section is applicable, paragraph (b)(2)(ii) of this section will not apply to a taxpayer who reports the aggregate amount of qualified derivative payments in good faith.
(3) Amount of any qualified derivative payment—(i) In general. The amount of any qualified derivative payment excluded from the denominator of the base erosion percentage as provided in § 1.59A-2(e)(3)(ii)(C) is determined as provided in § 1.59A-2(e)(3)(vi).
(ii) Net qualified derivative payment that includes a payment that is a base erosion payment. Any net amount determined in paragraph (b)(3)(i) of this section must be reduced by any gross items that are treated as a base erosion payment pursuant to paragraph (c) of this section.
(iii) Special rule for mark-to-market gains and losses on the securities leg of a securities lending transaction—(A) In general. The amount of any qualified derivative payment with respect to the securities leg of a securities lending transaction as defined in §§ 1.861-2(a)(7) and 1.861-3(a)(6) that is excluded from the denominator of the base erosion percentage is determined under § 1.59A-3(b)(2)(iv)(B). The securities leg of a securities lending transaction refers to the rights, obligations, and transfers of securities and payments under the transaction other than the obligation to provide or right to receive cash collateral and interest thereon. Pursuant to § 1.59A-3(b)(2)(iv)(B), mark-to-market gains and losses on a securities leg of a securities lending transaction are not included in determining the amount of the qualified derivative payment with respect to that security. Thus, the amount of the qualified derivative payment with respect to the securities leg of a securities lending transaction is determined by taking into account only other items of income, gain, loss, or deduction during the taxable year that relate to the securities leg, such as substitute payments defined in §§ 1.861-2(a)(7) and 1.861-3(a)(6) and borrow fees. This paragraph (b)(3)(iii)(A) applies to a taxpayer that is either the borrower or lender with respect to the securities lending transaction.
(B) Examples. The following examples illustrate the application of this paragraph (b)(3)(iii).
(1) Example 1: Securities loan—(i) Facts. FP is a foreign corporation that owns all of the shares of DC, a domestic corporation. FP is a foreign related party of DC under § 1.59A-1(b)(12). DC is a registered securities dealer. On September 1 of year 1, DC enters into a securities lending transaction with FP in which it borrows stock from FP. DC provides cash collateral for the loan and receives a rebate on that collateral from FP. On September 1, year 1, the stock has a value of $100x. On November 1, year 1, a dividend of $1x is paid by the issuer on the stock. DC pays a substitute dividend of $1x to FP on November 1, year 1 under the terms of the securities loan. There are no other payments made or received in year 1. On December 31, year 1, the stock has a value of $106x. DC is required to mark-to-market the securities leg of the securities lending transaction for U.S. Federal income tax purposes. DC is a calendar year taxpayer.
(ii) Analysis. DC has a deduction of $1x as a result of the substitute dividend it pays to FP. Assuming that the securities lending transaction otherwise meets the requirements of this section (including reporting the information required by § 1.6038A-2(b)(7)(ix)), the amount of DC's qualified derivative payment with respect to the securities lending transaction is $1x. Payments with respect to the cash collateral are not treated as part of the securities lending transaction. See paragraph (d)(2)(iii)(B) of this section. With respect to the securities leg of the securities lending transaction, DC has a mark-to-market loss of ($6x). Under paragraph (b)(3)(iii)(A) of this section, the amount of this mark-to-market loss is not included when determining the amount of the qualified derivative payment. Under § 1.59A-3(b)(2)(iv)(B), DC's ($6x) mark-to-market loss on the securities leg of the securities lending transaction also is not taken into account in determining the base erosion tax benefit amount for purposes of the numerator of the base erosion percentage. The ($6x) loss is taken into account in the denominator of the base erosion percentage, while the $1x substitute dividend payment is not taken into account for that purpose because it is a qualified derivative payment. See § 1.59A-2(e)(3)(ii)(C) and (e)(3)(vi). The amount of the qualified derivative payment would be the same if the lender paid a rebate on the cash collateral in year 1, without regard to whether the parties agree to pay and receive a net payment reflecting the difference between the amount of the rebate and the amount of the substitute payment.
(2) Example 2: Securities loan. The facts are the same as in paragraph (b)(3)(iii)(B)(1) of this section (Example 1) except that on December 31, year 1, the stock has a value of $94x. With respect to the securities leg of the securities lending transaction, DC has a mark-to-market gain of $6x. Under paragraph (b)(3)(iii)(A) of this section, the amount of this mark-to-market gain is not included when determining the amount of the qualified derivative payment. DC has a deduction of $1x as a result of the substitute dividend payment it makes to FP. Assuming that the securities lending transaction otherwise meets the requirements of this section (including reporting the information required by § 1.6038A-2(b)(7)(ix)), the amount of DC's qualified derivative payment with respect to the securities lending transaction is $1x. Neither the $6x gain nor the $1x substitute dividend payment, which is a qualified derivative payment, are taken into account in the denominator of the base erosion percentage.
(iv) Rule for determining the amount of a substitute payment or other payment paid with respect to a securities lending transaction to a foreign related party—(A) In general. When a taxpayer makes a substitute payment as defined in § 1.861-2(a)(7) or § 1.861-3(a)(6) or other payment with respect to the securities leg of a securities lending transaction, the taxpayer must determine whether the substitute payment or other payment is paid to a foreign related party. The amount of the substitute payment or other payment paid by the taxpayer to a foreign related party is determined under either paragraph (b)(3)(iv)(B) or (C) of this section.
(B) Specific identification method. The taxpayer may determine the amount of the substitute payments or other payments with respect to the securities leg of a securities lending transaction that it has paid to foreign related parties by using the amount actually paid by the taxpayer to the foreign related parties if the taxpayer can specifically identify all recipients of the substitute payments or other payments paid by the taxpayer during the taxable year with respect to the securities leg of a securities lending transaction or the taxpayer can specifically identify the payor for all substitute payments or other payments received by foreign related parties during the taxable year with respect to the securities leg of a securities lending transaction.
(C) Alternative method. If the taxpayer has paid any substitute payment or other payment with respect to the securities leg of a securities lending transaction to which the taxpayer cannot apply paragraph (b)(3)(iv)(B) of this section, the taxpayer must use the methodology provided in this paragraph (b)(3)(iv)(C).
(1) Step 1: Determining the total amount of substitute payments and other payments received by foreign related parties. The taxpayer must determine the total amount of substitute payments and other payments with respect to the securities leg of a securities lending transaction received by all foreign related parties of the taxpayer during the taxable year.
(2) Step 2: Determining the total amount of substitute payments and other payments paid by taxpayer. The taxpayer must determine the total amount of substitute payments and other payments with respect to the securities leg of a securities lending transaction paid by the taxpayer during the taxable year.
(3) Step 3: Determining the amount of substitute payments and other payments paid by the taxpayer to foreign related parties. The amount of substitute payments and other payments with respect to the securities leg of a securities lending transaction paid by the taxpayer is treated as being paid first to foreign related parties of the taxpayer up to the total amount of substitute payments and other payments with respect to the securities leg of a securities lending transaction received by foreign related parties. Any amount of substitute payments and other payments with respect to the securities leg of a securities lending transaction paid by the taxpayer that exceeds the amount of substitute payments and other payments received by foreign related parties is treated as paid to unrelated parties for purposes of this paragraph (b)(3)(iv)(C)(3).
(D) Example—(1) Facts. FP is a foreign corporation that owns all of the shares of DC, a domestic corporation, and all of the shares of several foreign subsidiaries. FP and its foreign subsidiaries are foreign related parties of DC under § 1.59A-1(b)(12). DC is a registered securities dealer. DC enters into securities lending transactions pursuant to which it borrows securities both from foreign affiliates that are members of the FP controlled group and from unrelated customers. DC obtains the securities from a common pool of available securities that includes securities from DC's U.S. customer accounts as well as securities held by members of the FP controlled group for their own account and for the account of customers. DC is unable to determine from its records either the identities of the counterparties from which DC has borrowed securities or whether it has entered into a securities lending transaction with a foreign affiliate. In year 1, DC makes substitute payments of $500x in aggregate with respect to the securities lending transactions. DC's foreign affiliates receive substitute payments in year 1 totaling $100x. Because DC cannot determine whether it has entered into a securities lending transaction with a foreign affiliate, DC does not know what portion of the $100x received by DC's foreign affiliates was paid by DC.
(2) Analysis. Because DC is unable to determine the actual amount of substitute payments it has paid to DC's foreign affiliates, DC cannot use the specific identification method of paragraph (b)(3)(iv)(B) of this section to determine the amount of substitute payments it has paid to foreign related parties for QDP reporting purposes. Instead, DC must use the alternative method set forth in paragraph (b)(3)(iv)(C) of this section to determine the amount of substitute payments treated as made to foreign related party recipients. Under Step 1, DC determines that its foreign affiliates have received substitute payments of $100x. Under Step 2, DC determines that it has paid substitute payments totaling $500x. Under Step 3, DC is treated as having paid substitute payments to its foreign affiliates of $100x, up to the total amount of substitute payments they received in year 1. The remaining $400x of substitute payments paid by DC is treated as having been paid to unrelated parties for purposes of paragraph (b)(3)(iv)(C)(3) of this section.
(c) Exceptions for payments otherwise treated as base erosion payments. A payment does not constitute a qualified derivative payment if—
(1) The payment would be treated as a base erosion payment if it were not made pursuant to a derivative, including any interest, royalty, or service payment; or
(2) In the case of a contract that has derivative and nonderivative components, the payment is properly allocable to the nonderivative component.
(d) Derivative defined—(1) In general. For purposes of this section, the term derivative means any contract (including any option, forward contract, futures contract, short position, swap, or similar contract) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined by reference to one or more of the following:
(i) Any share of stock in a corporation;
(ii) Any evidence of indebtedness;
(iii) Any commodity that is actively traded;
(iv) Any currency; or
(v) Any rate, price, amount, index, formula, or algorithm.
(2) Exceptions. The following contracts are not treated as derivatives for purposes of section 59A.
(i) Direct interest. A derivative contract does not include a direct interest in any item described in paragraph (d)(1)(i) through (v) of this section.
(ii) Insurance contracts. A derivative contract does not include any insurance, annuity, or endowment contract issued by an insurance company to which subchapter L applies (or issued by any foreign corporation to which the subchapter would apply if the foreign corporation were a domestic corporation).
(iii) Securities lending and sale-repurchase transactions—(A) Multi-step transactions treated as financing. For purposes of paragraph (d)(1) of this section, a derivative does not include any securities lending transaction, sale-repurchase transaction, or substantially similar transaction that is treated as a secured loan for federal tax purposes. Securities lending transaction and sale-repurchase transaction have the meanings provided in § 1.861-2(a)(7).
(B) Special rule for payments associated with the cash collateral provided in a securities lending transaction or substantially similar transaction. For purposes of paragraph (d)(1) of this section, a derivative does not include the cash collateral component of a securities lending transaction (or the cash payments pursuant to a sale-repurchase transaction, or similar payments pursuant to a substantially similar transaction).
(C) Anti-abuse exception for certain transactions that are the economic equivalent of substantially unsecured cash borrowing. For purposes of paragraph (d)(1) of this section, a derivative does not include any securities lending transaction or substantially similar transaction that is part of an arrangement that has been entered into with a principal purpose of avoiding the treatment of any payment with respect to that transaction as a base erosion payment and that provides the taxpayer with the economic equivalent of a substantially unsecured cash borrowing. The determination of whether the securities lending transaction or substantially similar transaction provides the taxpayer with the economic equivalent of a substantially unsecured cash borrowing takes into account arrangements that effectively serve as collateral due to the taxpayer's compliance with any U.S. regulatory requirements governing such transaction.
(3) American depository receipts. For purposes of section 59A, American depository receipts (or any similar instruments) with respect to shares of stock in a foreign corporation are treated as shares of stock in that foreign corporation.
(e) Examples. The following examples illustrate the rules of this section.
(1) Example 1: Notional principal contract as QDP—(i) Facts. Domestic Corporation (DC) is a dealer in securities within the meaning of section 475. On February 1, 2019, DC enters into a contract (Interest Rate Swap) with Foreign Parent (FP), a foreign related party, for a term of five years. Under the Interest Rate Swap, DC is obligated to make a payment to FP each month, beginning March 1, 2019, in an amount equal to a variable rate determined by reference to the prime rate, as determined on the first business day of the immediately preceding month, multiplied by a notional principal amount of $50x. Under the Interest Rate Swap, FP is obligated to make a payment to DC each month, beginning March 1, 2019, in an amount equal to 5% multiplied by the same notional principal amount. The Interest Rate Swap satisfies the definition of a notional principal contract under § 1.446-3(c). DC recognizes gain or loss on the Interest Rate Swap pursuant to section 475. DC reports the information required to be reported for the taxable year under § 1.6038A-2(b)(7)(ix).
(ii) Analysis. The Interest Rate Swap is a derivative as described in paragraph (d) of this section because it is a contract that references the prime rate and a fixed rate for determining the amount of payments. The exceptions described in paragraph (c) of this section do not apply to the Interest Rate Swap. Because DC recognizes ordinary gain or loss on the Interest Rate Swap pursuant to section 475(d)(3), it satisfies the condition in paragraph (b)(1)(ii) of this section. Because DC satisfies the requirement relating to the information required to be reported under paragraph (b)(2) of this section, any payment to FP with respect to the Interest Rate Swap will be a qualified derivative payment. Therefore, under § 1.59A-3(b)(3)(ii), the payments to FP are not base erosion payments.
(2) Example 2: Securities lending anti-abuse rule—(i) Facts. (A) Foreign Parent (FP) is a foreign corporation that owns all of the stock of domestic corporation (DC) and foreign corporation (FC). FP and FC are foreign related parties of DC under § 1.59A-1(b)(12) but not members of DC's aggregate group. On January 1 of year 1, with a principal purpose of providing financing to DC without DC making a base erosion payment to FC, FC lends 100x U.S. Treasury bills with a remaining maturity of 11 months (Securities A) to DC (Securities Lending Transaction 1) for a period of six months. Pursuant to the terms of Securities Lending Transaction 1, DC is obligated to make substitute payments to FC corresponding to the interest payments on Securities A. DC does not post cash collateral with respect to Securities Lending Transaction 1, and no other arrangements of FC or DC effectively serve as collateral under any U.S. regulatory requirements governing the transaction. Immediately thereafter, DC sells Securities A for cash.
(B) On June 30 of year 1, FC lends 100x U.S. Treasury bills with a remaining maturity of 11 months (Securities B) to DC (Securities Lending Transaction 2) for a period of six months. Pursuant to the terms of Securities Lending Transaction 2, DC is obligated to make substitute payments to FC corresponding to the interest payments on Securities B. Immediately thereafter, DC sells Securities B for cash and uses the cash to purchase U.S. Treasury bills with a remaining maturity equal to the Securities A bills that DC then transfers to FC in repayment of Securities Lending Transaction 1.
(ii) Analysis. Securities Lending Transaction 1 and Securities Lending Transaction 2 are not treated as derivatives for purposes of paragraph (d)(1) of this section because the transactions are part of an arrangement that has been entered into with a principal purpose of avoiding the treatment of any payment with respect to Securities Lending Transaction 1 and Securities Lending Transaction 2 as a base erosion payment and provides DC with the economic equivalent of a substantially unsecured cash borrowing by DC. As a result, pursuant to paragraph (d)(2)(iii)(C) of this section, the substitute payments made by DC to FC with respect to Securities A and Securities B are not eligible for the exception in § 1.59A-3(b)(3)(ii) (qualified derivative payment).
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended by T.D. 10041, 90 FR 59049, Dec. 18, 2025]
§ 1.59A-7 Application of base erosion and anti-abuse tax to partnerships.
(a) Scope. This section provides rules regarding how partnerships and their partners are treated for purposes of making certain determinations under section 59A, including whether there is a base erosion payment or base erosion tax benefit. All references to partnerships in this section include domestic and foreign partnerships. This section applies to payments to a partnership and payments from a partnership as well as transfers of partnership interests (as defined in paragraph (c)(3)(iv) of this section). The aggregate principle described in this section does not override the treatment of partnership items under any Code section other than section 59A. The aggregate principles provided in this section apply without regard to any tax avoidance purpose relating to a particular partnership. See § 1.701-2(e). Paragraph (b) of this section describes how the aggregate approach to partnerships applies for purposes of certain section 59A determinations. Paragraph (c) of this section provides rules for determining whether there is a base erosion payment with respect to a payment to or from a partnership. Paragraph (d) of this section provides rules for determining the base erosion tax benefits of a partner. Paragraph (e) of this section provides additional rules relating to the application of section 59A to partnerships. Paragraph (f) of this section provides a rule for determining whether a person is a foreign related party. Paragraph (g) of this section provides examples that illustrate the application of the rules of this section.
(b) Application of section 59A to partnerships. The purpose of this section is to provide a set of operating rules for the application of section 59A to partnerships and partners in a manner consistent with the purposes of section 59A. Except for purposes of determining a partner's base erosion tax benefits under paragraph (d)(1) of this section and whether a taxpayer is a registered securities dealer under paragraph (e)(3) of this section, section 59A determinations are made at the partner level in the manner described in this section. The provisions of section 59A must be interpreted in a manner consistent with this approach. If a transaction is not specifically described in this section, whether the transaction gives rise to a base erosion payment or base erosion tax benefit is determined in accordance with the principles of this section and the purposes of section 59A.
(c) Base erosion payment. For purposes of determining whether a taxpayer has made a base erosion payment as described in § 1.59A-3(b), the taxpayer must treat a payment to or from a partnership as made to or from each partner and the assets and liabilities of the partnership as assets and liabilities of each partner. This paragraph (c) provides specific rules for determining whether a partner has made or received a payment, including as a result of a partnership interest transfer (as defined in paragraph (c)(3)(iv) of this section).
(1) Payments made by or to a partnership. For purposes of determining whether a payment or accrual by a partnership is a base erosion payment described in § 1.59A-3(b)(1)(i), any amount paid or accrued by the partnership (including any guaranteed payment described in section 707(c)) is treated as paid or accrued by each partner based on the partner's distributive share of the item of deduction with respect to that amount. For purposes of determining whether a payment or accrual to a partnership is a base erosion payment described in § 1.59A-3(b)(1)(i) or (iii), any amount paid or accrued to the partnership (including any guaranteed payment described in section 707(c)) is treated as paid or accrued to each partner based on the partner's distributive share of the item of income with respect to that amount. See paragraph (e)(1) of this section to determine the partner's distributive share.
(2) Transfers of certain property. When a partnership transfers property, each partner is treated as transferring its proportionate share of the property transferred for purposes of determining whether there is a base erosion payment described in § 1.59A-3(b)(1)(ii) or (iv). When a partnership acquires property, each partner is treated as acquiring its proportionate share of the property acquired for purposes of determining whether there is a base erosion payment described in § 1.59A-3(b)(1)(ii) or (iv). For purposes of this paragraph (c)(2), a transfer of property does not include a transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section). See paragraph (c)(3) of this section for rules applicable to transfers of partnership interests. See paragraphs (g)(2)(v) and (vi) of this section (Example 5 and Example 6) for examples illustrating the application of this paragraph (c)(2).
(3) Transfers of a partnership interest—(i) In general. A transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section) is generally treated as a transfer by each partner in the partnership of its proportionate share of the partnership's assets to the extent of any change in its proportionate share of any partnership asset, as well as any assumption of associated liabilities by the partner. Paragraphs (c)(3)(ii) and (iii) of this section provide rules for applying the general rule to transfers of a partnership interest by a partner and issuances of a partnership interest by the partnership for contributed property, respectively. See paragraph (g)(2)(vii) of this section (Example 7) for an example illustrating the application of this paragraph (c)(3)(i).
(ii) Transfers of a partnership interest by a partner. A transfer of a partnership interest (as defined in paragraph (c)(3)(iv) of this section) by a partner is treated as a transfer by the transferor to the recipient of the transferor's proportionate share of each of the partnership assets and an assumption by the recipient of the transferor's proportionate share of the partnership liabilities. If the partner's entire partnership interest is not transferred, only the proportionate share of each of the partnership assets and liabilities associated with the transferred partnership interest is treated as transferred and assumed. See paragraphs (g)(2)(iii), (iv), and (vi) of this section (Example 3, Example 4, and Example 6) for examples illustrating the application of this paragraph (c)(3)(ii).
(iii) Certain issuances of a partnership interest by a partnership. If a partnership issues an interest in the partnership in exchange for a contribution of property to the partnership, the contributing partner is treated as exchanging a portion of the contributed property and assuming any liabilities associated with the transferred partnership interest for a portion of the partners' pre-contribution interests in the partnership's assets and the partners' assumption of any liabilities transferred to the partnership. For purposes of this paragraph (c)(3)(iii), a reference to the “partnership's assets” includes the assets contributed by the contributing partner and any other assets that are contributed to the partnership at the same time. Each partner whose proportionate share in a partnership asset (including the assets contributed to the partnership as part of the transaction) is reduced as a result of the transaction is treated as transferring the asset to the extent of the reduction, and each person who receives a proportionate share or an increased proportionate share in an asset as a result of the transaction is treated as receiving an asset to the extent of the increase, proportionately from the partners' reduced interests. For example, if a person contributes property to a partnership in which each of two existing partners has a 50 percent pro-rata interest in the partnership in exchange for a one-third pro-rata partnership interest, each of the pre-contribution partners is treated as transferring a one-third interest in their share of existing partnership assets to the contributing partner, and the contributing partner is treated as transferring a one-third interest in the contributed assets to each of the original partners. See paragraphs (g)(2)(i) and (ii) of this section (Example 1 and Example 2) for additional examples illustrating the application of this paragraph (c)(3)(iii).
(iv) Partnership interest transfers defined. For purposes of paragraphs (c)(3) and (4) of this section, a transfer of a partnership interest includes any issuance of a partnership interest by a partnership; any sale of a partnership interest; any increase or decrease in a partner's proportionate share of any partnership asset as a result of a contribution of property or services to a partnership, a distribution, or a redemption; or any other transfer of a proportionate share of any partnership asset (other than a transfer of a partnership asset that is not a partnership interest by the partnership to a person not acting in a partner capacity), whether by a partner or the partnership (including as a result of a deemed or actual sale or a capital shift).
(4) Increased basis from a distribution. If a distribution of property from a partnership to a partner results in an increase in the tax basis of either the distributed property or other partnership property, such as under section 732(b) or 734(b), the increase in tax basis attributable to a foreign related party is treated as if it was newly purchased property acquired by the taxpayer (to the extent of its proportionate share) from the foreign related party that is placed in service when the distribution occurs. See § 1.734-1(e). This increased basis treated as newly purchased property is treated as acquired with a base erosion payment, unless an exception in § 1.59A-3(b) applies. For this purpose, in the case of a distribution to a foreign related party, the increased basis in the remaining partnership property that is treated as newly purchased property is entirely attributable to the foreign related party. In the case of a distribution to a taxpayer, the increased basis in the distributed property that is treated as newly purchased property is attributable to each foreign related party in proportion to the foreign related party's proportionate share of the asset immediately before the distribution. If the distribution is to a person other than a taxpayer or a foreign related party, there is no base erosion payment caused by the distribution under this paragraph (c)(4). See paragraphs (g)(2)(vii), (viii), and (ix) of this section (Example 7, Example 8, and Example 9) for examples illustrating the application of this paragraph (c)(4).
(5) Operating rules applicable to base erosion payments—(i) Single payment characterized as separate transactions. If a single transaction is partially characterized in one manner and partially characterized in another manner, each part of the transaction is separately analyzed. For example, if a contribution of property to a partnership is partially treated as a contribution and partially treated as a disguised sale, the contribution and sale are separately analyzed under paragraph (c) of this section.
(ii) Ordering rule with respect to transfers of a partnership interest. If a partnership interest is transferred (within the meaning of paragraph (c)(3)(iv) of this section), paragraph (c)(3) of this section first applies to determine the assets deemed transferred by the transferor(s) to the transferee(s) and liabilities deemed assumed by the parties. Then, to the extent applicable (such as where a partnership makes a contribution in exchange for an interest in another partnership or when a partnership receives an interest in another partnership as a contribution to it), paragraph (c)(2) of this section applies for purposes of determining the proportionate share of the property received by the partners in a partnership. See paragraph (g)(2)(vi) of this section (Example 6) for an illustration of this rule.
(iii) Consideration for base erosion payment or property resulting in base erosion tax benefits. When a partnership pays or receives property, services, or other consideration, each partner is deemed to pay or receive the property, services, or other consideration paid or received by the partnership for purposes of determining if there is a base erosion payment, except as otherwise provided in paragraph (c) of this section. See paragraphs (g)(2)(v) and (vi) of this section (Example 5 and Example 6) for illustrations of this rule.
(iv) Non-cash consideration. When both parties to a transaction use non-cash consideration, each party must separately apply paragraph (c) of this section to determine its base erosion payment with respect to each property. For example, if two partnerships, each with a domestic corporation and a foreign corporation as partners, all of whom are related, exchange depreciable property, each transfer of property would be separately analyzed to determine whether it is a base erosion payment.
(v) Allocations of income in lieu of deductions. If a partnership adopts the curative method of making section 704(c) allocations under § 1.704-3(c), an allocation of income to the partner to whom any built-in gain or built-in loss would be allocable under section 704(c) (the 704(c) partner), in an amount necessary to offset the effect of the ceiling rule (as defined in § 1.704-3(b)(1)), in lieu of a deduction allocation to a partner other than the 704(c) partner (a non-704(c) partner), is treated as a deduction to the non-704(c) partner for purposes of section 59A in an amount equal to the income allocation. See paragraph (g)(2)(x) of this section (Example 10) for an example illustrating the application of this paragraph (c)(5)(v).
(d) Base erosion tax benefit for partners—(1) In general. A partner's distributive share of any deduction or reduction in gross receipts attributable to a base erosion payment (including as a result of sections 704(b) and (c), 707(a) and (c), 732(b) and (d), 734(b) and (d), 737, 743(b) and (d), and 751(b)) is the partner's base erosion tax benefit, subject to the exceptions in § 1.59A-3(c)(2). See paragraph (e)(1) of this section to determine the partner's distributive share for purposes of section 59A. A partner's base erosion tax benefit may be more than the partner's base erosion payment. For example, if a partnership makes a payment to a foreign related party of its domestic partner to acquire a depreciable asset, and the partnership specially allocates more depreciation deductions to a partner than its proportionate share of the asset, the partner's base erosion tax benefit includes the specially allocated depreciation deduction even if the total allocated deduction exceeds the partner's share of the base erosion payment made to acquire the asset. Base erosion tax benefits are determined separately for each asset, payment, or accrual, as applicable, and are not netted with other items. A taxpayer determines its base erosion tax benefits for non-partnership items pursuant to § 1.59A-3(c).
(2) Exception for base erosion tax benefits of certain small partners—(i) In general. For purposes of determining a partner's amount of base erosion tax benefits attributable to a base erosion payment made by a partnership, a partner does not take into account its distributive share of any base erosion tax benefits from the partnership for the taxable year if—
(A) The partner's interest in the partnership represents less than ten percent of the capital and profits of the partnership at all times during the taxable year;
(B) The partner is allocated less than ten percent of each partnership item of income, gain, loss, deduction, and credit for the taxable year; and
(C) The partner's interest in the partnership has a fair market value of less than $25 million on the last day of the partner's taxable year, determined using a reasonable method.
(ii) Attribution. For purposes of paragraph (d)(2)(i) of this section, a partner's interest in a partnership or partnership item is determined by adding the interests of the partner and any related party of the partner (as determined under section 59A), taking into account any interest owned directly, indirectly, or through constructive ownership (applying the section 318 rules as modified by section 59A (except section 318(a)(3)(A) through (C) will also apply so as to consider a United States person as owning stock that is owned by a person who is not a United States person), but excluding any interest to the extent already taken into account).
(e) Other rules for applying section 59A to partnerships—(1) Partner's distributive share. For purposes of section 59A, each partner's distributive share of an item of income or deduction of the partnership is determined under sections 704(b) and (c) and takes into account amounts determined under other provisions of the Code, including but not limited to sections 707(a) and (c), 732(b) and (d), 734(b) and (d), 737, 743(b) and (d), and 751(b). See § 1.704-1(b)(1)(iii) regarding the application of section 482. These amounts are calculated separately for each payment or accrual on a property-by-property basis, including for purposes of section 704(c), and are not netted. For purposes of section 59A, a partner's distributive share of a reduction to determine gross income is equal to a proportionate amount of the partnership's reduction to determine gross income corresponding to the partner's share of the partnership gross receipts (as determined under paragraph (e)(2)(i) of this section) related to that reduction.
(2) Gross receipts—(i) In general. For purposes of section 59A, each partner in the partnership includes a share of partnership gross receipts in proportion to the partner's distributive share (as determined under sections 704(b) and (c)) of items of gross income that were taken into account by the partnership under section 703 or 704(c) (such as remedial or curative items under § 1.704-3(c) or (d)).
(ii) Foreign corporation. See § 1.59A-2(d)(3) for gross receipts of foreign corporations.
(3) Registered securities dealers. If a partnership, or a branch of the partnership, is a registered securities dealer, each partner is treated as a registered securities dealer unless the partner's interest in the registered securities dealer would satisfy the criteria for the exception in paragraph (d)(2) of this section. For purposes of applying the de minimis exception in § 1.59A-2(e)(2)(iii), a partner takes into account its distributive share of the relevant partnership items.
(4) Application of sections 163(j) and 59A(c)(3) to partners. See § 1.59A-3(c)(4).
(5) Tiered partnerships. In the case of one or more partnerships owning an interest in another partnership (or partnerships), the rules of this section apply successively to each partnership and its partners in the chain of ownership. Paragraphs (d)(2) and (f) of this section and the small partner exception in paragraph (e)(3) of this section apply only to a partner that is not itself a partnership.
(f) Foreign related party. With respect to any person that owns an interest in a partnership, the related party determination in section 59A(g) applies at the partner level.
(g) Examples. The following examples illustrate the application of this section.
(1) Facts. The following facts are assumed for purposes of the examples.
(i) DC is a domestic corporation that is an applicable taxpayer for purposes section 59A.
(ii) FC is a foreign corporation that is a foreign related party with respect to DC.
(iii) UC is a domestic corporation that is not related to DC and FC.
(iv) Neither FC nor any partnership in the examples is (or is treated as) engaged in a U.S. trade or business or has a permanent establishment in the United States.
(v) All payments apply to a taxable year beginning after December 31, 2017.
(vi) Unless otherwise stated, all allocations are pro-rata and satisfy the requirements of section 704(b) and all the partners have equal interests in the partnership.
(vii) Unless otherwise stated, depreciable property acquired and placed in service by the partnership has a remaining recovery period of five years and is depreciated under the alternative depreciation system of section 168(g) using the straight line method. Solely for purposes of simplifying the calculations in these examples, assume the applicable convention rules in section 168(d) do not apply.
(viii) No exception under § 1.59A-3(b) or (c) applies to any amount paid or accrued.
(2) Examples—(i) Example 1: Contributions to a partnership on partnership formation—(A) Facts. DC and FC form partnership PRS, with each contributing depreciable property that has a fair market value and tax basis of $100x, Property A and Property B, respectively. Therefore, the property contributed by FC, Property B, will generate $20x of annual section 704(b) and tax depreciation deductions for five years. The depreciation deductions will be allocated $10x to each of DC and FC each year. Before the transactions, for purposes of section 59A, DC is treated as owning a 100 percent interest in Property A and a zero percent interest in Property B, and FC is treated as owning a 100 percent interest in Property B and a zero percent interest in Property A. After the formation of PRS, for purposes of section 59A, DC and FC are each treated as owning a 50 percent proportionate share of each of Property A and Property B.
(B) Analysis. The treatment of contributions of property in exchange for an interest in a partnership is described in paragraph (c)(3)(iii) of this section. Under paragraph (c)(3)(iii) of this section, DC is treated as exchanging a 50 percent interest in Property A for a 50 percent proportionate share of Property B. Under § 1.59A-3(b)(1)(ii), the payment to acquire depreciable property, Property B, from FC is a base erosion payment. The base erosion tax benefit is the amount of depreciation allocated to DC with respect to Property B ($10x per year) and is not netted with any other partnership item pursuant to paragraph (d)(1) of this section.
(ii) Example 2: Section 704(c) and remedial allocations—(A) Facts. The facts are the same as in paragraph (g)(2)(i)(A) of this section (the facts in Example 1), except that Property B has a tax basis of $40x and PRS adopts the remedial method under § 1.704-3(d).
(B) Analysis. The analysis and results are the same as in paragraph (g)(2)(i)(B) of this section (the analysis in Example 1), except that annual tax depreciation is $8x ($40x/5) and annual remedial tax deduction allocation to DC is $2x (with $2x of remedial income to FC) for five years. Both the tax depreciation and the remedial tax allocation to DC are base erosion tax benefits to DC under paragraph (d)(1) of this section.
(iii) Example 3: Sale of a partnership interest without a section 754 election—(A) Facts. UC and FC are equal partners in partnership PRS, the only asset of which is Property A, a depreciable property with a fair market value of $200x and a tax basis of $120x. PRS does not have any section 704(c) assets. DC purchases 50 percent of FC's interest in PRS for $50x. Prior to the sale, for section 59A purposes, FC is treated as owning a 50 percent proportionate share of Property A and DC is treated as owning no interest in Property A. Following the sale, for section 59A purposes, DC is treated as owning a 25 percent proportionate share of Property A, all of which is treated as acquired from FC. The partnership does not have an election under section 754 in effect. Property A will generate $24x of annual tax and section 704(b) depreciation deductions for five years. The depreciation deductions will be allocated $12x to UC and $6x to both FC and DC each year.
(B) Analysis. The sale of a partnership interest by a partner is analyzed under paragraph (c)(3)(ii) of this section. Under section (c)(3)(ii) of this section, FC is treated as selling to DC 25 percent of Property A. Under § 1.59A-3(b)(1)(ii), the payment to acquire depreciable property is a base erosion payment. Under paragraph (d)(1) of this section, the base erosion tax benefit is the amount of depreciation allocated to DC with respect to the base erosion payment, which would be the depreciation deductions allocated to DC with respect to Property A. DC's annual $6x depreciation deduction is its base erosion tax benefit with respect to the base erosion payment.
(iv) Example 4: Sale of a partnership interest with section 754 election—(A) Facts. The facts are the same as in paragraph (g)(2)(iii)(A) of this section (the facts in Example 3), except that the partnership has an election under section 754 in effect. As a result of the sale, there is a $20x positive adjustment to the tax basis in Property A with respect to DC under section 743(b) (DC's $50x basis in the PRS interest less DC's $30x share of PRS's tax basis in Property A). The section 743(b) step-up in tax basis is recovered over a depreciable recovery period of five years. Therefore, DC will be allocated a total of $10x in annual depreciation deductions for five years, comprised of $6x with respect to DC's proportionate share of PRS's common tax basis in Property A ($30x over 5 years) and $4x with respect to the section 743(b) adjustment ($20x over 5 years).
(B) Analysis. The analysis is the same as in paragraph (g)(2)(iii)(B) of this section (the analysis in Example 3); however, because section 743(b) increases the basis in Property A for DC by $20x, DC is allocated additional depreciation deductions of $4x per year as a result of the section 743(b) adjustment and has an annual base erosion tax benefit of $10x ($6x plus $4x) for five years under paragraph (d)(1) of this section.
(v) Example 5: Purchase of depreciable property from a partnership—(A) Facts. The facts are the same as in paragraph (d)(2)(iii)(A) of this section (the facts in Example 3), except that instead of DC purchasing an interest in the partnership, DC purchases Property A from the partnership for $200x.
(B) Analysis. DC must analyze whether the purchase of the depreciable property from the partnership is a base erosion payment under paragraph (c)(2) of this section. Under paragraph (c)(2) of this section, DC is treated as acquiring FC's proportionate share of Property A from FC. Because DC paid the partnership for the partnership's interest in Property A, under paragraph (c)(5)(iii) of this section, DC is treated as paying FC for FC's proportionate share of Property A. Under § 1.59A-3(b)(1)(ii), the payment to FC to acquire depreciable property is a base erosion payment. DC's base erosion tax benefit is the amount of depreciation allocated to DC with respect to the base erosion payment, which in this case is the amount of depreciation deductions with respect to the property acquired with a base erosion payment, or the depreciation deductions from FC's (but not UC's) proportionate share of the asset. See § 1.59A-7(d)(1).
(vi) Example 6: Sale of a partnership interest to a second partnership—(A) Facts. FC, UC1, and UC2 are equal partners in partnership PRS1. DC and UC3 are equal partners in partnership PRS2. UC1, UC2, and UC3 are not related to DC or FC. PRS1's sole asset is Property A, which is depreciable property with a fair market value and tax basis of $300x. FC sells its entire interest in PRS1 to PRS2 for $100. For section 59A purposes, FC's proportionate share of Property A prior to the sale is one-third. Following the sale, for section 59A purposes, PRS2's proportionate share of Property A is one-third and DC's proportionate share of Property A (through PRS2) is one-sixth (50 percent of one-third).
(B) Analysis. Under paragraph (c)(5)(ii) of this section (the ordering rule), FC's transfer of its interest in PRS1 is first analyzed under paragraph (c)(3) of this section to determine how the transfer of the partnership interest is treated. Then, paragraph (c)(2) of this section applies to analyze how the acquisition of property by PRS2 is treated. Under paragraph (c)(3)(ii) of this section, FC is deemed to transfer its proportionate share of PRS1's assets, which is one-third of Property A. Then, under paragraph (c)(2) of this section, DC is treated as acquiring its proportionate share of PRS2's proportionate share of Property A from FC, which is one-sixth (50 percent of one-third). Under paragraph (c)(5)(iii) of this section, DC is treated as paying for the property it is treated as acquiring from FC. Therefore, DC's deemed payment to FC to acquire depreciable property is a base erosion payment under § 1.59A-3(b)(1)(ii). DC's base erosion tax benefit is equal to DC's distributive share of depreciation deductions that PRS2 allocates to DC attributable to Property A. See § 1.59A-7(d)(1).
(vii) Example 7: Distribution of cash by a partnership to a foreign related party—(A) Facts. DC, FC, and UC are equal partners in a partnership, PRS, the assets of which consist of cash of $90x and a depreciable asset (Property A) with a fair market value of $180x and a tax basis of $60x. Each partner's interest in PRS has a fair market value of $90x ($270x/3) and a tax basis of $50x. Assume that all non-depreciable assets are capital assets, all depreciable assets are nonresidential real property under section 168, and that no depreciation has been claimed prior to the transaction below. PRS has an election under section 754 in effect. PRS distributes the $90x of cash to FC in complete liquidation of its interest, resulting in gain to FC of $40x ($90x minus its tax basis in PRS of $50x) under section 731(a)(1) and an increase to the tax basis of Property A under section 734(b) of $40x. Prior to the distribution, for section 59A purposes, each partner had a one-third proportionate share of Property A. After the distribution, for section 59A purposes, the remaining partners each have a 50 percent proportionate share of Property A. Each partner's pro-rata allocation of depreciation deductions with respect to Property A is in proportion to each partner's proportionate share of Property A both before and after the distribution. Half of the depreciation deductions attributable to the $40x section 734(b) step-up will be allocated to DC. In addition, DC's proportionate share of Property A increased from one-third to one-half and therefore DC will be allocated depreciation deductions with respect to half of the original basis of $60x (or $30x) instead of one-third of $60x (or $20x).
(B) Analysis. Distributions of property that cause an increase in the tax basis of property that continues to be held by the partnership are analyzed under paragraph (c)(4) of this section. The $40x increase in the tax basis of Property A as a result of the distribution of cash to FC is treated as newly purchased property acquired from FC under paragraph (c)(4) of this section and therefore acquired with a base erosion payment under § 1.59A-3(b)(1)(ii) to DC to the extent of DC's proportionate share. DC's base erosion tax benefit is the amount of DC's depreciation deductions attributable to that base erosion payment, which is DC's distributive share of the depreciation deductions with respect to the $40x increase in the tax basis of Property A. See § 1.59A-7(d)(1). In addition, FC transferred a partnership interest to DC (as defined in paragraph (c)(3)(iv) of this section), which is analyzed under paragraph (c)(3)(i) of this section. Under paragraph (c)(3)(i) of this section, DC is deemed to acquire a one-sixth interest in Property A from FC (the increase in DC's proportionate share from one-third to one-half). DC's base erosion tax benefit from this additional one-sixth interest in Property A is the amount of DC's depreciation deductions attributable to this interest.
(viii) Example 8: Distribution of property by a partnership to a taxpayer—(A) Facts. The facts are the same as paragraph (g)(2)(vii)(A) of this section (the facts of Example 7), except that PRS's depreciable property consists of two assets, Property A having a fair market value of $90x and a tax basis of $60x and Property B having a fair market value of $90x and a tax basis of zero. Instead of distributing cash to FC, PRS distributes Property B to DC in liquidation of its interest, resulting in an increase in the basis of the distributed Property B to DC of $50x (from zero to $50x) under section 732(b) because DC's tax basis in the PRS interest was $50x. For section 59A purposes, prior to the distribution, each partner had a one-third proportionate share of Property B and after the distribution, the property is wholly owned by DC.
(B) Analysis. Distributions of property that cause an increase in the tax basis of property that is distributed to a taxpayer are analyzed under paragraph (c)(4) of this section. Under paragraph (c)(4) of this section, the $50x increase in tax basis is treated as newly purchased property that was acquired with a base erosion payment to the extent that the increase in tax basis is attributable to FC. Under paragraph (c)(4) of this section, the portion of the increase that is attributable to FC is the proportionate share of the Property B immediately before the distribution that was treated as owned by FC. Immediately before the distribution, FC had a one-third proportionate share of Property B. Accordingly, one-third of the $50x increase in the tax basis of Property B is treated as if it was newly purchased property acquired by DC from FC with a base erosion payment under § 1.59A-3(b)(1)(ii). DC's base erosion tax benefit is the amount of DC's depreciation deductions with respect to the base erosion payment, which in this case is the depreciation deductions with respect to the one-third interest in the increased basis treated as newly purchased property deemed acquired from FC. See § 1.59A-3(c)(1). In addition, PRS transferred Property B to DC, which is analyzed under paragraph (c)(2) of this section. Prior to the distribution, DC, FC, and UC each owned one-third of Property B. After the distribution, DC entirely owned Property B. Therefore, under paragraph (c)(2) of this section, DC is treated as acquiring one-third of Property B from FC. DC's depreciation deductions with respect to the one-third of Property B acquired from FC (without regard to the basis increase) is also a base erosion tax benefit.
(ix) Example 9: Distribution of property by a partnership in liquidation of a foreign related party's interest—(A) Facts. The facts are the same as paragraph (g)(2)(viii)(A) (the facts of Example 8), except that Property B is not distributed to DC and, instead, Property A is distributed to FC in liquidation of its interest, resulting in a tax basis in Property A of $50x in FC's hands under section 732(b) and a section 734(b) step-up in Property B of $10x (because Property A's tax basis was reduced from $60x to $50x), allocable to DC and UC. For section 59A purposes, prior to the distribution, each partner had a one-third proportionate share of Property B and after the distribution, DC and UC each have a one-half proportionate share of Property B.
(B) Analysis. Distributions of property that cause an increase in the tax basis of property that continues to be held by the partnership are analyzed under paragraph (c)(4) of this section. Under paragraph (c)(4) of this section, because the distribution of Property A to FC from PRS caused an increase in the tax basis of Property B, the entire $10x increase in tax basis is treated as newly purchased property that was acquired with a base erosion payment under § 1.59A-3(b)(1)(ii). DC's base erosion tax benefit is the amount of DC's depreciation deductions attributable to the base erosion payment, which is DC's distributive share of the depreciation deductions with respect to the $10x increase in the tax basis of Property B. See § 1.59A-7(d)(1). In addition, under paragraph (c)(3)(i) of this section, DC is deemed to acquire a one-sixth interest in Property B from FC (the increase in DC's proportionate share from one-third to one-half). While this increase is a base erosion payment under § 1.59A-3(b)(1)(ii), there is no base erosion tax benefit from this additional one-sixth interest in Property B because the tax basis in Property B (without regard to the basis) is zero and therefore the increase in DC's proportionate share does not result in any additional depreciation deductions.
(x) Example 10: Section 704(c) and curative allocations—(A) Facts. The facts are the same as in paragraph (d)(2)(ii)(A) of this section (the facts in Example 2), except that DC's property is not depreciable, PRS uses the traditional method with curative allocations under § 1.704-3(c), and the curative allocations are to be made from operating income. Also assume that the partnership has $20x of gross operating income in each year and a curative allocation of the operating income satisfies the “substantially the same effect” requirement of § 1.704-3(c)(3)(iii)(A).
(B) Analysis. The analysis and results are the same as in paragraph (d)(2)(i)(B) of this section (the analysis in Example 1), except that actual depreciation is $8x ($40x/5) per year and the ceiling rule shortfall under § 1.704-3(b)(1) of $2x per year is corrected with a curative allocation of income from DC to FC of $2x per year. Solely for U.S. federal income tax purposes, each year FC is allocated $12x of total operating income and DC is allocated $8x of operating income. Both the actual depreciation deduction to DC and the curative allocation of income from DC are base erosion tax benefits to DC under paragraphs (c)(5)(v) and (d)(1) of this section.
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended by T.D. 9910, 85 FR 64367, Oct. 9, 2020]
§ 1.59A-8 [Reserved]
§ 1.59A-9 Anti-abuse and recharacterization rules.
(a) Scope. This section provides rules for recharacterizing certain transactions according to their substance for purposes of applying section 59A and the section 59A regulations. Paragraph (b) of this section provides specific anti-abuse rules. Paragraph (c) of this section provides examples illustrating the rules of paragraph (b) of this section.
(b) Anti-abuse rules—(1) Transactions involving unrelated persons, conduits, or intermediaries. If a taxpayer pays or accrues an amount to one or more intermediaries (including an intermediary unrelated to the taxpayer) that would have been a base erosion payment if paid or accrued to a foreign related party, and one or more of the intermediaries makes (directly or indirectly) corresponding payments to or for the benefit of a foreign related party as part of a transaction (or series of transactions), plan, or arrangement that has as a principal purpose of avoiding a base erosion payment (or reducing the amount of a base erosion payment), the role of the intermediary or intermediaries is disregarded as a conduit, or the amount paid or accrued to the intermediary is treated as a base erosion payment, as appropriate.
(2) Transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation. A transaction (or component of a transaction or series of transactions), plan, or arrangement that has a principal purpose of increasing the deductions taken into account for purposes of § 1.59A-2(e)(3)(i)(B) (the denominator of the base erosion percentage computation) is disregarded for purposes of § 1.59A-2(e)(3).
(3) Transactions to avoid the application of rules applicable to banks and registered securities dealers. A transaction (or series of transactions), plan, or arrangement that occurs among related parties that has a principal purpose of avoiding the rules applicable to certain banks and registered securities dealers in § 1.59A-2(e)(2) (base erosion percentage test for banks and registered securities dealers) or § 1.59A-5(c)(2) (increased base erosion and anti-abuse tax rate for banks and registered securities dealers) is not taken into account for purposes of § 1.59A-2(e)(2) or § 1.59A-5(c)(2).
(4) Nonrecognition transactions. If a transaction (or series of transactions), plan, or arrangement (the first transaction) increases the adjusted basis of property that the taxpayer acquires in a transaction (the second transaction) that qualifies for the specified nonrecognition transaction exception in § 1.59A-3(b)(3)(viii)(A) (or would qualify, but for this paragraph (b)(4)), and a principal purpose of the first transaction was to increase the taxpayer's depreciation or amortization deductions without increasing the taxpayer's base erosion tax benefits, then § 1.59A-3(b)(3)(viii)(A) does not apply to the property acquired in the second transaction to the extent of the increase in adjusted basis. For purposes of this paragraph (b)(4), if a transaction (or series of transactions), plan, or arrangement between related parties increases the adjusted basis of property within the six-month period before the taxpayer acquires the property, the transaction (or series of transactions), plan, or arrangement is deemed to have such a principal purpose.
(5) Transactions involving derivatives on a partnership interest. If a taxpayer acquires a derivative on a partnership interest (or partnership assets) as part of a transaction (or series of transactions), plan, or arrangement that has as a principal purpose of avoiding a base erosion payment (or reducing the amount of a base erosion payment) and the partnership interest (or partnership assets) would have resulted in a base erosion payment had the taxpayer acquired that interest (or partnership asset) directly, then the taxpayer is treated as having a direct interest instead of a derivative interest for purposes of applying section 59A. This paragraph (b)(5), however, does not apply to a derivative, as defined in section 59A(h)(4)(A)(v), on a partnership asset to the extent the payment pursuant to the derivative qualifies for the exception for qualified derivative payments in §§ 1.59A-3(b)(3)(ii) and 1.59A-6. A derivative interest in a partnership includes any contract (including any financial instrument) the value of which, or any payment or other transfer with respect to which, is (directly or indirectly) determined in whole or in part by reference to the partnership, including the amount of partnership distributions, the value of partnership assets, or the results of partnership operations.
(6) Allocations to eliminate or reduce a base erosion payment. If a partnership receives (or accrues) an amount from a person not acting in a partner capacity (including a person who is not a partner) and allocates the income or loss with respect to that amount to its partners with a principal purpose of avoiding a base erosion payment (or reducing the amount of a base erosion payment), then the taxpayer transacting (directly or indirectly) with the partnership will determine its base erosion payment as if the allocations had not been made and the items of income or loss had been allocated proportionately. The preceding sentence applies only when the allocations, in combination with any related allocations, do not change the economic arrangement of the partners to the partnership.
(c) Examples. The following examples illustrate the application of this section.
(1) Facts. The following facts are assumed for purposes of the examples.
(i) DC is a domestic corporation that is an applicable taxpayer for purposes section 59A.
(ii) FP is a foreign corporation that owns all the stock of DC.
(iii) None of the foreign corporations have income that is, or is treated as, effectively connected with the conduct of a trade or business in the United States under an applicable provision of the Internal Revenue Code or regulations thereunder.
(iv) All payments occur in a taxable year beginning after December 31, 2017.
(2) Example 1: Substitution of payments that are not base erosion payments for payments that otherwise would be base erosion payments through a conduit or intermediary—(i) Facts. FP owns Property 1 with a fair market value of $95x, which FP intends to transfer to DC. A payment from DC to FP for Property 1 would be a base erosion payment. Corp A is a domestic corporation that is not a related party with respect to DC. As part of a plan with a principal purpose of avoiding a base erosion payment, FP enters into an arrangement with Corp A to transfer Property 1 to Corp A in exchange for $95x. Pursuant to the same plan, Corp A transfers Property 1 to DC in exchange for $100x. Property 1 is subject to the allowance for depreciation (or amortization in lieu of depreciation) in the hands of DC.
(ii) Analysis. The arrangement between FP, DC, and Corp A is deemed to result in a $95x base erosion payment under paragraph (b)(1) of this section because DC's payment to Corp A would have been a base erosion payment if paid to a foreign related party, and Corp A makes a corresponding payment to FP as part of the series of transactions that has as a principal purpose of avoiding a base erosion payment.
(3) Example 2: Alternative transaction to base erosion payment—(i) Facts. The facts are the same as in paragraph (c)(2)(i) of this section (the facts in Example 1), except that DC does not purchase Property 1 from FP or Corp A. Instead, DC purchases Property 2 from Corp B, a domestic corporation that is not a related party with respect to DC and that originally produced or acquired Property 2 for Corp B's own account. Property 2 is substantially similar to Property 1, and DC uses Property 2 in substantially the same manner that DC would have used Property 1.
(ii) Analysis. Paragraph (b)(1) of this section does not apply to the transaction between DC and Corp B because Corp B does not make a corresponding payment to or for the benefit of FP as part of a transaction, plan, or arrangement.
(4) Example 3: Alternative financing source—(i) Facts. On Date 1, FP loaned $200x to DC in exchange for Note A. DC pays or accrues interest annually on Note A, and the payment or accrual is a base erosion payment within the meaning of § 1.59A-3(b)(1)(i). On Date 2, DC borrows $200x from Bank, a corporation that is not a related party with respect to DC, in exchange for Note B. The terms of Note B are substantially similar to the terms of Note A. DC uses the proceeds from Note B to repay Note A.
(ii) Analysis. Paragraph (b)(1) of this section does not apply to the transaction between DC and Bank because Bank does not make a corresponding payment to or for the benefit of FP as part of the series of transactions.
(5) Example 4: Alternative financing source that is a conduit—(i) Facts. The facts are the same as in paragraph (c)(4)(i) of this section (the facts in Example 3) except that in addition, as part of the same plan or arrangement as the Note B transaction and with a principal purpose of avoiding a base erosion payment, FP deposits $250x with Bank. The difference between the interest rate paid by Bank to FP on FP's deposit and the interest rate paid by DC to Bank is less than one percentage point. The interest rate charged by Bank to DC would have differed absent the deposit by FP.
(ii) Analysis. The transactions between FP, DC, and Bank are deemed to result in a base erosion payment under paragraph (b)(1) of this section because DC's payment to Bank would have been a base erosion payment if paid to a foreign related party, and Bank makes a corresponding payment to FP as part of the series of transactions that has as a principal purpose of avoiding a base erosion payment. See Rev. Rul. 87-89, 1987-2 C.B. 195, Situation 3.
(6) Example 5: Intermediary acquisition—(i) Facts. FP owns all of the stock of DC1 and DC2, each domestic corporations. FP is a manufacturer of lawn equipment. DC1 is in the trade or business of renting equipment to unrelated third parties. DC2 is a dealer in property that capitalizes its purchases into inventory and recovers the amount through cost of goods sold. Before Date 1, in the ordinary course of DC1's business, DC1 acquired depreciable property from FP that DC1 in turn rented to unrelated third parties. DC1's purchases from FP were base erosion payments within the meaning of § 1.59A-3(b)(1)(ii). On Date 1, with a principal purpose of avoiding a base erosion payment, FP and DC2 reorganized their operations so that DC2 acquires the lawn equipment from FP and immediately thereafter, DC2 resells the lawn equipment to DC1.
(ii) Analysis. The transactions between FP, DC1, and DC2 are deemed to result in a base erosion payment under paragraph (b)(1) of this section because DC1's payment to DC2 would have been a base erosion payment if paid directly to FP, and DC2 makes a corresponding payment to FP as part of a series of transactions, plan, or arrangement that has a principal purpose of avoiding a base erosion payment from DC1 to FP.
(7) Example 6: Offsetting transactions to increase the amount of deductions taken into account in the denominator of the base erosion percentage computation—(i) Facts. With a principal purpose of increasing the deductions taken into account by DC for purposes of § 1.59A-2(e)(3)(i)(B), DC enters into a long position with respect to Asset with Financial Institution 1 and simultaneously enters into a short position with respect to Asset with Financial Institution 2. Financial Institution 1 and Financial Institution 2 are not related to DC and are not related to each other.
(ii) Analysis. Paragraph (b)(2) of this section applies to the transactions between DC and Financial Institution 1 and DC and Financial Institution 2. These transactions are not taken into account for purposes of § 1.59A-2(e)(3)(i)(B) because the transactions have a principal purpose of increasing the deductions taken into account for purposes of § 1.59A-2(e)(3)(i)(B).
(8) Example 7: Ordinary course transactions that increase the amount of deductions taken into account in the denominator of the base erosion percentage computation—(i) Facts. DC, a financial institution, enters into a long position with respect to stock in Corporation with Person 1 and later on the same day enters into a short position with respect to stock in Corporation with Person 2. Person 1 and Person 2 are not related to DC and are not related to each other. DC entered into the positions in the ordinary course of its business and did not have a principal purpose of increasing the deductions taken into account by DC for purposes of § 1.59A-2(e)(3)(i)(B).
(ii) Analysis. Paragraph (b)(2) of this section does not apply because the transactions between DC and Person 1 and Person 2 were not entered into with a principal purpose of increasing the deductions taken into account by DC for purposes of § 1.59A-2(e)(3)(i)(B).
(9) Example 8: Transactions to avoid the application of rules applicable to banks and registered securities dealers—(i) Facts. DC owns all of the stock of DC1 and Bank (an entity defined in section 581). DC, DC1, and Bank are members of an affiliated group of corporations within the meaning of section 1504(a) that elect to file a consolidated U.S. federal income tax return. With a principal purpose of avoiding the rules of § 1.59A-2(e)(2) or § 1.59A-5(c)(2), DC and DC1 form a new partnership (PRS). DC contributes all of its stock of Bank, and DC1 contributes cash, to PRS. DC, DC1, and Bank do not materially change their business operations following the formation of PRS.
(ii) Analysis. Paragraph (b)(3) of this section applies to transactions with respect to Bank because the transactions with respect to PRS were entered into with a principal purpose of avoiding the rules of § 1.59A-2(e)(2) or § 1.59A-5(c)(2). The contribution of Bank to a PRS is not taken into account, and Bank will be deemed to be part of the affiliated group including DC and DC1 for purposes of § 1.59A-2(e)(2) and § 1.59A-5(c)(2).
(10) Example 9: Transactions that do not avoid the application of rules applicable to banks and registered securities dealers—(i) Facts. The facts are the same as the facts of paragraph (c)(9)(i) of this section (the facts of Example 8), except that DC sells 90 percent of the stock of Bank to an unrelated party in exchange for cash.
(ii) Analysis. Paragraph (b)(3) of this section does not apply to DC's sale of the stock of Bank because the sale was not made with a principal purpose of avoiding the rules of § 1.59A-2(e)(2) or § 1.59A-5(c)(2). Bank will not be treated as part of the affiliated group including DC and DC1 for purposes of § 1.59A-2(e)(2) and § 1.59A-5(c)(2).
(11) Example 10: Acquisition of depreciable property in a nonrecognition transaction—(i) Facts. U, which is not a related party with respect to FP or DC, owns Property 1 with an adjusted basis of $50x and a fair market value of $100x. On Date 1, FP purchases property, including Property 1, from U in exchange for cash, and then FP contributes Property 1 to DC in an exchange described in section 351. Following the exchange, DC's basis in Property 1 is $100x.
(ii) Analysis. Paragraph (b)(4) of this section does not apply to DC's acquisition of Property 1 because the purchase of Property 1 from U (first transaction) did not have a principal purpose of increasing DC's adjusted basis of Property 1 without increasing DC's base erosion tax benefits. The transaction is economically equivalent to an alternative transaction under which FP contributed $100x to DC and then DC purchased Property 1 from U. Further, the second sentence of paragraph (b)(4) of this section (providing that certain transactions are deemed to have a principal purpose of increasing the adjusted basis of property acquired in a second transaction) does not apply because FP purchased Property 1 from an unrelated party.
(12) Example 11: Transactions between related parties with a principal purpose of increasing the adjusted basis of property—(i) Facts. The facts are the same as paragraph (c)(11)(i) of this section (the facts in Example 10), except that U is related to FP and DC.
(ii) Analysis. Paragraph (b)(4) of this section applies to DC's acquisition of Property 1 because the transaction that increased the adjusted basis of Property 1 (the purchase of Property 1 from U) was between related parties, and within six months DC acquired Property 1 from FP in a specified nonrecognition transaction. Accordingly, the purchase of property from U (first transaction) is deemed to have a principal purpose of increasing the adjusted basis of Property 1 that DC acquires in the second transaction—the contribution (a transaction that qualifies as a specified nonrecognition transaction in part and would wholly qualify but for the application of paragraph (b)(4) of this section). Accordingly, the exception in § 1.59A-3(b)(3)(viii)(A) for specified nonrecognition transactions does not apply to the contribution of Property 1 to DC to the extent of the increased adjusted basis from the first transaction ($50x), and DC's depreciation deductions with respect to Property 1 will be base erosion tax benefits to the extent of the $50x increase in adjusted basis in Property 1.
[T.D. 9885, 84 FR 67017, Dec. 6, 2019, as amended at 85 FR 9370, Feb. 19, 2020; T.D. 9910, 85 FR 64368, Oct. 9, 2020]
§ 1.59A-10 Applicability date.
(a) General applicability date. Sections 1.59A-1 through 1.59A-9, other than the provisions described in the first sentence of paragraph (b) of this section or in paragraph (c) of this section, apply to taxable years ending on or after December 17, 2018. However, taxpayers may apply the regulations in this paragraph (a) in their entirety for taxable years beginning after December 31, 2017, and ending before December 17, 2018. In lieu of applying the regulations referred to in the first sentence of this paragraph (a), taxpayers may apply the provisions matching §§ 1.59A-1 through 1.59A-9 from the Internal Revenue Bulletin (IRB) 2019-02 (https:www.irs.gov/irb2019-02_IRB) in their entirety for all taxable years beginning after December 31, 2017, and ending on or before December 6, 2019.
(b) Exception. Sections 1.59A-2(c)(2)(ii) and (c)(4) through (6), 1.59A-3(b)(3)(iii)(C), 1.59A-3(c)(5) and (6), and 1.59A-9(b)(4) apply to taxable years beginning on or after October 9, 2020, and §§ 1.59A-7(c)(5)(v) and 1.59A-9(b)(5) and (6) apply to taxable years ending on or after December 2, 2019. Taxpayers may apply those regulations in their entirety for taxable years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply them in their entirety for all subsequent taxable years. Alternatively, taxpayers may apply only § 1.59A-3(c)(5) and (6) for taxable years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply § 1.59A-3(c)(5) and (6) in their entirety for all subsequent taxable years.
(c) Additional applicability dates for certain rules relating to securities lending transactions. Sections 1.59A-3(b)(2)(iv) and 1.59A-6(b)(3)(iii) and (iv) apply to taxable years beginning on or after December 17, 2025.
[T.D. 9910, 85 FR 64368, Oct. 9, 2020, as amended by T.D. 10041, 90 FR 59051, Dec. 18, 2025]
§ 1.60 [Reserved]
CHAPTER I INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY (CONTINUED)
SUBCHAPTER A INCOME TAX (CONTINUED)
PART 1 INCOME TAXES (CONTINUED)
Authority: 26 U.S.C. 7805, unless otherwise noted. Section 1.61-2T also issued under 26 U.S.C. 61. Section 1.61-21 also issued under 26 U.S.C. 61. Sections 1.62-1T and 1.62-2 also issued under 26 U.S.C. 62. Section 1.66-4 also issued under 26 U.S.C. 66(c); Sections 1.67-2T and 1.67-3T also issued under 26 U.S.C. 67(c). Section 1.67-3 also issued under 26 U.S.C. 67(c). Section 1.67-4 also issued under 26 U.S.C. 67(e). Sections 1.72-4, 1.72-5, 1.72-6, 1.72-7, 1.72-8, and 1.72-11 also issued under 26 U.S.C. 72(c). Section 1.78-1 also issued under 26 U.S.C. 245A(g). Section 1.101-7 also issued under 26 U.S.C. 101(d)(2)(B)(ii). Section 1.103-10 also issued under 26 U.S.C. 103(b)(6). Section 1.103A-2 also issued under 26 U.S.C. 103A(j). Section 1.108-1 also issued under 26 U.S.C. 108(e)(8) and 108(e)(10(B). Section 1.108-2 also issued under 26 U.S.C. 108. Section 1.108-3 also issued under 26 U.S.C. 108, 267, and 1502. Section 1.108-4 also issued under 26 U.S.C. 108. Section 1.108-5 also issued under 26 U.S.C. 108. Section 1.108(c)-1 also issued under the authority of 26 U.S.C. 108(d)(9). Section 1.108(i)-0 also issued under 26 U.S.C. 108(i)(7) and 1502. Section 1.108(i)-1 also issued under 26 U.S.C. 108(i)(7) and 1502. Section 1.108(i)-2 also issued under 26 U.S.C. 108(i)(7). Section 1.108(i)-3 also issued under 26 U.S.C. 108(i)(7) and 1502. Section 1.110-1 also issued under 26 U.S.C. 110(d). Sections 1.132-0 through 1.132-8T also issued under 26 U.S.C. 132(o). Section 1.139E-1 also issued under 26 U.S.C. 139E. Section 1.139E-1(d)(6) also issued under 26 U.S.C. 7872. Section 1.139E-2 also issued under 26 U.S.C. 139E.
Source: T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, unless otherwise noted.
1 COMPUTATION OF TAXABLE INCOME
2 Definition of Gross Income, Adjusted Gross Income, and Taxable Income
§ 1.61-1 Gross income.
(a) General definition. Gross income means all income from whatever source derived, unless excluded by law. Gross income includes income realized in any form, whether in money, property, or services. Income may be realized, therefore, in the form of services, meals, accommodations, stock, or other property, as well as in cash. Section 61 lists the more common items of gross income for purposes of illustration. For purposes of further illustration, § 1.61-14 mentions several miscellaneous items of gross income not listed specifically in section 61. Gross income, however, is not limited to the items so enumerated.
(b) Cross references. Cross references to other provisions of the Code are to be found throughout the regulations under section 61. The purpose of these cross references is to direct attention to the more common items which are included in or excluded from gross income entirely, or treated in some special manner. To the extent that another section of the Code or of the regulations thereunder, provides specific treatment for any item of income, such other provision shall apply notwithstanding section 61 and the regulations thereunder. The cross references do not cover all possible items.
(1) For examples of items specifically included in gross income, see Part II (section 71 and following), Subchapter B, Chapter 1 of the Code.
(2) For examples of items specifically excluded from gross income, see part III (section 101 and following), Subchapter B, Chapter 1 of the Code.
(3) For general rules as to the taxable year for which an item is to be included in gross income, see section 451 and the regulations thereunder.
§ 1.61-2 Compensation for services, including fees, commissions, and similar items.
(a) In general. (1) Wages, salaries, commissions paid salesmen, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses (including Christmas bonuses), termination or severance pay, rewards, jury fees, marriage fees and other contributions received by a clergyman for services, pay of persons in the military or naval forces of the United States, retired pay of employees, pensions, and retirement allowances are income to the recipients unless excluded by law. Several special rules apply to members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States; see paragraph (b) of this section.
(2) The Code provides special rules including the following items in gross income:
(i) Distributions from employees' trusts, see sections 72, 402, and 403, and the regulations thereunder;
(ii) Compensation for child's services (in child's gross income), see section 73 and the regulations thereunder;
(iii) Prizes and awards, see section 74 and the regulations thereunder.
(3) Similarly, the Code provides special rules excluding the following items from gross income in whole or in part:
(i) Gifts, see section 102 and the regulations thereunder;
(ii) Compensation for injuries or sickness, see section 104 and the regulations thereunder;
(iii) Amounts received under accident and health plans, see section 105 and the regulations thereunder;
(iv) Scholarship and fellowship grants, see section 117 and the regulations thereunder;
(v) Miscellaneous items, see section 122.
(b) Members of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service. (1) Subsistence and uniform allowances granted commissioned officers, chief warrant officers, warrant officers, and enlisted personnel of the Armed Forces, National Oceanic and Atmospheric Administration, and Public Health Service of the United States, and amounts received by them as commutation of quarters, are excluded from gross income. Similarly, the value of quarters or subsistence furnished to such persons is excluded from gross income.
(2) For purposes of this section, quarters or subsistence includes the following allowances for expenses incurred after December 31, 1993, by members of the Armed Forces, members of the commissioned corps of the National Oceanic and Atmospheric Administration, and members of the commissioned corps of the Public Health Service, to the extent that the allowances are not otherwise excluded from gross income under another provision of the Internal Revenue Code: a dislocation allowance, authorized by 37 U.S.C. 407; a temporary lodging allowance, authorized by 37 U.S.C. 405; a temporary lodging expense, authorized by 37 U.S.C. 404a; and a move-in housing allowance, authorized by 37 U.S.C. 405. No deduction is allowed under this chapter for any expenses reimbursed by such excluded allowances. For the exclusion from gross income of—
(i) Disability pensions, see section 104(a)(4) and the regulations thereunder;
(ii) Miscellaneous items, see section 122.
(3) The per diem or actual expense allowance, the monetary allowance in lieu of transportation, and the mileage allowance received by members of the Armed Forces, National Oceanic and Atmospheric Administration, and the Public Health Service, while in a travel status or on temporary duty away from their permanent stations, are included in their gross income except to the extent excluded under the accountable plan provisions of § 1.62-2.
(c) Payment to charitable, etc., organization on behalf of person rendering services. The value of services is not includible in gross income when such services are rendered directly and gratuitously to an organization described in section 170(c). Where, however, pursuant to an agreement or understanding, services are rendered to a person for the benefit of an organization described in section 170(c) and an amount for such services is paid to such organization by the person to whom the services are rendered, the amount so paid constitutes income to the person performing the services.
(d) Compensation paid other than in cash—(1) In general. Except as otherwise provided in paragraph (d)(6)(i) of this section (relating to certain property transferred after June 30, 1969), if services are paid for in property, the fair market value of the property taken in payment must be included in income as compensation. If services are paid for in exchange for other services, the fair market value of such other services taken in payment must be included in income as compensation. If the services are rendered at a stipulated price, such price will be presumed to be the fair market value of the compensation received in the absence of evidence to the contrary. For special rules relating to certain options received as compensation, see §§ 1.61-15, 1.83-7, and section 421 and the regulations thereunder. For special rules relating to premiums paid by an employer for an annuity contract which is not subject to section 403(a), see section 403(c) and the regulations thereunder and § 1.83-8(a). For special rules relating to contributions made to an employees' trust which is not exempt under section 501, see section 402(b) and the regulations thereunder and § 1.83-8(a).
(2) Property transferred to employee or independent contractor. (i) Except as otherwise provided in section 421 and the regulations thereunder and § 1.61-15 (relating to stock options), and paragraph (d)(6)(i) of this section, if property is transferred by an employer to an employee or if property is transferred to an independent contractor, as compensation for services, for an amount less than its fair market value, then regardless of whether the transfer is in the form of a sale or exchange, the difference between the amount paid for the property and the amount of its fair market value at the time of the transfer is compensation and shall be included in the gross income of the employee or independent contractor. In computing the gain or loss from the subsequent sale of such property, its basis shall be the amount paid for the property increased by the amount of such difference included in gross income
(ii)(A) Cost of life insurance on the life of the employee. Generally, life insurance premiums paid by an employer on the life of his employee where the proceeds of such insurance are payable to the beneficiary of such employee are part of the gross income of the employee. However, the amount includible in the employee's gross income is determined with regard to the provisions of section 403 and the regulations thereunder in the case of an individual contract issued after December 31, 1962, or a group contract, which provides incidental life insurance protection and which satisfies the requirements of section 401(g) and § 1.401-9, relating to the nontransferability of annuity contracts. For example, if an employee or independent contractor is the owner (as defined in § 1.61-22(c)(1)) of a life insurance contract and the payments with regard to such contract are not split-dollar loans under § 1.7872-15(b)(1), the employee or independent contractor must include in income the amount of any such payments by the employer or service recipient with respect to such contract during any year to the extent that the employee's or independent contractor's rights to the life insurance contract are substantially vested (within the meaning of § 1.83-3(b)). This result is the same regardless of whether the employee or independent contractor has at all times been the owner of the life insurance contract or the contract previously has been owned by the employer or service recipient as part of a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)) and was transferred by the employer or service recipient to the employee or independent contractor under § 1.61-22(g). For the special rules relating to the includibility in an employee's gross income of an amount equal to the cost of certain group term life insurance on the employee's life which is carried directly or indirectly by his employer, see section 79 and the regulations thereunder. For special rules relating to the exclusion of contributions by an employer to accident and health plans for the employee, see section 106 and the regulations thereunder.
(B) Cost of group-term life insurance on the life of an individual other than an employee. The cost (determined under paragraph (d)(2) of § 1.79-3) of group-term life insurance on the life of an individual other than an employee (such as the spouse or dependent of the employee) provided in connection with the performance of services by the employee is includible in the gross income of the employee.
(3) Meals and living quarters. The value of living quarters or meals which an employee receives in addition to his salary constitutes gross income unless they are furnished for the convenience of the employer and meet the conditions specified in section 119 and the regulations thereunder. For the treatment of rental value of parsonages or rental allowance paid to ministers, see section 107 and the regulations thereunder; for the treatment of statutory subsistence allowances received by police, see section 120 and the regulations thereunder.
(4) Stock and notes transferred to employee or independent contractor. Except as otherwise provided by section 421 and the regulations thereunder and § 1.61-15 (relating to stock options), and paragraph (d)(6)(i) of this section, if a corporation transfers its own stock to an employee or independent contractor as compensation for services, the fair market value of the stock at the time of transfer shall be included in the gross income of the employee or independent contractor. Notes or other evidences of indebtedness received in payment for services constitute income in the amount of their fair market value at the time of the transfer. A taxpayer receiving as compensation a note regarded as good for its face value at maturity, but not bearing interest, shall treat as income as of the time of receipt its fair discounted value computed at the prevailing rate. As payments are received on such a note, there shall be included in income that portion of each payment which represents the proportionate part of the discount originally taken on the entire note.
(5) Property transferred on or before June 30, 1969, subject to restrictions. Notwithstanding paragraph (d) (1), (2), or (4) of this section, if any property is transferred after September 24, 1959, by an employer to an employee or independent contractor as compensation for services, and such property is subject to a restriction which has a significant effect on its value at the time of transfer, the rules of § 1.421-6(d)(2) shall apply in determining the time and the amount of compensation to be included in the gross income of the employee or independent contractor. This (5) is also applicable to transfers subject to a restriction which has a significant effect on its value at the time of transfer and to which § 1.83-8(b) (relating to transitional rules with respect to transfers of restricted property) applies. For special rules relating to options to purchase stock or other property which are issued as compensation for services, see § 1.61-15 and section 421 and the regulations thereunder.
(6) Certain property transferred, premiums paid, and contributions made in connection with the performance of services after June 30, 1969—(i) Exception. Paragraph (d) (1), (2), (4), and (5) of this section and § 1.61-15 do not apply to the transfer of property (as defined in § 1.83-3(e)) after June 30, 1969, unless § 1.83-8 (relating to the applicability of section 83 and transitional rules) applies. If section 83 applies to a transfer of property, and the property is not subject to a restriction that has a significant effect on the fair market value of such property, then the rules contained in paragraph (d) (1), (2), and (4) of this section and § 1.61-15 shall also apply to such transfer to the extent such rules are not inconsistent with section 83.
(ii) Cross references. For rules relating to premiums paid by an employer for an annuity contract which is not subject to section 403(a), see section 403(c) and the regulations thereunder. For rules relating to contributions made to an employees' trust which is not exempt under section 501(a), see section 402(b) and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6696, 28 FR 13450, Dec. 12, 1963; T.D. 6856, 30 FR 13316, Oct. 20, 1965; T.D. 7544, 43 FR 31913, July 24, 1978; T.D. 7623, 44 FR 28800, May 17, 1979; T.D. 8256, 54 FR 28582, July 6, 1989; T.D. 8607, 60 FR 40076, Aug. 7, 1995; T.D. 9092, 68 FR 54344, Sept. 17, 2003]
§ 1.61-3 Gross income derived from business.
(a) In general. In a manufacturing, merchandising, or mining business, “gross income” means the total sales, less the cost of goods sold, plus any income from investments and from incidental or outside operations or sources. Gross income is determined without subtraction of depletion allowances based on a percentage of income to the extent that it exceeds cost depletion which may be required to be included in the amount of inventoriable costs as provided in § 1.471-11 and without subtraction of selling expenses, losses or other items not ordinarily used in computing costs of goods sold or amounts which are of a type for which a deduction would be disallowed under section 162 (c), (f), or (g) in the case of a business expense. The cost of goods sold should be determined in accordance with the method of accounting consistently used by the taxpayer. Thus, for example, an amount cannot be taken into account in the computation of cost of goods sold any earlier than the taxable year in which economic performance occurs with respect to the amount (see § 1.446-1(c)(1)(ii)).
(b) State contracts. The profit from a contract with a State or political subdivision thereof must be included in gross income. If warrants are issued by a city, town, or other political subdivision of a State, and are accepted by the contractor in payment for public work done, the fair market value of such warrants should be returned as income. If, upon conversion of the warrants into cash, the contractor does not receive and cannot recover the full value of the warrants so returned, he may deduct any loss sustained from his gross income for the year in which the warrants are so converted. If, however, he realizes more than the value of the warrants so returned, he must include the excess in his gross income for the year in which realized.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 7207, 37 FR 20767, Oct. 5, 1972; T.D. 7285, 38 FR 26184, Sept. 19, 1973; T.D. 8408, 57 FR 12419, Apr. 10, 1992]
§ 1.61-4 Gross income of farmers.
(a) Farmers using the cash method of accounting. A farmer using the cash receipts and disbursements method of accounting shall include in his gross income for the taxable year—
(1) The amount of cash and the value of merchandise or other property received during the taxable year from the sale of livestock and produce which he raised,
(2) The profits from the sale of any livestock or other items which were purchased,
(3) All amounts received from breeding fees, fees from rent of teams, machinery, or land, and other incidental farm income,
(4) All subsidy and conservation payments received which must be considered as income, and
(5) Gross income from all other sources.
The profit from the sale of livestock or other items which were purchased is to be ascertained by deducting the cost from the sales price in the year in which the sale occurs, except that in the case of the sale of purchased animals held for draft, breeding, or dairy purposes, the profits shall be the amount of any excess of the sales price over the amount representing the difference between the cost and the depreciation allowed or allowable (determined in accordance with the rules applicable under section 1016(a) and the regulations thereunder). However, see section 162 and the regulations thereunder with respect to the computation of taxable income on other than the crop method where the cost of seeds or young plants purchased for further development and cultivation prior to sale is involved. Crop shares (whether or not considered rent under State law) shall be included in gross income as of the year in which the crop shares are reduced to money or the equivalent of money. See section 263A for rules regarding costs that are required to be capitalized.
(b) Farmers using an accrual method of accounting. A farmer using an accrual method of accounting must use inventories to determine his gross income. His gross income on an accrual method is determined by adding the total of the items described in subparagraphs (1) through (5) of this paragraph and subtracting therefrom the total of the items described in subparagraphs (6) and (7) of this paragraph. These items are as follows:
(1) The sales price of all livestock and other products held for sale and sold during the year;
(2) The inventory value of livestock and products on hand and not sold at the end of the year;
(3) All miscellaneous items of income, such as breeding fees, fees from the rent of teams, machinery, or land, or other incidental farm income;
(4) Any subsidy or conservation payments which must be considered as income;
(5) Gross income from all other sources;
(6) The inventory value of the livestock and products on hand and not sold at the beginning of the year; and
(7) The cost of any livestock or products purchased during the year (except livestock held for draft, dairy, or breeding purposes, unless included in inventory).
All livestock raised or purchased for sale shall be added in the inventory at their proper valuation determined in accordance with the method authorized and adopted for the purpose. Livestock acquired for draft, breeding, or dairy purposes and not for sale may be included in the inventory (see subparagraphs (2), (6), and (7) of this paragraph) instead of being treated as capital assets subject to depreciation, provided such practice is followed consistently from year to year by the taxpayer. When any livestock included in an inventory are sold, their cost must not be taken as an additional deduction in computing taxable income, because such deduction is reflected in the inventory. See the regulations under section 471. See section 263A for rules regarding costs that are required to be capitalized. Crop shares (whether or not considered rent under State law) shall be included in gross income as of the year in which the crop shares are reduced to money or the equivalent of money.
(c) Special rules for certain receipts. In the case of the sale of machinery, farm equipment, or any other property (except stock in trade of the taxpayer, or property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business), any excess of the proceeds of the sale over the adjusted basis of such property shall be included in the taxpayer's gross income for the taxable year in which such sale is made. See, however, section 453 and the regulations thereunder for special rules relating to certain installment sales. If farm produce is exchanged for merchandise, groceries, or the like, the market value of the article received in exchange is to be included in gross income. Proceeds of insurance, such as hail or fire insurance on growing crops, should be included in gross income to the extent of the amount received in cash or its equivalent for the crop injured or destroyed. See section 451(d) for special rule relating to election to include crop insurance proceeds in income for taxable year following taxable year of destruction. For taxable years beginning after July 12, 1972, where a farmer is engaged in producing crops and the process of gathering and disposing of such crops is not completed within the taxable year in which such crops are planted, the income therefrom may, with the consent of the Commissioner (see section 446 and the regulations thereunder), be computed upon the crop method. For taxable years beginning on or before July 12, 1972, where a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may, with the consent of the Commissioner (see section 446 and the regulations thereunder), be computed upon the crop method. In any case in which the crop method is used, the entire cost of producing the crop must be taken as a deduction for the year in which the gross income from the crop is realized, and not earlier.
(d) Definition of “farm”. As used in this section, the term “farm” embraces the farm in the ordinarily accepted sense, and includes stock, dairy, poultry, fruit, and truck farms; also plantations, ranches, and all land used for farming operations. All individuals, partnerships, or corporations that cultivate, operate, or manage farms for gain or profit, either as owners or tenants, are designated as farmers. For more detailed rules with respect to the determination of whether or not an individual is engaged in farming, see § 1.175-3. For rules applicable to persons cultivating or operating a farm for recreation or pleasure, see sections 162 and 165, and the regulations thereunder.
(e) Cross references. (1) For election to include Commodity Credit Corporation loans as income, see section 77 and regulations thereunder.
(2) For definition of gross income derived from farming for purposes of limiting deductibility of soil and water conservation expenditures, see section 175 and regulations thereunder.
(3) For definition of gross income from farming in connection with declarations of estimated income tax, see section 6073 and regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 7198, 37 FR 13679, July 13, 1972; T.D. 8729, 62 FR 44546, Aug. 22, 1997]
§ 1.61-5 Allocations by cooperative associations; per-unit retain certificates—tax treatment as to cooperatives and patrons.
(a) In general. Amounts allocated on the basis of the business done with or for a patron by a cooperative association, whether or not entitled to tax treatment under section 522, in cash, merchandise, capital stock, revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice or in some other manner disclosing to the patron the dollar amount allocated, shall be included in the computation of the gross income of such patron for the taxable year in which received to the extent prescribed in paragraph (b) of this section, regardless of whether the allocation is deemed, for the purpose of section 522, to be made at the close of a preceding taxable year of the cooperative association. The determination of the extent of taxability of such amounts is in no way dependent upon the method of accounting employed by the patron or upon the method, cash, accrual, or otherwise, upon which the taxable income of such patron is computed.
(b) Extent of taxability. (1) Amounts allocated to a patron on a patronage basis by a cooperative association with respect to products marketed for such patron, or with respect to supplies, equipment, or services, the cost of which was deductible by the patron under section 162 or section 212, shall be included in the computation of the gross income of such patron, as ordinary income, to the following extent:
(i) If the allocation is in cash, the amount of cash received.
(ii) If the allocation is in merchandise, the amount of the fair market value of such merchandise at the time of receipt by the patron.
(iii) If the allocation is in the form of revolving fund certificates, retain certificates, certificates of indebtedness, letters of advice, or similar documents, the amount of the fair market value of such document at the time of its receipt by the patron. For purposes of this subdivision, any document containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary. However, for purposes of this subdivision, any document which is payable only in the discretion of the cooperative association, or which is otherwise subject to conditions beyond the control of the patron, shall be considered not to have any fair market value at the time of its receipt by the patron, unless it is clearly established to the contrary.
(iv) If the allocation is in the form of capital stock, the amount of the fair market value, if any, of such capital stock at the time of its receipt by the patron.
(2) If any allocation to which subparagraph (1) of this paragraph applies is received in the form of a document of the type described in subparagraph (1) (iii) or (iv) of this paragraph and is redeemed in full or in part or is otherwise disposed of, there shall be included in the computation of the gross income of the patron, as ordinary income, in the year of redemption or other disposition, the excess of the amount realized on the redemption or other disposition over the amount previously included in the computation of gross income under such subparagraph.
(3)(i) Amounts which are allocated on a patronage basis by a cooperative association with respect to supplies, equipment, or services, the cost of which was not deductible by the patron under section 162 or section 212, are not includible in the computation of the gross income of such patron. However, in the case of such amounts which are allocated with respect to capital assets (as defined in section 1221) or property used in the trade or business within the meaning of section 1231, such amounts shall, to the extent set forth in subparagraph (1) of this paragraph, be taken into account by such patron in determining the cost of the property to which the allocation relates. Notwithstanding the preceding sentence, to the extent that such amounts are in excess of the unrecovered cost of such property, and to the extent that such amounts relate to such property which the patron no longer owns, they shall be included in the computation of the gross income of such patron.
(ii) If any patronage dividend is allocated to the patron in the form of a document of the type described in subparagraph (1) (iii) or (iv) of this paragraph, and if such allocation is with respect to capital assets (as defined in section 1221) or property used in the trade or business within the meaning of section 1231, any amount realized on the redemption or other disposition of such document which is in excess of the amount which was taken into account upon the receipt of the document by the patron shall be taken into account by such patron in the year of redemption or other disposition as an adjustment to basis or as an inclusion in the computation of gross income, as the case may be.
(iii) Any adjustment to basis in respect of an amount to which subdivision (i) or (ii) of this subparagraph applies shall be made as of the first day of the taxable year in which such amount is received.
(iv) The application of the provisions of this subparagraph may be illustrated by the following examples:
Example 1. On July 1, 1959, P, a patron of a cooperative association, purchases a tractor for use in his farming business from such association for $2,200. The tractor has an estimated useful life of five years and an estimated salvage value of $200. P files his income tax returns on a calendar year basis and claims depreciation on the tractor for the year 1959 of $200 pursuant to his use of the straight-line method at the rate of $400 per year. On July 1, 1960, the cooperative association allocates to P with respect to his purchase of the tractor a dividend of $300 in cash. P will reduce his depreciation allowance with respect to the tractor for 1960 (and subsequent taxable years) to $333.33, determined as follows:
Cost of tractor, July 1, 1959 | $2,200
Less:
Depreciation for 1959 (6 mos.) | $200
Adjustment as of Jan. 1, 1960, for cash patronage dividend | 300
Salvage value | 200
700
Basis for depreciation for the remaining 4 1/2 years of estimated life | 1,500
Basis for depreciation divided by the 4 1/2 years of remaining life | 333.33
Example 2.Assume the same facts as in example (1), except that on July 1, 1960, the cooperative association allocates a dividend to P with respect to his purchase of the tractor in the form of a revolving fund certificate having a face amount of $300. The certificate is redeemable in cash at the discretion of the directors of the association and is subject to diminution by any future losses of the association, and has no fair market value when received by P. Since the certificate had no fair market value when received by P, no amount with respect to such certificate was taken into account by him in the year 1960. In 1965, P receives $300 cash from the association in full redemption of the certificate. Prior to 1965, he had recovered through depreciation $2,000 of the cost of the tractor, leaving an unrecovered cost of $200 (the salvage value). For the year 1965, the redemption proceeds of $300 are applied against the unrecovered cost of $200, reducing the basis to zero, and the balance of the redemption proceeds, $100, is includible in the computation of P's gross income.
Example 3. Assume the same facts as in example (2), except that the certificate is redeemed in full on July 1, 1962. The full $300 received on redemption of the certificate will be applied against the unrecovered cost of the tractor as of January 1, 1962, computed as follows:
Cost of tractor, July 1, 1959 | $2,200
Less:
Depreciation for 1959 (6 mos.) | $200
Depreciation for 1960 | 400
Depreciation for 1961 | 400
1,000
Unrecovered cost on Jan. 1, 1962 | 1,200
Adjustment as of Jan. 1, 1962, for proceeds of the redemption of the revolving fund certificate | 300
Unrecovered cost on Jan. 1, 1962, after adjustment | 900
Less: Salvage value | 200
Basis for depreciation on Jan. 1, 1962 | 700
If P uses the tractor in his business until June 30, 1964, he would be entitled to the following depreciation allowances with respect to the tractor:
For 1962 | 280
For 1963 | 280
For 1964 (6 mos.) | 140
700
Balance to be depreciated | 0
Example 4.Assume the same facts as in example (3), except that P sells the tractor in 1961. The entire $300 received in 1962 in redemption of the revolving fund certificate is includible in the computation of P's gross income for the year 1962.
(c) Special rule. If, for any taxable year ending before December 3, 1959, a taxpayer treated any patronage dividend received in the form of a document described in paragraph (b) (1) (iii) or (iv) of this section in accordance with the regulations then applicable (whether such dividend is subject to paragraph (b) (1) or (3) of this section), such taxpayer is not required to change the treatment of such patronage dividends for any such prior taxable year. On the other hand, the taxpayer may, if he so desires, amend his income tax returns to treat the receipt of such patronage dividend in accordance with the provisions of this section, but no provision in this paragraph shall be construed as extending the period of limitations within which a claim for credit or refund may be filed under section 6511.
(d) Per-unit retain certificates; tax treatment of cooperative associations; distribution and reinvestment alternative. (1)(i) In the case of a taxable year to which this paragraph applies to a cooperative association, such association shall, in computing the amount paid or returned to a patron with respect to products marketed for such patron, take into account the stated dollar amount of any per-unit retain certificate (as defined in paragraph (g) of this section)—
(a) Which is issued during the payment period for such year (as defined in subparagraph (3) of this paragraph) with respect to such products,
(b) With respect to which the patron is a qualifying patron (as defined in subparagraph (2) of this paragraph), and
(c) Which clearly states the fact that the patron has agreed to treat the stated dollar amount thereof as representing a cash distribution to him which he has reinvested in the cooperative association.
(ii) No amount shall be taken into account by a cooperative association by reason of the issuance of a per-unit retain certificate to a patron who was not a qualifying patron with respect to such certificate. However, any amount paid in redemption of a per-unit retain certificate which was issued to a patron who was not a qualifying patron with respect to such certificate shall be taken into account by the cooperative in the year of redemption, as an amount paid or returned to such patron with respect to products marketed for him. This subdivision shall apply only to per-unit retain certificates issued with respect to taxable years of the cooperative association to which this paragraph applied to the association (that is, taxable years with respect to which per-unit retain certificates were issued to one or more patrons who are qualifying patrons).
(2)(i) A patron shall be considered to be a “qualifying patron” with respect to a per-unit retain certificate if there is in effect an agreement between the cooperative association and such patron which clearly provides that such patron agrees to treat the stated dollar amounts of all per-unit retain certificates issued to him by the association as representing cash distributions which he has constructively received and which he has, of his own choice, reinvested in the cooperative association. Such an agreement may be included in a by-law of the cooperative which is adopted prior to the time the products to which the per-unit retain certificates relate are marketed. However, except where there is in effect a “written agreement” described in subdivision (ii) of this subparagraph, a patron shall not be considered to be a “qualifying patron” with respect to a per-unit retain certificate if it has been established by a determination of the Tax Court of the United States, or any other court of competent jurisdiction, which has become final, that the stated dollar amount of such certificate, or of a similar certificate issued under similar circumstances to such patron or any other patron by the cooperative association, is not required to be included (as ordinary income) in the gross income of such patron, or such other patron, for the taxable year of the patron in which received.
(ii) The “written agreement” referred to in subdivision (i) of this subparagraph is an agreement in writing, signed by the patron, on file with the cooperative association, and revocable as provided in this subdivision. Unless such an agreement specifically provides to the contrary, it shall be effective for per-unit retain certificates issued with respect to the taxable year of the cooperative association in which the agreement is received by the association, and unless revoked, for per-unit retain certificates issued with respect to all subsequent taxable years. A “written agreement” must be revocable by the patron at any time after the close of the taxable year in which it is made. To be effective, a revocation must be in writing, signed by the patron, and furnished to the cooperative association. A revocation shall be effective only for per-unit retain certificates issued with respect to taxable years of the cooperative association following the taxable year in which it is furnished to the association. Notwithstanding the preceding sentence, a revocation shall not be effective for per-unit retain certificates issued with respect to products marketed for the patron under a pooling arrangement in which such patron participated before such revocation. The following is an example of an agreement which would meet the requirements of this subparagraph:
I agree that, for purposes of determining the amount I have received from this cooperative in payment for my goods, I shall treat the face amount of any per-unit retain certificates issued to me on and after _____ as representing a cash distribution which I have constructively received and which I have reinvested in the cooperative.
(Signed)
(3) For purposes of this paragraph and paragraph (e) of this section, the payment period for any taxable year of the cooperative is the period beginning with the first day of such taxable year and ending with the 15th day of the 9th month following the close of such year.
(4) This paragraph shall apply to any taxable year of a cooperative association if, with respect to such taxable year, the association has issued per-unit retain certificates to one or more of its patrons who are qualifying patrons with respect to such certificates within the meaning of subparagraph (2) of this paragraph.
(e) Tax treatment of cooperative association; taxable years for which paragraph (d) does not apply. (1) In the case of a taxable year to which paragraph (d) of this section does not apply to a cooperative association, such association shall, in computing the amount paid or returned to a patron with respect to products marketed for such patron, take into account the fair market value (at the time of issue) of any per-unit retain certificates which are issued by the association with respect to such products during the payment period for such taxable year.
(2) An amount paid in redemption of a per-unit retain certificate issued with respect to a taxable year of the cooperative association for which paragraph (d) of this section did not apply to the association, shall, to the extent such amount exceeds the fair market value of the certificate at the time of its issue, be taken into account by the association in the year of redemption, as an amount paid or returned to a patron with respect to products marketed for such patron.
(3) For purposes of this paragraph and paragraph (f)(2) of this section, any per-unit retain certificate containing an unconditional promise to pay a fixed sum of money on demand or at a fixed or determinable time shall be considered to have a fair market value at the time of its issue, unless it is clearly established to the contrary. On the other hand, any per-unit retain certificate (other than capital stock) which is redeemable only in the discretion of the cooperative association, or which is otherwise subject to conditions beyond the control of the patron, shall be considered not to have any fair market value at the time of its issue, unless it is clearly established to the contrary.
(f) Tax treatment of patron. (1) The following rules apply for purposes of computing the amount includible in gross income with respect to a per-unit retain certificate which was issued to a patron by a cooperative association with respect to a taxable year of such association for which paragraph (d) of this section applies.
(i) If the patron is a qualifying patron with respect to such certificate (within the meaning of paragraph (d) (2) of this section), he shall, in accordance with his agreement, include (as ordinary income) the stated dollar amount of the certificate in gross income for his taxable year in which the certificate is received by him.
(ii) If the patron is not a qualifying patron with respect to such certificate, no amount is includible in gross income on the receipt of the certificate; however, any gain on the redemption, sale, or other disposition of such certificate shall, to the extent of the stated dollar amount thereof, be considered as gain from the sale or exchange of property which is not a capital asset.
(2) The amount of the fair market value of a per-unit retain certificate which is issued to a patron by a cooperative association with respect to a taxable year of the association for which paragraph (d) of this section does not apply shall be included, as ordinary income, in the gross income of the patron for the taxable year in which the certificate is received. Any gain on the redemption, sale, or other disposition of such a per-unit retain certificate shall, to the extent its stated dollar amount exceeds its fair market value at the time of issue, be treated as gain on the redemption, sale, or other disposition of property which is not a capital asset.
(g) “Per-unit retain certificate” defined. For purposes of paragraphs (d), (e), and (f), of this section, the term “per-unit retain certificate” means any capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice, or other written notice—
(1) Which is issued to a patron with respect to products marketed for such patron;
(2) Which discloses to the patron the stated dollar amount allocated to him on the books of the cooperative association; and
(3) The stated dollar amount of which is fixed without reference to net earnings.
(h) Effective date. This section shall not apply to any amount the tax treatment of which is prescribed in section 1385 and § 1.1385-1. Paragraphs (d), (e), and (f) of this section shall apply to per-unit retain certificates as defined in paragraph (g) of this section issued by a cooperative association during taxable years of the association beginning after April 30, 1966, with respect to products marketed for patrons during such years.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6855, 30 FR 13134, Oct. 15, 1965]
§ 1.61-6 Gains derived from dealings in property.
(a) In general. Gain realized on the sale or exchange of property is included in gross income, unless excluded by law. For this purpose property includes tangible items, such as a building, and intangible items, such as goodwill. Generally, the gain is the excess of the amount realized over the unrecovered cost or other basis for the property sold or exchanged. The specific rules for computing the amount of gain or loss are contained in section 1001 and the regulations thereunder. When a part of a larger property is sold, the cost or other basis of the entire property shall be equitably apportioned among the several parts, and the gain realized or loss sustained on the part of the entire property sold is the difference between the selling price and the cost or other basis allocated to such part. The sale of each part is treated as a separate transaction and gain or loss shall be computed separately on each part. Thus, gain or loss shall be determined at the time of sale of each part and not deferred until the entire property has been disposed of. This rule may be illustrated by the following examples:
Example 1.A, a dealer in real estate, acquires a 10-acre tract for $10,000, which he divides into 20 lots. The $10,000 cost must be equitably apportioned among the lots so that on the sale of each A can determine his taxable gain or deductible loss.
Example 2.B purchases for $25,000 property consisting of a used car lot and adjoining filling station. At the time, the fair market value of the filling station is $15,000 and the fair market value of the used car lot is $10,000. Five years later B sells the filling station for $20,000 at a time when $2,000 has been properly allowed as depreciation thereon. B's gain on this sale is $7,000, since $7,000 is the amount by which the selling price of the filling station exceeds the portion of the cost equitably allocable to the filling station at the time of purchase reduced by the depreciation properly allowed.
(b) Nontaxable exchanges. Certain realized gains or losses on the sale or exchange of property are not “recognized”, that is, are not included in or deducted from gross income at the time the transaction occurs. Gain or loss from such sales or exchanges is generally recognized at some later time. Examples of such sales or exchanges are the following:
(1) Certain formations, reorganizations, and liquidations of corporations, see sections 331, 333, 337, 351, 354, 355, and 361;
(2) Certain formations and distributions of partnerships, see sections 721 and 731;
(3) Exchange of certain property held for productive use or investment for property of like kind, see section 1031;
(4) A corporation's exchange of its stock for property, see section 1032;
(5) Certain involuntary conversions of property if replaced, see section 1033;
(6) Sale or exchange of residence if replaced, see section 1034;
(7) Certain exchanges of insurance policies and annuity contracts, see section 1035; and
(8) Certain exchanges of stock for stock in the same corporation, see section 1036.
(c) Character of recognized gain. Under Subchapter P, Chapter 1 of the Code, relating to capital gains and losses, certain gains derived from dealings in property are treated specially, and under certain circumstances the maximum rate of tax on such gains is 25 percent, as provided in section 1201. Generally, the property subject to this treatment is a “capital asset”, or treated as a “capital asset”. For definition of such assets, see sections 1221 and 1231, and the regulations thereunder. For some of the rules either granting or denying this special treatment, see the following sections and the regulations thereunder:
(1) Transactions between partner and partnership, section 707;
(2) Sale or exchange of property used in the trade or business and involuntary conversions, section 1231;
(3) Payment of bonds and other evidences of indebtedness, section 1232;
(4) Gains and losses from short sales, section 1233;
(5) Options to buy or sell, section 1234;
(6) Sale or exchange of patents, section 1235;
(7) Securities sold by dealers in securities, section 1236;
(8) Real property subdivided for sale, section 1237;
(9) Amortization in excess of depreciation, section 1238;
(10) Gain from sale of certain property between spouses or between an individual and a controlled corporation, section 1239;
(11) Taxability to employee of termination payments, section 1240.
§ 1.61-7 Interest.
(a) In general. As a general rule, interest received by or credited to the taxpayer constitutes gross income and is fully taxable. Interest income includes interest on savings or other bank deposits; interest on coupon bonds; interest on an open account, a promissory note, a mortgage, or a corporate bond or debenture; the interest portion of a condemnation award; usurious interest (unless by State law it is automatically converted to a payment on the principal); interest on legacies; interest on life insurance proceeds held under an agreement to pay interest thereon; and interest on refunds of Federal taxes. For rules determining the taxable year in which interest, including interest accrued or constructively received, is included in gross income, see section 451 and the regulations thereunder. For the inclusion of interest in income for the purpose of the retirement income credit, see section 37 and the regulations thereunder. For credit of tax withheld at source on interest on tax-free covenant bonds, see section 32 and the regulations thereunder. For rules relating to interest on certain deferred payments, see section 483 and the regulations thereunder.
(b) Interest on Government obligations—(1) Wholly tax-exempt interest. Interest upon the obligations of a State, Territory, or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia, is wholly exempt from tax. Interest on certain United States obligations issued before March 1, 1941, is exempt from tax to the extent provided in the acts of Congress authorizing the various issues. See section 103 and the regulations thereunder.
(2) Partially tax-exempt interest. Interest earned on certain United States obligations is partly tax exempt and partly taxable. For example, the interest on United States Treasury bonds issued before March 1, 1941, to the extent that the principal of such bonds exceeds $5,000, is exempt from normal tax but is subject to surtax. See sections 35 and 103, and the regulations thereunder.
(3) Fully taxable interest. In general, interest on United States obligations issued on or after March 1, 1941, and obligations issued by any agency or instrumentality of the United States after that date, is fully taxable; but see section 103 and the regulations thereunder. A taxpayer using the cash receipts and disbursements method of accounting who owns United States savings bonds issued at a discount has an election as to when he will report the interest; see section 454 and the regulations thereunder.
(c) Obligations bought at a discount; bonds bought when interest defaulted or accrued. When notes, bonds, or other certificates of indebtedness are issued by a corporation or the Government at a discount and are later redeemed by the debtor at the face amount, the original discount is interest, except as otherwise provided by law. See also paragraph (b) of this section for the rules relating to Government bonds. If a taxpayer purchases bonds when interest has been defaulted or when the interest has accrued but has not been paid, any interest which is in arrears but has accrued at the time of purchase is not income and is not taxable as interest if subsequently paid. Such payments are returns of capital which reduce the remaining cost basis. Interest which accrues after the date of purchase, however, is taxable interest income for the year in which received or accrued (depending on the method of accounting used by the taxpayer).
(d) Bonds sold between interest dates; amounts received in excess of original issue discount; interest on life insurance. When bonds are sold between interest dates, part of the sales price represents interest accrued to the date of the sale and must be reported as interest income. Amounts received in excess of the original issue discount upon the retirement or sale of a bond or other evidence of indebtedness may under some circumstances constitute capital gain instead of ordinary income. See section 1232 and the regulations thereunder. Interest payments on amounts payable as employees' death benefits (whether or not section 101(b) applies thereto) and on the proceeds of life insurance policies payable by reason of the insured's death constitute gross income under some circumstances. See section 101 and the regulations thereunder for details. Where accrued interest on unwithdrawn insurance policy dividends is credited annually and is subject to withdrawal annually by the taxpayer, such interest credits constitute gross income to such taxpayer as of the year of credit. However, if under the terms of the insurance policy the interest on unwithdrawn policy dividends is subject to withdrawal only on the anniversary date of the policy (or some other date specified therein), then such interest shall constitute gross income to the taxpayer for the taxable year in which such anniversary date (or other specified date) falls.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6723, 29 FR 5342, Apr. 21, 1964; T.D. 6873, 31 FR 941, Jan. 25, 1966]
§ 1.61-8 Rents and royalties.
(a) In general. Gross income includes rentals received or accrued for the occupancy of real estate or the use of personal property. For the inclusion of rents in income for the purpose of the retirement income credit, see section 37 and the regulations thereunder. Gross income includes royalties. Royalties may be received from books, stories, plays, copyrights, trademarks, formulas, patents, and from the exploitation of natural resources, such as coal, gas, oil, copper, or timber. Payments received as a result of the transfer of patent rights may under some circumstances constitute capital gain instead of ordinary income. See section 1235 and the regulations thereunder. For special rules for certain income from natural resources, see Subchapter I (section 611 and following), Chapter 1 of the Code, and the regulations thereunder.
(b) Advance rentals; cancellation payments. Except as provided in section 467 and the regulations thereunder and except as otherwise provided by the Commissioner in published guidance (see § 601.601(d)(2) of this chapter), gross income includes advance rentals, which must be included in income for the year of receipt regardless of the period covered or the method of accounting employed by the taxpayer. An amount received by a lessor from a lessee for cancelling a lease constitutes gross income for the year in which it is received, since it is essentially a substitute for rental payments. As to amounts received by a lessee for the cancellation of a lease, see section 1241 and the regulations thereunder.
(c) Expenditures by lessee. As a general rule, if a lessee pays any of the expenses of his lessor such payments are additional rental income of the lessor. If a lessee places improvements on real estate which constitute, in whole or in part, a substitute for rent, such improvements constitute rental income to the lessor. Whether or not improvements made by a lessee result in rental income to the lessor in a particular case depends upon the intention of the parties, which may be indicated either by the terms of the lease or by the surrounding circumstances. For the exclusion from gross income of income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by a lessee, see section 109 and the regulations thereunder. For the exclusion from gross income of a lessor corporation of certain of its income taxes on rental income paid by a lessee corporation under a lease entered into before January 1, 1954, see section 110 and the regulations thereunder.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as amended by T.D. 8820, 64 FR 26851, May 18, 1999; T.D. 9135, 69 FR 41192, July 8, 2004]
§ 1.61-9 Dividends.
(a) In general. Except as otherwise specifically provided, dividends are included in gross income under sections 61 and 301. For the principal rules with respect to dividends includible in gross income, see section 316 and the regulations thereunder. As to distributions made or deemed to be made by regulated investment companies, see sections 851 through 855, and the regulations thereunder. As to distributions made by real estate investment trusts, see sections 856 through 858, and the regulations thereunder. See section 116 for the exclusion from gross income of $100 ($50 for dividends received in taxable years beginning before January 1, 1964) of dividends received by an individual, except those from certain corporations. Furthermore, dividends may give rise to a credit against tax under section 34, relating to dividends received by individuals (for dividends received on or before December 31, 1964), and under section 37, relating to retirement income.
(b) Dividends in kind; stock dividends; stock redemptions. Gross income includes dividends in property other than cash, as well as cash dividends. For amounts to be included in gross income when distributions of property are made, see section 301 and the regulations thereunder. A distribution of stock, or rights to acquire stock, in the corporation making the distribution is not a dividend except under the circumstances described in section 305(b). However, the term “dividend” includes a distribution of stock, or rights to acquire stock, in a corporation other than the corporation making the distribution. For determining when distributions in complete liquidation shall be treated as dividends, see section 333 and the regulations thereunder. For rules determining when amounts received in exchanges under section 354 or exchanges and distributions under section 355 shall be treated as dividends, see section 356 and the regulations thereunder.
(c) Dividends on stock sold. When stock is sold, and a dividend is both declared and paid after the sale, such dividend is not gross income to the seller. When stock is sold after the declaration of a dividend and after the date as of which the seller becomes entitled to the dividend, the dividend ordinarily is income to the seller. When stock is sold between the time of declaration and the time of payment of the dividend, and the sale takes place at such time that the purchaser becomes entitled to the dividend, the dividend ordinarily is income to him. The fact that the purchaser may have included the amount of the dividend in his purchase price in contemplation of receiving the dividend does not exempt him from tax. Nor can the purchaser deduct the added amount he advanced to the seller in anticipation of the dividend. That added amount is merely part of the purchase price of the stock. In some cases, however, the purchaser may be considered to be the recipient of the dividend even though he has not received the legal title to the stock itself and does not himself receive the dividend. For example, if the seller retains the legal title to the stock as trustee solely for the purpose of securing the payment of the purchase price, with the understanding that he is to apply the dividends received from time to time in reduction of the purchase price, the dividends are considered to be income to the purchaser.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6777, 29 FR 17807, Dec. 16, 1964]
§ 1.61-10 Alimony and separate maintenance payments; annuities; income from life insurance and endowment contracts.
(a) In general. Alimony and separate maintenance payments, annuities, and income from life insurance and endowment contracts in general constitute gross income, unless excluded by law. Annuities paid by religious, charitable, and educational corporations are generally taxable to the same extent as other annuities. An annuity charged upon devised land is taxable to the donee-annuitant to the extent that it becomes payable out of the rents or other income of the land, whether or not it is a charge upon the income of the land.
(b) Cross references. For the detailed rules relating to—
(1) Alimony and separate maintenance payments, see section 71 and the regulations thereunder;
(2) Annuities, certain proceeds of endowment and life insurance contracts, see section 72 and the regulations thereunder;
(3) Life insurance proceeds paid by reason of death of insured, employees' death benefits, see section 101 and the regulations thereunder;
(4) Annuities paid by employees' trusts, see section 402 and the regulations thereunder;
(5) Annuities purchased for employee by employer, see section 403 and the regulations thereunder.
§ 1.61-11 Pensions.
(a) In general. Pensions and retirement allowances paid either by the Government or by private persons constitute gross income unless excluded by law. Usually, where the taxpayer did not contribute to the cost of a pension and was not taxable on his employer's contributions, the full amount of the pension is to be included in his gross income. But see sections 72, 402, and 403, and the regulations thereunder. When amounts are received from other types of pensions, a portion of the payment may be excluded from gross income. Under some circumstances, amounts distributed from a pension plan in excess of the employee's contributions may constitute long-term capital gain, rather than ordinary income.
(b) Cross references. For the inclusion of pensions in income for the purpose of the retirement income credit, see section 37 and the regulations thereunder. Detailed rules concerning the extent to which pensions and retirement allowances are to be included in or excluded from gross income are contained in other sections of the Code and the regulations thereunder. Amounts received as pensions or annuities under the Social Security Act (42 U.S.C. ch. 7) or the Railroad Retirement Act (45 U.S.C. ch. 9) are excluded from gross income. For other partial and total exclusions from gross income, see the following:
(1) Annuities in general, section 72 and the regulations thereunder;
(2) Employees' annuities, sections 402 and 403 and the regulations thereunder;
(3) References to other acts of Congress exempting veterans' pensions and railroad retirement annuities and pensions, section 122.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6856, 30 FR 13316, Oct. 20, 1965]
§ 1.61-12 Income from discharge of indebtedness.
(a) In general. The discharge of indebtedness, in whole or in part, may result in the realization of income. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, the debtor realizes income in the amount of the debt as compensation for his services. A taxpayer may realize income by the payment or purchase of his obligations at less than their face value. In general, if a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation to the extent of the principal of the debt.
(b) Proceedings under Bankruptcy Act. (1) Income is not realized by a taxpayer by virtue of the discharge, under section 14 of the Bankruptcy Act (11 U.S.C. 32), of his indebtedness as the result of an adjudication in bankruptcy, or by virtue of an agreement among his creditors not consummated under any provision of the Bankruptcy Act, if immediately thereafter the taxpayer's liabilities exceed the value of his assets. Furthermore, unless one of the principal purposes of seeking a confirmation under the Bankruptcy Act is the avoidance of income tax, income is not realized by a taxpayer in the case of a cancellation or reduction of his indebtedness under—
(i) A plan of corporate reorganization confirmed under Chapter X of the Bankruptcy Act (11 U.S.C., ch. 10);
(ii) An “arrangement” or a “real property arrangement” confirmed under Chapter XI or XII, respectively, of the Bankruptcy Act (11 U.S.C., ch. 11, 12); or
(iii) A “wage earner's plan” confirmed under Chapter XIII of the Bankruptcy Act (11 U.S.C., ch. 13).
(2) For adjustment of basis of certain property in the case of cancellation or reduction of indebtedness resulting from a proceeding under the Bankruptcy Act, see the regulations under section 1016.
(c) Issuance and repurchase of debt instruments—(1) Issuance. An issuer does not realize gain or loss upon the issuance of a debt instrument. For rules relating to an issuer's interest deduction for a debt instrument issued with bond issuance premium, see § 1.163-13.
(2) Repurchase—(i) In general. An issuer does not realize gain or loss upon the repurchase of a debt instrument. However, if a debt instrument provides for payments denominated in, or determined by reference to, a nonfunctional currency, an issuer may realize a currency gain or loss upon the repurchase of the instrument. See section 988 and the regulations thereunder. For purposes of this paragraph (c)(2), the term repurchase includes the retirement of a debt instrument, the conversion of a debt instrument into stock of the issuer, and the exchange (including an exchange under section 1001) of a newly issued debt instrument for an existing debt instrument.
(ii) Repurchase at a discount. An issuer realizes income from the discharge of indebtedness upon the repurchase of a debt instrument for an amount less than its adjusted issue price (within the meaning of § 1.1275-1(b)). The amount of discharge of indebtedness income is equal to the excess of the adjusted issue price over the repurchase price. See section 108 and the regulations thereunder for additional rules relating to income from discharge of indebtedness. For example, to determine the repurchase price of a debt instrument that is repurchased through the issuance of a new debt instrument, see section 108(e)(10).
(iii) Repurchase at a premium. An issuer may be entitled to a repurchase premium deduction upon the repurchase of a debt instrument for an amount greater than its adjusted issue price (within the meaning of § 1.1275-1(b)). See § 1.163-7(c) for the treatment of repurchase premium.
(iv) Effective date. This paragraph (c)(2) applies to debt instruments repurchased on or after March 2, 1998.
(d) Cross references. For exclusion from gross income of—
(1) Income from discharge of indebtedness in certain cases, see sections 108 and 1017, and regulations thereunder;
(2) Forgiveness of Government payments to encourage exploration, development, and mining for defense purposes, see section 621 and regulations thereunder.
(e) Cross reference. For rules relating to the treatment of liabilities on the sale or other disposition of encumbered property, see § 1.1001-2.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6984, 33 FR 19174, Dec. 24, 1968; T.D. 7741, 45 FR 81745, Dec. 12, 1980; T.D. 8746, 62 FR 68175, Dec. 31, 1997]
§ 1.61-13 Distributive share of partnership gross income; income in respect of a decedent; income from an interest in an estate or trust.
(a) In general. A partner's distributive share of partnership gross income (under section 702(c)) constitutes gross income to him. Income in respect of a decedent (under section 691) constitutes gross income to the recipient. Income from an interest in an estate or trust constitutes gross income under the detailed rules of Part I (section 641 and following), Subchapter J, Chapter 1 of the Code. In many cases, these sections also determine who is to include in his gross income the income from an estate or trust.
(b) Creation of sinking fund by corporation. If a corporation, for the sole purpose of securing the payment of its bonds or other indebtedness, places property in trust or sets aside certain amounts in a sinking fund under the control of a trustee who may be authorized to invest and reinvest such sums from time to time, the property or fund thus set aside by the corporation and held by the trustee is an asset of the corporation, and any gain arising therefrom is income of the corporation and shall be included as such in its gross income.
§ 1.61-14 Miscellaneous items of gross income.
(a) In general. In addition to the items enumerated in section 61(a), there are many other kinds of gross income. For example, punitive damages such as treble damages under the antitrust laws and exemplary damages for fraud are gross income. Another person's payment of the taxpayer's income taxes constitutes gross income to the taxpayer unless excluded by law. Illegal gains constitute gross income. Treasure trove, to the extent of its value in United States currency, constitutes gross income for the taxable year in which it is reduced to undisputed possession.
(b) Cross references. (1) Prizes and awards, see section 74 and regulations thereunder;
(2) Damages for personal injury or sickness, see section 104 and the regulations thereunder;
(3) Income taxes paid by lessee corporation, see section 110 and regulations thereunder;
(4) Scholarships and fellowship grants, see section 117 and regulations thereunder;
(5) Miscellaneous exemptions under other acts of Congress, see section 122;
(6) Tax-free covenant bonds, see section 1451 and regulations thereunder.
(7) Notional principal contracts, see § 1.446-3.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6856, 30 FR 13316, Oct. 20, 1965; T.D. 8491, 58 FR 53127, Oct. 14, 1993]
§ 1.61-15 Options received as payment of income.
(a) In general. Except as otherwise provided in § 1.61-2(d)(6)(i) (relating to certain restricted property transferred after June 30, 1969), if any person receives an option in payment of an amount constituting compensation of such person (or any other person), such option is subject to the rules contained in § 1.421-6 for purposes of determining when income is realized in connection with such option and the amount of such income. In this regard, the rules of § 1.421-6 apply to an option received in payment of an amount constituting compensation regardless of the form of the transaction. Thus, the rules of § 1.421-6 apply to an option transferred for less than its fair market value in a transaction taking the form of a sale or exchange if the difference between the amount paid for the option and its fair market value at the time of transfer is the payment of an amount constituting compensation of the transferee or any other person. This section, for example, makes the rules of § 1.421-6 applicable to options granted in whole or partial payment for services of an independent contractor. If an amount of money or property is paid for an option to which this paragraph applies, then the amount paid shall be part of the basis of such option.
(b) Options to which paragraph (a) does not apply. (1) Paragraph (a) of this section does not apply to:
(i) An option which is subject to the rules contained in section 421; and
(ii) An option which is not granted as the payment of an amount constituting compensation, such as an option which is acquired solely as an investment (including an option which is part of an investment unit described in paragraph (b) of § 1.1232-3). For rules relating to the taxation of options described in this subdivision, see section 1234 and the regulations thereunder.
(2) If a person acquires an option which is not subject to the rules contained in section 421, and if such option has a readily ascertainable fair market value, such person may establish that such option was not acquired as payment of an amount constituting compensation by showing that the amount of money or its equivalent paid for the option equaled the readily ascertainable fair market value of the option. If a person acquires an option which is not subject to the rules contained in section 421, and if such option does not have a readily ascertainable fair market value, then to establish that such option was not acquired as payment of an amount constituting compensation, such person must show that, from an examination of all the surrounding circumstances, there was no reason for the option to have been granted as the payment of an amount constituting compensation. For example, such person must show that he had neither rendered nor was obligated to render substantial services in consideration for the granting of the option. In determining whether an option, such as an option acquired in connection with an obligation as part of an investment unit, has been granted as compensation for services, the ordinary services performed by an investor in his own self-interest in connection with his investing activities will not be treated as the consideration for the grant of the option. For example, if a small business investment company takes an active part in the management of its debtor small business company, the rendering of such management services will not be treated as the consideration for the granting of the option, provided such services are rendered for an independent consideration, or are merely protective of the small business investment company's investment in the borrower. See paragraph (c) of § 1.421-6 for the meaning of the term “readily ascertainable fair market value.”
(c) Statement required in connection with certain options. (1) Any person acquiring any option to purchase securities (other than an option described in subparagraph (2) of this paragraph) shall attach a statement to his income tax return for the taxable year in which the option was acquired. For the definition of the term “securities”, see section 165(g)(2).
(2) The statement otherwise required by subparagraph (1) of this paragraph shall not be required with respect to the following options:
(i) Options subject to the rules contained in section 305(a) or section 421;
(ii) Options acquired as part of an investment unit consisting of an option and a debenture, note, or other similar obligation—
(a) If such unit is acquired as part of a public offering and the amount of money or its equivalent paid for such unit is not less than the public offering price, or
(b) If such unit is actively traded on an established market and the amount of money or its equivalent paid for such unit is not less than the price paid for such unit in contemporaneous purchases of such unit by persons independent of both the seller and the taxpayer;
(iii) Options acquired as part of a public offering, if the amount of money or its equivalent paid for such option is not less than the public offering price; and
(iv) Options which are actively traded on an established market and which are acquired for money or its equivalent at a price not less than the price paid for such options in contemporaneous purchases of such options by persons independent of both the seller and the taxpayer.
(3) The statement required by subparagraph (1) of this paragraph shall contain the following information:
(i) Name and address of the taxpayer;
(ii) Description of the securities subject to the option (including number of shares of stock);
(iii) Period during which the option is exercisable;
(iv) Whether the option had a readily ascertainable fair market value at date of grant; and
(v) Whether the option is subject to paragraph (a) of this section.
(4) If the statement required by subparagraph (1) of this paragraph indicates either that the option is not subject to paragraph (a) of this section, or that the option is subject to paragraph (a) of this section but that such option had a readily ascertainable fair market value at date of grant, then such statement shall contain the following additional information:
(i) Option price;
(ii) Value at date of grant of securities subject to the option;
(iii) Restrictions (if any) on exercise or transfer of option;
(iv) Restrictions (if any) on transfer of securities subject to the option;
(v) Value of the option (if readily ascertainable);
(vi) How value of option was determined;
(vii) Amount of money (or its equivalent) paid for the option;
(viii) Person from whom the option was acquired;
(ix) A concise description of the circumstances surrounding the acquisition of the option and any other factors relied upon by the taxpayer to establish that the option is not subject to paragraph (a) of this section, or, if the option is treated by the taxpayer as subject to paragraph (a) of this section, that the option had a readily ascertainable fair market value at date of grant.
(d) Effective date. This section shall apply to options granted after July 11, 1963, other than options required to be granted pursuant to the terms of a written contract entered into on or before such date.
[T.D. 6696, 28 FR 13450, Dec. 12, 1963, as amended by T.D. 6706, 29 FR 2911, Mar. 3, 1964; T.D. 6984, 33 FR 19175, Dec. 24, 1968; T.D. 7554, 43 FR 31913, July 24, 1978]
§ 1.61-21 Taxation of fringe benefits.
(a) Fringe benefits—(1) In general. Section 61(a)(1) provides that, except as otherwise provided in subtitle A of the Internal Revenue Code of 1986, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. For an outline of the regulations under this section relating to fringe benefits, see paragraph (a)(7) of this section. Examples of fringe benefits include: an employer-provided automobile, a flight on an employer-provided aircraft, an employer-provided free or discounted commercial airline flight, an employer-provided vacation, an employer-provided discount on property or services, an employer-provided membership in a country club or other social club, and an employer-provided ticket to an entertainment or sporting event.
(2) Fringe benefits excluded from income. To the extent that a particular fringe benefit is specifically excluded from gross income pursuant to another section of subtitle A of the Internal Revenue Code of 1986, that section shall govern the treatment of that fringe benefit. Thus, if the requirements of the governing section are satisfied, the fringe benefits may be excludable from gross income. Examples of excludable fringe benefits include qualified tuition reductions provided to an employee (section 117(d)); meals or lodging furnished to an employee for the convenience of the employer (section 119); benefits provided under a dependent care assistance program (section 129); and no-additional-cost services, qualified employee discounts, working condition fringes, and de minimis fringes (section 132). Similarly, the value of the use by an employee of an employer-provided vehicle or a flight provided to an employee on an employer-provided aircraft may be excludable from income under section 105 (because, for example, the transportation is provided for medical reasons) if and to the extent that the requirements of that section are satisfied. Section 134 excludes from gross income “qualified military benefits.” An example of a benefit that is not a qualified military benefit is the personal use of an employer-provided vehicle. The fact that another section of subtitle A of the Internal Revenue Code addresses the taxation of a particular fringe benefit will not preclude section 61 and the regulations thereunder from applying, to the extent that they are not inconsistent with such other section. For example, many fringe benefits specifically addressed in other sections of subtitle A of the Internal Revenue Code are excluded from gross income only to the extent that they do not exceed specific dollar or percentage limits, or only if certain other requirements are met. If the limits are exceeded or the requirements are not met, some or all of the fringe benefit may be includible in gross income pursuant to section 61. See paragraph (b)(3) of this section.
(3) Compensation for services. A fringe benefit provided in connection with the performance of services shall be considered to have been provided as compensation for such services. Refraining from the performance of services (such as pursuant to a covenant not to compete) is deemed to be the performance of services for purposes of this section.
(4) Person to whom fringe benefit is taxable—(i) In general. A taxable fringe benefit is included in the income of the person performing the services in connection with which the fringe benefit is furnished. Thus, a fringe benefit may be taxable to a person even though that person did not actually receive the fringe benefit. If a fringe benefit is furnished to someone other than the service provider such benefit is considered in this section as furnished to the service provider, and use by the other person is considered use by the service provider. For example, the provision of an automobile by an employer to an employee's spouse in connection with the performance of services by the employee is taxable to the employee. The automobile is considered available to the employee and use by the employee's spouse is considered use by the employee.
(ii) All persons to whom benefits are taxable referred to as employees. The person to whom a fringe benefit is taxable need not be an employee of the provider of the fringe benefit, but may be, for example, a partner, director, or an independent contractor. For convenience, the term “employee” includes any person performing services in connection with which a fringe benefit is furnished, unless otherwise specifically provided in this section.
(5) Provider of a fringe benefit referred to as an employer. The “provider” of a fringe benefit is that person for whom the services are performed, regardless of whether that person actually provides the fringe benefit to the recipient. The provider of a fringe benefit need not be the employer of the recipient of the fringe benefit, but may be, for example, a client or customer of the employer or of an independent contractor. For convenience, the term “employer” includes any provider of a fringe benefit in connection with payment for the performance of services, unless otherwise specifically provided in this section.
(6) Effective date. Except as otherwise provided, this section is effective as of January 1, 1989 with respect to fringe benefits provided after December 31, 1988.
(7) Outline of this section. The following is an outline of the regulations in this section relating to fringe benefits:
§ 1.61-21 (a) Fringe benefits.
(1) In general.
(2) Fringe benefits excluded from income.
(3) Compensation for services.
(4) Person to whom fringe benefit is taxable.
(5) Provider of a fringe benefit referred to as an employer.
(6) Effective date.
(7) Outline of this section.
§ 1.61-21 (b) Valuation of fringe benefits
(1) In general.
(2) Fair market value.
(3) Exclusion from income based on cost.
(4) Fair market value of the availability of an employer-provided vehicle.
(5) Fair market value of chauffeur services.
(6) Fair market value of a flight on an employer-provided piloted aircraft.
(7) Fair market value of the use of an employer-provided aircraft for which the employer does not furnish a pilot.
§ 1.61-21 (c) Special valuation rules.
(1) In general.
(2) Use of the special valuation rules.
(3) Additional rules for using special valuation.
(4) Application of section 414 to employers.
(5) Valuation formulae contained in the special valuation rules.
(6) Modification of the special valuation rules.
(7) Special accounting rule.
§ 1.61-21 (d) Automobile lease valuation rule.
(1) In general.
(2) Calculation of Annual Lease Value.
(3) Services included in, or excluded from, the Annual Lease Value Table.
(4) Availability of an automobile for less than an entire calendar year.
(5) Fair market value.
(6) Special rules for continuous availability of certain automobiles.
(7) Consistency rules.
§ 1.61-21 (e)Vehicle cents-per-mile valuation rule.
(1) In general.
(2) Definition of vehicle.
(3) Services included in, or excluded from, the cents-per-mile rate.
(4) Valuation of personal use only.
(5) Consistency rules.
§ 1.61-21 (f) Commuting valuation rule.
(1) In general.
(2) Special rules.
(3) Commuting value.
(4) Definition of vehicle.
(5) Control employee defined—Non-government employer.
(6) Control employee defined—Government employer.
(7) “Compensation” defined.
§ 1.61-21 (g) Non-commercial flight valuation rule.
(1) In general.
(2) Eligible flights and eligible aircraft.
(3) Definition of a flight.
(4) Personal and non-personal flights.
(5) Aircraft valuation formula.
(6) Discretion to provide new formula.
(7) Aircraft multiples.
(8) Control employee defined—Non-government employer.
(9) Control employee defined—Government employer.
(10) “Compensation” defined.
(11) Treatment of former employees.
(12) Seating capacity rule.
(13) Erroneous use of the non-commercial flight valuation rule.
(14) Consistency rules.
§ 1.61-21 (h) Commercial flight valuation rule.
(1) In general.
(2) Space-available flight.
(3) Commercial aircraft.
(4) Timing of inclusion.
(5) Consistency rules.
§ 1.61-21 (i) [Reserved]
§ 1.61-21 (j) Valuation of meals provided at an employer-operated eating facility for employees.
(1) In general.
(2) Valuation formula.
§ 1.61-21 (k) Commuting valuation rule for certain employees.
(1) In general.
(2) Trip-by-trip basis.
(3) Commuting value.
(4) Definition of employer-provided transportation.
(5) Unsafe conditions.
(6) Qualified employee defined.
(7) Examples.
(8) Effective date.
(b) Valuation of fringe benefits—(1) In general. An employee must include in gross income the amount by which the fair market value of the fringe benefit exceeds the sum of—
(i) The amount, if any, paid for the benefit by or on behalf of the recipient, and
(ii) The amount, if any, specifically excluded from gross income by some other section of subtitle A of the Internal Revenue Code of 1986.
Therefore, for example, if the employee pays fair market value for what is received, no amount is includible in the gross income of the employee. In general, the determination of the fair market value of a fringe benefit must be made before subtracting out the amount, if any, paid for the benefit and the amount, if any, specifically excluded from gross income by another section of subtitle A. See paragraphs (d)(2)(ii) and (e)(1)(iii) of this section.
(2) Fair market value. In general, fair market value is determined on the basis of all the facts and circumstances. Specifically, the fair market value of a fringe benefit is the amount that an individual would have to pay for the particular fringe benefit in an arm's-length transaction. Thus, for example, the effect of any special relationship that may exist between the employer and the employee must be disregarded. Similarly, an employee's subjective perception of the value of a fringe benefit is not relevant to the determination of the fringe benefit's fair market value nor is the cost incurred by the employer determinative of its fair market value. For special rules relating to the valuation of certain fringe benefits, see paragraph (c) of this section.
(3) Exclusion from income based on cost. If a statutory exclusion phrased in terms of cost applies to the provision of a fringe benefit, section 61 does not require the inclusion in the recipient's gross income of the difference between the fair market value and the excludable cost of that fringe benefit. For example, section 129 provides an exclusion from an employee's gross income for amounts contributed by an employer to a dependent care assistance program for employees. Even if the fair market value of the dependent care assistance exceeds the employer's cost, the excess is not subject to inclusion under section 61 and this section. However, if the statutory cost exclusion is a limited amount, the fair market value of the fringe benefit attributable to any excess cost is subject to inclusion. This would be the case, for example, where an employer pays or incurs a cost of more than $5,000 to provide dependent care assistance to an employee.
(4) Fair market value of the availability of an employer-provided vehicle—(i) In general. If the vehicle special valuation rules of paragraph (d), (e), or (f) of this section do not apply with respect to an employer-provided vehicle, the value of the availability of that vehicle is determined under the general valuation principles set forth in this section. In general, that value equals the amount that an individual would have to pay in an arm's-length transaction to lease the same or comparable vehicle on the same or comparable conditions in the geographic area in which the vehicle is available for use. An example of a comparable condition is the amount of time that the vehicle is available to the employee for use, e.g., a one-year period. Unless the employee can substantiate that the same or comparable vehicle could have been leased on a cents-per-mile basis, the value of the availability of the vehicle cannot be computed by applying a cents-per-mile rate to the number of miles the vehicle is driven.
(ii) Certain equipment excluded. The fair market value of a vehicle does not include the fair market value of any specialized equipment not susceptible to personal use or any telephone that is added to or carried in the vehicle, provided that the presence of that equipment or telephone is necessitated by, and attributable to, the business needs of the employer. However, the value of specialized equipment must be included, if the employee to whom the vehicle is available uses the specialized equipment in a trade or business of the employee other than the employee's trade or business of being an employee of the employer.
(5) Fair market value of chauffeur services—(i) Determination of value—(A) In general. The fair market value of chauffeur services provided to the employee by the employer is the amount that an individual would have to pay in an arm's-length transaction to obtain the same or comparable chauffeur services in the geographic area for the period in which the services are provided. In determining the applicable fair market value, the amount of time, if any, the chauffeur remains on-call to perform chauffeur services must be included. For example, assume that A, an employee of corporation M, needs a chauffeur to be on-call to provide services to A during a twenty-four hour period. If during that twenty-four hour period, the chauffeur actually drives A for only six hours, the fair market value of the chauffeur services would have to be the value of having a chauffeur on-call for a twenty-four hour period. The cost of taxi fare or limousine service for the six hours the chauffeur actually drove A would not be an accurate measure of the fair market value of chauffeur services provided to A. Moreover, all other aspects of the chauffeur's services (including any special qualifications of the chauffeur (e.g., training in evasive driving skills) or the ability of the employee to choose the particular chauffeur) must be taken into consideration.
(B) Alternative valuation with reference to compensation paid. Alternatively, the fair market value of the chauffeur services may be determined by reference to the compensation (as defined in paragraph (b)(5)(ii) of this section) received by the chauffeur from the employer.
(C) Separate valuation for chauffeur services. The value of chauffeur services is determined separately from the value of the availability of an employer-provided vehicle.
(ii) Definition of compensation—(A) In general. For purposes of this paragraph (b)(5)(ii), the term “compensation” means compensation as defined in section 414(q)(7) and the fair market value of nontaxable lodging (if any) provided by the employer to the chauffeur in the current year.
(B) Adjustments to compensation—For purposes of this paragraph (b)(5)(ii), a chauffeur's compensation is reduced proportionately to reflect the amount of time during which the chauffeur performs substantial services for the employer other than as a chauffeur and is not on-call as a chauffeur. For example, assume a chauffeur is paid $25,000 a year for working a ten-hour day, five days a week and also receives $5,000 in nontaxable lodging. Further assume that during four hours of each day, the chauffeur is not on-call to perform services as a chauffeur because that individual is performing secretarial functions for the employer. Then, for purposes of determining the fair market value of this chauffeur's services, the employer may reduce the chauffeur's compensation by 4/10 or $12,000 (.4 × ($25,000 + $5,000) = $12,000). Therefore, in this example, the fair market value of the chauffeur's services is $18,000 ($30,000 −$12,000). However, for purposes of this paragraph (b)(5)(ii), a chauffeur's compensation is not to be reduced by any amounts paid to the chauffeur for time spent “on-call,” even though the chauffeur actually performs other services for the employer during such time. For purposes of this paragraph (b)(5)(ii), a determination that a chauffeur is performing substantial services for the employer other than as a chauffeur is based upon the facts and circumstances of each situation. An employee will be deemed to be performing substantial services for the employer other than as a chauffeur if a certain portion of each working day is regularly spent performing other services for the employer.
(iii) Calculation of chauffeur services for personal purposes of the employee. The fair market value of chauffeur services provided to the employee for personal purposes may be determined by multiplying the fair market value of chauffeur services, as determined pursuant to paragraph (b)(5)(i) (A) or (B) of this section, by a fraction, the numerator of which is equal to the sum of the hours spent by the chauffeur actually providing personal driving services to the employee and the hours spent by the chauffeur in “personal on-call time,” and the denominator of which is equal to all hours the chauffeur spends in driving services of any kind paid for by the employer, including all hours that are “on-call.”
(iv) Definition of on-call time. For purposes of this paragraph, the term “on-call time” means the total amount of time that the chauffeur is not engaged in the actual performance of driving services, but during which time the chauffeur is available to perform such services. With respect to a round-trip, time spent by a chauffeur waiting for an employee to make a return trip is generally not treated as on-call time; rather such time is treated as part of the round-trip.
(v) Definition of personal on-call time. For purposes of this paragraph, the term “personal on-call time” means the amount of time outside the employee's normal working hours for the employer when the chauffeur is available to the employee to perform driving services.
(vi) Presumptions. (A) An employee's normal working hours will be presumed to consist of a ten hour period during which the employee usually conducts business activities for that employer.
(B) It will be presumed that if the chauffeur is on-call to provide driving services to an employee during the employee's normal working hours, then that on-call time will be performed for business purposes.
(C) Similarly, if the chauffeur is on-call to perform driving services to an employee after normal working hours, then that on-call time will be presumed to be “personal on-call time.”
(D) The presumptions set out in paragraph (b)(5)(vi) (A), (B), and (C) of this section may be rebutted. For example, an employee may demonstrate by adequate substantiation that his or her normal working hours consist of more than ten hours. Furthermore, if the employee keeps adequate records and is able to substantiate that some portion of the driving services performed by the chauffeur after normal working hours is attributable to business purposes, then personal on-call time may be reduced by an amount equal to such personal on-call time multiplied by a fraction, the numerator of which is equal to the time spent by the chauffeur after normal working hours driving the employee for business purposes, and the denominator of which is equal to the total time spent by the chauffeur driving the employee after normal working hours for all purposes.
(vii) Examples. The rules of this paragraph (b)(5) may be illustrated by the following examples:
Example 1.An employer makes available to employee A an automobile and a full-time chauffeur B (who performs no other services for A's employer) for an entire calendar year. Assume that the automobile lease valuation rule of paragraph (d) of this section is used and that the Annual Lease Value of the automobile is $9,250. Assume further that B's compensation for the year is $12,000 (as defined in section 414(q)(7)) and that B is furnished lodging with a value of $3,000 that is excludable from B's gross income. The maximum amount subject to inclusion in A's gross income for use of the automobile and chauffeur is therefore $24,250 ($12,000 + $3,000 + $9,250). If 70 percent of the miles placed on the automobile during the year are for A's employer's business, then $6,475 is excludable from A's gross income with respect to the automobile as a working condition fringe ($9,250 × .70). Thus, $2,775 is includible in A's gross income with respect to the automobile ($9,250−$6,475). With respect to the chauffeur, if 20 percent of the chauffeur's time is spent actually driving A or being on-call to drive A for personal purposes; then $3,000 is includible in A's income (.20 × $15,000). Eighty percent of $15,000, or $12,000, is excluded from A's income as a working condition fringe.
Example 2.Assume the same facts as in example (1) except that in addition to providing chauffeur services, B is responsible for performing substantial non-chauffeur-related duties (such as clerical or secretarial functions) during which time B is not “on-call” as a chauffeur. If B spends only 75 percent of the time performing chauffeur services, then the maximum amount subject to inclusion in A's gross income for use of the automobile and chauffeur is $20,500 (($15,000 × .75) + $9,250). If B is actually driving A for personal purposes or is on-call to drive A for personal purposes for 20 percent of the time during which B is available to provide chauffeur services, then $2,250 is includible in A's gross income (.20 × $11,250). The income inclusion with respect to the automobile is the same as in example (1).
Example 3.Assume the same facts as in example (2) except that while B is performing non-chauffeur-related duties, B is on call as A's chauffeur. No part of B's compensation is excluded when determining the value of the benefit provided to A. Thus, as in example (1), $3,000 is includible in A's gross income with respect to the chauffeur.
(6) Fair market value of a flight on an employer-provided piloted aircraft—(i) In general. If the non-commercial flight special valuation rule of paragraph (g) of this section does not apply, the value of a flight on an employer-provided piloted aircraft is determined under the general valuation principles set forth in this paragraph.
(ii) Value of flight. If an employee takes a flight on an employer-provided piloted aircraft and that employee's flight is primarily personal (see § 1.162-2(b)(2)), the value of the flight is equal to the amount that an individual would have to pay in an arm's-length transaction to charter the same or a comparable piloted aircraft for that period for the same or a comparable flight. A flight taken under these circumstances may not be valued by reference to the cost of commercial airfare for the same or a comparable flight. The cost to charter the aircraft must be allocated among all employees on board the aircraft based on all the facts and circumstances unless one or more of the employees controlled the use of the aircraft. Where one or more employees control the use of the aircraft, the value of the flight shall be allocated solely among such controlling employees, unless a written agreement among all the employees on the flight otherwise allocates the value of such flight. Notwithstanding the allocation required by the preceding sentence, no additional amount shall be included in the income of any employee whose flight is properly valued under the special valuation rule of paragraph (g) of this section. For purposes of this paragraph (b)(6), “control” means the ability of the employee to determine the route, departure time and destination of the flight. The rules provided in paragraph (g)(3) of this section will be used for purposes of this section in defining a flight. Notwithstanding the allocation required by the preceding sentence, no additional amount shall be included in the income of an employee for that portion of any such flight which is excludible from income pursuant to section 132(d) or § 1.132-5 as a working condition fringe.
(iii) Examples. The rules of paragraph (b)(6) of this section may be illustrated by the following examples:
Example 1.An employer makes available to employees A and B a piloted aircraft in New York, New York. A wants to go to Los Angeles, California for personal purposes. B needs to go to Chicago, Illinois for business purposes, and then wants to go to Los Angeles, California for personal purposes. Therefore, the aircraft first flies to Chicago, and B deplanes and then boards the plane again. The aircraft then flies to Los Angeles, California where A and B deplane. The value of the flight to employee A will be no more than the amount that an individual would have to pay in an arm's length transaction to charter the same or a comparable piloted aircraft for the same or comparable flight from New York City to Los Angeles. No amount will be imputed to employee A for the stop at Chicago. As to employee B, the value of the personal flight will be no more than the value or the flight from Chicago to Los Angeles. Pursuant to the rules set forth in § 1.132-5(k), the flight from New York to Chicago will not be included in employee B's income since that flight was taken solely for business purposes. The charter cost must be allocated between A and B, since both employees controlled portions of the flight. Assume that the employer allocates according to the relative value of each employee's flight. If the charter value of A's flight from New York City to Los Angeles is $1,000 and the value of B's flight from Chicago to Los Angeles is $600 and the value of the actual flight from New York to Chicago to Los Angeles is $1,200, then the amount to be allocated to employee A is $750 ($1,000/($1,000 + $600) × $1,200) and the amount to be allocated to employee B is $450 ($600/($1000 + $600) × $1,200).
Example 2.Assume the same facts as in example (1), except that employee A also deplanes at Chicago, Illinois, but for personal purposes. The value of the flight to employee A then becomes the value of a flight from New York to Chicago to Los Angeles, i.e., $1,200. Therefore, the amount to be allocated to employee A is $800 ($1,200/($1,200 + $600) × $1,200) and the amount to be allocated to employee B is $400 ($600/($1,200 + $600) × $1,200).
(7) Fair market value of the use of an employer-provided aircraft for which the employer does not furnish a pilot—(i) In general. If the non-commercial flight special valuation rule of paragraph (g) of this section does not apply and if an employer provides an employee with the use of an aircraft without a pilot, the value of the use of the employer-provided aircraft is determined under the general valuation principles set forth in this paragraph (b)(7).
(ii) Value of flight. In general, if an employee takes a flight on an employer-provided aircraft for which the employer does not furnish a pilot, the value of that flight is equal to the amount that an individual would have to pay in an arm's-length transaction to lease the same or comparable aircraft on the same or comparable terms for the same period in the geographic area in which the aircraft is used. For example, if an employer makes its aircraft available to an employee who will pilot the aircraft for a two-hour flight, the value of the use of the aircraft is the amount that an individual would have to pay in an arm's-length transaction to rent a comparable aircraft for that period in the geographic area in which the aircraft is used. As another example, assume that an employee uses an employer-provided aircraft to commute between home and work. The value of the use of the aircraft is the amount that an individual would have to pay in an arm's-length transaction to rent a comparable aircraft for commuting in the geographic area in which the aircraft is used. If the availability of the flight is of benefit to more than one employee, then such value shall be allocated among such employees on the basis of the relevant facts and circumstances.
(c) Special valuation rules—(1) In general. Paragraphs (d) through (k) of this section provide special valuation rules that may be used under certain circumstances for certain commonly provided fringe benefits. For general rules relating to the valuation of fringe benefits not eligible for valuation under the special valuation rules or fringe benefits with respect to which the special valuation rules are not used, see paragraph (b) of this section.
(2) Use of the special valuation rules—(i) For benefits provided before January 1, 1993. The special valuation rules may be used for income tax, employment tax, and reporting purposes. The employer has the option to use any of the special valuation rules. However, an employee may only use a special valuation rule if the employer uses the rule. Moreover, an employee may only use the special rule that the employer uses to value the benefit provided; the employee may not use another special rule to value that benefit. The employee may always use general valuation rules based on facts and circumstances (see paragraph (b) of this section) even if the employer uses a special rule. If a special rule is used, it must be used for all purposes. If an employer properly uses a special rule and the employee uses the special rule, the employee must include in gross income the amount determined by the employer under the special rule reduced by the sum of—
(A) Any amount reimbursed by the employee to the employer, and
(B) Any amount excludable from income under another section of subtitle A of the Internal Revenue Code of 1986. If an employer properly uses a special rule and properly determines the amount of an employee's working condition fringe under section 132 and § 1.132-5 (under the general rule or under a special rule), and the employee uses the special valuation rule, the employee must include in gross income the amount determined by the employer less any amount reimbursed by the employee to the employer. The employer and employee may use the special rules to determine the amount of the reimbursement due the employer by the employee. Thus, if an employee reimburses an employer for the value of a benefit as determined under a special valuation rule, no amount is includable in the employee's gross income with respect to the benefit. The provisions of this paragraph are effective for benefits provided before January 1, 1993.
(ii) For benefits provided after December 31, 1992. The special valuation rules may be used for income tax, employment tax, and reporting purposes. The employer has the option to use any of the special valuation rules. An employee may use a special valuation rule only if the employer uses that rule or the employer does not meet the condition of paragraph (c)(3)(ii)(A) of this section, but one of the other conditions of paragraph (c)(3)(ii) of this section is met. The employee may always use general valuation rules based on facts and circumstances (see paragraph (b) of this section) even if the employer uses a special rule. If a special rule is used, it must be used for all purposes. If an employer properly uses a special rule and the employee uses the special rule, the employee must include in gross income the amount determined by the employer under the special rule reduced by the sum of—
(A) Any amount reimbursed by the employee to the employer; and
(B) Any amount excludable from income under another section of subtitle A of the Internal Revenue Code of 1986. If an employer properly uses a special rule and properly determines the amount of an employee's working condition fringe under section 132 and § 1.132-5 (under the general rule or under a special rule), and the employee uses the special valuation rule, the employee must include in gross income the amount determined by the employer less any amount reimbursed by the employee to the employer. The employer and employee may use the special rules to determine the amount of the reimbursement due the employer by the employee. Thus, if an employee reimburses an employer for the value of a benefit as determined under a special valuation rule, no amount is includible in the employee's gross income with respect to the benefit. The provisions of this paragraph are effective for benefits provided after December 31, 1992.
(iii) Vehicle special valuation rules—(A) Vehicle by vehicle basis. Except as provided in paragraphs (d)(7)(v) and (e)(5)(v) of this section, the vehicle special valuation rules of paragraphs (d), (e), and (f) of this section apply on a vehicle by vehicle basis. An employer need not use the same vehicle special valuation rule for all vehicles provided to all employees. For example, an employer may use the automobile lease valuation rule for automobiles provided to some employees, and the commuting and vehicle cents-per-mile valuation rules for automobiles provided to other employees. For purposes of valuing the use or availability of a vehicle, the consistency rules provided in paragraphs (d)(7) and (e)(5) of this section (relating to the automobile lease valuation rule and the vehicle cents-per-mile valuation rule, respectively) apply.
(B) Shared vehicle usage. If an employer provides a vehicle to employees for use by more than one employee at the same time, such as with an employer-sponsored vehicle commuting pool, the employer may use any of the special valuation rules that may be applicable to value the use of the vehicle by the employees. The employer must use the same special valuation rule to value the use of the vehicle by each employee who shares such use. The employer must allocate the value of the use of the vehicle based on the relevant facts and circumstances among the employees who share use of the vehicle. For example, assume that an employer provides an automobile to four of its employees and that the employees use the automobile in an employer-sponsored vehicle commuting pool. Assume further that the employer uses the automobile lease valuation rule of paragraph (d) of this section and that the Annual Lease Value of the automobile is $5,000.
The employer must treat $5,000 as the value of the availability of the automobile to the employees, and must apportion the $5,000 value among the employees who share the use of the automobile based on the relevant facts and circumstances. Each employee's share of the value of the availability of the automobile is then to be reduced by the amount, if any, of each employee's working condition fringe exclusion and the amount reimbursed by the employee to the employer.
(iv) Commercial and noncommercial flight valuation rules. Except as otherwise provided, if either the commercial flight valuation rule or the non-commercial flight valuation rule is used, that rule must be used by an employer to value all eligible flights taken by all employees in a calendar year. See paragraph (g)(14) of this section for the applicable consistency rules.
(3) Additional rules for using special valuation—(i) Election to use special valuation rules for benefits provided before January 1, 1993. A particular special valuation rule is deemed to have been elected by the employer (and, if applicable, by the employee), if the employer (and, if applicable, the employee) determines the value of the fringe benefit provided by applying the special valuation rule and treats that value as the fair market value of the fringe benefit for income, employment tax, and reporting purposes. Neither the employer nor the employee must notify the Internal Revenue Service of the election. The provisions of this paragraph are effective for benefits provided before January 1, 1993.
(ii) Conditions on the use of special valuation rules for benefits provided after December 31, 1992. Neither the employer nor the employee may use a special valuation rule to value a benefit provided after December 31, 1992, unless one of the following conditions is satisfied—
(A) The employer treats the value of the benefit as wages for reporting purposes within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided;
(B) The employee includes the value of the benefit in income within the time for filing the returns for the taxable year (including extensions) in which the benefit is provided;
(C) The employee is not a control employee as defined in paragraphs (f)(5) and (f)(6) of this section; or
(D) The employer demonstrates a good faith effort to treat the benefit correctly for reporting purposes.
(4) Application of section 414 to employers. For purposes of paragraphs (c) through (k) of this section, except as otherwise provided therein, the term “employer” includes all entities required to be treated as a single employer under section 414 (b), (c), (m), or (o).
(5) Valuation formulae contained in the special valuation rules. The valuation formula contained in the special valuation rules are provided only for use in connection with those rules. Thus, when a special valuation rule is properly applied to a fringe benefit, the Commissioner will accept the value calculated pursuant to the rule as the fair market value of that fringe benefit. However, when a special valuation rule is not properly applied to a fringe benefit (see, for example, paragraph (g)(13) of this section), or when a special valuation rule is used to value a fringe benefit by a taxpayer not entitled to use the rule, the fair market value of that fringe benefit may not be determined by reference to any value calculated under any special valuation rule. Under the circumstances described in the preceding sentence, the fair market value of the fringe benefit must be determined pursuant to the general valuation rules of paragraph (b) of this section.
(6) Modification of the special valuation rules. The Commissioner may, to the extent necessary for tax administration, add, delete, or modify any special valuation rule, including the valuation formulae contained herein, on a prospective basis by regulation, revenue ruling or revenue procedure.
(7) Special accounting rule. If the employer is using the special accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (see § 601.601(d)(2)(ii)(b) of this chapter) (relating to the reporting of and withholding on the value of noncash fringe benefits), benefits which are deemed provided in a subsequent calendar year pursuant to that rule are considered as provided in that subsequent calendar year for purposes of the special valuation rules. Thus, if a particular special valuation rule is in effect for a calendar year, it applies to benefits deemed provided during that calendar year under the special accounting rule.
(d) Automobile lease valuation rule—(1) In general—(i) Annual Lease Value. Under the special valuation rule of this paragraph (d), if an employer provides an employee with an automobile that is available to the employee for an entire calendar year, the value of the benefit provided is the Annual Lease Value (determined under paragraph (d)(2) of this section) of that automobile. Except as otherwise provided, for an automobile that is available to an employee for less than an entire calendar year, the value of the benefit provided is either a pro-rated Annual Lease Value or the Daily Lease Value (both as defined in paragraph (d)(4) of this section), whichever is applicable. Absent any statutory exclusion relating to the employer-provided automobile (see, for example, section 132(a)(3) and § 1.132-5(b)), the amount of the Annual Lease Value (or a pro-rated Annual Lease Value or the Daily Lease Value, as applicable) is included in the gross income of the employee.
(ii) Definition of automobile. For purposes of this paragraph (d), the term “automobile” means any four-wheeled vehicle manufactured primarily for use on public streets, roads, and highways.
(2) Calculation of Annual Lease Value—(i) In general. The Annual Lease Value of a particular automobile is calculated as follows:
(A) Determine the fair market value of the automobile as of the first date on which the automobile is made available to any employee of the employer for personal use. For an automobile first made available to any employee for personal use prior to January 1, 1985, determine the fair market value as of January l of the first year the special valuation rule of this paragraph (d) is used with respect to the automobile. For rules relating to determination of the fair market value of an automobile for purposes of this paragraph (d), see paragraph (d)(5) of this section.
(B) Select the dollar range in column 1 of the Annual Lease Value Table, set forth in paragraph (d)(2)(iii) of this section corresponding to the fair market value of the automobile. Except as otherwise provided in paragraphs (d)(2) (iv) and (v) of this section, the Annual Lease Value for each year of availability of the automobile is the corresponding amount in column 2 of the Table.
(ii) Calculation of Annual Lease Value of automobile owned or leased by both an employer and an employee—(A) Purchased automobiles. Notwithstanding anything in this section to the contrary, if an employee contributes an amount toward the purchase price of an automobile in return for a percentage ownership interest in the automobile, the Annual Lease Value or the Daily Lease Value, whichever is applicable, is determined by reducing the fair market value of the employer-provided automobile by the lesser of—
(1) The amount contributed, or
(2) An amount equal to the employee's percentage ownership interest multiplied by the unreduced fair market value of the automobile.
If the automobile is subsequently revalued, the revalued amount (determined without regard to this paragraph (d)(2)(ii)(A)) is reduced by an amount which is equal to the employee's percentage ownership interest in the vehicle). If the employee does not receive an ownership interest in the employer-provided automobile, then the Annual Lease Value or the Daily Lease Value, whichever is applicable, is determined without regard to any amount contributed. For purposes of this paragraph (d)(2)(ii)(A), an employee's ownership interest in an automobile will not be recognized unless it is reflected in the title of the automobile. An ownership interest reflected in the title of an automobile will not be recognized if under the facts and circumstances the title does not reflect the benefits and burdens of ownership.
(B) Leased automobiles. Notwithstanding anything in this section to the contrary, if an employee contributes an amount toward the cost to lease an automobile in return for a percentage interest in the automobile lease, the Annual Lease Value or the Daily Lease Value, whichever is applicable, is determined by reducing the fair market value of the employer-provided automobile by the amount specified in the following sentence. The amount specified in this sentence is the unreduced fair market value of a vehicle multiplied by the lesser of—
(1) The employee's percentage interest in the lease, or
(2) A fraction, the numerator of which is the amount contributed and the denominator of which is the entire lease cost.
If the automobile is subsequently revalued, the revalued amount (determined without regard to this paragraph (d)(2)(ii)(B)) is reduced by an amount which is equal to the employee's percentage interest in the lease) multiplied by the revalued amount. If the employee does not receive an interest in the automobile lease, then the Annual Lease Value or the Daily Lease Value, whichever is applicable, is determined without regard to any amount contributed. For purposes of this paragraph (d)(2)(ii)(B), an employee's interest in an automobile lease will not be recognized unless the employee is a named co-lessee on the lease. An interest in a lease will not be recognized if under the facts and circumstances the lease does not reflect the true obligations of the lessees.
(C) Example. The rules of paragraph (d)(2)(ii) (A) and (B) of this section are illustrated by the following example:
Example.Assume that an employer pays $15,000 and an employee pays $5,000 toward the purchase of an automobile. Assume further that the employee receives a 25 percent interest in the automobile and is named as a co-owner on the title to the automobile. Under the rule of paragraph (d)(2)(ii)(A) of this section, the Annual Lease Value of the automobile is determined by reducing the fair market value of the automobile ($20,000) by the $5,000 employee contribution. Thus, the Annual Lease Value of the automobile under the table in paragraph (d)(2)(iii) of this section is $4,350. If the employee in this example does not receive an ownership interest in the automobile and is provided the use of the automobile for two years, the Annual Lease Value would be determined without regard to the $5,000 employee contribution. Thus, the Annual Lease Value would be $5,600. The $5,000 employee contribution would reduce the amount includible in the employee's income after taking into account the amount, if any, excluded from income under another provision of subtitle A of the Internal Revenue Code, such as the working condition fringe exclusion. Thus, if the employee places 50 percent of the mileage on the automobile for the employer's business each year, then the amount includible in the employee's income in the first year would be ($5,600-2,800-2,800), or $0, the amount includible in the employee's income in the second year would be ($5,600-2,800-2,200 ($5,000-2,800)) or $600 and the amount includible in the third year would be ($5,600-2,800) or $2,800 since the employee's contribution has been completely used in the first two years.
(iii) Annual Lease Value Table.
Automobile fair market value | Annual lease value
(1) (2)
$0 to 999 | $600
1,000 to 1,999 | 850
2,000 to 2,999 | 1,100
3,000 to 3,999 | 1,350
4,000 to 4,999 | 1,600
5,000 to 5,999 | 1,850
6,000 to 6,999 | 2,100
7,000 to 7,999 | 2,350
8,000 to 8,999 | 2,600
9,000 to 9,999 | 2,850
10,000 to 10,999 | 3,100
11,000 to 11,999 | 3,350
12,000 to 12,999 | 3,600
13,000 to 13,999 | 3,850
14,000 to 14,999 | 4,100
15,000 to 15,999 | 4,350
16,000 to 16,999 | 4,600
17,000 to 17,999 | 4,850
18,000 to 18,999 | 5,100
19,000 to 19,999 | 5,350
20,000 to 20,999 | 5,600
21,000 to 21,999 | 5,850
22,000 to 22,999 | 6,100
23,000 to 23,999 | 6,350
24,000 to 24,999 | 6,600
25,000 to 25,999 | 6,850
26,000 to 27,999 | 7,250
28,000 to 29,999 | 7,750
30,000 to 31,999 | 8,250
32,000 to 33,999 | 8,750
34,000 to 35,999 | 9,250
36,000 to 37,999 | 9,750
38,000 to 39,999 | 10,250
40,000 to 41,999 | 10,750
42,000 to 43,999 | 11,250
44,000 to 45,999 | 11,750
46,000 to 47,999 | 12,250
48,000 to 49,999 | 12,750
50,000 to 51,999 | 13,250
52,000 to 53,999 | 13,750
54,000 to 55,999 | 14,250
56,000 to 57,999 | 14,750
58,000 to 59,999 | 15,250
For vehicles having a fair market value in excess of $59,999, the Annual Lease Value is equal to: (.25 × the fair market value of the automobile) + $500.
(iv) Recalculation of Annual Lease Value. The Annual Lease Values determined under the rules of this paragraph (d) are based on four-year lease terms. Therefore, except as otherwise provided in paragraph (d)(2)(v) of this section, the Annual Lease Value calculated by applying paragraph (d)(2) (i) or (ii) of this section shall remain in effect for the period that begins with the first date the special valuation rule of paragraph (d) of this section is applied by the employer to the automobile and ends on December 31 of the fourth full calendar year following that date. The Annual Lease Value for each subsequent four-year period is calculated by determining the fair market value of the automobile as of the first January 1 following the period described in the previous sentence and selecting the amount in column 2 of the Annual Lease Value Table corresponding to the appropriate dollar range in column 1 of the Table. If, however, the employer is using the special accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (relating to the reporting of and withholding on the value of noncash fringe benefits), the employer may calculate the Annual Lease Value for each subsequent four-year period as of the beginning of the special accounting period that begins immediately prior to the January 1 described in the previous sentence. For example, assume that pursuant to Announcement 85-113, an employer uses the special accounting rule. Assume further that beginning on November 1, 1988, the special accounting period is November 1 to October 31 and that the employer elects to use the special valuation rule of this paragraph (d) as of January 1, 1989. The employer may recalculate the Annual Lease Value as of November 1, 1992, rather than as of January 1, 1993.
(v) Transfer of the automobile to another employee. Unless the primary purpose of the transfer is to reduce Federal taxes, if an employer transfers the use of an automobile from one employee to another employee, the employer may recalculate the Annual Lease Value based on the fair market value of the automobile as of January 1 of the calendar year of transfer. If, however, the employer is using the special accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (relating to the reporting of and withholding on the value of noncash fringe benefits), the employer may recalculate the Annual Lease Value based on the fair market value of the automobile as of the beginning of the special accounting period in which the transfer occurs. If the employer does not recalculate the Annual Lease Value, and the employee to whom the automobile is transferred uses the special valuation rule, the employee may not recalculate the Annual Lease Value.
(3) Services included in, or excluded from, the Annual Lease Value Table—(i) Maintenance and insurance included. The Annual Lease Values contained in the Annual Lease Value Table include the fair market value of maintenance of, and insurance for, the automobile. Neither an employer nor an employee may reduce the Annual Lease Value by the fair market value of any service included in the Annual Lease Value that is not provided by the employer, such as reducing the Annual Lease Value by the fair market value of a maintenance service contract or insurance. An employer or employee who wishes to take into account only the services actually provided with respect to an automobile may value the availability of the automobile under the general valuation rules of paragraph (b) of this section.
(ii) Fuel excluded—(A) In general. The Annual Lease Values do not include the fair market value of fuel provided by the employer, whether fuel is provided in kind or its cost is reimbursed by or charged to the employer. Thus, if an employer provides fuel, the fuel must be valued separately for inclusion in income.
(B) Valuation of fuel provided in kind. The provision of fuel in kind may be valued at fair market value based on all the facts and circumstances or, in the alternative, it may be valued at 5.5 cents per mile for all miles driven by the employee. However, the provision of fuel in kind may not be valued at 5.5 cents per mile for miles driven outside the United States, Canada or Mexico. For purposes of this section, the United States includes the United States, its possessions and its territories.
(C) Valuation of fuel where cost reimbursed by or charged to an employer. The fair market value of fuel, the cost of which is reimbursed by or charged to an employer, is generally the amount of the actual reimbursement or the amount charged, provided the purchase of the fuel is at arm's-length.
(D) Fleet-average cents-per-mile fuel cost. If an employer with a fleet of at least 20 automobiles that meets the requirements of paragraph (d)(5)(v)(D) of this section reimburses employees for the cost of fuel or allows employees to charge the employer for the cost of fuel, the fair market value of fuel provided to those automobiles may be determined by reference to the employer's fleet-average cents-per-mile fuel cost. The fleet-average cents-per-mile fuel cost is equal to the fleet-average per-gallon fuel cost divided by the fleet-average miles-per-gallon rate. The averages described in the preceding sentence must be determined by averaging the per-gallon fuel costs and miles-per-gallon rates of a representative sample of the automobiles in the fleet equal to the greater of ten percent of the automobiles in the fleet or 20 automobiles for a representative period, such as a two-month period. In lieu of determining the fleet-average cents-per-mile fuel cost, if an employer is using the fleet-average valuation rule of paragraph (d)(5)(v) of this section and if determining the amount of the actual reimbursement or the amount charged for the purchase of fuel would impose unreasonable administrative burdens on the employer, the provision of fuel may be valued under the rule provided in paragraph (d)(3)(ii)(B) of this section.
(iii) Treatment of other services. The fair market value of any service not specifically identified in paragraph (d)(3)(i) of this section that is provided by the employer with respect to an automobile (other than the services of a chauffeur) must be added to the Annual Lease Value of the automobile in determining the fair market value of the benefit provided. See paragraph (b) (5) of this section for rules relating to the valuation of chauffeur services.
(4) Availability of an automobile for less than an entire calendar year—(i) Pro-rated Annual Lease Value used for continuous availability of at least 30 days—(A) In general. Except as otherwise provided in paragraph (d)(4)(iv) of this section, for periods of continuous availability of at least 30 days, but less than an entire calendar year, the value of the availability of an automobile provided by an employer electing to use the automobile lease valuation rule of this paragraph (d) is the pro-rated Annual Lease Value. The pro-rated Annual Lease Value is calculated by multiplying the applicable Annual Lease Value by a fraction, the numerator of which is the number of days of availability and the denominator of which is 365.
(B) Special rule for continuous availability of at least 30 days that straddles two reporting years. If an employee is provided with the continuous availability of an automobile for at least 30 days, but the continuous period straddles two calendar years (or two special accounting periods if the special accounting rule of Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (relating to the reporting of and withholding on noncash fringe benefits) is used), the pro-rated Annual Lease Value, rather than the Daily Lease Value, may be applied with respect to such period of continuous availability.
(ii) Daily Lease Value used for continuous availability of less than 30 days. Except as otherwise provided in paragraph (d)(4)(iii) of this section, for periods of continuous availability of one or more but less than 30 days, the value of the availability of the employer-provided automobile is the Daily Lease Value. The Daily Lease Value is calculated by multiplying the applicable Annual Lease Value by a fraction, the numerator of which is four times the number of days of availability and the denominator of which is 365.
(iii) Election to treat all periods as periods of at least 30 days. The value of the availability of an employer-provided automobile for a period of continuous availability of less than 30 days may be determined by applying the pro-rated Annual Lease Value by treating the automobile as if it had been available for 30 days, if doing so would result in a lower valuation than applying the Daily Lease Value to the shorter period of actual availability.
(iv) Periods of unavailability—(A) General rule. In general, a pro-rated Annual Lease Value (as provided in paragraph (d)(4)(i) of this section) is used to value the availability of an employer-provided automobile when the automobile is available to an employee for a continuous period of at least 30 days but less than the entire calendar year. Neither an employer nor an employee, however, may use a pro-rated Annual Lease Value when the reduction of Federal taxes is the primary reason the automobile is unavailable to an employee at certain times during the calendar year.
(B) Unavailability for personal reasons of the employee. If an automobile is unavailable to an employee because of personal reasons of the employee, such as while the employee is on vacation, a pro-rated Annual Lease Value, if used, must not take into account such periods of unavailability. For example, assume that an automobile is available to an employee during the first five months of the year and during the last five months of the year. Assume further that the period of unavailability occurs because the employee is on vacation. The Annual Lease Value, if it is applied, must be applied with respect to the entire 12-month period. The Annual Lease Value may not be pro-rated to take into account the two-month period of unavailability.
(5) Fair market value—(i) In general. For purposes of determining the Annual Lease Value of an automobile under the Annual Lease Value Table, the fair market value of an automobile is the amount that an individual would have to pay in an arm's-length transaction to purchase the particular automobile in the jurisdiction in which the vehicle is purchased or leased. That amount includes all amounts attributable to the purchase of an automobile such as sales tax and title fees as well as the purchase price of the automobile. Any special relationship that may exist between the employee and the employer must be disregarded. Also, the employee's subjective perception of the value of the automobile is not relevant to the determination of the automobile's fair market value, and, except as provided in paragraph (d)(5)(ii) of this section, the cost incurred by the employer in connection with the purchase or lease of the automobile is not determinative of the fair market value of the automobile.
(ii) Safe-harbor valuation rule—(A) General rule. For purposes of calculating the Annual Lease Value of an automobile under this paragraph (d), the safe-harbor value of the automobile may be used as the fair market value of the automobile.
(B) Automobiles owned by the employer. For an automobile owned by the employer, the safe-harbor value of the automobile is the employer's cost of purchasing the automobile (including sales tax, title, and other expenses attributable to such purchase), provided the purchase is made at arm's-length. Notwithstanding the preceding sentence, the safe-harbor value of this paragraph (d)(5)(ii)(B) is not available with respect to an automobile manufactured by the employer. Thus, for example, if one entity manufactures an automobile and sells it to an entity with which it is aggregated pursuant to paragraph (c)(4) of this section, this paragraph (d)(5)(ii)(B) does not apply to value the automobile by the aggregated employer. In this case, value must be determined under paragraph (d)(5)(i) of this section.
(C) Automobiles leased by the employer. For an automobile leased but not manufactured by the employer, the safe-harbor value of the automobile is either the manufacturer's suggested retail price of the automobile less eight percent (including sales tax, title, and other expenses attributable to such purchase), or the value determined under paragraph (d)(5)(iii) of this section.
(iii) Use of nationally recognized pricing sources. The fair market value of an automobile that is—
(A) Provided to an employee prior to January 1, 1985,
(B) Being revalued pursuant to paragraph (d)(2) (iv) or (v) of this section, or
(C) A leased automobile being valued pursuant to paragraph (d)(5)(ii) of this section, may be determined by reference to the retail value of such automobile as reported by a nationally recognized pricing source that regularly reports new or used automobile retail values, whichever is applicable. That retail value must be reasonable with respect to the automobile being valued. Pricing sources consist of publications and electronic data bases.
(iv) Fair market value of special equipment. When determining the fair market value of an automobile, the employer may exclude the fair market value of any specialized equipment or telephone that is added to or carried in the automobile provided that the presence of that equipment or telephone is necessitated by, and attributable to, the business needs of the employer. The value of the specialized equipment must be included if the employee to whom the automobile is available uses the specialized equipment in a trade or business of the employee other than the employee's trade or business of being an employee of the employer.
(v) Fleet-average valuation rule—(A) In general. An employer with a fleet of 20 or more automobiles meeting the requirements of this paragraph (d)(5)(v) (including the business-use and fair market value conditions of paragraph (d)(5)(v)(D) of this section) may use a fleet-average value for purposes of calculating the Annual Lease Values of the automobiles in the fleet. The fleet-average value is the average of the fair market values of all automobiles in the fleet. The fair market value of each automobile in the fleet shall be determined, pursuant to the rules of paragraphs (d)(5) (i) through (iv) of this section, as of the date described in paragraph (d)(2)(i)(A) of this section.
(B) Period for use of rule. The fleet-average valuation rule of this paragraph (d)(5)(v) may be used by an employer as of January 1 of any calendar year following the calendar year in which the employer acquires a sufficient number of automobiles to total a fleet of 20 or more automobiles. The Annual Lease Value calculated for the automobiles in the fleet, based on the fleet-average value, shall remain in effect for the period that begins with the first January 1 the fleet-average valuation ru1e of this paragraph (d)(5)(v) is applied by the employer to the automobiles in the fleet and ends on December 31 of the subsequent calendar year. The Annual Lease Value for each subsequent two-year period is calculated by determining the fleet-average value of the automobiles in the fleet as of the first January 1 of such period. An employer may cease using the fleet-average valuation rule as of any January 1. If, however, the employer is using the special accounting rule provided in Announcement 85-113 (1985-31 I.R.B. 31, August 5, 1985) (relating to the reporting of and withholding on noncash fringe benefits), the employer may apply the rules of this paragraph (d)(5)(v)(B) on the basis of the special accounting period rather than the calendar year. (This is accomplished by substituting (1) the beginning of the special accounting period that begins immediately prior to the January 1 described in this paragraph (d)(5)(v)(B) for January 1 wherever it appears in this paragraph (d)(5)(v) (B) and (2) the end of such accounting period for December 31.) If the number of qualifying automobiles in the employer's fleet declines to fewer than 20 for more than 50 percent of the days in a year, then the fleet-average valuation rule does not apply as of January 1 of such year. In this case, the Annual Lease Value must be determined separately for each remaining automobile. The revaluation rules of paragraphs (d)(2) (iv) and (v) of this section do not apply to automobiles valued under this paragraph (d)(5)(v).
(C) Automobiles included in the fleet. An employer may include in a fleet any automobile that meets the requirements of this paragraph (d)(5)(v) and is available to any employee of the employer for personal use. An employer may include in the fleet only automobiles the availability of which is valued under the automobile lease valuation rule of this paragraph (d). An employer need not include in the fleet all automobiles valued under the automobile lease valuation rule. An employer may have more than one fleet for purposes of the fleet-average rule of this paragraph (d)(5)(v). For example, an employer may group automobiles in a fleet according to their physical type or use.
(D) Limitations on use of fleet-average rule. The rule provided in this paragraph (d)(5)(v) may not be used for any automobile the fair market value of which (determined pursuant to paragraphs (d)(5)(i) through (iv) of this section as of the first date on which the automobile is made available to any employee of the employer for personal use) exceeds $50,000, as adjusted by section 280F(d)(7). The first such adjustment shall be for calendar year 2019. In addition, the rule provided in this paragraph (d)(5)(v) may only be used for automobiles that the employer reasonably expects will regularly be used in the employer's trade or business. For rules concerning when an automobile is regularly used in the employer's business, see paragraph (e)(1)(iv) of this section.
(E) Additional automobiles added to the fleet. The fleet-average value in effect at the time an automobile is added to a fleet is treated as the fair market value of the additional automobile for purposes of determining the Annual Lease Value of the automobile until the fleet-average value changes pursuant to paragraph (d)(5)(v)(B) of this section.
(F) Use of the fleet-average rule by employees. An employee may only use the fleet-average rule if it is used by the employer. If an employer uses the fleet-average rule, and the employee uses the special valuation rule of paragraph (d) of this section, the employee must use the fleet-average value determined by the employer.
(G) Transition rule for 2018 and 2019. Notwithstanding paragraph (d)(5)(v)(B) of this section, an employer that did not qualify to use the fleet-average valuation rule prior to January 1, 2018, with respect to any automobile (including a truck or van) because the fair market value of the vehicle exceeded the inflation-adjusted maximum value requirement of paragraph (d)(5)(v)(D) of this section, as published by the Service in a notice or revenue procedure applicable to the year the vehicle was first made available to any employee of the employer, may adopt the fleet-average valuation rule for 2018 or 2019 with respect to the vehicle, provided the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively.
(H) Applicability date. Paragraphs (d)(5)(v)(D), and (G) of this section apply to taxable years beginning on or after February 5, 2020. Notwithstanding the first sentence of this paragraph (d)(5)(v)(H), any taxpayer may choose to apply paragraph (d)(5)(v)(G) of this section beginning on or after January 1, 2018.
(6) Special rules for continuous availability of certain automobiles—(i) Fleet automobiles. If an employer is using the fleet-average valuation ru1e of paragraph (d)(5)(v) of this section and the employer provides an employee with the continuous availability of an automobile from the same fleet during a period (though not necessarily the same fleet automobile for the entire period), the employee is treated as having the use of a single fleet automobile for the entire period, e.g., an entire calendar year. Thus, when applying the automobile lease valuation rule of this paragraph (d), the employer may treat the fleet-average value as the fair market value of the automobile deemed available to the employee for the period for purposes of calculating the Annual Lease Value, (or pro-rated Annual Lease Value or Daily Lease Value whichever is applicable) of the automobile. If an employer provides an employee with the continuous availability of more than one fleet automobile during a period, the employer may treat the fleet-average value as the fair market value of each automobile provided to the employee provided that the rules of paragraph (d)(5)(v)(D) of this section are satisfied.
(ii) Demonstration automobiles—(A) In general. If an automobile dealership provides an employee with the continuous availability of a demonstration automobile (as defined in § 1.132-5(o)(3)) during a period (though not necessarily the same demonstration automobile for the entire period), the employee is treated as having the use of a single demonstration automobile for the entire period, e.g., an entire calendar year. If an employer provides an employee with the continuous availability of more than one demonstration automobile during a period, the employer may treat the value determined under paragraph (d)(6)(ii)(B) of this section as the fair market value of each automobile provided to the employee. For rules relating to the treatment as a working condition fringe of the qualified automobile demonstration use of a demonstration automobile by a full-time automobile salesman, see § 1.132-5(o).
(B) Determining the fair market value of a demonstration automobile. When applying the automobile lease valuation rule of this paragraph (d), the employer may treat the average of the fair market values of the demonstration automobiles which are available to an employee and held in the dealership's inventory during the calendar year as the fair market value of the demonstration automobile deemed available to the employee for the period for purposes of calculating the Annual Lease Value of the automobile. If under the facts and circumstances it is inappropriate to take into account, with respect to an employee, certain models of demonstration automobiles, the value of the benefit is determined without reference to the fair market values of such models. For example, assume that an employee has the continuous availability for an entire calendar year of one demonstration automobile, although not the same one for the entire year. Assume further that the fair market values of the automobiles in the dealership inventory during the year range from $8,000 to $20,000. If there is not a substantial period (such as three months) during the year when the employee uses demonstration automobiles valued at less than $16,000, then those automobiles are not considered in determining the value of the benefit provided to the employee. In this case, the average of the fair market values of the demonstration automobiles in the dealership's inventory valued at $16,000 or more is treated as the fair market value of the automobile deemed available to the employee for the calendar year for purposes of calculating the Annual Lease Value of the automobile.
(7) Consistency rules—(i) Use of the automobile lease valuation rule by an employer. Except as provided in paragraph (d)(5)(v)(B) of this section, an employer may adopt the automobile lease valuation rule of this paragraph (d) for an automobile only if the rule is adopted to take effect by the later of—
(A) January 1, 1989, or
(B) The first day on which the automobile is made available to an employee of the employer for personal use (or, if the commuting valuation rule of paragraph (f) of this section is used when the automobile is first made available to an employee of the employer for personal use, the first day on which the commuting valuation rule is not used).
(ii) An employer must use the automobile lease valuation rule for all subsequent years. Once the automobile lease valuation rule has been adopted for an automobile by an employer, the rule must be used by the employer for all subsequent years in which the employer makes the automobile available to any employee except that the employer may, for any year during which (or for any employee for whom) use of the automobile qualifies for the commuting valuation rule of paragraph (f) of this section, use the commuting valuation rule with respect to the automobile.
(iii) Use of the automobile lease valuation rule by an employee. An employee may adopt the automobile lease valuation rule for an automobile only if the rule is adopted—
(A) By the employer, and
(B) Beginning with the first day on which the automobile for which the employer (consistent with paragraph (d)(7)(i) of this section) adopted the rule is made available to that employee for personal use (or, if the commuting valuation rule of paragraph (f) of this section is used when the automobile is first made available to that employee for personal use, the first day on which the commuting valuation rule is not used).
(iv) An employee must use the automobile lease valuation rule for all subsequent years. Once the automobile lease valuation rule has been adopted for an automobile by an employee, the rule must be used by the employee for all subsequent years in which the automobile for which the rule is used is available to the employee. However, the employee may, for any year during which use of the automobile qualifies for use of the commuting valuation rule of paragraph (f) of this section and for which the employer uses such rule, use the commuting valuation rule with respect to the automobile.
(v) Replacement automobiles. Notwithstanding anything in this paragraph (d)(7) to the contrary, if the automobile lease valuation rule is used by an employer, or by an employer and an employee, with respect to a particular automobile, and a replacement automobile is provided to the employee for the primary purpose of reducing Federal taxes, then the employer, or the employer and the employee, using the rule must continue to use the rule with respect to the replacement automobile.
(e) Vehicle cents-per-mile valuation rule—(1) In general—(i) General rule. Under the vehicle cents-per-mile valuation rule of this paragraph (e), if an employer provides an employee with the use of a vehicle that—
(A) The employer reasonably expects will be regularly used in the employer's trade or business throughout the calendar year (or such shorter period as the vehicle may be owned or leased by the employer), or
(B) Satisfies the requirements of paragraph (e)(1)(ii) of this section, the value of the benefit provided in the calendar year is the standard mileage rate provided in the applicable Revenue Ruling or Revenue Procedure (“cents-per-mile rate”) multiplied by the total number of miles the vehicle is driven by the employee for personal purposes. The cents-per-mile rate is to be applied prospectively from the first day of the taxable year following the date of publication of the applicable Revenue Ruling or Revenue Procedure. An employee who uses an employer-provided vehicle, in whole or in part, for a trade or business other than the employer's trade or business, may take a deduction for such business use based upon the vehicle cents-per-mile rule as long as such deduction is at the same standard mileage rate as that used in calculating the employee's income inclusion. The standard mileage rate must be applied to personal miles independent of business miles. Thus, for example, if the standard mileage rate were 24 cents per mile for the first 15,000 miles and 11 cents per mile for all miles over 15,000 and an employee drives 20,000 personal miles and 45,000 business miles in a year, the value of the personal use of the vehicle is $4,150 ((15,000 × $.24) + (5,000 × $.11)). For purposes of this section, the use of a vehicle for personal purposes is any use of the vehicle other than use in the employee's trade or business of being an employee of the employer.
(ii) Mileage rule. A vehicle satisfies the requirements of this paragraph (e)(1)(ii) for a calendar year if—
(A) It is actually driven at least 10,000 miles in that year; and
(B) Use of the vehicle during the year is primarily by employees. For example, if a vehicle is used by only one employee during the calendar year and that employee drives the vehicle at least 10,000 miles during the year, the vehicle satisfies the requirements of this paragraph (e)(1)(ii) even if all miles driven by the employee are personal. A vehicle is considered used during the year primarily by employees in accordance with the requirement of paragraph (e)(1)(ii)(B) of this section if employees use the vehicle on a consistent basis for commuting. If the employer does not own or lease the vehicle during a portion of the year, the 10,000 mile threshold is to be reduced proportionately to reflect the periods when the employer did not own or lease the vehicle. For purposes of this paragraph (e)(1)(ii), use of the vehicle by an individual (other than the employee) whose use would be taxed to the employee is not considered use by the employee.
(iii) Limitation on use of the vehicle cents-per-mile valuation rule—(A) In general. The value of the use of an automobile (as defined in paragraph (d)(1)(ii) of this section) may not be determined under the vehicle cents-per-mile valuation rule of this paragraph (e) for a calendar year if the fair market value of the automobile (determined pursuant to paragraphs (d)(5)(i) through (iv) of this section as of the first date on which the automobile is made available to any employee of the employer for personal use) exceeds $50,000, as adjusted by section 280F(d)(7). The first such adjustment shall be for calendar year 2019.
(B) Application of limitation with respect to a vehicle owned by both an employer and an employee. If an employee contributes an amount towards the purchase price of a vehicle in return for a percentage ownership interest in the vehicle, for purposes of determining whether the limitation of this paragraph (e)(1)(iii) applies, the fair market value of the vehicle is reduced by the lesser of—
(1) The amount contributed, or
(2) An amount equal to the employee's percentage ownership interest multiplied by the unreduced fair market value of the vehicle. If the employee does not receive an ownership interest in the employer-provided vehicle, then the fair market value of the vehicle is determined without regard to any amount contributed. For purposes of this paragraph (e)(1)(iii)(B), an employee's ownership interest in a vehicle will not be recognized unless it is reflected in the title of the vehicle. An ownership interest reflected in the title of a vehicle will not be recognized if under the facts and circumstances the title does not reflect the benefits and burdens of ownership.
(C) Application of limitation with respect to a vehicle leased by both an employer and employee. If an employee contributes an amount toward the cost to lease a vehicle in return for a percentage interest in the vehicle lease, for purposes of determining whether the limitation of this paragraph (e)(1)(iii) applies, the fair market value of the vehicle is reduced by the amount specified in the following sentence. The amount specified in this sentence is the unreduced fair market value of a vehicle multiplied by the lesser of—
(1) The employee's percentage interest in the lease, or
(2) A fraction, the numerator of which is the amount contributed and the denominator of which is the entire lease cost. If the employee does not receive an interest in the vehicle lease, then the fair market value is determined without regard to any amount contributed. For purposes of this paragraph (e)(1)(iii)(C), an employee's interest in a vehicle lease will not be recognized unless the employee is a named co-lessee on the lease. An interest in a lease will not be recognized if under the facts and circumstances, the lease does not reflect the true obligations of the lessees.
(iv) Regular use in an employer's trade or business. Whether a vehicle is regularly used in an employer's trade or business is determined on the basis of all facts and circumstances. A vehicle is considered regularly used in an employer's trade or business for purposes of paragraph (e)(1)(i)(A) of this section if one of the following safe harbor conditions is satisfied:
(A) At least 50 percent of the vehicle's total annual mileage is for the employer's business; or
(B) The vehicle is generally used each workday to transport at least three employees of the employer to and from work in an employer-sponsored commuting vehicle pool. Infrequent business use of the vehicle, such as for occasional trips to the airport or between the employer's multiple business premises, does not constitute regular use of the vehicle in the employer's trade or business.
(v) Application of rule to shared usage. If an employer regularly provides a vehicle to employees for use by more than one employee at the same time, such as with an employer-sponsored vehicle commuting pool, the employer may use the vehicle cents-per-mile valuation rule to value the use of the vehicle by each employee who shares such use. See § 1.61-21(c)(2)(ii)(B) for provisions relating to the allocation of the value of an automobile to more than one employee.
(2) Definition of vehicle. For purposes of this paragraph (e), the term “vehicle” means any motorized wheeled vehicle manufactured primarily for use on public streets, roads, and highways. The term “vehicle” includes an automobile as defined in paragraph (d)(1)(ii) of this section.
(3) Services included in, or excluded from, the cents-per-mile rate—(i) Maintenance and insurance included. The cents-per-mile rate includes the fair market value of maintenance of, and insurance for, the vehicle. The cents-per-mile rate may not be reduced by the fair market value of any service included in the cents-per-mile rate but not provided by the employer. An employer or employee who wishes to take into account only the particular services provided with respect to a vehicle may value the availability of the vehicle under the general valuation rules of paragraph (b) of this section.
(ii) Fuel provided by the employer—(A) Miles driven in the United States, Canada, or Mexico. With respect to miles driven in the United States, Canada, or Mexico, the cents-per-mile rate includes the fair market value of fuel provided by the employer. If fuel is not provided by the employer, the cents-per-mile rate may be reduced by no more than 5.5 cents or the amount specified in any applicable Revenue Ruling or Revenue Procedure. For purposes of this section, the United States includes the United States, its possessions and its territories.
(B) Miles driven outside the United States, Canada, or Mexico. With respect to miles driven outside the United States, Canada, or Mexico, the fair market value of fuel provided by the employer is not reflected in the cents-per-mile rate. Accordingly, the cents-per-mile rate may be reduced but by no more than 5.5 cents or the amount specified in any applicable Revenue Ruling or Revenue Procedure. If the employer provides the fuel in kind, it must be valued based on all the facts and circumstances. If the employer reimburses the employee for the cost of fuel or allows the employee to charge the employer for the cost of fuel, the fair market value of the fuel is generally the amount of the actual reimbursement or the amount charged, provided the purchase of fuel is at arm's length.
(iii) Treatment of other services. The fair market value of any service not specifically identified in paragraph (e)(3)(i) of this section that is provided by the employer with respect to a vehicle is not reflected in the cents-per-mile rate. See paragraph (b)(5) of this section for rules relating to valuation of chauffeur services.
(4) Valuation of personal use only. The vehicle cents-per-mile valuation rule of this paragraph (e) may only be used to value the miles driven for personal purposes. Thus, the employer must include an amount in an employee's income with respect to the use of a vehicle that is equal to the product of the number of personal miles driven by the employee and the appropriate cents-per-mile rate. The term “personal miles” means all miles for which the employee used the automobile except miles driven in the employee's trade or business of being an employee of the employer. Unless additional services are provided with respect to the vehicle (see paragraph (e)(3)(iii) of this section), the employer may not include in income a greater amount; for example, the employer may not include in income 100 percent (all business and personal miles) of the value of the use of the vehicle.
(5) Consistency rules—(i) Use of the vehicle cents-per-mile valuation rule by an employer. An employer must adopt the vehicle cents-per-mile valuation rule of this paragraph (e) for a vehicle to take effect by the first day on which the vehicle is used by an employee of the employer for personal use (or, if the commuting valuation rule of paragraph (f) of this section is used when the vehicle is first used by an employee of the employer for personal use, the first day on which the commuting valuation rule is not used).
(ii) An employer must use the vehicle cents-per-mile valuation rule for all subsequent years. Once the vehicle cents-per-mile valuation rule has been adopted for a vehicle by an employer, the rule must be used by the employer for all subsequent years in which the vehicle qualifies for use of the rule, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule of paragraph (f) of this section, use the commuting valuation rule with respect to the vehicle. If the vehicle fails to qualify for use of the vehicle cents-per-mile valuation rule during a subsequent year, the employer may adopt for such subsequent year and thereafter any other special valuation rule for which the vehicle then qualifies. If the employer elects to use the automobile lease valuation rule of paragraph (d) of this section for a period in which the automobile does not qualify for use of the vehicle cents-per-mile valuation rule, then the employer must comply with the requirements of paragraph (d)(7) of this section. For purposes of paragraph (d)(7) of this section, the first day on which the automobile with respect to which the vehicle cents-per-mile rule had been used fails to qualify for use of the vehicle cents-per-mile valuation rule may be deemed to be the first day on which the automobile is available to an employee of the employer for personal use.
(iii) Use of the vehicle cents-per-mile valuation rule by an employee. An employee may adopt the vehicle cents-per-mile valuation rule for a vehicle only if the rule is adopted—
(A) By the employer, and
(B) Beginning with respect to the first day on which the vehicle for which the employer (consistent with paragraph (e)(5)(i) of this section) adopted the rule is available to that employee for personal use (or, if the commuting valuation rule of paragraph (f) of this section is used when the vehicle is first used by an employee for personal use, the first day on which the commuting valuation rule is not used).
(iv) An employee must use the vehicle cents-per-mile valuation rule for all subsequent years. Once the vehicle cents-per-mile valuation rule has been adopted for a vehicle by an employee, the rule must be used by the employee for all subsequent years of personal use of the vehicle by the employee for which the rule is used by the employer. However, see paragraph (f) of this section for rules relating to the use of the commuting valuation rule for a subsequent year.
(v) Replacement vehicles. Notwithstanding anything in this paragraph (e)(5) to the contrary, if the vehicle cents-per-mile valuation rule is used by an employer, or by an employer and an employee, with respect to a particular vehicle. and a replacement vehicle is provided to the employee for the primary purpose of reducing Federal taxes, then the employer, or the employer and the employee, using the rule must continue to use the rule with respect to the replacement vehicle if the replacement vehicle qualifies for use of the rule.
(vi) Transition rule for 2018 and 2019. For a vehicle first made available to any employee of an employer for personal use before calendar year 2018, an employer that did not qualify under this paragraph (e)(5) to adopt the vehicle cents-per-mile valuation rule on the first day on which the vehicle is used by the employee for personal use because the fair market value of the vehicle exceeded the inflation-adjusted limitation of paragraph (e)(1)(iii) of this section, as published by the Service in a notice or revenue procedure applicable to the year the vehicle was first used by the employee for personal use, may first adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 taxable year, provided the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. Similarly, for a vehicle first made available to any employee of the employer for personal use before calendar year 2018, if the commuting valuation rule of paragraph (f) of this section was used when the vehicle was first used by the employee for personal use, and the employer did not qualify to switch to the vehicle cents-per-mile valuation rule of this paragraph (e) on the first day on which the commuting valuation rule of paragraph (f) of this section was not used because the vehicle had a fair market value in excess of the inflation-adjusted limitation of paragraph (e)(1)(iii) of this section, as published by the Service in a notice or revenue procedure applicable to the year the commuting valuation rule was first not used, the employer may adopt the vehicle cents-per-mile valuation rule for the 2018 or 2019 taxable year, provided the fair market value of the vehicle does not exceed $50,000 on January 1, 2018, or $50,400 on January 1, 2019, respectively. However, in accordance with paragraph (e)(5)(ii) of this section, an employer that adopts the vehicle cents-per-mile valuation rule pursuant to this paragraph (e)(5)(vi) must continue to use the rule for all subsequent years in which the vehicle qualifies for use of the rule, except that the employer may, for any year during which use of the vehicle qualifies for the commuting valuation rule of paragraph (f) of this section, use the commuting valuation rule with regard to the vehicle.
(6) Applicability date. Paragraphs (e)(1)(iii)(A) and (e)(5)(i) and (vi) of this section apply to taxable years beginning on or after February 5, 2020. Notwithstanding the first sentence of this paragraph (e)(6), any taxpayer may choose to apply paragraph (e)(5)(vi) of this section beginning on or after January 1, 2018.
(f) Commuting valuation rule—(1) In general. Under the commuting valuation rule of this paragraph (f), the value of the commuting use of an employer-provided vehicle may be determined pursuant to paragraph (f)(3) of this section if the following criteria are met by the employer and employees with respect to the vehicle:
(i) The vehicle is owned or leased by the employer and is provided to one or more employees for use in connection with the employer's trade or business and is used in the employer's trade or business;
(ii) For bona fide noncompensatory business reasons, the employer requires the employee to commute to and/or from work in the vehicle;
(iii) The employer has established a written policy under which neither the employee, nor any individual whose use would be taxable to the employee, may use the vehicle for personal purposes, other than for commuting or de minimis personal use (such as a stop for a personal errand on the way between a business delivery and the employee's home);
(iv) Except for de minimis personal use, the employee does not use the vehicle for any personal purpose other than commuting; and
(v) The employee required to use the vehicle for commuting is not a control employee of the employer (as defined in paragraphs (f) (5) and (6) of this section).
Personal use of a vehicle is all use of the vehicle by an employee that is not used in the employee's trade or business of being an employee of the employer. An employer-provided vehicle that is generally used each workday to transport at least three employees of the employer to and from work in an employer-sponsored commuting vehicle pool is deemed to meet the requirements of paragraphs (f)(1) (i) and (ii) of this section.
(2) Special rules. Notwithstanding anything in paragraph (f)(1) of this section to the contrary, the following special rules apply—
(i) Chauffeur-driven vehicles. If a vehicle is chauffeur-driven, the commuting valuation rule of this paragraph (f) may not be used to value the commuting use of any person (other than the chauffeur) who rides in the vehicle. (See paragraphs (d) and (e) of this section for other vehicle special valuation rules.) The special rule of this paragraph (f) may be used to value the commuting-only use of the vehicle by the chauffeur if the conditions of paragraph (f)(1) of this section are satisfied. For purposes of this paragraph (f)(2), an individual will not be considered a chauffeur if he or she performs non-driving services for the employer, is not available to perform driving services while performing such other services and whose only driving services consist of driving a vehicle used for commuting by other employees of the employer.
(ii) Control employee exception. If the vehicle in which the employee is required to commute is not an automobile as defined in paragraph (d)(1)(ii) of this section, the restriction of paragraph (f)(1)(v) of this section (relating to control employees) does not apply.
(3) Commuting value—(i) $1.50 per one-way commute. If the requirements of this paragraph (f) are satisfied, the value of the commuting use of an employer-provided vehicle is $1.50 per one-way commute (e.g., from home to work or from work to home). The value provided in this paragraph (f)(3) includes the value of any goods or services directly related to the vehicle (e.g., fuel).
(ii) Value per employee. If there is more than one employee who commutes in the vehicle, such as in the case of an employer-sponsored commuting vehicle pool, the amount includible in the income of each employee is $1.50 per one-way commute. Thus, the amount includible for each round-trip commute is $3.00 per employee. See paragraphs (d)(7)(vi) and (e)(5)(vi) of this section for use of the automobile lease valuation and vehicle cents-per-mile valuation special rules for valuing the use or availability of the vehicle in the case of an employer-sponsored vehicle or automobile commuting pool.
(4) Definition of vehicle. For purposes of this paragraph (f), the term “vehicle” means any motorized wheeled vehicle manufactured primarily for use on public streets, roads, and highways. The term “vehicle” includes an automobile as defined in paragraph (d)(1)(ii) of this section.
(5) Control employee defined—Non-government employer. For purposes of this paragraph (f), a control employee of a non-government employer is any employee—
(i) Who is a Board- or shareholder-appointed, confirmed, or elected officer of the employer whose compensation equals or exceeds $50,000,
(ii) Who is a director of the employer,
(iii) Whose compensation equals or exceeds $100,000, or
(iv) Who owns a one-percent or greater equity, capital, or profits interest in the employer.
For purposes of determining who is a one-percent owner under paragraph (f)(5)(iv) of this section, any individual who owns (or is considered as owning under section 318(a) or principles similar to section 318(a) for entities other than corporations) one percent or more of the fair market value of an entity (the “owned entity”) is considered a one-percent owner of all entities which would be aggregated with the owned entity under the rules of section 414 (b), (c), (m), or (o). For purposes of determining who is an officer or director with respect to an employer under this paragraph (f)(5), notwithstanding anything in this section to the contrary, if an entity would be aggregated with other entities under the rules of section 414 (b), (c), (m), or (o), the officer definition (but not the compensation requirement) and the director definition apply to each such separate entity rather tha to the aggregated employer. An employee who is an officer or a director of an entity (the “first entity”) shall be treated as an officer or a director of all entities aggregated with the first entity under the rules of section 414 (b), (c), (m), or (o). Instead of applying the control employee definition of this paragraph (f)(5), an employer may treat all, and only, employees who are “highly compensated” employees (as defined in § 1.132-8(g)) as control employees for purposes of this paragraph (f).
(6) Control employee defined—Government employer. For purposes of this paragraph (f), a control employee of a government employer is any—
(i) Elected official, or
(ii) Employee whose compensation equals or exceeds the compensation paid to a Federal Government employee holding a position at Executive Level V, determined under Chapter 11 of title 2, United States Code, as adjusted by section 5318 of title 5 United States Code.
For purposes of this paragraph (f), the term “government” includes any Federal, state or local governmental unit, and any agency or instrumentality thereof. Instead of applying the control employee definition of paragraph (f)(6), an employer may treat all and only employees who are “highly compensated” employees (as defined in § 1.132-8(f)) as control employees for purposes of this paragraph (f).
(7) “Compensation” defined. For purposes of this paragraph (f), the term “compensation” has the same meaning as in section 414(q)(7). Compensation includes all amounts received from all entities treated as a single employer under section 414 (b), (c), (m), or (o). Levels of compensation shall be adjusted at the same time and in the same manner as provided in section 415(d). The first such adjustment shall be for calendar year 1988.
(g) Non-commercial flight valuation rule—(1) In general. Under the non-commercial flight valuation rule of this paragraph (g), except as provided in paragraph (g)(12) of this section, if an employee is provided with a flight on an employer-provided aircraft, the value of the flight is calculated using the aircraft valuation formula of paragraph (g)(5) of this section. For purposes of this paragraph (g), the value of a flight on an employer-provided aircraft by an individual who is less than two years old is deemed to be zero. See paragraph (b)(1) of this section for rules relating to the amount includible in income when an employee reimburses the employee's employer for all or part of the fair market value of the benefit provided.
(2) Eligible flights and eligible aircraft. The valuation rule of this paragraph (g) may be used to value flights on all employer-provided aircraft, including helicopters. The valuation rule of this paragraph (g) may be used to value international as well as domestic flights. The valuation rule of this paragraph (g) may not be used to value a flight on any commercial aircraft on which air transportation is sold to the public on a per-seat basis. For a special valuation rule relating to certain flights on commercial aircraft, see paragraph (h) of this section.
(3) Definition of a flight—(i) General rule. Except as otherwise provided in paragraph (g)(3)(iii) of this section (relating to intermediate stops), for purposes of this paragraph (g), a flight is the distance (in statute miles, i.e., 5,280 feet per statute mile) between the place at which the individual boards the aircraft and the place at which the individual deplanes.
(ii) Valuation of each flight. Under the valuation rule of this paragraph (g), value is determined separately for each flight. Thus, a round-trip is comprised of at least two flights. For example, an employee who takes a personal trip on an employer-provided aircraft from New York City to Denver, then Denver to Los Angeles, and finally Los Angeles to New York City has taken three flights and must apply the aircraft valuation formula separately to each flight. The value of a flight must be determined on a passenger-by-passenger basis. For example, if an individual accompanies an employee and the flight taken by the individual would be taxed to the employee, the employee would be taxed on the special rule value of the flight by the employee and the flight by the individual.
(iii) Intermediate stop. If a landing is necessitated by weather conditions, by an emergency, for purposes of refueling or obtaining other services relating to the aircraft or for any other purpose unrelated to the personal purposes of the employee whose flight is being valued, that landing is an intermediate stop. Additional mileage attributable to an intermediate stop is not considered when determining the distance of an employee's flight.
(iv) Examples. The rules of paragraph (g)(3)(iii) of this section may be illustrated by the following examples:
Example 1.Assume that an employee's trip originates in St. Louis, Missouri, with Seattle, Washington as its destination, but, because of weather conditions, the aircraft lands in Denver, Colorado, and the employee stays in Denver overnight. Assume further that the next day the aircraft flies to Seattle where the employee deplanes. The employee's flight is the distance between the airport in St. Louis and the airport in Seattle.
Example 2.Assume that a trip originates in New York, New York, with five passengers and that the aircraft makes a stop in Chicago, Illinois, so that one of the passengers can deplane for a purpose unrelated to the personal purposes of the other passengers whose flights are being valued. The aircraft then goes on to Los Angeles, California, where the other four passengers will deplane. The flight of the passenger who deplaned in Chicago is the distance between the airport in New York and the airport in Chicago. The stop in Chicago is disregarded as an intermediate stop, however, when measuring the flights taken by each of the other four passengers. Their flights would be the distance between the airport in New York and the airport in Los Angeles.
(4) Personal and non-personal flights—(i) In general. The valuation rule of this paragraph (g) applies to personal flights on employer-provided aircraft. A personal flight is one the value of which is not excludable under another section of subtitle A of the Internal Revenue Code of 1986, such as under section 132(d) (relating to a working condition fringe). However, solely for purposes of paragraphs (g)(4)(ii) and (g)(4)(iii) of this section, references to personal flights do not include flights a portion of which would not be excludable from income by reason of section 274(c).
(ii) Trip primarily for employer's business. If an employee combines, in one trip, personal and business flights on an employer-provided aircraft and the employee's trip is primarily for the employer's business (see § 1.162-2(b)(2)), the employee must include in income the excess of the value of all the flights that comprise the trip over the value of the flights that would have been taken had there been no personal flights but only business flights. For example, assume that an employee flies on an employer-provided aircraft from Chicago, Illinois, to Miami, Florida, for the employer's business and that from Miami the employee flies on the employer-provided aircraft to Orlando, Florida, for personal purposes and then flies back to Chicago. Assume further that the primary purpose of the trip is for the employer's business. The amount includible in income is the excess of the value of the three flights (Chicago to Miami, Miami to Orlando, and Orlando to Chicago), over the value of the flights that would have been taken had there been no personal flights but only business flights (Chicago to Miami and Miami to Chicago).
(iii) Primarily personal trip. If an employee combines, in one trip, personal and business flights on an employer-provided aircraft and the employee's trip is primarily personal (see § 1.162-2(b)(2)), the amount includible in the employee's income is the value of the personal flights that would have been taken had there been no business flights but only personal flights. For example, assume that an employee flies on an employer-provided aircraft from San Francisco, California, to Los Angeles, California, for the employer's business and that from Los Angeles the employee flies on an employer-provided aircraft to Palm Springs, California, primarily for personal reasons and then flies back to San Francisco. Assume further that the primary purpose of the trip is personal. The amount includible in the employee's income is the value of personal flights that would have been taken had there been no business flights but only personal flights (San Francisco to Palm Springs and Palm Springs to San Francisco).
(iv) Application of section 274(c). The value of employer- provided travel outside the United States away from home may not be excluded from the employee's gross income as a working condition fringe, by either the employer or the employee, to the extent not deductible by reason of section 274(c). The valuation rule of this paragraph (g) applies to that portion of the value any flight not excludable by reason of section 274(c). Such value is includible in income in addition to the amounts determined under paragraphs (g)(4)(ii) and (g)(4)(iii) of this section.
(v) Flights by individuals who are not personal guests. If an individual who is not an employee of the employer providing the aircraft is on a flight, and the individual is not the personal guest of any employee of the employer, the flight by the individual is not taxable to any employee of the employer providing the aircraft. The rule in the preceding sentence applies where the individual is provided the flight by the employer for noncompensatory business reasons of the employer. For example, assume that G, an employee of company Y, accompanies A, an employee of company X, on company X's aircraft for the purpose of inspecting land under consideration for purchase by company X from company Y. The flight by G is not taxable to A. No inference may be drawn from this paragraph (g)(4)(v) concerning the taxation of a flight provided to an individual who is neither an employee of the employer nor a personal guest of any employee of the employer.
(5) Aircraft valuation formula. Under the valuation rule of this paragraph (g), the value of a flight is determined under the base aircraft valuation formula (also known as the Standard Industry Fare Level formula or SIFL) by multiplying the SIFL cents-per-mile rates applicable for the period during which the flight was taken by the appropriate aircraft multiple (as provided in paragraph (g)(7) of this section) and then adding the applicable terminal charge. The SIFL cents-per-mile rates in the formula and the terminal charge are calculated by the Department of Transportation and are revised semi-annually. The base aircraft valuation formula in effect from January 1, 1989 through June 30, 1989, is as follows: a terminal charge of $26.48 plus ($.1449 per mile for the first 500 miles, $.1105 per mile for miles between 501 and 1500, and $.1062 per mile for miles over 1500). For example, if a flight taken on January 15, 1989, by a non-control employee on an employer-provided aircraft with a maximum certified takeoff weight of 26,000 lbs. is 2,000 miles long, the value of the flight determined under this paragraph (g)(5) is: $100.36 ((.313 × (($.1449 × 500) + ($.1105 × 1,000) + ($.1062 × 500))) + $26.48). The aircraft valuation formula applies separately to each flight being valued under this paragraph (g). Therefore, the number of miles an employee has flown on employer-provided aircraft flights prior to the flight being valued does not affect the determination of the value of the flight.
(6) Discretion to provide new formula. The Commissioner may prescribe a different base aircraft valuation formula by regulation, Revenue Ruling or Revenue Procedure in the event that the calculation of the Standard Industry Fare Level is discontinued.
(7) Aircraft multiples—(i) In general. The aircraft multiples are based on the maximum certified takeoff weight of the aircraft. When applying the aircraft valuation formula to a flight, the appropriate aircraft multiple is multiplied by the product of the applicable SIFL cents-per-mile rates multiplied by the number of miles in the flight and then the terminal charge is added to the product. For purposes of applying the aircraft valuation formula described in paragraph (g)(5) of this section, the aircraft multiples are as follows:
Maximum certified take-off weight of the aircraft | Aircraft multiple for a control employee (percent) | Aircraft multiple for a non-control employee (percent)
6,000 lbs. or less | 62.5 | 15.6
6,001-10,000 lbs. | 125 | 23.4
10,001-25,000 lbs. | 300 | 31.3
25,001 lbs. or more | 400 | 31.3
(ii) Flights treated as provided to a control employee. Except as provided in paragraph (g)(12) of this section, any fIight provided to an individual whose flight would be taxable to a control employee (as defined in paragraphs (g) (8) and (9) of this section) as the recipient shall be valued as if such flight had been provided to that control employee. For example, assume that the chief executive officer of an employer, his spouse, and his two children fly on an employer-provided aircraft for personal purposes. Assume further that the maximum certified takeoff weight of the aircraft is 12,000 lbs. The amount includible in the employee's income is 4 × ((300 percent × the applicable SIFL cents-per-mile rates provided in paragraph (g)(5) of this section multiplied by the number of miles in the flight) plus the applicable terminal charge).
(8) Control employee defined—Non-government employer—(i) Definition. For purposes of this paragraph (g), a control employee of a non-government employer is any employee—
(A) Who is a Board- or shareholder-appointed, confirmed, or elected officer of the employer, limited to the lesser of—
(1) One percent of all employees (increased to the next highest integer, if not an integer) or
(2) Ten employees;
(B) Who is among the top one percent most highly-paid employees of the employer (increased to the next highest integer, if not an integer) limited to a maximum of 50;
(C) Who owns a five-percent or greater equity, capital, or profits interest in the employer; or
(D) Who is a director of the employer.
(ii) Special rules for control employee definition—(A) In general. For purposes of this paragraph (g), any employee who is a family member (within the meaning of section 267(c)(4)) of a control employee is also a control employee. For purposes of paragraph (g)(8)(i)(B) of this section, the term “employee” does not include any individual unless such individual is a common-law employee, partner, or one-percent or greater shareholder of the employer. Pursuant to this paragraph (g)(8), an employee may be a control employee under more than one of the requirements listed in paragraphs (g)(8)(i) (A) through (D) of this section. For example, an employee may be both an officer under paragraph (g)(8)(i)(A) of this section and a highly-paid employee under paragraph (g)(8)(i)(B) of this section. In this case, for purposes of the officer limitation rule of paragraph (g)(8)(i)(A) of this section and the highly-paid employee limitation rule of paragraph (g)(8)(i)(B) of this section, the employee would be counted in applying both limitations. For purposes of determining the one-percent limitation under paragraphs (g)(8)(i) (A) and (B) of this section, an employer shall exclude from consideration employees described in § 1.132-8(b)(3). Instead of applying the control employee definition of this paragraph (g)(8), an employer may treat all (and only) employees who are “highly compensated” employees (as defined in § 1.132-8(f)) as control employees for purposes of this paragraph (g).
(B) Special rules for officers, owners, and highly-paid control employees. In no event shall an employee whose compensation is less than $50,000 be a control employee under paragraph (g)(8)(i) (A) or (B) of this section. For purposes of determining who is a five-percent (or one-percent) owner under this paragraph (g)(8), any individual who owns (or is considered as owning under section 318(a) or principles similar to section 318(a) for entities other than corporations) five percent (or one-percent) or more of the fair market value of an entity (the “owned entity”) is considered a five-percent (or one-percent) owner of all entities which would be aggregated with the owned entity under the rules of section 414(b), (c), (m), or (o). For purposes of determining who is an officer or director with respect to an employer under this paragraph (g)(8), notwithstanding anything in this section to the contrary, if the employer would be aggregated with other employers under the rules of section 414 (b), (c), (m), or (o), the officer definition and the limitations and the director definition are applied to each such separate employer rather than to the aggregated employer. An employee who is an officer or director of one employer (the “first employer”) shall not be counted as an officer or a director of any other employer aggregated with the first employer under the rules of section 414 (b), (c), or (m). If applicable, the officer limitations rule of paragraph (g)(8)(i)(A) of this section is applied to employees in descending order of their compensation. Thus, if an employer has 11 board-appointed officers and the limit imposed under paragraph (g)(8)(i)(A) of this section is 10 officers, the employee with the least compensation of those officers would not be a control employee under paragraph (g)(8)(i)(A) of this section.
(9) Control employee defined—Government employer. For purposes of this paragraph (g), a control employee of a government employer is any—
(i) Elected official, or
(ii) Employee whose compensation equals or exceeds the compensation paid to a Federal Government employee holding a position at Executive Level V, determined under Chapter 11 of title 2, United States Code, as adjusted by section 5318 of title 5 United States Code.
For purposes of paragraph (f), the term “government” includes any Federal, state or local governmental unit, and any agency or instrumentality thereof. lnstead of applying the control employee definition of paragraph (f)(6), an employer may treat all and only employees who are “highly compensated” employees (as defined in § 1.132-8(f)) as control employees for purposes of this paragraph (f).
(10) “Compensation” defined. For purposes of this paragraph (g), the term “compensation” has the same meaning as in section 414(q)(7). Compensation includes all amounts received from all entities treated as a single employer under section 414 (b), (c), (m), or (o). Levels of compensation shall be adjusted at the same time and in the same manner as provided in section 415(d). The first such adjustment was for calendar year 1988.
(11) Treatment of former employees. For purposes of this paragraph (g), an employee who was a control employee of the employer (as defined in this paragraph (g)) at any time after reaching age 55, or within three years of separation from the service of the employer, is a control employee with respect to flights taken after separation from the service of the employer. An individual who is treated as a control employee under this paragraph (g)(11) is not counted when determining the limitation of paragraph (g)(8)(i) (A) and (B) of this section. Thus, the total number of individuals treated as control employees under such paragraphs may exceed the limitations of such paragraphs to the extent that this paragraph (g)(11) applies.
(12) Seating capacity rule—(i) In general—(A) General rule. Where 50 percent or more of the regular passenger seating capacity of an aircraft (as used by the employer) is occupied by individuals whose flights are primarily for the employer's business (and whose flights are excludable from income under section 132(d)), the value of a flight on that aircraft by any employee who is not flying primarily for the employer's business (or who is flying primarily for the employer's business but the value of whose flight is not excludable under section 132(d) by reason of section 274(c)) is deemed to be zero. See § 1.132-5 which limits the working condition fringe exclusion under section 132(d) to situations where the employee receives the flight in connection with the performance of services for the employer providing the aircraft.
(B) Special rules—(1) Definition of “employee.” For purposes of this paragraph (g)(12), the term “employee” includes only employees of the employer, including a partner of a partnership, providing the aircraft and does not include independent contractors and directors of the employer. A flight taken by an individual other than an “employee” as defined in the preceding sentence is considered a flight taken by an employee for purposes of this paragraph (g)(12) only if that individual is treated as an employee pursuant to section 132(f)(1) or that individual's flight is treated as a flight taken by an employee pursuant to section 132(f)(2). If—
(i) A flight by an individual is not considered a flight taken by an employee (as defined in this paragraph (g)(12)(i)),
(ii) The value of that individual's flight is not excludable under section 132(d), and
(iii) The seating capacity rule of this paragraph (g) (12) otherwise applies, then the value of the flight provided to such an individual is the value of a flight provided to a non-control employee pursuant to paragraph (g)(5) of this section (even if the individual who would be taxed on the value of the flight is a control employee).
(2) Example. The special rules of paragraph (g)(12)(i)(B)(1) of this section are illustrated by the following example:
Example.Assume that 60 percent of the regular passenger seating capacity of an employer's aircraft is occupied by individuals whose flights are primarily for the employer's business and are excludable from income under section 132(d). If a control employee, his spouse, and his dependent child fly on the employer's aircraft for primarily personal reasons, the value of the three flights is deemed to be zero. If, however, the control employee's cousin were provided a flight on the employer's aircraft, the value of the flight taken by the cousin is determined by applying the aircraft valuation formula of paragraph (g)(5) of this section (including the terminal charge) and the non-control employee aircraft multiples of paragraph (g)(7) of this section.
(ii) Application of 50-percent test to multiple flights. The seating capacity rule of this paragraph (g)(12) must be met both at the time the individual whose flight is being valued boards the aircraft and at the time the individual deplanes. For example, assume that employee A boards an employer-provided aircraft for personal purposes in New York, New York, and that at that time 80 percent of the regular passenger seating capacity of the aircraft is occupied by individuals whose flights are primarily for the employer's business (and whose flights are excludable from income under section 132(d)) (“the business passengers”). If the aircraft flies directly to Hartford, Connecticut where all of the passengers, including A, deplane, the requirements of the seating capacity rule of this paragraph (g)(12) have been satisfied. If instead, some of the passengers, including A, remain on the aircraft in Hartford and the aircraft continues on to Boston, Massachusetts, where they all deplane, the requirements of the seating capacity rule of this paragraph (g)(12) will not be satisfied with respect to A's flight from New York to Boston unless at least 50 percent of the seats comprising the aircraft's regular passenger seating capacity were occupied by the business passengers at the time A deplanes in Boston.
(iii) Regular passenger seating capacity. (A) General rule. Except as otherwise provided, the regular passenger seating capacity of an aircraft is the maximum number of seats that have at any time on or prior to the date of the flight been on the aircraft (while owned or leased by the employer). Except to the extent excluded pursuant to paragraph (g)(12)(v) of this section, regular seating capacity includes all seats which may be occupied by members of the flight crew. It is irrelevant that, on a particular flight, less than the maximum number of seats are available for use because, for example, some of the seats are removed.
(B) Special rules. When determining the maximum number of seats that have at any time on or prior to the date of the flight been on the aircraft (while owned or leased by the employer), seats that could not at any time be legally used during takeoff and have not at any time been used during takeoff are not counted. As of the date an employer permanently reduces the seating capacity of an aircraft, the regular passenger seating capacity is the reduced number of seats on the aircraft. The previous sentence shall not apply if at any time within 24 months after such reduction any seats are added in the aircraft. Unless the conditions of this paragraph (g)(12)(iii)(B) are satisfied, jumpseats and removable seats used solely for purposes of flight crew training are counted for purposes of the seating capacity rule of this paragraph (g)(12).
(iv) Examples. The rules of paragraph (g)(12)(iii) of this section are illustrated by the following examples:
Example 1.Employer A and employer B order the same aircraft, except that A orders it with 10 seats and B orders it with eight seats. A always uses its aircraft as a 10-seat aircraft; B always uses its aircraft as an eight-seat aircraft. The regular passenger seating capacity of A's aircraft is 10 and of B's aircraft is eight.
Example 2.Assume the same facts as in example (1), except that whenever A's chief executive officer and spouse use the aircraft eight seats are removed. Even if substantially all of the use of the aircraft is by the chief executive officer and spouse, the regular passenger seating capacity of the aircraft is 10.
Example 3.Assume the same facts as in example (1), except that whenever more than eight people want to fly in B's aircraft, two extra seats are added. Even if substantially all of the use of the aircraft occurs with eight seats, the regular passenger seating capacity of the aircraft is 10.
Example 4.Employer C purchases an aircraft with 12 seats. Three months later C remodels the interior of the aircraft and permanently removes four of the seats. Upon completion of the remodeling, the regular passenger seating capacity of the aircraft is eight. If, however, any seats are added within 24 months after the remodeling, the regular seating capacity of the aircraft is treated as 12 throughout the entire period.
(v) Seats occupied by flight crew. When determining the regular passenger seating capacity of an aircraft, any seat occupied by a member of the flight crew (whether or not such individual is an employee of the employer providing the aircraft) shall not be counted, unless the purpose of the flight by such individual is not primarily to serve as a member of the flight crew. If the seat occupied by a member of the flight crew is not counted as a passenger seat pursuant to the previous sentence, such member of the flight crew is disregarded in applying the 50-percent test described in the first sentence of paragraph (g)(12)(i) of this section. For example, assume that prior to application of this paragraph (g)(12)(v) the regular passenger seating capacity of an aircraft is one. Assume further that an employee pilots the aircraft and that the employee's flight is nor primarily for the employer's business. If the employee's spouse occupies the other seat for personal purposes, the seating capacity rule is not met and the value of both flights must be included in the employee's income. If, however, the employee's flight were primarily for the employer's business (unrelated to serving as a member of the flight crew), then the seating capacity rule is met and the value of the flight for the employee's spouse is deemed to be zero. If the employee's flight were primarily to serve as a member of the flight crew, then the seating capacity rule is not met and the value of a flight by any passenger for primarily personal reasons is not deemed to be zero.
(13) Erroneous use of the non-commercial flight valuation rule—(i) Certain errors in the case of a flight by a control employee. If—
(A) The non-commercial flight valuation rule of this paragraph (g) is applied by an employer or a control employee, as the case may be, on a return as originally filed or on an amended return on the grounds that either—
(1) The control employee is not in fact a control employee, or
(2) The aircraft is within a specific weight classification, and
(B) Either position is subsequently determined to be erroneous, the valuation rule of this paragraph (g) is not available to value the flight taken by that control employee by the person or persons taking the erroneous position. With respect to the weight classifications, the previous sentence does not apply if the position taken is that the weight of the aircraft is greater than it is subsequently determined to be. If, with respect to a flight by a control employee, the seating capacity rule of paragraph (g)(12) of this section is used by an employer or the control employee, as the case may be, on a return as originally filed or on an amended return, the valuation rule of this paragraph (g) is not available to value the flight taken by that control employee by the person or persons taking the erroneous position.
(ii) Value of flight excluded as a working condition fringe. If either an employer or an employee, on a return as originally filed or on an amended return, excludes from the employee's income or wages all or any part of the value of a flight on the grounds that the flight was excludable as a working condition fringe under section 132, and that position is subsequently determined to be erroneous, the valuation rule of this paragraph (g) is not available to value the flight taken by that employee by the person or persons taking the erroneous position. Instead, the general valuation rules of paragraphs (b) (5) and (6) of this section apply.
(14) Consistency rules—(i) Use by employer. Except as otherwise provided in paragraph (g)(13) or paragraph (g)(14)(iii) of this section or in § 1.132-5(m)(4), if the non-commercial flight valuation rule of this paragraph (g) is used by an employer to value any flight provided in a calendar year, the rule must be used to value all flights provided to all employees in the calendar year.
(ii) Use by employee. Except as otherwise provided in paragraph (g)(13) or (g)(14)(iii) of this section or in § 1.132-5(m)(4), if the non-commercial flight valuation rule of this paragraph (g) is used by an employee to value a flight provided by an employer in a calendar year, the rule must be used to value all flights provided to the employee by that employer in the calendar year.
(iii) Exception for entertainment flights provided to specified individuals after October 22, 2004. Notwithstanding the provisions of paragraph (g)(14)(i) of this section, an employer may use the general valuation rules of paragraph (b) of this section to value the entertainment use of an aircraft provided after October 22, 2004, to a specified individual. An employer who uses the general valuation rules of paragraph (b) of this section to value any entertainment use of an aircraft by a specified individual in a calendar year must use the general valuation rules of paragraph (b) of this section to value all entertainment use of aircraft provided to all specified individuals during that calendar year.
(A) Specified individuals defined. For purposes of paragraph (g)(14)(iii) of this section, specified individual is defined in section 274(e)(2)(B) and § 1.274-9(b).
(B) Entertainment defined. For purposes of paragraph (g)(14)(iii) of this section, entertainment is defined in § 1.274-2(b)(1).
(h) Commercial flight valuation rule—(1) In general. Under the commercial flight valuation rule of this paragraph (h), the value of a space-available flight (as defined in paragraph (h) (2) of this section) on a commercial aircraft is 25 percent of the actual carrier's highest unrestricted coach fare in effect for the particular flight taken. The rule of this paragraph (h) is available only to an individual described in § 1.132-1(b)(1).
(2) Space-available flight. The commercial flight valuation rule of this paragraph (h) is available to value a space-available flight. The term “space-available flight” means a flight on a commercial aircraft—
(i) Which is subject to the same types of restrictions customarily associated with flying on an employee “stand-by” or “space-available” basis, and
(ii) Which meets the definition of a no-additional-cost service under section 132(b), except that the flight is provided to an individual other than the employee or an individual treated as the employee under section 132(f). Thus, a flight is not a space-available flight if the employer guarantees the employee a seat on the flight or if the nondiscrimination requirements of section 132(h)(1) and § 1.132-8 are not satisfied. A flight may be a space-available flight even if the airline that is the actual carrier is not the employer of the employee.
(3) Commercial aircraft. If the actual carrier does not offer, in the ordinary course of its business, air transportation to customers on a per-seat basis, the commercial flight valuation rule of this paragraph (h) is not available. Thus, if, in the ordinary course of its line of business, the employer only offers air transportation to customers on a charter basis, the commercial flight valuation rule of this paragraph (h) may not be used to value a space-available flight on the employer's aircraft. If the commercial flight valuation rule is not available, the flight may be valued under the non-commercial flight valuation rule of paragraph (g) of this section.
(4) Timing of inclusion. The date that the flight is taken is the relevant date for purposes of applying section 61(a)(1) and this section to a space-available flight on a commercial aircraft. The date of purchase or issuance of a pass or ticket is not relevant. Thus, this section applies to a flight taken on or after January 1, 1989, regardless of the date on which the pass or ticket for the flight was purchased or issued.
(5) Consistency rules—(i) Use by employer. If the commercial flight valuation rule of this paragraph (h) is used by an employer to value any flight provided in a calendar year, the rule must be used to value all flights eligible for use of the rule provided in the calendar year.
(ii) Use by employee. If the commercial flight valuation rule of this paragraph (h) is used by an employee to value a flight provided by an employer in a calendar year, the rule must be used to value all flights provided by that employer eligible for use of the rule taken by such employee in the calendar year.
(i) [Reserved]
(j) Valuation of meals provided at an employer-operated eating facility for employees—(1) In general. The valuation rule of this paragraph (j) may be used to value a meal provided at an employer-operated eating facility for employees (as defined in § 1.132-7). For rules relating to an exclusion for the value of meals provided at an employer-operated eating facility for employees, see section 132(e)(2) and § 1.132-7.
(2) Valuation formula—(i) In general. The value of all meals provided at an employer-operated eating facility for employees during a calendar year (“total meal value”) is 150 percent of the direct operating costs of the eating facility determined separately with respect to such eating facility whether or not the direct operating costs test is applied separately to such eating facility under § 1.132-7(b)(2). For purposes of this paragraph (j), the definition of direct operating costs provided in § 1.132-7(b) and the adjustments specified in § 1.132-7(a)(2) apply. The taxable value of meals provided at an eating facility may be determined in two ways. The “individual meal subsidy” may be treated as the taxable value of a meal provided at the eating facility (see paragraph (j)(2)(ii) of this section) to a particular employee. Alternatively, the employer may allocate the “total meal subsidy” among employees (see paragraph (j)(2)(iii) of this section).
(ii) “Individual meal subsidy” defined. The “individual meal subsidy” is determined by multiplying the amount paid by the employee for a particular meal by a fraction, the numerator of which is the total meal value and the denominator of which is the gross receipts of the eating facility for the calendar year and then subtracting the amount paid by the employee for the meal. The taxable value of meals provided to a particular employee during a calendar year, therefore, is the sum of the individual meal subsidies provided to the employee during the calendar year. This rule is available only if there is a charge for each meal selection and if each employee is charged the same price for any given meal selection.
(iii) Allocation of “total meal subsidy.” Instead of using the individual meal subsidy method provided in paragraph (j)(2)(ii) of this section, the employer may allocate the “total meal subsidy” (total meal value less the gross receipts of the facility) among employees in any manner reasonable under the circumstances. It will be presumed reasonable for an employer to allocate the total meal subsidy on a per-employee basis if the employer has information that would substantiate to the satisfaction of the Commissioner that each employee was provided approximately the same number of meals at the facility.
(k) Commuting valuation rule for certain employees—(1) In general. Under the rule of this paragraph (k), the value of the commuting use of employer-provided transportation may be determined under paragraph (k)(3) of this section if the following criteria are met by the employer and employee with respect to the transportation:
(i) The transportation is provided, solely because of unsafe conditions, to an employee who would ordinarily walk or use public transportation for commuting to or from work;
(ii) The employer has established a written policy (e.g., in the employer's personnel manual) under which the transportation is not provided for the employee's personal purposes other than for commuting due to unsafe conditions and the employer's practice in fact corresponds with the policy;
(iii) The transportation is not used for personal purposes other than commuting due to unsafe conditions; and
(iv) The employee receiving the employer-provided transportation is a qualified employee of the employer (as defined in paragraph (k)(6) of this section).
(2) Trip-by-trip basis. The special valuation rule of this paragraph (k) applies on a trip-by-trip basis. If an employer and employee fail to meet the criteria of paragraph (k)(1) of this section with respect to any trip, the value of the transportation for that trip is not determined under paragraph (k)(3) of this section and the amount includible in the employee's income is determined by reference to the fair market value of the transportation.
(3) Commuting value—(i) $1.50 per one-way commute. If the requirements of this paragraph (k) are satisfied, the value of the commuting use of the employer-provided transportation is $1.50 per one-way commute (i.e., from home to work or from work to home).
(ii) Value per employee. If transportation is provided to more than one qualified employee at the same time, the amount includible in the income of each employee is $1.50 per one-way commute.
(4) Definition of employer-provided transportation. For purposes of this paragraph (k), “employer-provided transportation” means transportation by vehicle (as defined in paragraph (f)(4) of this section) that is purchased by the employer (or that is purchased by the employee and reimbursed by the employer) from a party that is not related to the employer for the purpose of transporting a qualified employee to or from work. Reimbursements made by an employer to an employee to cover the cost of purchasing transportation (e.g., hiring cabs) must be made under a bona fide reimbursement arrangement.
(5) Unsafe conditions. Unsafe conditions exist if a reasonable person would, under the facts and circumstances, consider it unsafe for the employee to walk to or from home, or to walk to or use public transportation at the time of day the employee must commute. One of the factors indicating whether it is unsafe is the history of crime in the geographic area surrounding the employee's workplace or residence at the time of day the employee must commute.
(6) Qualified employee defined—(i) In general. For purposes of this paragraph (k), a qualified employee is one who meets the following requirements with respect to the employer:
(A) The employee performs services during the current year, is paid on an hourly basis, is not claimed under section 213(a)(1) of the Fair Labor Standards Act of 1938 (as amended), 29 U.S.C. 201-219 (FLSA), to be exempt from the minimum wage and maximum hour provisions of the FLSA, and is within a classification with respect to which the employer actually pays, or has specified in writing that it will pay, compensation for overtime equal to or exceeding one and one-half times the regular rate as provided by section 207 of the FLSA; and
(B) The employee does not receive compensation from the employer in excess of the amount permitted by section 414(q)(1)(C) of the Code.
(ii) “Compensation” and “paid on an hourly basis” defined. For purposes of this paragraph (k), “compensation” has the same meaning as in section 414(q)(7). Compensation includes all amounts received from all entities treated as a single employer under section 414 (b), (c), (m), or (o). Levels of compensation shall be adjusted at the same time and in the same manner as provided in section 415(d). If an employee's compensation is stated on an annual basis, the employee is treated as “paid on an hourly basis” for purposes of this paragraph (k) as long as the employee is not claimed to be exempt from the minimum wage and maximum hour provisions of the FLSA and is paid overtime wages either equal to or exceeding one and one-half the employee's regular hourly rate of pay.
(iii) FLSA compliance required. An employee will not be considered a qualified employee for purposes of this paragraph (k), unless the employer is in compliance with the recordkeeping requirements concerning that employee's wages, hours, and other conditions and practices of employment as provided in section 211(c) of the FLSA and 29 CFR part 516.
(iv) Issues arising under the FLSA. If questions arise concerning an employee's classification under the FLSA, the pronouncements and rulings of the Administrator of the Wage and Hour Division, Department of Labor are determinative.
(v) Non-qualified employees. If an employee is not a qualified employee within the meaning of this paragraph (k)(6), no portion of the value of the commuting use of employer-provided transportation is excluded under this paragraph (k).
(7) Examples. This paragraph (k) is illustrated by the following examples:
Example 1.A and B are word-processing clerks employed by Y, an accounting firm in a large metropolitan area, and both are qualified employees under paragraph (k)(6) of this section. The normal working hours for A and B are from 11:00 p.m. until 7:00 a.m. and public transportation, the only means of transportation available to A or B, would be considered unsafe by a reasonable person at the time they are required to commute from home to work. In response, Y hires a car service to pick up A and B at their homes each evening for purposes of transporting them to work. The amount includible in the income of both A and B is $1.50 for the one-way commute from home to work.
Example 2.Assume the same facts as in Example 1, except that Y also hires a car service to return A and B to their homes each morning at the conclusion of their shifts and public transportation would not be considered unsafe by a reasonable person at the time of day A and B commute to their homes. The value of the commute from work to home is includible in the income of both A and B by reference to fair market value since unsafe conditions do not exist for that trip.
Example 3.C is an associate for Z, a law firm in a metropolitan area. The normal working hours for C's law firm are from 9 a.m. until 6 p.m., but C's ordinary office hours are from 10 a.m. until 8 p.m. Public transportation, the only means of transportation available to C at the time C commutes from work to home during the evening, would be considered unsafe by a reasonable person. In response, Z hires a car service to take C home each evening. C does not receive annual compensation from Z in excess of the amount permitted by section 414(q)(1)(C) of the Code. However, C is treated as an employee exempt from the provisions of the FLSA and, accordingly, is not paid overtime wages. Therefore, C is not a qualified employee within the meaning of paragraph (k)(6) of this section. The value of the commute from work to home is includible in C's income by reference to fair market value.
(8) Effective date. This paragraph (k) applies to employer-provided transportation provided to a qualified employee on or after July 1, 1991.
[T.D. 8256, 54 FR 28582, July 6, 1989, as amended by T.D. 8389, 57 FR 1870, Jan. 16, 1992; T.D. 8457, 57 FR 62195, Dec. 30, 1992; T.D. 9597, 77 FR 45483, Aug. 1, 2012; T.D. 9849, 84 FR 9233, Mar. 14, 2019; T.D. 9893, 85 FR 6427, Feb. 5, 2020]
§ 1.61-22 Taxation of split-dollar life insurance arrangements.
(a) Scope—(1) In general. This section provides rules for the taxation of a split-dollar life insurance arrangement for purposes of the income tax, the gift tax, the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Tax Act (RRTA), and the Self-Employment Contributions Act of 1954 (SECA). For the Collection of Income Tax at Source on Wages, this section also provides rules for the taxation of a split-dollar life insurance arrangement, other than a payment under a split-dollar life insurance arrangement that is a split-dollar loan under § 1.7872-15(b)(1). A split-dollar life insurance arrangement (as defined in paragraph (b) of this section) is subject to the rules of paragraphs (d) through (g) of this section, § 1.7872-15, or general tax rules. For rules to determine which rules apply to a split-dollar life insurance arrangement, see paragraph (b)(3) of this section.
(2) Overview. Paragraph (b) of this section defines a split-dollar life insurance arrangement and provides rules to determine whether an arrangement is subject to the rules of paragraphs (d) through (g) of this section, § 1.7872-15, or general tax rules. Paragraph (c) of this section defines certain other terms. Paragraph (d) of this section sets forth rules for the taxation of economic benefits provided under a split-dollar life insurance arrangement. Paragraph (e) of this section sets forth rules for the taxation of amounts received under a life insurance contract that is part of a split-dollar life insurance arrangement. Paragraph (f) of this section provides rules for additional tax consequences of a split-dollar life insurance arrangement, including the treatment of death benefit proceeds. Paragraph (g) of this section provides rules for the transfer of a life insurance contract (or an undivided interest in the contract) that is part of a split-dollar life insurance arrangement. Paragraph (h) of this section provides examples illustrating the application of this section. Paragraph (j) of this section provides the effective date of this section.
(b) Split-dollar life insurance arrangement—(1) In general. A split-dollar life insurance arrangement is any arrangement between an owner and a non-owner of a life insurance contract that satisfies the following criteria—
(i) Either party to the arrangement pays, directly or indirectly, all or any portion of the premiums on the life insurance contract, including a payment by means of a loan to the other party that is secured by the life insurance contract;
(ii) At least one of the parties to the arrangement paying premiums under paragraph (b)(1)(i) of this section is entitled to recover (either conditionally or unconditionally) all or any portion of those premiums and such recovery is to be made from, or is secured by, the proceeds of the life insurance contract; and
(iii) The arrangement is not part of a group-term life insurance plan described in section 79 unless the group-term life insurance plan provides permanent benefits to employees (as defined in § 1.79-0).
(2) Special rule—(i) In general. Any arrangement between an owner and a non-owner of a life insurance contract is treated as a split-dollar life insurance arrangement (regardless of whether the criteria of paragraph (b)(1) of this section are satisfied) if the arrangement is described in paragraph (b)(2)(ii) or (iii) of this section.
(ii) Compensatory arrangements. An arrangement is described in this paragraph (b)(2)(ii) if the following criteria are satisfied—
(A) The arrangement is entered into in connection with the performance of services and is not part of a group-term life insurance plan described in section 79;
(B) The employer or service recipient pays, directly or indirectly, all or any portion of the premiums; and
(C) Either—
(1) The beneficiary of all or any portion of the death benefit is designated by the employee or service provider or is any person whom the employee or service provider would reasonably be expected to designate as the beneficiary; or
(2) The employee or service provider has any interest in the policy cash value of the life insurance contract.
(iii) Shareholder arrangements. An arrangement is described in this paragraph (b)(2)(iii) if the following criteria are satisfied—
(A) The arrangement is entered into between a corporation and another person in that person's capacity as a shareholder in the corporation;
(B) The corporation pays, directly or indirectly, all or any portion of the premiums; and
(C) Either—
(1) The beneficiary of all or any portion of the death benefit is designated by the shareholder or is any person whom the shareholder would reasonably be expected to designate as the beneficiary; or
(2) The shareholder has any interest in the policy cash value of the life insurance contract.
(3) Determination of whether this section or § 1.7872-15 applies to a split-dollar life insurance arrangement—(i) Split-dollar life insurance arrangements involving split-dollar loans under § 1.7872-15. Except as provided in paragraph (b)(3)(ii) of this section, paragraphs (d) through (g) of this section do not apply to any split-dollar loan as defined in § 1.7872-15(b)(1). Section 1.7872-15 applies to any such loan. See paragraph (b)(5) of this section for the treatment of a payment made by a non-owner under a split-dollar life insurance arrangement if the payment is not a split-dollar loan.
(ii) Exceptions. Paragraphs (d) through (g) of this section apply (and § 1.7872-15 does not apply) to any split-dollar life insurance arrangement if—
(A) The arrangement is entered into in connection with the performance of services, and the employer or service recipient is the owner of the life insurance contract (or is treated as the owner of the contract under paragraph (c)(1)(ii)(A)(1) of this section); or
(B) The arrangement is entered into between a donor and a donee (for example, a life insurance trust) and the donor is the owner of the life insurance contract (or is treated as the owner of the contract under paragraph (c)(1)(ii)(A)(2) of this section).
(4) Consistency requirement. A split-dollar life insurance arrangement described in paragraph (b)(1) or (2) of this section must be treated in the same manner by the owner and the non-owner of the life insurance contract under either the rules of this section or § 1.7872-15. In addition, the owner and non-owner must fully account for all amounts under the arrangement under paragraph (b)(5) of this section, paragraphs (d) through (g) of this section, or § 1.7872-15.
(5) Non-owner payments that are not split-dollar loans. If a non-owner of a life insurance contract makes premium payments (directly or indirectly) under a split-dollar life insurance arrangement, and the payments are neither split-dollar loans nor consideration for economic benefits described in paragraph (d) of this section, then neither the rules of paragraphs (d) through (g) of this section nor the rules in § 1.7872-15 apply to such payments. Instead, general income tax, employment tax, self-employment tax, and gift tax principles apply to the premium payments. See, for example, § 1.61-2(d)(2)(ii)(A).
(6) Waiver, cancellation, or forgiveness. If a repayment obligation described in § 1.7872-15(a)(2) is waived, cancelled, or forgiven at any time, then the parties must take the amount waived, cancelled, or forgiven into account in accordance with the relationships between the parties (for example, as compensation in the case of an employee-employer relationship).
(7) Change in the owner. If payments made by a non-owner to an owner were treated as split-dollar loans under § 1.7872-15 and the split-dollar life insurance arrangement is modified such that, after the modification, the non-owner is the owner (within the meaning of paragraph (c)(1) of this section) of the life insurance contract under the arrangement, paragraphs (d) through (g) of this section apply to the split-dollar life insurance arrangement from the date of the modification. The payments made (both before and after the modification) are not treated as split-dollar loans under § 1.7872-15 on or after the date of the modification. The non-owner of the life insurance contract under the modified split-dollar life insurance arrangement must fully take into account all economic benefits provided under the arrangement under paragraph (d) of this section on or after the date of the modification. For the treatment of a transfer of the contract when the unmodified arrangement is governed by paragraphs (d) through (g) of this section, see paragraph (g) of this section.
(c) Definitions. The following definitions apply for purposes of this section:
(1) Owner—(i) In general. With respect to a life insurance contract, the person named as the policy owner of such contract generally is the owner of such contract. If two or more persons are named as policy owners of a life insurance contract and each person has, at all times, all the incidents of ownership with respect to an undivided interest in the contract, each person is treated as the owner of a separate contract to the extent of such person's undivided interest. If two or more persons are named as policy owners of a life insurance contract but each person does not have, at all times, all the incidents of ownership with respect to an undivided interest in the contract, the person who is the first-named policy owner is treated as the owner of the entire contract.
(ii) Special rule for certain arrangements—(A) In general. Notwithstanding paragraph (c)(1)(i) of this section—
(1) An employer or service recipient is treated as the owner of a life insurance contract under a split-dollar life insurance arrangement that is entered into in connection with the performance of services if, at all times, the only economic benefit that will be provided under the arrangement is current life insurance protection as described in paragraph (d)(3) of this section; and
(2) A donor is treated as the owner of a life insurance contract under a split-dollar life insurance arrangement that is entered into between a donor and a donee (for example, a life insurance trust) if, at all times, the only economic benefit that will be provided under the arrangement is current life insurance protection as described in paragraph (d)(3) of this section.
(B) Modifications. If an arrangement described in paragraph (c)(1)(ii)(A) of this section is modified such that the arrangement is no longer described in paragraph (c)(1)(ii)(A) of this section, the following rules apply:
(1) If, immediately after such modification, the employer, service recipient, or donor is the owner of the life insurance contract under the split-dollar life insurance arrangement (determined without regard to paragraph (c)(1)(ii)(A) of this section), the employer, service recipient, or donor continues to be treated as the owner of the life insurance contract.
(2) If, immediately after such modification, the employer, service recipient, or donor is not the owner of the life insurance contract under the split-dollar life insurance arrangement (determined without regard to paragraph (c)(1)(ii)(A) of this section), the employer, service recipient, or donor is treated as having made a transfer of the entire life insurance contract to the employee, service provider, or donee under the rules of paragraph (g) of this section as of the date of such modification.
(3) For purposes of this paragraph (c)(1)(ii)(B), entering into a successor split-dollar life insurance arrangement that has the effect of providing any economic benefit in addition to that described in paragraph (d)(3) of this section is treated as a modification of the prior split-dollar life insurance arrangement.
(iii) Attribution rules for compensatory arrangements. For purposes of this section, if a split-dollar life insurance arrangement is entered into in connection with the performance of services, the employer or service recipient is treated as the owner of the life insurance contract if the owner (within the meaning of paragraph (c)(1)(i) of this section) of the life insurance contract under the split-dollar life insurance arrangement is—
(A) A trust described in section 402(b);
(B) A trust that is treated as owned (within the meaning of sections 671 through 677) by the employer or the service recipient;
(C) A welfare benefit fund within the meaning of section 419(e)(1); or
(D) A member of the employer or service recipient's controlled group (within the meaning of section 414(b)) or a trade or business that is under common control with the employer or service recipient (within the meaning of section 414(c)).
(iv) Life insurance contracts owned by partnerships. [Reserved]
(2) Non-owner—(i) Definition. With respect to a life insurance contract, a non-owner is any person (other than the owner of such contract under paragraph (c)(1) of this section) that has any direct or indirect interest in such contract (but not including a life insurance company acting only in its capacity as the issuer of a life insurance contract).
(ii) Example. The following example illustrates the provisions of this paragraph (c)(2):
Example. (i) On January 1, 2009, Employer R and Trust T, an irrevocable life insurance trust that is not treated under sections 671 through 677 as owned by a grantor or other person, enter into a split-dollar life insurance arrangement in connection with the performance of services under which R will pay all the premiums on the life insurance contract until the termination of the arrangement or the death of E, an employee of R. C, the beneficiary of T, is E's child. R is the owner of the contract under paragraph (c)(1)(i) of this section. E is the insured under the life insurance contract. Upon termination of the arrangement or E's death, R is entitled to receive the lesser of the aggregate premiums or the policy cash value of the contract and T will be entitled to receive any remaining amounts. Under the terms of the arrangement and applicable state law, the policy cash value is fully accessible by R and R's creditors but T has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R.
(ii) Because E and T each have an indirect interest in the life insurance contract that is part of the split-dollar life insurance arrangement, each is a non-owner under paragraph (c)(2)(i) of this section. E and T each are provided economic benefits described in paragraph (d)(2) of this section pursuant to the split-dollar life insurance arrangement. Economic benefits are provided by owner R to E as a payment of compensation, and separately provided by E to T as a gift.
(3) Transfer of entire contract or undivided interest therein. A transfer of the ownership of a life insurance contract (or an undivided interest in such contract) that is part of a split-dollar life insurance arrangement occurs on the date that a non-owner becomes the owner (within the meaning of paragraph (c)(1) of this section) of the entire contract or of an undivided interest in the contract.
(4) Undivided interest. An undivided interest in a life insurance contract consists of an identical fractional or percentage interest or share in each right, benefit, and obligation with respect to the contract. In the case of any arrangement purporting to create undivided interests where, in substance, the rights, benefits or obligations are shared to any extent among the holders of such interests, the arrangement will be treated as a split-dollar life insurance arrangement.
(5) Employment tax. The term employment tax means any tax imposed by, or collected under, the Federal Insurance Contributions Act (FICA), the Federal Unemployment Tax Act (FUTA), the Railroad Retirement Tax Act (RRTA), and the Collection of Income Tax at Source on Wages.
(6) Self-employment tax. The term self-employment tax means the tax imposed by the Self-Employment Contributions Act of 1954 (SECA).
(d) Economic benefits provided under a split-dollar life insurance arrangement—(1) In general. In the case of a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section, economic benefits are treated as being provided to the non-owner of the life insurance contract. The non-owner (and the owner for gift and employment tax purposes) must take into account the full value of all economic benefits described in paragraph (d)(2) of this section, reduced by the consideration paid directly or indirectly by the non-owner to the owner for those economic benefits. Depending on the relationship between the owner and the non-owner, the economic benefits may constitute a payment of compensation, a distribution under section 301, a contribution to capital, a gift, or a transfer having a different tax character. Further, depending on the relationship between or among a non-owner and one or more other persons (including a non-owner or non-owners), the economic benefits may be treated as provided from the owner to the non-owner and as separately provided from the non-owner to such other person or persons (for example, as a payment of compensation from an employer to an employee and as a gift from the employee to the employee's child).
(2) Value of economic benefits. The value of the economic benefits provided to a non-owner for a taxable year under the arrangement equals—
(i) The cost of current life insurance protection provided to the non-owner as determined under paragraph (d)(3) of this section;
(ii) The amount of policy cash value to which the non-owner has current access within the meaning of paragraph (d)(4)(ii) of this section (to the extent that such amount was not actually taken into account for a prior taxable year); and
(iii) The value of any economic benefits not described in paragraph (d)(2)(i) or (ii) of this section provided to the non-owner (to the extent not actually taken into account for a prior taxable year).
(3) Current life insurance protection—(i) Amount of current life insurance protection. In the case of a split-dollar life insurance arrangement described in paragraph (d)(1) of this section, the amount of the current life insurance protection provided to the non-owner for a taxable year (or any portion thereof in the case of the first year or the last year of the arrangement) equals the excess of the death benefit of the life insurance contract (including paid-up additions thereto) over the total amount payable to the owner (including any outstanding policy loans that offset amounts otherwise payable to the owner) under the split-dollar life insurance arrangement, less the portion of the policy cash value actually taken into account under paragraph (d)(1) of this section or paid for by the non-owner under paragraph (d)(1) of this section for the current taxable year or any prior taxable year.
(ii) Cost of current life insurance protection. The cost of current life insurance protection provided to the non-owner for any year (or any portion thereof in the case of the first year or the last year of the arrangement) equals the amount of the current life insurance protection provided to the non-owner (determined under paragraph (d)(3)(i) of this section) multiplied by the life insurance premium factor designated or permitted in guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2)(ii) of this chapter).
(4) Policy cash value—(i) In general. For purposes of this paragraph (d), policy cash value is determined disregarding surrender charges or other similar charges or reductions. Policy cash value includes policy cash value attributable to paid-up additions.
(ii) Current access. For purposes of this paragraph (d), a non-owner has current access to that portion of the policy cash value—
(A) To which, under the arrangement, the non-owner has a current or future right; and
(B) That currently is directly or indirectly accessible by the non-owner, inaccessible to the owner, or inaccessible to the owner's general creditors.
(5) Valuation date—(i) General rules. For purposes of this paragraph (d), the amount of the current life insurance protection and the policy cash value shall be determined on the same valuation date. The valuation date is the last day of the non-owner's taxable year, unless the owner and non-owner agree to instead use the policy anniversary date as the valuation date. Notwithstanding the previous sentence, if the split-dollar life insurance arrangement terminates during the taxable year of the non-owner, the value of such economic benefits is determined on the day that the arrangement terminates.
(ii) Consistency requirement. The owner and non-owner of the split-dollar life insurance arrangement must use the same valuation date. In addition, the same valuation date must be used for all years prior to termination of the split-dollar life insurance arrangement unless the parties receive consent of the Commissioner to change the valuation date.
(iii) Artifice or device. Notwithstanding paragraph (d)(5)(i) of this section, if any artifice or device is used to understate the amount of any economic benefit on the valuation date in paragraph (d)(5)(i) of this section, then, for purposes of this paragraph (d), the date on which the amount of the economic benefit is determined is the date on which the amount of the economic benefit is greatest during that taxable year.
(iv) Special rule for certain taxes. For purposes of employment tax (as defined in paragraph (c)(5) of this section), self-employment tax (as defined in paragraph (c)(6) of this section), and sections 6654 and 6655 (relating to the failure to pay estimated income tax), the portions of the current life insurance protection and the policy cash value that are treated as provided by the owner to the non-owner shall be treated as so provided on the last day of the taxable year of the non-owner. Notwithstanding the previous sentence, if the split-dollar life insurance arrangement terminates during the taxable year of the non-owner, such portions of the current life insurance protection and the policy cash value shall be treated as so provided on the day that the arrangement terminates.
(6) Examples. The following examples illustrate the rules of this paragraph (d). Except as otherwise provided, both examples assume the following facts: employer (R) is the owner (as defined in paragraph (c)(1)(i) of this section) and employee (E) is the non-owner (as defined in paragraph (c)(2)(i) of this section) of a life insurance contract that is part of a split-dollar life insurance arrangement that is subject to the provisions of paragraphs (d) through (g) of this section; the contract is a life insurance contract as defined in section 7702 and not a modified endowment contract as defined in section 7702A; R does not withdraw or obtain a loan of any portion of the policy cash value and does not surrender any portion of the life insurance contract; the compensation paid to E is reasonable; E is not provided any economic benefits described in paragraph (d)(2)(iii) of this section; E does not make any premium payments; E's taxable year is the calendar year; the value of the economic benefits is determined on the last day of E's taxable year; and E reports on E's Federal income tax return for each year that the split-dollar life insurance arrangement is in effect the amount of income required to be reported under paragraph (d) of this section. The examples are as follows:
Example 1. (i) Facts. On January 1 of year 1, R and E enter into the split-dollar life insurance arrangement. Under the arrangement, R pays all of the premiums on the life insurance contract until the termination of the arrangement or E's death. The arrangement provides that upon termination of the arrangement or E's death, R is entitled to receive the lesser of the aggregate premiums paid or the policy cash value of the contract and E is entitled to receive any remaining amounts. Under the terms of the arrangement and applicable state law, the policy cash value is fully accessible by R and R's creditors but E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R. To fund the arrangement, R purchases a life insurance contract with constant death benefit protection equal to $1,500,000. R makes premium payments on the life insurance contract of $60,000 in each of years 1, 2, and 3. The policy cash value equals $55,000 as of December 31 of year 1, $140,000 as of December 31 of year 2, and $240,000 as of December 31 of year 3.
(ii) Analysis. Under the terms of the split-dollar life insurance arrangement, E has the right for year 1 and all subsequent years to borrow or withdraw the portion of the policy cash value exceeding the amount payable to R. Thus, under paragraph (d)(4)(ii) of this section, E has current access to such portion of the policy cash value for each year that the arrangement is in effect. In addition, because R pays all of the premiums on the life insurance contract, R provides to E all of the economic benefits that E receives under the arrangement. Therefore, under paragraph (d)(1) of this section, E includes in gross income the value of all economic benefits described in paragraphs (d)(2)(i) and (ii) of this section provided to E under the arrangement.
(iii) Results for year 1. For year 1, E is provided, under paragraph (d)(2)(ii) of this section, $0 of policy cash value (excess of $55,000 policy cash value determined as of December 31 of year 1 over $55,000 payable to R). For year 1, E is also provided, under paragraph (d)(2)(i) of this section, current life insurance protection of $1,445,000 ($1,500,000 minus $55,000 payable to R). Thus, E includes in gross income for year 1 the cost of $1,445,000 of current life insurance protection.
(iv) Results for year 2. For year 2, E is provided, under paragraph (d)(2)(ii) of this section, $20,000 of policy cash value ($140,000 policy cash value determined as of December 31 of year 2 minus $120,000 payable to R). For year 2, E is also provided, under paragraph (d)(2)(i) of this section, current life insurance protection of $1,360,000 ($1,500,000 minus the sum of $120,000 payable to R and the aggregate of $20,000 of policy cash value that E actually includes in income on E's year 1 and year 2 federal income tax returns). Thus, E includes in gross income for year 2 the sum of $20,000 of policy cash value and the cost of $1,360,000 of current life insurance protection.
(v) Results for year 3. For year 3, E is provided, under paragraph (d)(2)(ii) of this section, $40,000 of policy cash value ($240,000 policy cash value determined as of December 31 of year 3 minus the sum of $180,000 payable to R and $20,000 of aggregate policy cash value that E actually included in gross income on E's year 1 and year 2 federal income tax returns). For year 3, E is also provided, under paragraph (d)(2)(i) of this section, current life insurance protection of $1,260,000 ($1,500,000 minus the sum of $180,000 payable to R and $60,000 of aggregate policy cash value that E actually includes in gross income on E's year 1, year 2, and year 3 federal income tax returns). Thus, E includes in gross income for year 3 the sum of $40,000 of policy cash value and the cost of $1,260,000 of current life insurance protection.
Example 2. (i) Facts. The facts are the same as in Example 1 except that E cannot directly or indirectly access any portion of the policy cash value, but the terms of the split-dollar life insurance arrangement or applicable state law provide that the policy cash value in excess of the amount payable to R is inaccessible to R's general creditors.
(ii) Analysis. Under the terms of the split-dollar life insurance arrangement or applicable state law, the portion of the policy cash value exceeding the amount payable to R is inaccessible to R's general creditors and E has a current or future right to that portion of the cash value. Thus, under paragraph (d)(4)(ii) of this section, E has current access to such portion of the policy cash value for each year that the arrangement is in effect. In addition, because R pays all of the premiums on the life insurance contract, R provides to E all of the economic benefits that E receives under the arrangement. Therefore, under paragraph (d)(1) of this section, E includes in gross income the value of all economic benefits described in paragraphs (d)(2)(i) and (ii) of this section provided to E under the arrangement.
(iii) Results for years 1, 2 and 3. The results for this example are the same as the results in Example 1.
(e) Amounts received under the contract—(1) In general. Except as otherwise provided in paragraph (f)(3) of this section, any amount received under a life insurance contract that is part of a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section (including, but not limited to, a policy owner dividend, proceeds of a specified policy loan described in paragraph (e)(2) of this section, or the proceeds of a withdrawal from or partial surrender of the life insurance contract) is treated, to the extent provided directly or indirectly to a non-owner of the life insurance contract, as though such amount had been paid to the owner of the life insurance contract and then paid by the owner to the non-owner. The amount received is taxable to the owner in accordance with the rules of section 72. The non-owner (and the owner for gift tax and employment tax purposes) must take the amount described in paragraph (e)(3) of this section into account as a payment of compensation, a distribution under section 301, a contribution to capital, a gift, or other transfer depending on the relationship between the owner and the non-owner.
(2) Specified policy loan. A policy loan is a specified policy loan to the extent—
(i) The proceeds of the loan are distributed directly from the insurance company to the non-owner;
(ii) A reasonable person would not expect that the loan will be repaid by the non-owner; or
(iii) The non-owner's obligation to repay the loan to the owner is satisfied or is capable of being satisfied upon repayment by either party to the insurance company.
(3) Amount required to be taken into account. With respect to a non-owner (and the owner for gift tax and employment tax purposes), the amount described in this paragraph (e)(3) is equal to the excess of—
(i) The amount treated as received by the owner under paragraph (e)(1) of this section; over
(ii) The amount of all economic benefits described in paragraphs (d)(2)(ii) and (iii) of this section actually taken into account by the non-owner (and the owner for gift tax and employment tax purposes) plus any consideration described in paragraph (d)(1) of this section paid by the non-owner for such economic benefits described in paragraphs (d)(2)(ii) and (iii) of this section. The amount determined under the preceding sentence applies only to the extent that neither this paragraph (e)(3)(ii) nor paragraph (g)(1)(ii) of this section previously has applied to such economic benefits.
(f) Other tax consequences—(1) Introduction. In the case of a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section, this paragraph (f) sets forth other tax consequences to the owner and non-owner of a life insurance contract that is part of the arrangement for the period prior to the transfer (as defined in paragraph (c)(3) of this section) of the contract (or an undivided interest therein) from the owner to the non-owner. See paragraph (g) of this section and § 1.83-6(a)(5) for tax consequences upon the transfer of the contract (or an undivided interest therein).
(2) Investment in the contract—(i) To the non-owner. A non-owner does not receive any investment in the contract under section 72(e)(6) with respect to a life insurance contract that is part of a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section.
(ii) To owner. Any premium paid by an owner under a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section is included in the owner's investment in the contract under section 72(e)(6). No premium or amount described in paragraph (d) of this section is deductible by the owner (except as otherwise provided in § 1.83-6(a)(5)). Any amount paid by a non-owner, directly or indirectly, to the owner of the life insurance contract for current life insurance protection or for any other economic benefit under the life insurance contract is included in the owner's gross income and is included in the owner's investment in the life insurance contract for purposes of section 72(e)(6) (but only to the extent not otherwise so included by reason of having been paid by the owner as a premium or other consideration for the contract).
(3) Treatment of death benefit proceeds—(i) Death benefit proceeds to beneficiary (other than the owner). Any amount paid to a beneficiary (other than the owner) by reason of the death of the insured is excluded from gross income by such beneficiary under section 101(a) as an amount received under a life insurance contract to the extent such amount is allocable to current life insurance protection provided to the non-owner pursuant to the split-dollar life insurance arrangement, the cost of which was paid by the non-owner, or the value of which the non-owner actually took into account pursuant to paragraph (d)(1) of this section.
(ii) Death benefit proceeds to owner as beneficiary. Any amount paid or payable to an owner in its capacity as a beneficiary by reason of the death of the insured is excluded from gross income of the owner under section 101(a) as an amount received under a life insurance contract to the extent such amount is not allocable to current life insurance protection provided to the non-owner pursuant to the split-dollar life insurance arrangement, the cost of which was paid by the non-owner, or the value of which the non-owner actually took into account pursuant to paragraph (d)(1) of this section.
(iii) Transfers of death benefit proceeds. Death benefit proceeds paid to a party to a split-dollar life insurance arrangement (or the estate or beneficiary of that party) that are not excludable from that party's income under section 101(a) to the extent provided in paragraph (f)(3)(i) or (ii) of this section, are treated as transferred to that party in a separate transaction. The death benefit proceeds treated as so transferred will be taxed in a manner similar to other transfers. For example, if death benefit proceeds paid to an employee, the employee's estate, or the employee's beneficiary are not excludable from the employee's gross income under section 101(a) to the extent provided in paragraph (f)(3)(i) of this section, then such payment is treated as a payment of compensation by the employer to the employee.
(g) Transfer of entire contract or undivided interest therein—(1) In general. Upon a transfer within the meaning of paragraph (c)(3) of this section of a life insurance contract (or an undivided interest therein) to a non-owner (transferee), the transferee (and the owner (transferor) for gift tax and employment tax purposes) takes into account the excess of the fair market value of the life insurance contract (or the undivided interest therein) transferred to the transferee at that time over the sum of—
(i) The amount the transferee pays to the transferor to obtain the contract (or the undivided interest therein); and
(ii) The amount of all economic benefits described in paragraph (d)(2)(ii) and (iii) of this section actually taken into account by the transferee (and the transferor for gift tax and employment tax purposes), plus any consideration described in paragraph (d)(1) of this section paid by the transferee for such economic benefits described in paragraphs (d)(2)(ii) and (iii) of this section. The amount determined under the preceding sentence applies only to the extent that neither this paragraph (g)(1)(ii) nor paragraph (e)(3)(ii) of this section previously has applied to such economic benefits.
(2) Determination of fair market value. For purposes of paragraph (g)(1) of this section, the fair market value of a life insurance contract is the policy cash value and the value of all other rights under such contract (including any supplemental agreements thereto and whether or not guaranteed), other than the value of current life insurance protection. Notwithstanding the preceding sentence, the fair market value of a life insurance contract for gift tax purposes is determined under § 25.2512-6(a) of this chapter.
(3) Exception for certain transfers in connection with the performance of services. To the extent the ownership of a life insurance contract (or undivided interest in such contract) is transferred in connection with the performance of services, paragraph (g)(1) of this section does not apply until such contract (or undivided interest in such contract) is taxable under section 83. For purposes of paragraph (g)(1) of this section, fair market value is determined disregarding any lapse restrictions and at the time the transfer of such contract (or undivided interest in such contract) is taxable under section 83.
(4) Treatment of non-owner after transfer—(i) In general. After a transfer of an entire life insurance contract (except when such transfer is in connection with the performance of services and the transfer is not yet taxable under section 83), the person who previously had been the non-owner is treated as the owner of such contract for all purposes, including for purposes of paragraph (b) of this section and for purposes of § 1.61-2(d)(2)(ii)(A). After the transfer of an undivided interest in a life insurance contract (or, if later, at the time such transfer is taxable under section 83), the person who previously had been the non-owner is treated as the owner of a separate contract consisting of that interest for all purposes, including for purposes of paragraph (b) of this section and for purposes of § 1.61-2(d)(2)(ii)(A).
(ii) Investment in the contract after transfer—(A) In general. The amount treated as consideration paid to acquire the contract under section 72(g)(1), in order to determine the aggregate premiums paid by the transferee for purposes of section 72(e)(6)(A) after the transfer (or, if later, at the time such transfer is taxable under section 83), equals the greater of the fair market value of the contract or the sum of the amounts determined under paragraphs (g)(1)(i) and (ii) of this section.
(B) Transfers between a donor and a donee. In the case of a transfer of a contract between a donor and a donee, the amount treated as consideration paid by the transferee to acquire the contract under section 72(g)(1), in order to determine the aggregate premiums paid by the transferee for purposes of section 72(e)(6)(A) after the transfer, equals the sum of the amounts determined under paragraphs (g)(1)(i) and (ii) of this section except that—
(1) The amount determined under paragraph (g)(1)(i) of this section includes the aggregate of premiums or other consideration paid or deemed to have been paid by the transferor; and
(2) The amount of all economic benefits determined under paragraph (g)(1)(ii) of this section actually taken into account by the transferee does not include such benefits to the extent such benefits were excludable from the transferee's gross income at the time of receipt.
(C) Transfers of an undivided interest in a contract. If a portion of a contract is transferred to the transferee, then the amount to be included as consideration paid to acquire the contract is determined by multiplying the amount determined under paragraph (g)(4)(ii)(A) of this section (as modified by paragraph (g)(4)(ii)(B) of this section, if the transfer is between a donor and a donee) by a fraction, the numerator of which is the fair market value of the portion transferred and the denominator of which is the fair market value of the entire contract.
(D) Example. The following example illustrates the rules of this paragraph (g)(4)(ii):
Example. (i) In year 1, donor D and donee E enter into a split-dollar life insurance arrangement as defined in paragraph (b)(1) of this section. D is the owner of the life insurance contract under paragraph (c)(1) of this section. The life insurance contract is not a modified endowment contract as defined in section 7702A. In year 5, D gratuitously transfers the contract, within the meaning of paragraph (c)(3) of this section, to E. At the time of the transfer, the fair market value of the contract is $200,000 and D had paid $50,000 in premiums under the arrangement. In addition, by the time of the transfer, E had current access to $80,000 of policy cash value which was excludable from E's gross income under section 102.
(ii) E's investment in the contract is $50,000, consisting of the $50,000 of premiums paid by D. The $80,000 of policy cash value to which E had current access is not included in E's investment in the contract because such amount was excludable from E's gross income when E had current access to that policy cash value.
(iii) No investment in the contract for current life insurance protection. Except as provided in paragraph (g)(4)(ii)(B) of this section, no amount allocable to current life insurance protection provided to the transferee (the cost of which was paid by the transferee or the value of which was provided to the transferee) is treated as consideration paid to acquire the contract under section 72(g)(1) to determine the aggregate premiums paid by the transferee for purposes of determining the transferee's investment in the contract under section 72(e) after the transfer.
(h) Examples. The following examples illustrate the rules of this section. Except as otherwise provided, each of the examples assumes that the employer (R) is the owner (as defined in paragraph (c)(1) of this section) of a life insurance contract that is part of a split-dollar life insurance arrangement subject to the rules of paragraphs (d) through (g) of this section, that the employee (E) is not provided any economic benefits described in paragraph (d)(2)(iii) of this section, that the life insurance contract is not a modified endowment contract under section 7702A, that the compensation paid to E is reasonable, and that E makes no premium payments. The examples are as follows:
Example 1. (i) In year 1, R purchases a life insurance contract on the life of E. R is named as the policy owner of the contract. R and E enter into an arrangement under which R will pay all the premiums on the life insurance contract until the termination of the arrangement or E's death. Upon termination of the arrangement or E's death, R is entitled to receive the greater of the aggregate premiums or the policy cash value of the contract. The balance of the death benefit will be paid to a beneficiary designated by E.
(ii) Because R is designated as the policy owner of the contract, R is the owner of the contract under paragraph (c)(1)(i) of this section. In addition, R would be treated as the owner of the contract regardless of whether R were designated as the policy owner under paragraph (c)(1)(i) of this section because the split-dollar life insurance arrangement is described in paragraph (c)(1)(ii)(A)(1) of this section. E is a non-owner of the contract. Under the arrangement between R and E, a portion of the death benefit is payable to a beneficiary designated by E. The arrangement is a split-dollar life insurance arrangement under paragraph (b)(1) or (2) of this section. Because R pays all the premiums on the life insurance contract, R provides to E the entire amount of the current life insurance protection E receives under the arrangement. Therefore, for each year that the split-dollar life insurance arrangement is in effect, E must include in gross income under paragraph (d)(1) of this section the value of current life insurance protection described in paragraph (d)(2)(i) of this section provided to E in each year.
Example 2. (i) The facts are the same as in Example 1 except that, upon termination of the arrangement or E's death, R is entitled to receive the lesser of the aggregate premiums or the policy cash value of the contract. Under the terms of the arrangement and applicable state law, the policy cash value is fully accessible by R and R's creditors but E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R.
(ii) Because R is designated as the policy owner, R is the owner of the contract under paragraph (c)(1)(i) of this section. E is a non-owner of the contract. For each year that the split-dollar life insurance arrangement is in effect, E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R. Thus, under paragraph (d)(4)(ii) of this section, E has current access to such portion of the policy cash value for each year that the arrangement is in effect. In addition, because R pays all the premiums on the life insurance contract, R provides to E all the economic benefits that E receives under the arrangement. Therefore, for each year that the split-dollar life insurance arrangement is in effect, E must include in gross income under paragraph (d)(1) of this section, the value of all economic benefits described in paragraph (d)(2)(i) and (ii) of this section provided to E in each year.
Example 3. (i) The facts are the same as in Example 1 except that in year 5, R and E modify the split-dollar life insurance arrangement to provide that, upon termination of the arrangement or E's death, R is entitled to receive the greater of the aggregate premiums or one-half the policy cash value of the contract. Under the terms of the modified arrangement and applicable state law, the policy cash value is fully accessible by R and R's creditors but E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R.
(ii) For each year that the split-dollar life insurance arrangement is in effect, E must include in gross income under paragraph (d)(1) of this section the value of the economic benefits described in paragraph (d)(2)(i) of this section provided to E under the arrangement during that year. In year 5 (and subsequent years), E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the amount payable to R. Thus, under paragraph (d)(4)(ii) of this section, E has current access to such portion of the policy cash value. Thus, in year 5 (and each subsequent year), E must also include in gross income under paragraph (d)(1) of this section the value of the economic benefits described in paragraph (d)(2)(ii) of this section provided to E in each year.
(iii) The arrangement is not described in paragraph (c)(1)(ii)(A)(1) of this section after it is modified in year 5. Because R is the designated owner of the life insurance contract, R continues to be treated as the owner of the contract under paragraph (c)(1)(ii)(B)(1) of this section after the arrangement is modified. In addition, because the modification made by R and E in year 5 does not involve the transfer (within the meaning of paragraph (c)(3) of this section) of an undivided interest in the life insurance contract from R to E, the modification is not a transfer for purposes of paragraph (g) of this section.
Example 4. (i) The facts are the same as in Example 2 except that in year 7, R and E modify the split-dollar life insurance arrangement to provide that, upon termination of the arrangement or E's death, R will be paid the lesser of 80 percent of the aggregate premiums or the policy cash value of the contract. Under the terms of the modified arrangement and applicable state law, the policy cash value is fully accessible by R and R's creditors but E has the right to borrow or withdraw at any time the portion of the policy cash value exceeding the lesser of 80 percent of the aggregate premiums paid by R or the policy cash value of the contract.
(ii) Commencing in year 7 (and in each subsequent year), E must include in gross income the economic benefits described in paragraph (d)(2)(ii) of this section as provided in this Example 4(ii) rather than as provided in Example 2(ii). Thus, in year 7 (and in each subsequent year) E must include in gross income under paragraph (d) of this section, the excess of the policy cash value over the lesser of 80 percent of the aggregate premiums paid by R or the policy cash value of the contract (to the extent E did not actually include such amounts in gross income for a prior taxable year). In addition, in year 7 (and each subsequent year) E must also include in gross income the value of the economic benefits described in paragraph (d)(2)(i) of this section provided to E under the arrangement in each such year.
Example 5. (i) The facts are the same as in Example 3 except that in year 7, E is designated as the policy owner. At that time, E's rights to the contract are substantially vested as defined in § 1.83-3(b).
(ii) In year 7, R is treated as having made a transfer (within the meaning of paragraph (c)(3) of this section) of the life insurance contract to E. E must include in gross income the amount determined under paragraph (g)(1) of this section.
(iii) After the transfer of the contract to E, E is the owner of the contract and any premium payments by R will be included in E's income under paragraph (b)(5) of this section and § 1.61-2(d)(2)(ii)(A) (unless R's payments are split-dollar loans as defined in § 1.7872-15(b)(1)).
Example 6. (i) In year 1, E and R enter into a split-dollar life insurance arrangement as defined in paragraph (b)(2) of this section. Under the arrangement, R is required to make annual premium payments of $10,000 and E is required to make annual premium payments of $500. In year 5, a $500 policy owner dividend payable to E is declared by the insurance company. E directs the insurance company to use the $500 as E's premium payment for year 5.
(ii) For each year the arrangement is in effect, E must include in gross income the value of the economic benefits provided during the year, as required by paragraph (d)(2) of this section, over the $500 premium payments paid by E. In year 5, E must also include in gross income as compensation the excess, if any, of the $500 distributed to E from the proceeds of the policy owner dividend over the amount determined under paragraph (e)(3)(ii) of this section.
(iii) R must include in income the premiums paid by E during the years the split-dollar life insurance arrangement is in effect, including the $500 of the premium E paid in year 5 with proceeds of the policy owner dividend. R's investment in the contract is increased in an amount equal to the premiums paid by E, including the $500 of the premium paid by E in year 5 from the proceeds of the policy owner dividend. In year 5, R is treated as receiving a $500 distribution under the contract, which is taxed pursuant to section 72.
Example 7. (i) The facts are the same as in Example 2 except that in year 10, E withdraws $100,000 from the cash value of the contract.
(ii) In year 10, R is treated as receiving a $100,000 distribution from the insurance company. This amount is treated as an amount received by R under the contract and taxed pursuant to section 72. This amount reduces R's investment in the contract under section 72(e). R is treated as paying the $100,000 to E as cash compensation, and E must include that amount in gross income less any amounts determined under paragraph (e)(3)(ii) of this section.
Example 8. (i) The facts are the same as in Example 7 except E receives the proceeds of a $100,000 specified policy loan directly from the insurance company.
(ii) The transfer of the proceeds of the specified policy loan to E is treated as a loan by the insurance company to R. Under the rules of section 72(e), the $100,000 loan is not included in R's income and does not reduce R's investment in the contract. R is treated as paying the $100,000 of loan proceeds to E as cash compensation. E must include that amount in gross income less any amounts determined under paragraph (e)(3)(ii) of this section.
(i) [Reserved]
(j) Effective date—(1) General rule—(i) In general. This section applies to any split-dollar life insurance arrangement (as defined in paragraph (b)(1) or (2) of this section) entered into after September 17, 2003.
(ii) Determination of when an arrangement is entered into. For purposes of paragraph (j) of this section, a split-dollar life insurance arrangement is entered into on the latest of the following dates:
(A) The date on which the life insurance contract under the arrangement is issued;
(B) The effective date of the life insurance contract under the arrangement;
(C) The date on which the first premium on the life insurance contract under the arrangement is paid;
(D) The date on which the parties to the arrangement enter into an agreement with regard to the policy; or
(E) The date on which the arrangement satisfies the definition of a split-dollar life insurance arrangement (as defined in paragraph (b)(1) or (2) of this section).
(2) Modified arrangements treated as new arrangements—(i) In general. For purposes of paragraph (j)(1) of this section, if an arrangement entered into on or before September 17, 2003 is materially modified after September 17, 2003, the arrangement is treated as a new arrangement entered into on the date of the modification.
(ii) Non-material modifications. The following is a non-exclusive list of changes that are not material modifications under paragraph (j)(2)(i) of this section (either alone or in conjunction with other changes listed in paragraphs (j)(2)(ii)(A) through (I) of this section)—
(A) A change solely in the mode of premium payment (for example, a change from monthly to quarterly premiums);
(B) A change solely in the beneficiary of the life insurance contract, unless the beneficiary is a party to the arrangement;
(C) A change solely in the interest rate payable under the life insurance contract on a policy loan;
(D) A change solely necessary to preserve the status of the life insurance contract under section 7702;
(E) A change solely to the ministerial provisions of the life insurance contract (for example, a change in the address to send payment);
(F) A change made solely under the terms of any agreement (other than the life insurance contract) that is a part of the split-dollar life insurance arrangement if the change is non-discretionary by the parties and is made pursuant to a binding commitment (whether set forth in the agreement or otherwise) in effect on or before September 17, 2003;
(G) A change solely in the owner of the life insurance contract as a result of a transaction to which section 381(a) applies and in which substantially all of the former owner's assets are transferred to the new owner of the policy;
(H) A change to the policy solely if such change is required by a court or a state insurance commissioner as a result of the insolvency of the insurance company that issued the policy; or
(I) A change solely in the insurance company that administers the policy as a result of an assumption reinsurance transaction between the issuing insurance company and the new insurance company to which the owner and the non-owner were not a party.
(iii) Delegation to Commissioner. The Commissioner, in revenue rulings, notices, and other guidance published in the Internal Revenue Bulletin, may provide additional guidance with respect to other modifications that are not material for purposes of paragraph (j)(2)(i) of this section. See § 601.601(d)(2)(ii) of this chapter.
[T.D. 9092, 68 FR 54344, Sept. 17, 2003; 68 FR 63735, Nov. 10, 2003]
§ 1.62-1 Adjusted gross income.
(a)-(b) [Reserved]
(c) Deductions allowable in computing adjusted gross income. The deductions specified in section 62(a) for purposes of computing adjusted gross income are—
(1) Deductions set forth in § 1.62-1T(c); and
(2) Deductions allowable under part VI, subchapter B, chapter 1 of the Internal Revenue Code, (section 161 and following) that consist of expenses paid or incurred by the taxpayer in connection with the performance of services as an employee under a reimbursement or other expense allowance arrangement (as defined in § 1.62-2) with his or her employer. For the rules pertaining to expenses paid or incurred in taxable years beginning before January 1, 1989, see § 1.62-1T (c)(2) and (f) (as contained in 26 CFR part 1 (§§ 1.61 to 1.169) revised April 1, 1992).
(d)-(h) [Reserved]
(i) Effective date. Paragraph (c) of this section is effective for taxable years beginning on or after January 1, 1989.
[T.D. 8451, 57 FR 57668, Dec. 7, 1992; 57 FR 60568, Dec. 21, 1992]
§ 1.62-1T Adjusted gross income (temporary).
(a) Basis for determining the amount of certain deductions. The term “adjusted gross income” means the gross income computed under section 61 minus such of the deductions allowed by chapter 1 of the Code as are specified in section 62(a). Adjusted gross income is used as the basis for determining the following:
(1) The limitation on the amount of miscellaneous itemized deductions (under section 67).
(2) The limitation on the amount of the deduction for casualty losses (under section 165(h)(2)),
(3) The limitation on the amount of the deduction for charitable contributions (under section 170(b)(1)),
(4) The limitation on the amount of the deduction for medical and dental expenses (under section 213),
(5) The limitation on the amount of the deduction for qualified retirement contributions for active participants in certain pension plans (under section 219(g)), and
(6) The phase-out of the exemption from the disallowance of passive activity losses and credits (under section 469(i)(3)).
(b) Double deduction not permitted. Section 62 (a) merely specifies which of the deductions provided in chapter 1 of the Code shall be allowed in computing adjusted gross income. It does not create any new deductions. The fact that a particular item may be described in more than one of the paragraphs under section 62(a) does not permit the item to be deducted twice in computing adjusted gross income or taxable income.
(c) Deductions allowable in computing adjusted gross income. The deductions specified in section 62(a) for purposes of computing adjusted gross income are:
(1) Deductions allowable under chapter 1 of the Code (other than by part VII (section 211 and following), subchapter B of such chapter) that are attributable to a trade or business carried on by the taxpayer not consisting of services performed as an employee;
(2) [Reserved]
(3) For taxable years beginning after December 31, 1986, deductions allowable under section 162 that consist of expenses paid or incurred by a qualified performing artist (as defined in section 62(b)) in connection with the performance by him or her of services in the performing arts as an employee;
(4) Deductions allowable under part VI as losses from the sale or exchange of property;
(5) Deductions allowable under part VI, section 212, or section 611 that are attributable to property held for the production of rents or royalties;
(6) Deductions for depreciation or depletion allowable under sections 167 or 611 to a life tenant of property or to an income beneficiary of property held in trust or to an heir, legatee, or devisee of an estate;
(7) Deductions allowed by section 404 for contributions on behalf of a self-employed individual;
(8) Deductions allowed by section 219 for contributions to an individual retirement account described in section 408(a), or for an individual retirement annuity described in section 408(b);
(9) Deductions allowed by section 402(e)(3) with respect to a lump-sum distribution;
(10) For taxable years beginning after December 31, 1972, deductions allowed by section 165 for losses incurred in any transaction entered into for profit though not connected with a trade or business, to the extent that such losses include amounts forfeited to a bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank or homestead association as a penalty for premature withdrawal of funds from a time savings account, certificate of deposit, or similar class of deposit;
(11) For taxable years beginning after December 31, 1976, deductions for alimony and separate maintenance payments allowed by section 215;
(12) Deductions allowed by section 194 for the amortization of reforestation expenditures; and
(13) Deductions allowed by section 165 for the repayment (made in a taxable year beginning after December 28, 1980) to a trust described in paragraph (9) or (17) of section 501(c) of supplemental unemployment compensation benefits received from such trust if such repayment is required because of the receipt of trade readjustment allowances under section 231 or 232 of the Trade Act of 1974 (19 U.S.C. 2291 and 2292).
(d) Expenses directly related to a trade or business. For the purpose of the deductions specified in section 62, the performance of personal services as an employee does not constitute the carrying on of a trade or business, except as otherwise expressly provided. The practice of a profession, not as an employee, is considered the conduct of a trade or business within the meaning of such section. To be deductible for the purposes of determining adjusted gross income, expenses must be those directly, and not those merely remotely, connected with the conduct of a trade or business. For example, taxes are deductible in arriving at adjusted gross income only if they constitute expenditures directly attributable to a trade or business or to property from which rents or royalties are derived. Thus, property taxes paid or incurred on real property used in a trade or business are deductible, but state taxes on net income are not deductible even though the taxpayer's income is derived from the conduct of a trade or business.
(e) Reimbursed and unreimbursed employee expenses—(1) In general. Expenses paid or incurred by an employee that are deductible from gross income under part VI in computing taxable income (determined without regard to section 67) and for which the employee is reimbursed by the employer, its agent, or third party (for whom the employee performs a benefit as an employee of the employer) under an express agreement for reimbursement or pursuant to an express expense allowance arrangement may be deducted from gross income in computing adjusted gross income. Except as provided in paragraphs (e)(2) and (e)(4) of this section, for taxable years beginning after December 31, 1986, if the amount of a reimbursement made by an employer, its agent, or third party to an employee is less than the total amount of the business expenses paid or incurred by the employee, the determination of to which of the employee's business expenses the reimbursement applies and the amount of each expense that is covered by the reimbursement is made on the basis of all of the facts and circumstances of the particular case.
(2) Facts and circumstances unclear on business expenses for meals and entertainment. If—
(i) The facts and circumstances do not make clear—
(A) That a reimbursement does not apply to business expenses for meals or entertainment, or
(B) The amount of business expenses for meals or entertainment that is covered by the reimbursement, and
(ii) The employee pays or incurs business expenses for meals or entertainment,
the amount of the reimbursement that applies to such expenses (or portion thereof with respect to which the facts and circumstances are unclear) shall be determined by multiplying the amount of the employee's business expenses for meals and entertainment (or portion thereof with respect to which the facts and circumstances are unclear) by a fraction, the numerator of which is the total amount of the reimbursement (or portion thereof with respect to which the facts and circumstances are unclear) and the denominator of which is the aggregate amount of all the business expenses of the employee (or portion thereof with respect to which the facts and circumstances are unclear).
(3) Deductibility of unreimbursed expenses. The amount of expenses that is determined not to be reimbursed pursuant to paragraph (e) (1) or (2) of this section is deductible from adjusted gross income in determining the employee's taxable income subject to the limitations applicable to such expenses (e.g., the 2-percent floor of section 67 and the 80-percent limitation on meal and entertainment expenses provided for in section 274(n)).
(4) Unreimbursed expenses of State legislators. For taxable years beginning after December 31, 1986, any portion of the amount allowed as a deduction to State legislators pursuant to section 162(h)1)(B) that is not reimbursed by the State or a third party shall be allocated between lodging and meals in the same ratio as the amounts allowable for lodging and meals under the Federal per diem applicable to the legislator's State capital at the end of the legislator's taxable year (see Appendix 1-A of the Federal Travel Regulations (FTR), which as of March 28, 1988, are contained in GSA Bulletin FPMR A-40, Supplement 20). For purposes of this paragraph (e)(4), the amount allowable for meals under the Federal per diem shall be the amount of the Federal per diem allowable for meals and incidental expenses reduced by $2 per legislative day (or other amount allocated to incidental expenses in 1-7.5(a)(2) of the FTR). The unreimbursed portion of each type of expense is deductible from adjusted gross income in determining the State legislator's taxable income subject to the limitations applicable to such expenses. For example, the unreimbursed portion allocable to meals shall be reduced by 20 percent pursuant to section 274(n) before being subjected to the 2-percent floor of section 67 for purposes of computing the taxable income of a State legislator. See § 1.67-1T(a)(2).
(5) Expenses paid directly by an employer, its agent, or third party. In the case of an employer, its agent, or a third party who provides property or services to an employee or who pays an employee's expenses directly instead of reimbursing the employee, see section 132 and the regulations thereunder for the income tax treatment of such expenses.
(6) Examples. The provisions of this paragraph (e) may be illustrated by the following examples:
Example 1.During 1987, A, an employee, while on business trips away from home pays $300 for travel fares, $200 for lodging and $100 for meals. In addition, A pays $50 for business meals in the area of his place of employment (“local meals”), $250 for continuing education courses, and $100 for business-related entertainment (other than meals). The total amount of the reimbursements received by A for his employee expenses from his employer is $750, and it is assumed that A's expenses meet the deductibility requirements of sections 162 and 274. A includes the amount of the reimbursement in his gross income. A's employer designates the reimbursement to cover in full A's expenses for travel fares, lodging, and meals while away from home, local meals, and entertainment, and no facts or circumstances indicate a contrary intention of the employer. Because the facts and circumstances make clear the amount of A's business expenses for meals and entertainment that is covered by the reimbursement, the reimbursement will be allocated to these expenses. In determining his adjusted gross income under section 62, A may deduct the full amount of the reimbursement for travel fares, lodging, and meals while away from home, local meals, and entertainment. In determining his taxable income under section 63, A may deduct his expenses for continuing education courses to the extent allowable by sections 67 and 162.
Example 2.Assume the facts are the same as in example (1) except that the facts and circumstances make clear that the reimbursement covers all types of deductible expenses but they do not make clear the amount of each type of expense that is covered by the reimbursement. The amount of the reimbursement that is allocated to A's business expenses for meals and entertainment is $187.50. This amount is determined by multiplying the total amount of A's business expenses for meals and entertainment ($250) by the ratio of A's total reimbursement to A's total business expenses ($750/$1,000). The remaining amount of the reimbursement, $562.50 ($750−$187.50), is allocated to A's business expenses other than meal and entertainment expenses. Therefore, in determining his adjusted gross income under section 62, A may deduct $750 for reimbursed business expenses (including meals and entertainment). In determining his taxable income under section 63, A may deduct (subject to the limitations and conditions of sections 67, 162, and 274) the unreimbursed portion of his expenses for meals and entertainment ($62.50 ($250−$187.50), and other employee business expenses ($187.50 ($750−$562.50)).
Example 3.Assume the facts are the same as in example (1) except that the amount of the reimbursement is $500. Assume further that the facts and circumstances make clear that the reimbursement covers $100 of expenses for meals and that the remaining $400 of the reimbursement covers all types of deductible expenses (including any expenses for meals in excess of the $100 already designated) other than expenses for entertainment. The amount of the reimbursement that is allocated to A's business expenses for meals and entertainment is $125. This amount is equal to the sum of the amount of the reimbursement that clearly applies to meals ($100) and the amount of the reimbursement with respect to which the facts are unclear that is allocated to meals ($25). The latter amount is determined by multiplying the total amount of A's business expenses for meals and entertainment with respect to which the facts are unclear ($50) by the ratio of A's total reimbursement with respect to which the facts are unclear to A's total business expenses with respect to which the facts are unclear ($400/$800). The remaining amount of the reimbursement, $375 ($500−$125) is allocated to A's business expenses other than meals and entertainment. Therefore, in determining his adjusted gross income under section 62, A may deduct $500 for reimbursed business expenses (including meals). In determining his taxable income under section 63, A may deduct (subject to the limitations and conditions of sections 67, 162, and 274) the unreimbursed portion of his expenses for meals ($25 ($150−$125)), entertainment ($100), and other employee business expenses ($375 ($750−$375)).
Example 4.During 1987 B, a research scientist, is employed by Corporation X. B gives a speech before members of Association Y, a professional organization of scientists, describing her most recent research findings. Pursuant to a reimbursement arrangement, Y reimburses B for the full amount of her travel fares to the site of the speech and for the full amount of her expenses for lodging and meals while there. B includes the amount of the reimbursement in her gross income. B may deduct the full amount of her travel expenses pursuant to section 62(a)(2)(A) in computing her adjusted gross income.
(f) [Reserved]
(g) Moving expenses. For taxable years beginning after December 31, 1986, a taxpayer described in section 217(a) shall not take into account the deduction described in section 217 relating to moving expenses in computing adjusted gross income under section 62 even if the taxpayer is reimbursed for his or her moving expenses. Such a taxpayer shall include the amount of any reimbursement for moving expenses in income pursuant to section 82. The deduction described in section 217 shall be taken into account in computing the taxable income of the taxpayer under section 63. Pursuant to section 67(b)(6), the 2-percent floor described in section 67(a) does not apply to moving expenses.
(h) Cross-reference. See 26 CFR 1.62-1 (Rev. as of April 1, 1986) with respect to pre-1987 deductions for travel, meal, lodging, transportation, and other trade or business expenses of an employee, reimbursed expenses of an employee, expenses of an outside salesperson, long-term capital gains, contributions described in section 405(c) to a bond purchase plan on behalf of a self-employed individual, moving expenses, amounts not received as benefits pursuant to section 1379(b)(3), and retirement bonds described in section 409 (allowed by section 219).
[T.D. 8189, 53 FR 9873, Mar. 28, 1988, as amended by T.D. 8276, 54 FR 51024, Dec. 12, 1989; T.D. 8324, 55 FR 51691, Dec. 17, 1990; T.D. 8451, 57 FR 57668, Dec. 7, 1992]
§ 1.62-2 Reimbursements and other expense allowance arrangements.
(a) Table of contents. The contents of this section are as follows:
(a) Table of contents.
(b) Scope.
(c) Reimbursement or other expense allowance arrangement.
(1) Defined.
(2) Accountable plans.
(i) In general.
(ii) Special rule for failure to return excess.
(3) Nonaccountable plans.
(i) In general.
(ii) Special rule for failure to return excess.
(4) Treatment of payments under accountable plans.
(5) Treatment of payments under nonaccountable plans.
(d) Business connection.
(1) In general.
(2) Other bona fide expenses.
(3) Reimbursement requirement.
(i) In general.
(ii) Per diem allowances.
(e) Substantiation.
(1) In general.
(2) Expenses governed by section 274(d).
(3) Expenses not governed by section 274(d).
(f) Returning amounts in excess of expenses.
(1) In general.
(2) Per diem or mileage allowances.
(g) Reasonable period.
(1) In general.
(2) Safe harbors.
(i) Fixed date method.
(ii) Periodic payment method.
(3) Pattern of overreimbursements.
(h) Withholding and payment of employment taxes.
(1) When excluded from wages.
(2) When included in wages.
(i) Accountable plans.
(A) General rule.
(B) Per diem or mileage allowances.
(1) In general.
(2) Reimbursements.
(3) Advances.
(4) Special rules.
(ii) Nonaccountable plans.
(i) Application.
(j) Examples.
(k) Anti-abuse provision.
(l) Cross references.
(m) Effective dates.
(b) Scope. For purposes of determining “adjusted gross income,” section 62(a)(2)(A) allows an employee a deduction for expenses allowed by part VI (section 161 and following), subchapter B, chapter 1 of the Code, paid by the employee, in connection with the performance of services as an employee of the employer, under a reimbursement or other expense allowance arrangement with a payor (the employer, its agent, or a third party). Section 62(c) provides that an arrangement will not be treated as a reimbursement or other expense allowance arrangement for purposes of section 62(a)(2)(A) if—
(1) Such arrangement does not require the employee to substantiate the expenses covered by the arrangement to the payor, or
(2) Such arrangement provides the employee the right to retain any amount in excess of the substantiated expenses covered under the arrangement.
This section prescribes rules relating to the requirements of section 62(c).
(c) Reimbursement or other expense allowance arrangement—(1) Defined. For purposes of §§ 1.62-1, 1.62-1T, and 1.62-2, the phrase “reimbursement or other expense allowance arrangement” means an arrangement that meets the requirements of paragraphs (d) (business connection, (e) (substantiation), and (f) (returning amounts in excess of expenses) of this section. A payor may have more than one arrangement with respect to a particular employee, depending on the facts and circumstances. See paragraph (d)(2) of this section (payor treated as having two arrangements under certain circumstances).
(2) Accountable plans—(i) In general. Except as provided in paragraph (c)(2)(ii) of this section, if an arrangement meets the requirements of paragraphs (d), (e), and (f) of this section, all amounts paid under the arrangement are treated as paid under an “accountable plan.”
(ii) Special rule for failure to return excess. If an arrangement meets the requirements of paragraphs (d), (e), and (f) of this section, but the employee fails to return, within a reasonable period of time, any amount in excess of the amount of the expenses substantiated in accordance with paragraph (e) of this section, only the amounts paid under the arrangement that are not in excess of the substantiated expenses are treated as paid under an accountable plan.
(3) Nonaccountable plans—(i) In general. If an arrangement does not satisfy one or more of the requirements of paragraphs (d), (e), or (f) of this section, all amounts paid under the arrangement are treated as paid under a “nonaccountable plan.” If a payor provides a nonaccountable plan, an employee who receives payments under the plan cannot compel the payor to treat the payments as paid under an accountable plan by voluntarily substantiating the expenses and returning any excess to the payor.
(ii) Special rule for failure to return excess. If an arrangement meets the requirements of paragraphs (d), (e), and (f) of this section, but the employee fails to return, within a reasonable period of time, any amount in excess of the amount of the expenses substantiated in accordance with paragraph (e) of this section, the amounts paid under the arrangement that are in excess of the substantiated expenses are treated as paid under a nonaccountable plan.
(4) Treatment of payments under accountable plans. Amounts treated as paid under an accountable plan are excluded from the employee's gross income, are not reported as wages or other compensation on the employee's Form W-2, and are exempt from the withholding and payment of employment taxes (Federal Insurance Contributions Act (FICA), Federal Unemployment Tax Act (FUTA), Railroad Retirement Tax Act (RRTA), Railroad Unemployment Repayment Tax (RURT), and income tax.) See paragraph (l) of this section for cross references.
(5) Treatment of payments under nonaccountable plans. Amounts treated as paid under a nonaccountable plan are included in the employee's gross income, must be reported as wages or other compensation on the employee's Form W-2, and are subject to withholding and payment of employment taxes (FICA, FUTA, RRTA, RURT, and income tax). See paragraph (h) of this section. Expenses attributable to amounts included in the employee's gross income may be deducted, provided the employee can substantiate the full amount of his or her expenses (i.e., the amount of the expenses, if any, the reimbursement for which is treated as paid under an accountable plan as well as those for which the employee is claiming the deduction) in accordance with §§ 1.274-5T and 1.274(d)-1 or § 1.162-17, but only as a miscellaneous itemized deduction subject to the limitations applicable to such expenses (e.g., the 80-percent limitation on meal and entertainment expenses provided in section 274(n) and the 2-percent floor provided in section 67).
(d) Business connection—(1) In general. Except as provided in paragraphs (d)(2) and (d)(3) of this section, an arrangement meets the requirements of this paragraph (d) if it provides advances, allowances (including per diem allowances, allowances only for meals and incidental expenses, and mileage allowances), or reimbursements only for business expenses that are allowable as deductions by part VI (section 161 and the following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the employee in connection with the performance of services as an employee of the employer. The payment may be actually received from the employer, its agent, or a third party for whom the employee performs a service as an employee of the employer, and may include amounts charged directly or indirectly to the payor through credit card systems or otherwise. In addition, if both wages and the reimbursement or other expense allowance are combined in a single payment, the reimbursement or other expense allowance must be identified either by making a separate payment or by specifically identifying the amount of the reimbursement or other expense allowance.
(2) Other bona fide expenses. If an arrangement provides advances, allowances, or reimbursements for business expenses described in paragraph (d)(1) of this section (i.e., deductible employee business expenses) and for other bona fide expenses related to the employer's business (e.g., travel that is not away from home) that are not deductible under part VI (section 161 and the following), subchapter B, chapter 1 of the Code, the payor is treated as maintaining two arrangements. The portion of the arrangement that provides payments for the deductible employee business expenses is treated as one arrangement that satisfies this paragraph (d). The portion of the arrangement that provides payments for the nondeductible employee expenses is treated as a second arrangement that does not satisfy this paragraph (d) and all amounts paid under this second arrangement will be treated as paid under a nonaccountable plan. See paragraphs (c)(5) and (h) of this section.
(3) Reimbursement requirement—(i) In general. If a payor arranges to pay an amount to an employee regardless of whether the employee incurs (or is reasonably expected to incur) business expenses of a type described in paragraph (d)(1) or (d)(2) of this section, the arrangement does not satisfy this paragraph (d) and all amounts paid under the arrangement are treated as paid under a nonaccountable plan. See paragraphs (c)(5) and (h) of this section.
(ii) Per diem allowances. An arrangement providing a per diem allowance for travel expenses of a type described in paragraph (d)(1) or (d)(2) of this section that is computed on a basis similar to that used in computing the employee's wages or other compensation (e.g., the number of hours worked, miles traveled, or pieces produced) meets the requirements of this paragraph (d) only if, on December 12, 1989, the per diem allowance was identified by the payor either by making a separate payment or by specifically identifying the amount of the per diem allowance, or a per diem allowance computed on that basis was commonly used in the industry in which the employee is employed. See section 274(d) and § 1.274(d)-1. A per diem allowance described in this paragraph (d)(3)(ii) may be adjusted in a manner that reasonably reflects actual increases in employee business expenses occurring after December 12, 1989.
(e) Substantiation—(1) In general. An arrangement meets the requirements of this paragraph (e) if it requires each business expense to be substantiated to the payor in accordance with paragraph (e)(2) or (e)(3) of this section, whichever is applicable, within a reasonable period of time. See § 1.274-5T or § 1.162-17.
(2) Expenses governed by section 274(d). An arrangement that reimburses travel, entertainment, use of a passenger automobile or other listed property, or other business expenses governed by section 274(d) meets the requirements of this paragraph (e)(2) if information sufficient to satisfy the substantiation requirements of section 274(d) and the regulations thereunder is submitted to the payor. See § 1.274-5. Under section 274(d), information sufficient to substantiate the requisite elements of each expenditure or use must be submitted to the payor. For example, with respect to travel away from home, § 1.274-5(b)(2) requires that information sufficient to substantiate the amount, time, place, and business purpose of the expense must be submitted to the payor. Similarly, with respect to use of a passenger automobile or other listed property, § 1.274-5(b)(6) requires that information sufficient to substantiate the amount, time, use, and business purpose of the expense must be submitted to the payor. See § 1.274-5(g) and (j), which grant the Commissioner the authority to establish optional methods of substantiating certain expenses. Substantiation of the amount of a business expense in accordance with rules prescribed pursuant to the authority granted by § 1.274-5(g) or (j) will be treated as substantiation of the amount of such expense for purposes of this section.
(3) Expenses not governed by section 274(d). An arrangement that reimburses business expenses not governed by section 274(d) meets the requirements of this paragraph (e)(3) if information is submitted to the payor sufficient to enable the payor to identify the specific nature of each expense and to conclude that the expense is attributable to the payor's business activities. Therefore, each of the elements of an expenditure or use must be substantiated to the payor. It is not sufficient if an employee merely aggregates expenses into broad categories (such as “travel”) or reports individual expenses through the use of vague, nondescriptive terms (such as “miscellaneous business expenses”). See § 1.162-17(b).
(f) Returning amounts in excess of expenses—(1) In general. Except as provided in paragraph (f)(2) of this section, an arrangement meets the requirements of this paragraph (f) if it requires the employee to return to the payor within a reasonable period of time may amount paid under the arrangement in excess of the expenses substantiated in accordance with paragraph (e) of this section. The determination of whether an arrangement requires an employee to return amounts in excess of substantiated expenses will depend on the facts and circumstances. An arrangement whereby money is advanced to an employee to defray expenses will be treated as satisfying the requirements of this paragraph (f) only if the amount of money advanced is reasonably calculated not to exceed the amount of anticipated expenditures, the advance of money is made on a day within a reasonable period of the day that the anticipated expenditures are paid or incurred, and any amounts in excess of the expenses substantiated in accordance with paragraph (e) of this section are required to be returned to the payor within a reasonable period of time after the advance is received.
(2) Per diem or mileage allowances. The Commissioner may, in his discretion, prescribe rules in pronouncements of general applicability under which a reimbursement or other expense allowance arrangement that provides per diem allowances providing for ordinary and necessary expenses of traveling away from home (exclusive of transportation costs to and from destination) or mileage allowances providing for ordinary and necessary expenses of local travel and tranportation while traveling away from home will be treated as satisfying the requirements of this paragraph (f), even though the arrangement does not require the employee to return the portion of such an allowance that relates to the days or miles of travel substantiated and that exceeds the amount of the employee's expenses deemed substantiated pursuant to rules prescribed under section 274(d), provided the allowance is paid at a rate for each day or mile of travel that is reasonably calculated not to exceed the amount of the employee's expenses or anticipated expenses and the employee is required to return to the payor within a reasonable period of time any portion of such allowance which relates to days or miles of travel not substantiated in accordance with paragraph (e) of this section.
(g) Reasonable period—(1) In general. The determination of a reasonable period of time will depend on the facts and circumstances.
(2) Safe harbors—(i) Fixed date method. An advance made within 30 days of when an expense is paid or incurred, an expense substantiated to the payor within 60 days after it is paid or incurred, or an amount returned to the payor within 120 days after an expense is paid or incurred will be treated as having occurred within a reasonable period of time.
(ii) Periodic statement method. If a payor provides employees with periodic statements (no less frequently than quarterly) stating the amount, if any, paid under the arrangement in excess of the expenses the employee has substantiated in accordance with paragraph (e) of this section, and requesting the employee to substantiate any additional business expenses that have not yet been substantiated (whether or not such expenses relate to the expenses with respect to which the original advance was paid) and/or to return any amounts remaining unsubstantiated within 120 days of the statement, an expense substantiated or an amount returned within that period will be treated as being substantiated or returned within a reasonable period of time.
(3) Pattern of overreimbursements. If, under a reimbursement or other expense allowance arrangement, a payor has a plan or practice to provide amounts to employees in excess of expenses substantiated in accordance with paragraph (e) of this section and to avoid reporting and withholding on such amounts, the payor may not use either of the safe harbors provided in paragraph (g)(2) of this section for any years during which such plan or practice exists.
(h) Withholding and payment of employment taxes—(1) When excluded from wages. If an arrangement meets the requirements of paragraphs (d), (e), and (f) of this section, the amounts paid under the arrangement that are not in excess of the expenses substantiated in accordance with paragraph (e) of this section (i.e., the amounts treated as paid under an accountable plan) are not wages and are not subject to withholding and payment of employment taxes. If an arrangement provides advances, allowances, or reimbursements for meal and entertainment expenses and a portion of the payment is treated as paid under a nonaccountable plan under paragraph (d)(2) of this section due solely to section 274(n), then notwithstanding paragraph (h)(2)(ii) of this section, these nondeductible amounts are neither treated as gross income nor subject to withholding and payment of employment taxes.
(2) When included in wages—(i) Accountable plans—(A) General rule. Except as provided in paragraph (h)(2)(i)(B) of this section, if the expenses covered under an arrangement that meets the requirements of paragraphs (d), (e), and (f) of this section are not substantiated to the payor in accordance with paragraph (e) of this section within a reasonable period of time or if any amounts in excess of the substantiated expenses are not returned to the payor in accordance with paragraph (f) of this section within a reasonable period of time, the amount which is treated as paid under a nonaccountable plan under paragraph (c)(3)(ii) of this section is subject to withholding and payment of employment taxes no later than the first payroll period following the end of the reasonable period. A payor may treat any amount not substantiated or returned within the periods specified in paragraph (g)(2) of this section as not substantiated or returned within a reasonable period of time.
(B) Per diem or mileage allowances—(1) In general. If a payor pays a per diem or mileage allowance under an arrangement that meets the requirements of the paragraphs (d), (e), and (f) of this section, the portion, if any, of the allowance paid that relates to days or miles of travel substantiated in accordance with paragraph (e) of this section and that exceeds the amount of the employee's expenses deemed substantiated for such travel pursuant to rules prescribed under section 274(d) and § 1.274(d)-1 or § 1.274-5T(j) is treated as paid under a nonaccountable plan. See paragraph (c)(3)(ii) of this section. Because the employee is not required to return this excess portion, the reasonable period of time provisions of paragraph (g) of this section (relating to the return of excess amounts) do not apply to this excess portion.
(2) Reimbursements. Except as provided in paragraph (h)(2)(i)(B)(4) of this section, in the case of a per diem or mileage allowance paid as a reimbursement at a rate for each day or mile of travel that exceeds the amounts of the employee's expenses deemed substantiated for a day or mile of travel, the excess portion described in paragraph (h)(2)(i) of this section is subject to withholding and payment of employment taxes in the payroll period in which the payor reimburses the expenses for the days or miles of travel substantiated in accordance with paragraph (e) of this section.
(3) Advances. Except as provided in paragraph (h)(2)(i)(B)(4) of this section, in the case of a per diem or mileage allowance paid as an advance at a rate for each day or mile of travel that exceeds the amount of the employee's expenses deemed substantiated for a day or mile of travel, the excess portion described in paragraph (h)(2)(i) of this section is subject to withholding and payment of employment taxes no later than the first payroll period following the payroll period in which the expenses with respect to which the advance was paid (i.e., the days or miles of travel) are substantiated in accordance with paragraph (e) of this section. The expenses with respect to which the advance was paid must be substantiated within a reasonable period of time. See paragraph (g) of this section.
(4) Special rules. The Commissioner may, in his discretion, prescribe special rules in pronouncements of general applicability regarding the timing of withholding and payment of employment taxes on per diem and mileage allowances.
(ii) Nonaccountable plans. If an arrangement does not satisfy one or more of the requirements of paragraphs (d), (e), or (f) of this section, all amounts paid under the arrangement are wages and are subject to withholding and payment of employment taxes when paid.
(i) Application. The requirements of paragraphs (d) (business connection), (e) (substantiation), and (f) (returning amounts in excess of expenses) of this section will be applied on an employee-by-employee basis. Thus, for example, the failure by one employee to substantiate expenses under an arrangement in accordance with paragraph (e) of this section will not cause amounts paid to other employees to be treated as paid under a nonaccountable plan.
(j) Examples. The rules contained in this section may be illustrated by the following examples:
Example 1 Reimbursement requirement.Employer S pays its engineers $200 a day. On those days that an engineer travels away from home on business for Employer S, Employer S designates $50 of the $200 as paid to reimburse the engineer's travel expenses. Because Employer S would pay an engineer $200 a day regardless of whether the engineer was traveling away from home, the arrangement does not satisfy the reimbursement requirement of paragraph (d)(3)(i) of this section. Thus, no part of the $50 Employer S designated as a reimbursement is treated as paid under an accountable plan. Rather, all payments under the arrangement are treated as paid under a nonaccountable plan. Employer S must report the entire $200 as wages or other compensation on the employees' Forms W-2 and must withhold and pay employment taxes on the entire $200 when paid.
Example 2 Reimbursement requirement, multiple arrangements.Airline T pays all its employees a salary. Airline T also pays an allowance under an arrangement that otherwise meets the requirements of paragraphs (d), (e), and (f) of this section to its pilots and flight attendants who travel away from their home base airports, whether or not they are “away from home.” Because the allowance is paid only to those employees who incur (or are reasonably expected to incur) expenses of a type described in paragraph (d)(1) or (d)(2) of this section, the arrangement satisfies the reimbursement requirement of paragraph (d)(3)(i) of this section. Under paragraph (d)(2) of this section, Airline T is treated as maintaining two arrangements. The portion of the arrangement providing the allowances for away from home travel is treated as an accountable plan. The portion of the arrangement providing the allowances for non-away from home travel is treated as a nonaccountable plan. Airline T must report the non-away from home allowances as wages or other compensation on the employees' Forms W-2 and must withhold and pay employment taxes on these payments when paid.
Example 3. Reimbursement requirement.Corporation R pays all its salespersons a salary. Corporation R also pays a travel allowance under an arrangement that otherwise meets the requirements of paragraphs (d), (e), and (f) of this section. This allowance is paid to all salespersons, including salespersons that Corporation R knows, or has reason to know, do not travel away from their offices on Corporation R business and would not be reasonably expected to incur travel expenses. Because the allowance is not paid only to those employees who incur (or are reasonably expected to incur) expenses of a type described in paragraph (d)(1) or (d)(2) of this section, the arrangement does not satisfy the reimbursement requirement of paragraph (d)(3)(i) of this section. Thus, no part of the allowance Corporation R designated as a reimbursement is treated as paid under an accountable plan. Rather, all payments under the arrangement are treated as paid under a nonaccountable plan. Corporation R must report all payments under the arrangement as wages or other compensation on the employees' Forms W-2 and must withhold and pay employment taxes on the payments when paid.
Example 4 Separate arrangement, miscellaneous expenses.Under an arrangement that meets the requirements of paragraphs (d), (e), and (f) of this section, County U reimburses its employees for lodging and meal expenses incurred when they travel away from home on County U business. For its own convenience, County U also separately pays certain of its employees a $25 monthly allowance to cover the cost of small miscellaneous office expenses. County U does not require its employees to substantiate these miscellaneous expenses and does not require them to return the amounts by which the monthly allowance exceeds the miscellaneous expenses. The monthly allowance arrangement is a nonaccountable plan. County U must report the monthly allowances as wages or other compensation on the employees' Forms W-2 and must withhold and pay employment taxes on the monthly allowances when paid. The nonaccountable plan providing the monthly allowances is treated as separate from the accountable plan providing reimbursements for lodging and meal expenses incurred for travel away from home on County U business.
Example 5 Excessive advances.In anticipation of employee business expenses that Corporation V does not reasonably expect to exceed $400 in any quarter, Corporation V nonetheless advances $1,000 to Employee A for such expenses. Whenever Employee A substantiates an expense in accordance with paragraph (e) of this section, Corporation V provides an additional advance in an amount equal to the amount substantiated, thereby providing a continuing advance of $1,000. Because the amounts advanced under this arrangement are not reasonably calculated so as not to exceed the amount of anticipated expenditures and because the advance of money is not made on a day within a reasonable period of the day that the anticipated expenditures are paid or incurred, the arrangement is a nonaccountable plan. The arrangement fails to satisfy the requirements of paragraphs (d) (business connection) and (f) (reasonable calculation of advances) of this section. Thus, Corporation V must report the entire amount of each advance as wages or other compensation and must withhold and pay employment taxes on the entire amount of each advance when paid.
Example 6 Excess mileage advance.Under an arrangement that meets the requirements of paragraphs (d), (e), and (f) of this section, Employer W pays its employees a mileage allowance at a rate of 30 cents per mile (when the amount deemed substantiated for each mile of travel substantiated is 26 cents per mile) to cover automobile business expenses. The allowance is paid at a rate for each mile of travel that is reasonably calculated not to exceed the amount of the employee's expenses or anticipated expenses. Employer W does not require the return of the portion of the mileage allowance (4 cents) that exceeds the amount deemed substantiated for each mile of travel substantiated in accordance with paragraph (e) of this section. In June, Employer W advances Employee B $150 for 500 miles to be traveled by Employee B during the month. In July, Employee B substantiates 500 miles of business travel. The amount deemed substantiated by Employee B is $130. However, Employer W does not require Employee B to return the remaining $20 of the advance. No later than the first payroll period following the payroll period in which the business miles of travel are substantiated, Employer W must withhold and pay employment taxes on $20 (500 miles × 4 cents per mile).
Example 7 Excess per diem reimbursement.Under an arrangement that meets the requirements of paragraphs (d), (e), and (f) of this section, Employer X pays its employees a per diem allowance to cover lodging, meal, and incidental expenses incurred for travel away from home on Employer X business at a rate equal to 120 percent of the amount deemed substantiated for each day of travel to the localities to which the employees travel. Employer X does not require the employees to return the 20 percent by which the reimbursement for those expenses exceeds the amount deemed substantiated for each day of travel substantiated in accordance with paragraph (e) of this section. Employee C substantiates six days of business travel away from home: Two days in a locality for which the amount deemed substantiated is $100 a day and four days in a locality for which the amount deemed substantiated is $125 a day. Employer X reimburses Employee C $840 for the six days of travel away from home (2 × (120% × $100) + 4 × (120% × $125)), and does not require Employee C to return the excess portion ($140 excess portion = (2 days × $20 ($120−$100) + 4 days × $25 ($150-$125)). For the payroll period in which Employer X reimburses the expenses, Employer X must withhold and pay employment taxes on $140.
Example 8. Return Requirement.Employer Y provides expense allowances to certain of its employees to cover business expenses of a type described in paragraph (d)(1) of this section under an arrangement that requires the employees to substantiate their expenses within a reasonable period of time and to return any excess amounts within a reasonable period of time. Each time an employee returns an excess amount to Employer Y, however, Employer Y pays the employee a “bonus” equal to the amount returned by the employee. The arrangement fails to satisfy the requirements of paragraph (f) (returning amounts in excess of expenses) of this section. Thus, Employer Y must report the entire amount of the expense allowance payments as wages or other compensation and must withhold and pay employment taxes on the payments when paid. Compare example (6) (where the employee is not required to return the portion of the mileage allowance that exceeds the amount deemed substantiated for each mile of travel substantiated).
Example 9 Timely substantiation.Employer Z provides a $500 advance to Employee D for a trip away from home on Employer Z business. Employee D incurs $500 in business expenses on the trip. Employer Z uses the periodic statement method safe harbor. At the end of the quarter during which the trip occurred, Employer Z sends a quarterly statement to Employee D stating that $500 was advanced to Employee D during the quarter and that no expenses were substantiated and no excess amounts returned. The statement advises Employee D that Employee D must substantiate any additional business expenses within 120 days of the date of the statement, and must return any unsubstantiated excess within the 120-day period. Employee D fails to substantiate any expenses or to return the excess within the 120-day period. Employer Z treats the $500 as wages and withholds and pays employment taxes on the $500. After the 120-day period has expired, Employee D substantiates the $500 in travel expenses in accordance with paragraph (e) of this section. Employer Z properly reported and withheld and paid employment taxes on the $500 and no adjustments may be made. Employee D must include the $500 in gross income and may deduct the $500 of expenses as a miscellaneous itemized deduction subject to the 2-percent floor provided in section 67.
(k) Anti-abuse provision. If a payor's reimbursement or other expense allowance arrangement evidences a pattern of abuse of the rules of section 62(c) and this section, all payments made under the arrangement will be treated as made under a nonaccountable plan.
(l) Cross references. For employment tax regulations relating to reimbursement and expense allowance arrangements, see §§ 31.3121 (a)-3, 31.3231(e)-(3), 31.3306(b)-2, and 31.3401(a)-4, which generally apply to payments made under reimbursement or other expense allowance arrangements received by an employee on or after July 1, 1990 with respect to expenses paid or incurred on or after July 1, 1990. For reporting requirements, see § 1.6041-3(i), which generally applies to payments made under reimbursement or other expense allowance arrangements received by an employee on or after January 1, 1989 with respect to expenses paid or incurred on or after January 1, 1989.
(m) Effective dates. This section generally applies to payments made under reimbursement or other expense allowance arrangements received by an employee in taxable years of the employee beginning on or after January 1, 1989, with respect to expenses paid or incurred in taxable years beginning on or after January 1, 1989. Paragraph (h) of this section generally applies to payments made under reimbursement or other expense allowance arrangements received by an employee on or after July 1, 1990 with respect to expenses paid or incurred on or after July 1, 1990. Paragraphs (d)(3)(ii) and (h)(2)(i)(B) of this section apply to payments made under reimbursement or other expense allowance arrangements received by an employee on or after January 1, 1991 with respect to expenses paid or incurred on or after January 1, 1991. Paragraph (e)(2) of this section applies to payments made under reimbursement or other expense allowance arrangements received by an employee with respect to expenses paid or incurred after December 31, 1997.
[T.D. 8324, 55 FR 51691, Dec. 17, 1990; 56 FR 8911, Mar. 4, 1991, as amended by T.D. 8451, 57 FR 57668, Dec. 7, 1992; T.D. 8666, 61 FR 27005, May 30, 1996; T.D. 8784, 63 FR 52600, Oct. 1, 1998; T.D. 8864, 65 FR 4122, Jan. 26, 2000; T.D. 9064, 68 FR 39011, July 1, 2003]
§ 1.63-1 Change of treatment with respect to the zero bracket amount and itemized deductions.
(a) In general. An individual who files a return on which the individual itemizes deductions in accordance with section 63(g) may later make a change of treatment by recomputing taxable income for the taxable year to which that return relates without itemizing deductions. Similarly, an individual who files a return on which the individual computes taxable income without itemizing deductions may later make a change of treatment by itemizing deductions in accordance with section 63(g) in recomputing taxable income for the taxable year to which that return relates.
(b) No extension of time for claiming credit or refund. A change of treatment described in paragraph (a) of this section does not extend the period of time prescribed in section 6511 within which the taxpayer may make a claim for credit or refund of tax.
(c) Special requirements if spouse filed separate return—(1) Requirements. If the spouse of the taxpayer filed a separate return for a taxable year corresponding to the taxable year of the taxpayer, the taxpayer may not make a change of treatment described in paragraph (a) of this section for that year unless—
(i) The spouse makes a change of treatment on the separate return consistent with the change of treatment sought by the taxpayer; and
(ii) The taxpayer and the taxpayer's spouse file a consent in writing to the assessment of any deficiency of either spouse to the extent attributable to the change of treatment, even though the assessment of the deficiency would otherwise be prevented by the operation of any law or rule of law. The consent must be filed with the district director for the district in which the taxpayer applies for the change of treatment, and the period during which a deficiency may be assessed shall be established by agreement of the spouses and the district director.
(2) Corresponding taxable year. A taxable year of one spouse corresponds to a taxable year of the other spouse if both taxable years end in the same calendar year. If the taxable year of one spouse ends with death, however, the corresponding taxable year of the surviving spouse is that in which the death occurs.
(d) Inapplicable if tax liability has been compromised. The taxpayer may not make a change of treatment described in paragraph (a) of this section for any taxable year if—
(1) The tax liability of the taxpayer for the taxable year has been compromised under section 7122; or
(2) The tax liability of the taxpayer's spouse for a taxable year corresponding to the taxable year of the taxpayer has been compromised under section 7122. See paragraph (c)(2) of this section for the determination of a corresponding taxable year.
(e) Effective date. This section applies to taxable years beginning after 1976.
[T.D. 7585, 44 FR 1105, Jan. 4, 1979]
§ 1.63-2 Cross reference.
For rules with respect to charitable contribution deductions for nonitemizing taxpayers, see section 63 (b)(1)(C) and (i) and section 170(i) of the Internal Revenue Code of 1954.
(Secs. 170(a)(1) and 7805 of the Internal Revenue Code of 1954 (68A Stat. 58, 26 U.S.C. 170(a)(1); 68A Stat. 917, 26 U.S.C. 7805)
[T.D. 8002, 49 FR 50666, Dec. 31, 1984]
§ 1.66-1 Treatment of community income.
(a) In general. Married individuals domiciled in a community property state who do not elect to file a joint individual Federal income tax return under section 6013 generally must report half of the total community income earned by the spouses during the taxable year except at times when one of the following exceptions applies:
(1) The spouses live apart and meet the qualifications of § 1.66-2.
(2) The Secretary denies a spouse the Federal income tax benefits resulting from community property law under § 1.66-3, because that spouse acted as if solely entitled to the income and failed to notify his or her spouse of the nature and amount of the income prior to the due date for the filing of his or her spouse's return.
(3) A requesting spouse qualifies for traditional relief from the Federal income tax liability resulting from the operation of community property law under § 1.66-4(a).
(4) A requesting spouse qualifies for equitable relief from the Federal income tax liability resulting from the operation of community property law under § 1.66-4(b).
(b) Applicability. (1) The rules of this section apply only to community income, as defined by state law. The rules of this section do not apply to income that is not community income. Thus, the rules of this section do not apply to income from property that was formerly community property, but in accordance with state law, has ceased to be community property, becoming, e.g., separate property or property held by joint tenancy or tenancy in common.
(2) When taxpayers report income under paragraph (a) of this section, all community income for the calendar year is treated in accordance with the rules provided by section 879(a). Unlike the other provisions under section 66, section 66(a) does not permit inclusion on an item-by-item basis.
(c) Transferee liability. The provisions of section 66 do not negate liability that arises under the operation of other laws. Therefore, a spouse who is not subject to Federal income tax on community income may nevertheless remain liable for the unpaid tax (including additions to tax, penalties, and interest) to the extent provided by Federal or state transferee liability or property laws (other than community property laws). For the rules regarding the liability of transferees, see sections 6901 through 6904 and the regulations thereunder.
[T.D. 9074, 68 FR 41070, July 10, 2003]
§ 1.66-2 Treatment of community income where spouses live apart.
(a) Community income of spouses domiciled in a community property state will be treated in accordance with the rules provided by section 879(a) if all of the following requirements are satisfied—
(1) The spouses are married to each other at any time during the calendar year;
(2) The spouses live apart at all times during the calendar year;
(3) The spouses do not file a joint return with each other for a taxable year beginning or ending in the calendar year;
(4) One or both spouses have earned income that is community income for the calendar year; and
(5) No portion of such earned income is transferred (directly or indirectly) between such spouses before the close of the calendar year.
(b) Living apart. For purposes of this section, living apart requires that spouses maintain separate residences. Spouses who maintain separate residences due to temporary absences are not considered to be living apart. Spouses who are not members of the same household under § 1.6015-3(b) are considered to be living apart for purposes of this section.
(c) Transferred income. For purposes of this section, transferred income does not include a de minimis amount of earned income that is transferred between the spouses. In addition, any amount of earned income transferred for the benefit of the spouses' child will not be treated as an indirect transfer to one spouse. Additionally, income transferred between spouses is presumed to be a transfer of earned income. This presumption is rebuttable.
(d) Examples. The following examples illustrate the rules of this section:
Example 1 Living apart.H and W are married, domiciled in State A, a community property state, and have lived apart the entire year of 2002. W, who is in the Army, was stationed in Korea for the entire calendar year. During their separation, W intended to return home to H, and H intended to live with W upon W's return. H and W do not file a joint return for taxable year 2002. H and W may not report their income under this section because a temporary absence due to military service is not living apart as contemplated under this section.
Example 2 Transfer of earned income—de minimis exception.H and W are married, domiciled in State B, a community property state, and have lived apart the entire year of 2002. H and W are estranged and intend to live apart indefinitely. H and W do not file a joint return for taxable year 2002. H occasionally visits W and their two children, who live with W. When H visits, he often buys gifts for the children, takes the children out to dinner, and occasionally buys groceries or gives W money to buy the children new clothes for school. Both W and H have earned income in the year 2002 that is community income under the laws of State B. H and W may report their income on separate returns under this section.
Example 3 Transfer of earned income—source of transfer.H and W are married, domiciled in State C, a community property state, and have lived apart the entire year of 2002. H and W are estranged and intend to live apart indefinitely. H and W do not file a joint return for taxable year 2002. W provides H $1,000 a month from March 2002 through August 2002 while H is working part-time and seeking full-time employment. W is not legally obligated to make the $1,000 payments. W earns $75,000 in 2002 in wage income. W also receives $10,000 in capital gains income in December 2002. H wants to report his income in accordance with this section, alleging that the $6,000 that he received from W was not from W's earned income, but from the capital gains income W received in 2002. The facts and circumstances surrounding the periodic payments to H from W do not indicate that W made the payments out of her capital gains. H and W may not report their income in accordance with this section, as the $6,000 W transferred to H is presumed to be from W's earned income, and H has not presented any facts to rebut the presumption.
[T.D. 9074, 68 FR 41070, July 10, 2003]
§ 1.66-3 Denial of the Federal income tax benefits resulting from the operation of community property law where spouse not notified.
(a) In general. The Secretary may deny the Federal income tax benefits of community property law to any spouse with respect to any item of community income if that spouse acted as if solely entitled to the income and failed to notify his or her spouse of the nature and amount of the income before the due date (including extensions) for the filing of the return of his or her spouse for the taxable year in which the item of income was derived. Whether a spouse has acted as if solely entitled to the item of income is a facts and circumstances determination. This determination focuses on whether the spouse used, or made available, the item of income for the benefit of the marital community.
(b) Effect. The item of community income will be included, in its entirety, in the gross income of the spouse to whom the Secretary denied the Federal income tax benefits resulting from community property law. The tax liability arising from the inclusion of the item of community income must be assessed in accordance with section 6212 against this spouse.
(c) Examples. The following examples illustrate the rules of this section:
Example 1 Acting as if solely entitled to income. (i) H and W are married and are domiciled in State A, a community property state. W's Form W-2 for taxable year 2000 showed wage income of $35,000. W also received a Form 1099-INT, “Interest Income,” showing $1,000 W received in taxable year 2000. W's wage income was directly deposited into H and W's joint account, from which H and W paid bills and household expenses. W did not inform H of her interest income or the Form 1099-INT, but W gave H a copy of the W-2 when she received it in January 2001. W did not use her interest income for bills or household expenses. Instead W gave her interest income to her brother, who was unemployed. Neither the separate return filed by H nor the separate return filed by W included the interest income. In 2002, the IRS audits both H and W. The Internal Revenue Service (IRS) may raise section 66(b) as to W's interest income, denying W the Federal income tax benefit resulting from community property law as to this item of income.
(ii) H and W are married and are domiciled in State B, a community property state. For taxable year 2000, H receives $45,000 in wage income that H places in a separate account. H and W maintain separate residences. H's wage income is community income under the laws of State B. That same year, W loses her job, and H pays W's mortgage and household expenses for several months while W seeks employment. Neither H nor W files a return for 2000, the taxable year for which the IRS subsequently audits them. The IRS may not raise section 66(b) and deny H the Federal income tax benefits resulting from the operation of community property law as to H's wage income of $45,000, as H has not treated this income as if H were solely entitled to it.
Example 2 Notification of nature and amount of the income.H and W are married and domiciled in State C, a community property state. H and W do not file a joint return for taxable year 2001. H's and W's earned income for 2001 is community income under the laws of State C. H receives $50,000 in wage income in 2001. In January 2002, H receives a Form W-2 that erroneously states that H earned $45,000 in taxable year 2001. H provides W a copy of H's Form W-2 in February 2002. W files for an extension prior to April 15, 2002. H receives a corrected Form W-2 reflecting wages of $50,000 in May 2002. H provides a copy of the corrected Form W-2 to W in May 2002. W files a separate return in June 2002, but reports one half of $45,000 ($22,500) of wage income that H earned. H files a separate return reporting half of $50,000 ($25,000) in wage income. The IRS audits both H and W. Even if H had acted as if solely entitled to the wage income, the IRS may not raise section 66(b) as to this income because H notified W of the nature and amount of the income prior to the due date of W's return (including extensions).
[T.D. 9074, 68 FR 41070, July 10, 2003]
§ 1.66-4 Request for relief from the Federal income tax liability resulting from the operation of community property law.
(a) Traditional relief—(1) In general. A requesting spouse will receive relief from the Federal income tax liability resulting from the operation of community property law for an item of community income if—
(i) The requesting spouse did not file a joint Federal income tax return for the taxable year for which he or she seeks relief;
(ii) The requesting spouse did not include in gross income for the taxable year an item of community income properly includible therein, which, under the rules contained in section 879(a), would be treated as the income of the nonrequesting spouse;
(iii) The requesting spouse establishes that he or she did not know of, and had no reason to know of, the item of community income; and
(iv) Taking into account all of the facts and circumstances, it is inequitable to include the item of community income in the requesting spouse's individual gross income.
(2) Knowledge or reason to know. (i) A requesting spouse had knowledge or reason to know of an item of community income if he or she either actually knew of the item of community income, or if a reasonable person in similar circumstances would have known of the item of community income. All of the facts and circumstances are considered in determining whether a requesting spouse had reason to know of an item of community income. The relevant facts and circumstances include, but are not limited to, the nature of the item of community income, the amount of the item of community income relative to other income items, the couple's financial situation, the requesting spouse's educational background and business experience, and whether the item of community income was reflected on prior years' returns (e.g., investment income omitted that was regularly reported on prior years' returns).
(ii) If the requesting spouse is aware of the source of community income or the income-producing activity, but is unaware of the specific amount of the nonrequesting spouse's community income, the requesting spouse is considered to have knowledge or reason to know of the item of community income. The requesting spouse's lack of knowledge of the specific amount of community income does not provide a basis for relief under this section.
(3) Inequitable. All of the facts and circumstances are considered in determining whether it is inequitable to hold a requesting spouse liable for a deficiency attributable to an item of community income. One relevant factor for this purpose is whether the requesting spouse benefitted, directly or indirectly, from the omitted item of community income. A benefit includes normal support, but does not include de minimis amounts. Evidence of direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. Thus, for example, if a requesting spouse receives from the nonrequesting spouse property (including life insurance proceeds) that is traceable to items of community income attributable to the nonrequesting spouse, the requesting spouse will have benefitted from those items of community income. Other factors may include, if the situation warrants, desertion, divorce or separation. Factors relevant to whether it would be inequitable to hold a requesting spouse liable, more specifically described under the applicable administrative procedure issued under section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447) (See § 601.601(d)(2) of this chapter), or other applicable guidance published by the Secretary), are to be considered in making a determination under this paragraph.
(b) Equitable relief. Equitable relief may be available when the four requirements of paragraph (a)(1) of this section are not satisfied, but it would be inequitable to hold the requesting spouse liable for the unpaid tax or deficiency. Factors relevant to whether it would be inequitable to hold a requesting spouse liable, more specifically described under the applicable administrative procedure issued under section 66(c) (Revenue Procedure 2000-15 (2000-1 C.B. 447), or other applicable guidance published by the Secretary), are to be considered in making a determination under this paragraph.
(c) Applicability. Traditional relief under paragraph (a) of this section applies only to deficiencies arising out of items of omitted income. Equitable relief under paragraph (b) of this section applies to any deficiency or any unpaid tax (or any portion of either). Equitable relief is available only for the portion of liabilities that were unpaid as of July 22, 1998, and for liabilities that arise after July 22, 1998.
(d) Effect of relief. When the requesting spouse qualifies for relief under paragraph (a) or (b) of this section, the IRS must assess any deficiency of the nonrequesting spouse arising from the granting of relief to the requesting spouse in accordance with section 6212.
(e) Examples. The following examples illustrate the rules of this section:
Example 1 Item-by-item approach.H and W are married, living together, and domiciled in State A (a community property state). H and W file separate returns for taxable year 2002 on April 15, 2003. H earns $56,000 in wages, and W earns $46,000 in wages, in 2002. H reports half of his wage income as shown on his Form W-2, in the amount of $28,000, and half of W's wage income as shown on her Form W-2, in the amount of $23,000. W reports half of her wage income as shown on her W-2, in the amount of $23,000, and half of H's wage income as shown on his Form W-2, in the amount of $28,000. Neither H nor W reports W's income from her sole proprietorship of $34,000 or W's investment income of $5,000 for taxable year 2002. The Internal Revenue Service (IRS) proposes deficiencies with respect to H's and W's taxable year 2002 returns due to the omission of W's income from her sole proprietorship and investments. H timely requests relief under section 66(c). Because the IRS determines that H satisfies the four requirements of the traditional relief provision of section 66(c) with respect to W's omitted investment income, the IRS grants H's request for relief as to the omitted investment income. The IRS determines that H does not satisfy the four requirements of the traditional relief provision of section 66(c) as to W's sole proprietorship income. The IRS further determines that, under the equitable relief provision of section 66(c), it is not inequitable to hold H liable for the sole proprietorship income. Relief is applicable on an item-by-item basis. Thus, H is liable for the tax on half of his wage income in the amount of $28,000, half of W's wage income in the amount of $23,000, half of W's sole proprietorship income in the amount of $17,000, but none of W's investment income, for which H obtained relief under section 66(c). W is liable for the tax on half of H's wage income in the amount of $28,000, half of W's wage income in the amount of $23,000, half of W's sole proprietorship income in the amount of $17,000, and all of W's investment income in the amount of $5,000, because H obtained relief under section 66(c).
Example 2 Benefit.H and W are married, living together, and domiciled in State B (a community property state). Neither H nor W files a return for taxable year 2000. H earns $60,000 in 2000, which he deposits in a joint account. H and W pay the mortgage payment, household bills, and other family expenses out of the joint account. W earns $20,000 in 2000. W uses a portion of the $20,000 to make monthly loan payments on the family cars, but loses the remainder at the local racetrack. In 2002, the IRS audits H and W. H requests relief under section 66(c), stating that he did not know or have reason to know of W's additional income, as H travels extensively while W handles the family finances. Regardless of whether H had knowledge or reason to know of the source of W's income, H is not eligible for traditional relief under section 66(c) because H benefitted from W's income. H's benefit, the portion of W's income used to make monthly payments on the car loans, was more than a de minimis amount. While this benefit was not in excess of normal support, it is enough to preclude relief under the traditional relief provision of section 66(c). H may still qualify for equitable relief under section 66(c), depending on all of the facts and circumstances.
(f) Fraudulent scheme. If the Secretary establishes that a spouse transferred assets to his or her spouse as part of a fraudulent scheme, relief is not available under this section. For purposes of this section, a fraudulent scheme includes a scheme to defraud the Secretary or another third party, such as a creditor, ex-spouse, or business partner.
(g) Definitions—(1) Requesting spouse. A requesting spouse is an individual who does not file a joint Federal income tax return with the nonrequesting spouse for the taxable year in question, and who requests relief from the Federal income tax liability resulting from the operation of community property law under this section for the portion of the liability arising from his or her share of community income for such taxable year.
(2) Nonrequesting spouse. A nonrequesting spouse is the individual to whom the requesting spouse was married and whose income or deduction gave rise to the tax liability from which the requesting spouse seeks relief in whole or in part.
(h) Effect of prior closing agreement or offer in compromise. A requesting spouse is not entitled to relief from the Federal income tax liability resulting from the operation of community property law under section 66 for any taxable year for which the requesting spouse has entered into a closing agreement (other than an agreement pursuant to section 6224(c) relating to partnership items) with the Secretary that disposes of the same liability that is the subject of the request for relief. In addition, a requesting spouse is not entitled to relief from the Federal income tax liability resulting from the operation of community property law under section 66 for any taxable year for which the requesting spouse has entered into an offer in compromise with the Secretary. For rules relating to the effect of closing agreements and offers in compromise, see sections 7121 and 7122, and the regulations thereunder.
(i) [Reserved]
(j) Time and manner for requesting relief—(1) Requesting relief. To request relief from the Federal income tax liability resulting from the operation of community property law under this section, a requesting spouse must file, within the time period prescribed in paragraph (j)(2) of this section, Form 8857, “Request for Innocent Spouse Relief” (or other specified form), or other written request, signed under penalties of perjury, stating why relief is appropriate. The requesting spouse must include the nonrequesting spouse's name and taxpayer identification number in the written request. The requesting spouse must also comply with the Secretary's reasonable requests for information that will assist the Secretary in identifying and locating the nonrequesting spouse.
(2) Time period for filing a request for relief—(i) Traditional relief. The earliest time for submitting a request for relief from the Federal income tax liability resulting from the operation of community property law under paragraph (a) of this section, for an amount underreported on, or omitted from, the requesting spouse's separate return, is the date the requesting spouse receives notification of an audit or a letter or notice from the IRS stating that there may be an outstanding liability with regard to that year (as described in paragraph (j)(2)(iii) of this section). The latest time for requesting relief under paragraph (a) of this section is 6 months before the expiration of the period of limitations on assessment, including extensions, against the nonrequesting spouse for the taxable year that is the subject of the request for relief, unless the examination of the requesting spouse's return commences during that 6-month period. If the examination of the requesting spouse's return commences during that 6-month period, the latest time for requesting relief under paragraph (a) of this section is 30 days after the commencement of the examination.
(ii) Equitable relief. The earliest time for submitting a request for relief from the Federal income tax liability resulting from the operation of community property law under paragraph (b) of this section is the date the requesting spouse receives notification of an audit or a letter or notice from the IRS stating that there may be an outstanding liability with regard to that year (as described in paragraph (j)(2)(iii) of this section). A request for equitable relief from the Federal income tax liability resulting from the operation of community property law under paragraph (b) of this section for a liability that is properly reported but unpaid is properly submitted with the requesting spouse's individual Federal income tax return, or after the requesting spouse's individual Federal income tax return is filed.
(iii) Premature requests for relief. The Secretary will not consider a premature request for relief under this section. The notices or letters referenced in this paragraph (j)(2) do not include notices issued pursuant to section 6223 relating to TEFRA partnership proceedings. These notices or letters include notices of computational adjustment to a partner or partner's spouse (Notice of Income Tax Examination Changes) that reflect a computation of the liability attributable to partnership items of the partner or the partner's spouse.
(k) Nonrequesting spouse's notice and opportunity to participate in administrative proceedings—(1) In general. When the Secretary receives a request for relief from the Federal income tax liability resulting from the operation of community property law under this section, the Secretary must send a notice to the nonrequesting spouse's last known address that informs the nonrequesting spouse of the requesting spouse's request for relief. The notice must provide the nonrequesting spouse with an opportunity to submit any information for consideration in determining whether to grant the requesting spouse relief from the Federal income tax liability resulting from the operation of community property law. The Secretary will share with each spouse the information submitted by the other spouse, unless the Secretary determines that the sharing of this information will impair tax administration.
(2) Information submitted. The Secretary will consider all of the information (as relevant to the particular relief provision) that the nonrequesting spouse submits in determining whether to grant relief from the Federal income tax liability resulting from the operation of community property law under this section.
[T.D. 9074, 68 FR 41070, July 10, 2003]
§ 1.66-5 Effective date.
Sections 1.66-1 through 1.66-4 are applicable on July 10, 2003. In addition, § 1.66-4 applies to any request for relief filed prior to July 10, 2003, for which the Internal Revenue Service has not issued a preliminary determination as of July 10, 2003.
[T.D. 9074, 68 FR 41070, July 10, 2003]
§ 1.67-1T 2-percent floor on miscellaneous itemized deductions (temporary).
(a) Type of expenses subject to the floor—(1) In general. With respect to individuals, section 67 disallows deductions for miscellaneous itemized deductions (as defined in paragraph (b) of this section) in computing taxable income (i.e., so-called “below-the-line” deductions) to the extent that such otherwise allowable deductions do not exceed 2 percent of the individual's adjusted gross income (as defined in section 62 and the regulations thereunder). Examples of expenses that, if otherwise deductible, are subject to the 2-percent floor include but are not limited to—
(i) Unreimbursed employee expenses, such as expenses for transportation, travel fares and lodging while away from home, business meals and entertainment, continuing education courses, subscriptions to professional journals, union or professional dues, professional uniforms, job hunting, and the business use of the employee's home.
(ii) Expenses for the production or collection of income for which a deduction is otherwise allowable under section 212 (1) and (2), such as investment advisory fees, subscriptions to investment advisory publications, certain attorneys' fees, and the cost of safe deposit boxes,
(iii) Expenses for the determination of any tax for which a deduction is otherwise allowable under section 212(3), such as tax counsel fees and appraisal fees, and
(iv) Expenses for an activity for which a deduction is otherwise allowable under section 183.
See section 62 with respect to deductions that are allowable in computing adjusted gross income (i.e., so-called “above-the-line” deductions).
(2) Other limitations. Except as otherwise provided in paragraph (d) of this section, to the extent that any limitation or restriction is placed on the amount of a miscellaneous itemized deduction, that limitation shall apply prior to the application of the 2-percent floor. For example, in the case of an expense for food or beverages, only 80 percent of which is allowable as a deduction because of the limitations provided in section 274(n), the otherwise deductible 80 percent of the expense is treated as a miscellaneous itemized deduction and is subject to the 2-percent limitation of section 67.
(b) Definition of miscellaneous itemized deductions. For purposes of this section, the term “miscellaneous itemized deductions” means the deductions allowable from adjusted gross income in determining taxable income, as defined in section 63, other than—
(1) The standard deduction as defined in section 63(c),
(2) Any deduction allowable for impairment-related work expenses as defined in section 67(d),
(3) The deduction under section 72(b)(3) (relating to deductions if annuity payments cease before the investment is recovered),
(4) The deductions allowable under section 151 for personal exemptions,
(5) The deduction under section 163 (relating to interest),
(6) The deduction under section 164 (relating to taxes),
(7) The deduction under section 165(a) for losses described in subsection (c)(3) or (d) of section 165,
(8) The deduction under section 170 (relating to charitable contributions and gifts),
(9) The deduction under section 171 (relating to deductions for amortizable bond premiums),
(10) The deduction under section 213 (relating to medical and dental expenses),
(11) The deduction under section 216 (relating to deductions in connection with cooperative housing corporations),
(12) The deduction under section 217 (relating to moving expenses),
(13) The deduction under section 691(c) (relating to the deduction for estate taxes in the case of income in respect of the decedent),
(14) The deduction under 1341 (relating to the computation of tax if a taxpayer restores a substantial amount held under claim of right), and
(15) Any deduction allowable in connection with personal property used in a short sale.
(c) Allocation of expenses. If a taxpayer incurs expenses that relate to both a trade or business activity (within the meaning of section 162) and a production of income or tax preparation activity (within the meaning of section 212), the taxpayer shall allocate such expenses between the activities on a reasonable basis.
(d) Members of Congress—(1) In general. With respect to the deduction for living expenses of Members of Congress referred to in section 162(a), the 2-percent floor described in section 67 and paragraph (a) of this section shall be applied to the deduction before the application of the $3,000 limitation on deductions for living expenses referred to in section 162(a). (For purposes of this paragraph (d), the term “Member(s) of Congress” includes any Delegate or Resident Commissioner.) The amount of miscellaneous itemized deductions of a Member of Congress that is disallowed pursuant to section 67 and paragraph (a) of this section shall be allocated between deductions for living expenses (within the meaning of section 162(a)) and other miscellaneous itemized deductions. The amount of deductions for living expenses of a Member of Congress that is disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the aggregate amount of such living expenses (determined without regard to the $3,000 limitation of section 162(a) but with regard to any other limitations) by a fraction, the numerator of which is the aggregate amount disallowed pursuant to section 67 and paragraph (a) of this section with respect to miscellaneous itemized deductions of the Member of Congress and the denominator of which is the amount of miscellaneous itemized deductions (including deductions for living expenses) of the Member of Congress (determined without regard to the $3,000 limitation of section 162(a) but without regard to any other limitations). The amount of deductions for miscellaneous itemized deductions (other than deductions for living expenses) of a Member of Congress that are disallowed pursuant to section 67 and paragraph (a) of this section is determined by multiplying the amount of miscellaneous itemized deductions (other than deductions for living expenses) of the Member of Congress (determined with regard to any limitations) by the fraction described in the preceding sentence.
(2) Example. The provisions of this paragraph (d) may be illustrated by the following example:
Example.For 1987 A, a Member of Congress, has adjusted gross income of $100,000, and miscellaneous itemized deductions of $10,750 of which $3,750 is for meals, $3,000 is for other living expenses, and $4,000 is for other miscellaneous itemized deductions (none of which is subject to any percentage limitations other than the 2-percent floor of section 67). The amount of A's business meal expenses that are disallowed under section 274(n) is $750 ($3,750 × 20%). The amount of A's miscellaneous itemized deductions that are disallowed under section 67 is $2,000 ($100,000 × 2%). The portion of the amount disallowed under section 67 that is allocated to A's living expenses is $1,200. This portion is equal to the amount of A's deductions for living expenses allowable after the application of section 274(n) and before the application of section 67 ($6,000) multiplied by the ratio of A's total miscellaneous itemized deductions disallowed under section 67 to A's total miscellaneous itemized deductions, determined without regard to the $3,000 limitation of section 162(a) ($2,000/$10,000). Thus, after application of section 274(n) and section 67, A's deduction for living expenses is $4,800 ($6,750−$750−$1,200). However, pursuant to section 162(a), A may deduct only $3,000 of such expenses. The amount of A's other miscellaneous itemized deductions that are disallowed under section 67 is $800 ($4,000 × $2,000/$10,000). Thus, $3,200 ($4,000−$800) of A's miscellaneous itemized deductions (other than deductions for living expenses) are allowable after application of section 67. A's total allowable miscellaneous itemized deductions are $6,200 ($3,000 + $3,200).
(e) State legislators. See § 1.62-1T(e)(4) with respect to rules regarding state legislator's expenses.
[T.D. 8189, 53 FR 9875, Mar. 28, 1988]
§ 1.67-2T Treatment of pass-through entities (temporary).
(a) Application of section 67. This section provides rules for the application of section 67 to partners, shareholders, beneficiaries, participants, and others with respect to their interests in pass-through entities (as defined in paragraph (g) of this section). In general, an affected investor (as defined in paragraph (h) of this section) in a pass-through entity shall separately take into account as an item of income and as an item of expense an amount equal to his or her allocable share of the affected expenses (as defined in paragraph (i) of this section) of the pass-through entity for purposes of determining his or her taxable income. Except as provided in paragraph (e)(1)(ii)(B) of this section, the expenses so taken into account shall be treated as paid or incurred by the affected investor in the same manner as paid or incurred by the pass-through entity. For rules regarding the application of section 67 to affected investors in—
(1) Partnerships, S corporations, and grantor trusts, see paragraph (b) of this section,
(2) Real estate mortgage investment conduits, see paragraph (c) of this section,
(3) Common trust funds, see paragraph (d) of this section,
(4) Nonpublicly offered regulated investment companies, see paragraph (e) of this section, and
(5) Publicly offered regulated investment companies, see paragraph (p) of this section.
(b) Partnerships, S corporations, and grantor trusts—(1) In general. Pursuant to section 702(a) and 1366(a) of the Code and the regulations thereunder, each partner of a partnership or shareholder of an S corporation shall take into account separately his or her distributive or pro rata share of any items of deduction of such partnership or corporation that are defined as miscellaneous itemized deductions pursuant to section 67(b). The 2-percent limitation described in section 67 does not apply to the partnership or corporation with respect to such deductions, but such deductions shall be included in the deductions of the partner or shareholder to which that limitation applies. Similarly, the limitation applies to the grantor or other person treated as the owner of a grantor trust with respect to items that are paid or incurred by a grantor trust and are treated as miscellaneous itemized deductions of the grantor or other person pursuant to Subpart E, Part 1, Subchapter J, Chapter 1 of the Code, but not to the trust itself. The 2-percent limitation applies to amounts otherwise deductible in taxable years of partners, shareholders, or grantors beginning after December 31, 1986, regardless of the taxable year of the partnership, corporation, or trust.
(2) Example. The provisions of this paragraph (b) may be illustrated by the following example:
Example.P, a partnership, incurs $1,000 in expenses to which section 212 applies during its taxable year. A, an individual, is a partner in P. A's distributive share of the expenses to which section 212 applies is $20, determined without regard to the 2-percent limitation of section 67. Pursuant to section 702(a), A must take $20 of expenses to which section 212 applies into account in determining his income tax. Pursuant to section 67, in determining his taxable income A may deduct his miscellaneous itemized deductions (including his $20 distributive share of deductions from P) to the extent the total amount exceeds 2 percent of his adjusted gross income.
(c) Real estate mortgage investment conduit. See § 1.67-3T for rules regarding the application of section 67 to holders of interests in REMICs.
(d) Common trust funds—(1) In general. For purposes of determining the taxable income of an affected investor that is a participant in a common trust fund—
(i) The ordinary taxable income and ordinary net loss of the common trust fund shall be computed under section 584(d)(2) without taking into account any affected expenses, and
(ii) Each affected investor shall be treated as having paid or incurred an expense described in section 212 in an amount equal to the affected investor's proportionate share of the affected expenses.
The 2-percent limitation described in section 67 applies to amounts otherwise deductible in taxable years of participants beginning after December 31, 1986, regardless of the taxable year of the common trust fund.
(2) Example. The provisions of this paragraph (d) may be illustrated by the following example:
Example.During 1987, the gross income and deductions of common trust fund C, a calendar year taxpayer, consist of the following items: (i) $50,000 of short-term capital gains; (ii) $150,000 of long-term capital gains; (iii) $1,000,000 of dividend income; (iv) $10,000 of deductions that are not affected expenses; and (v) $60,000 of deductions that are affected expenses. The proportionate share of Trust T in the income and losses of C is one percent. In computing its taxable income for 1987, T, a calendar year taxpayer, shall take into account the following items: (A) $500 of short-term capital gains (one percent of $50,000, C's short-term capital gains); (B) $1,500 of long-term capital gains (one percent of $150,000, C's long-term capital gains); (C) $9,900 of ordinary taxable income (one percent of $990,000, the excess of $100,000, C's gross income after excluding capital gains and losses, over $10,000, C's deductions that are not affected expenses); (D) $600 of expenses described in section 212 (one percent of $60,000, C's affected expenses).
(e) Nonpublicly offered regulated investment companies—(1) In general. For purposes of determining the taxable income of an affected investor that is a shareholder of a nonpublicly offered regulated investment company (as defined in paragraph (g)(3) of this section) during a calendar year—
(i) The current earnings and profits of the nonpublicly offered regulated investment company shall be computed without taking into account any affected RIC expenses that are allocated among affected investors, and
(ii) The affected investor shall be treated—
(A) As having received or accrued a dividend in an amount equal to the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year, and
(B) As having paid or incurred an expense described in section 212 (or section 162 in the case of an affected investor that is a nonpublicly offered regulated investment company) in an amount equal to the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year
in the affected investor's taxable year with which (or within which) the calendar year with respect to which the expenses are allocated ends. An affected investor's allocable share of the affected RIC expenses is the amount allocated to that affected investor pursuant to paragraph (k) of this section.
(2) Shareholders that are not affected investors. A shareholder of a nonpublicly offered regulated investment company that is not an affected investor shall not take into account in computing its taxable income any amount of income or expense with respect to its allocable share of affected RIC expenses.
(3) Example. The provisions of this paragraph (e) may be illustrated by the following example:
Example.During calendar year 1987, nonpublicly offered regulated investment company M distributes to individual shareholder A, a calendar year taxpayer, capital gain dividends of $1,000 and other dividends of $5,000. A's allocable share of the affected RIC expenses of M is $200. In computing A's taxable income for 1987, A shall take into account the following items: (i) $1,000 of long-term capital gains (the capital gain dividends received by A); (ii) $5,200 of dividend income (the sum of the other dividends received by A and A's allocable share of the affected RIC expenses of M); and (iii) $200 of expenses described in section 212 (A's allocable share of the affected RIC expenses of M). A is allowed a deduction for miscellaneous itemized deductions (including A's $200 allocable share of the affected RIC expenses of M, which is treated as an expense described in section 212) for 1987 only to the extent the aggregate of such deductions exceeds 2 percent of A's adjusted gross income for 1987.
(f) Cross-reference. See § 1.67-1T with respect to limitations on deductions for expenses described in section 212 (including amounts treated as such expenses under this section).
(g) Pass-through entity—(1) In general. Except as provided in paragraph (g)(2) of this section, for purposes of section 67(c) and this section, a pass-through entity is—
(i) A trust (or any portion thereof) to which Subpart E, Part 1, Subchapter J, Chapter 1 of the Code applies,
(ii) A partnership,
(iii) An S corporation,
(iv) A common trust fund described in section 584,
(v) A nonpublicly offered regulated investment company,
(vi) A real estate mortgage investment conduit, and
(vii) Any other person—
(A) Which is not subject to the income tax imposed by Subtitle A, Chapter 1, or which is allowed a deduction in computing such tax for distributions to owners or beneficiaries, and
(B) The character of the income of which may affect the character of the income recognized with respect to that person by its owners or beneficiaries.
Entities that do not meet the requirements of paragraph (g)(1)(vii) (A) and (B) of this section, such as qualified pension plans, individual retirement accounts, and insurance companies holding assets in separate asset accounts to fund variable contracts defined in section 817(d), are not described in this paragraph (g)(1).
(2) Exception. For purposes of section 67(c) and this section, a pass-through entity does not include:
(i) An estate;
(ii) A trust (or any portion thereof) not described in paragraph (g)(1)(i) of this section,
(iii) A cooperative described in section 1381(a)(2), determined without regard to subparagraphs (A) and (C) thereof, or
(iv) A real estate investment trust.
(3) Nonpublicly offered regulated investment company—(i) In general. For purposes of this section, the term “nonpublicly offered regulated investment company” means a regulated investment company to which Part I of Subchapter M of the Code applies that is not a publicly offered regulated investment company.
(ii) Publicly offered regulated investment company. For purposes of this section, the term “publicly offered regulated investment company” means a regulated investment company to which Part I of Subchapter M of the Code applies the shares of which are—
(A) Continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),
(B) Regularly traded on an established securities market, or
(C) Held by or for no fewer than 500 persons at all times during the taxable year.
(h) Affected investor—(1) In general. For purposes of this section, the term “affected investor” means a partner, shareholder, beneficiary, participant, or other interest holder in a pass-through entity at any time during the pass-through entity's taxable year that is—
(i) An individual (other than a nonresident alien whose income with respect to his or her interest in the pass-through entity is not effectively connected with the conduct of a trade or business within the United States),
(ii) A person, including a trust or estate, that computes its taxable income in the same manner as in the case of an individual; or
(iii) A pass-through entity if one or more of its partners, shareholders, beneficiaries, participants, or other interest holders is (A) a pass-through entity or (B) a person described in paragraph (h)(1) (i) or (ii) of this section.
(2) Examples. The provisions of this paragraph (h) may be illustrated by the following examples:
Example 1.Corporation X holds shares of nonpublicly offered regulated investment company R in its capacity as a nominee or custodian for individual A, the beneficial owner of the shares. Because the owner of the shares for Federal income tax purposes is an individual, the shares are owned by an affected investor.
Example 2.Individual retirement account I owns shares of a nonpublicly offered regulated investment company. Because an individual retirement account is not a person described in paragraph (h)(1) of this section, the shares are not owned by an affected investor.
(i) Affected expenses—(1) In general. In general, for purposes of this section, the term “affected expenses” means expenses that, if paid or incurred by an individual, would be deductible, if at all, as miscellaneous itemized deductions as defined in section 67(b).
(2) Special rule for nonpublicly offered regulated investment companies. In the case of a nonpublicly offered regulated investment company, the term “affected expenses” means only affected RIC expenses.
(j) Affected RIC expenses—(1) In general. In general, for purposes of this section the term “affected RIC expenses” means the excess of—
(i) The aggregate amount of the expenses (other than expenses described in sections 62(a)(3) and 67(b) and § 1.67-1T(b)) paid or incurred in the calendar year that are allowable as a deduction in determining the investment company taxable income (without regard to section 852(b)(2)(D)) of the nonpublicly offered regulated investment company for a taxable year that begins or ends with or within the calendar year, over
(ii) The amount of expenses taken into account under paragraph (j)(1)(i) of this section that are allocable to the following items (whether paid separately or included as part of a fee paid to an investment advisor or other person for a variety of services):
(A) Registration fees;
(B) Directors' or trustees' fees;
(C) Periodic meetings of directors, trustees, or shareholders;
(D) Transfer agent fees;
(E) Legal and accounting fees (other than fees for income tax return preparation or income tax advice); and
(F) Shareholder communications required by law (e.g. the preparation and mailing of prospectuses and proxy statements).
Expenses described in paragraph (j)(1)(ii) (A) through (F) of this section do not include, for example, expenses allocable to investment advice, marketing activities, shareholder communications and other services not specifically described in paragraph (j)(1)(ii) (A) through (F) of this section, and custodian fees.
(2) Safe harbor. If a nonpublicly offered regulated investment company makes an election under this paragraph (j)(2), the affected RIC expenses for a calendar year shall be treated as equal to 40 percent of the amount determined under paragraph (j)(1)(i) of this section for that calendar year. The nonpublicly offered regulated investment company shall make the election by attaching to its income tax return for the taxable year that includes the last day of the first calendar year for which the nonpublicly offered regulated investment company makes the election a statement that it is making an election under paragraph (j)(2) of this section. An election made pursuant to this paragraph (j)(2) shall remain in effect for all subsequent calendar years unless revoked with the consent of the Commissioner.
(3) Reduction for unused RIC expenses. The amount determined under paragraph (j)(1)(i) of this section shall be reduced by the nonpublicly offered regulated investment company's net operating loss, if any, for the taxable year ending with or within the calendar year. In computing the nonpublicly offered regulated investment company's net operating loss for purposes of this section, the deduction for dividends paid shall not be allowed and any net capital gain for the taxable year shall be excluded.
(4) Exception. The affected RIC expenses of a nonpublicly offered regulated investment company will be treated as zero if the amount of its gross income for the calendar year (determined without regard to capital gain net income) is not greater than 1 percent of the sum of (i) such gross income and (ii) the amount of its interest income for the calendar year that is not includible in gross income pursuant to section 103.
(k) Allocation of expenses among nonpublicly offered regulated investment company shareholders—(1) General rule. A nonpublicly offered regulated investment company shall allocate to each of its affected investors that is a shareholder at any time during the calendar year, the affected investor's allocable share of the affected RIC expenses of the nonpublicly offered regulated investment company for that calendar year. (See paragraph (m) of this section for rules regarding estimates with respect to the amount of an affected investor's share of affected RIC expenses upon which certain persons can rely for certain purposes.) A nonpublicly offered regulated investment company may use any reasonable method to make the allocation. A method of allocation shall not be reasonable if—
(i) The method can be expected to have the effect, if applied to all affected RIC expenses and all shareholders (whether or not affected investors), of allocating to the shareholders an amount of affected RIC expenses that is less than the affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year,
(ii) The method can be expected to have the effect of allocating a disproportionately high share of the affected RIC expenses of the nonpublicly offered regulated investment company to shareholders that are not affected investors or affected investors, the amount of whose miscellaneous itemized deductions (including their allocable share of affected RIC expenses) exceeds the 2-percent floor described in section 67, or
(iii) A principal purpose of the method of allocation is to avoid allocating affected RIC expenses to persons described in paragraph (h)(1) (i) or (ii) of this section whose miscellaneous itemized deductions (inclusive of their allocable share of affected RIC expenses) may not exceed the 2-percent floor described in section 67.
(2) Reasonable allocation method described—(i) In general. The allocation method described in this paragraph (k)(2) shall be treated as a reasonable allocation method. Under the method described in this paragraph, an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company is the amount that bears the same ratio to the amount of affected RIC expenses of the nonpublicly offered regulated investment company for the calendar year as—
(A) The amount of dividends paid to the affected investor during the calendar year, bears to
(B) The sum of—
(1) The aggregate amount of dividends paid by the nonpublicly offered regulated investment company during the calendar year to all shareholders, and
(2) Any amount on which tax is imposed under section 852(b)(1) for any taxable year of the nonpublicly offered regulated investment company ending within or with the calendar year.
(ii) Exception. Paragraph (k)(2)(i) of this section does not apply if the amount of the deduction for dividends paid during the calendar year is zero.
(iii) Dividends paid. For purposes of this paragraph (k)(2)—
(A) Dividends that are treated as paid during a calendar year pursuant to section 852(b)(7) are treated as paid during that calendar year and not during the succeeding calendar year.
(B) The term “dividends paid” does not include capital gain dividends (as defined in section 852(b)(3)(C)), exempt-interest dividends (as defined in section 852(b)(5)(A)), or any amount to which section 302(a) applies.
(C) The dividends paid during a calendar year is determined without regard to section 855(a).
(3) Reasonable allocation made by District Director. If a nonpublicly offered regulated investment company does not make a reasonable allocation of affected RIC expenses to its affected investors as required by paragraph (k)(1) of this section, a reasonable allocation shall be made by the District Director of the internal revenue district in which the principal place of business or principal office or agency of the nonpublicly offered regulated investment company is located.
(4) Examples. The provisions of this paragraph (k) may be illustrated by the following examples:
Example 1.Nonpublicly offered regulated investment company M, in calculating its investment company taxable income, claims a dividends paid deduction for a portion of redemption distributions (to which section 302(a) applies) to shareholders, as well as for nonredemption distributions. M allocates affected expenses among shareholders who have received nonredemption distributions by multiplying the amount of nonredemption distributions distributed to each shareholder by a fraction, the numerator of which is the affected RIC expenses of M and the denominator of which is M's investment company taxable income, determined on a calendar year basis and without regard to deductions described in section 852(b)(2)(D). No affected RIC expenses are allocated with respect to the redemption distributions. This allocation method can be expected to have the effect of allocating among the shareholders an amount of expenses that is less than the total amount of affected RIC expenses of M. Accordingly, the allocation method is not reasonable.
Example 2.Nonpublicly offered regulated investment company N has two classes of stock, a “capital” class and an “income” class. Owners of the capital class receive the benefit of all capital appreciation on the stocks owned by N, and bear the burden of certain capital expenditures of N; owners of the income class receive the benefit of all other income of N, and bear the burden of all expenses of N that are deductible under section 162. M allocates all affected RIC expenses among shareholders of the income class shares under a method that would be reasonable if the income class were the only class of N stock. Corporations and other shareholders that are not affected investors own a higher proportion of income class shares than of capital class shares. The affected RIC expenses of N are properly allocated among the shareholders who bear the burden of those expenses. Accordingly, the allocation method does not have the effect of allocating a disproportionately high share of the affected RIC expenses of N to shareholders that are not affected investors merely because a disproportionate share of income class shares are owned by shareholders that are not affected investors. The allocation method is reasonable.
Example 3.Nonpublicly offered regulated investment company O has two classes of stock, Class A and Class B. Shares of Class A, which may be purchased without payment of a sales or brokerage commission, are charged with the expenses of a Rule 12b-1 distribution plan of O. Shares of Class B, which may be purchased only upon payment of a sales or brokerage commission, are not charged with the expenses of the Rule 12b-1 distribution plan of O. O allocates all affected RIC expenses among shareholders of Class A and Class B shares under a method that would be reasonable if Class A or Class B shares, respectively, were the only class of O stock. The affected RIC expenses attributable to the Rule 12b-1 plan are allocated to the shareholders of Class A shares. Shareholders that are not affected investors own a higher proportion of Class A shares than of Class B shares. The affected RIC expenses of O are properly allocated among the shareholders who bear the burden of those expenses. Accordingly, the allocation method does not have the effect of allocating a disproportionately high share of the affected RIC expenses of O to shareholders that are not affected investors merely because a disproportionately high share of Class A shares are owned by persons that are not affected investors. The allocation method is reasonable.
Example 4.Assume the facts are the same as in example (3) except that a portion of the affected RIC expenses attributable to the Rule 12b-1 plan are allocated to the shareholders of Class B shares, and shareholders that are not affected investors own a higher proportion of Class B shares than of Class A shares. Thus, the affected RIC expenses are not allocated among the class of shareholders that bear the burden of the expenses. Accordingly, the allocation method has the effect of allocating a disproportionate share of the affected RIC expenses of O to the shareholders of Class B shares. Because shareholders that are not affected investors own a higher proportion of Class B shares than Class A shares, the method can be expected to allocate a disproportionately high share of the affected RIC expenses of O to shareholders that are not affected investors. Accordingly, the allocation method is not reasonable.
(l) Affected RIC expenses not subject to backup withholding. The amount of dividend income that an affected investor in a nonpublicly offered regulated investment company is treated as having received or accrued under paragraph (e)(1)(ii) of this section is not subject to backup withholding under section 3406.
(m) Reliance by nominees and pass-through investors on notices—(1) General rule. Persons described in paragraph (m)(3) of this section may, for the purposes described in that paragraph (m)(3), treat an affected investor's allocable share of the affected RIC expenses of a nonpublicly offered regulated investment company as being equal to an amount determined by the nonpublicly offered regulated investment company on the basis of a reasonable estimate (e.g., of allocable expenses as a percentage of dividend distributions or allocable expenses per share) that is (i) reported in writing by the nonpublicly offered regulated investment company to the person or (ii) reported in a newspaper or financial publication having a nationwide circulation (e.g., the Wall Street Journal or Standard and Poor's Weekly Dividend Record).
(2) Estimates must be reasonable. In general, for purposes of paragraph (m)(1) of this section, estimates of affected RIC expenses of a nonpublicly offered regulated investment company will be treated as reasonable only if the nonpublicly offered regulated investment company makes a reasonable effort to offset material understatements (or overstatements) of affected RIC expenses for a period by increasing (or decreasing) estimates of affected RIC expenses for a subsequent period. Understatements or overstatements of affected RIC expenses that are not material may be corrected by making offsetting adjustments in future periods, provided that understatements and overstatements are treated consistently.
(3) Application. Paragraph (m)(1) of this section shall apply to the following persons for the following purposes:
(i) A nominee who, pursuant to section 6042(a)(1)(B) and paragraph (n)(2) of this section, is required to report dividends paid by a nonpublicly offered regulated investment company to the Internal Revenue Service and to the person to whom the payment is made, for purposes of reporting to the Internal Revenue Service and the person to whom the payment is made the amount of affected RIC expenses allocated to such person.
(ii) An affected investor to whom a nominee (to which paragraph (m)(3)(i) of this section applies) reports, for purposes of calculating the affected investor's taxable income and the amount of its affected expenses.
(iii) A shareholder that is a pass-through entity, for purposes of calculating its taxable income and the amount of its affected expenses.
(n) Return of information and reporting to affected investors by a nonpublicly offered regulated investment company—(1) In general—(i) Return of information. A nonpublicly offered regulated investment company shall make an information return (e.g., Form 1099-DIV, Dividends and Distributions, for 1987) with respect to each affected investor to which an allocation of affected RIC expenses is required to be made pursuant to paragraph (k) of this section and for which the nonpublicly offered regulated investment company is required to make an information return to the Internal Revenue Service pursuant to section 6042 (or would be required to make such information return but for the $10 threshold described in section 6042 (a)(1) (A) and (B). The nonpublicly offered regulated investment company shall make the information return for each calendar year and shall state separately on such return—
(A) The amount of affected RIC expenses required to be allocated to the affected investor for the calendar year pursuant to paragraph (k) of this section,
(B) The sum of—
(1) The aggregate amount of the dividends paid to the affected investor during the calendar year, and
(2) The amount of the affected RIC expenses required to be allocated to the affected investor for the calendar year pursuant to paragraph (k) of this section, and
(C) Such other information as may be specified by the form or its instructions.
(ii) Statement to be furnished to affected investors. A nonpublicly offered regulated investment company shall provide to each affected investor for each calendar year (whether or not the nonpublicly offered regulated investment company is required to make an information return with respect to the affected investor pursuant to section 6042), a written statement showing the following information:
(A) The information described in paragraph (n)(1)(i) of this section with respect to the affected investor;
(B) The name and address of the nonpublicly offered regulated investment company;
(C) The name and address of the affected investor; and
(D) If the nonpublicly offered regulated investment company is required to report the amount of the affected investor's allocation of affected RIC expense to the Internal Revenue Service pursuant to paragraph (n)(1)(i) of this section a statement to that effect.
(iii) Affected investor's shares held by a nominee. If an affected investor's shares in a nonpublicly offered regulated investment company are held in the name of a nominee, the nonpublicly offered regulated investment company may make the information return described in paragraph (n)(1)(i) of this section with respect to the nominee in lieu of the affected investor and may provide the written statement described in paragraph (n)(1)(ii) of this section to such nominee in lieu of the affected investor.
(2) By a nominee—(i) In general. Except as otherwise provided for in paragraph (n)(2)(iii) of this section, in any case in which a nonpublicly offered regulated investment company provides, pursuant to paragraph (n)(1)(iii) of this section, a written statement to the nominee of an affected investor for a calendar year, the nominee shall—
(A) If the nominee is required to make an information return pursuant to section 6042 (or would be required to make an information return but for the $10 threshold described in section 6042(a)(1) (A) and (B), make an information return (e.g., Form 1099-DIV, Dividends and Distributions, for 1987) for the calendar year with respect to each affected investor and state separately on such information return the information described in paragraph (n)(1)(i) of this section, and
(B) Furnish each affected investor with a written statement for the calendar year showing the information required by paragraph (n)(2)(ii) of this section (whether or not the nominee is required to make an information return with respect to the affected investor pursuant to section 6042).
(ii) Form of statement. The written statement required to be furnished for a calendar year pursuant to paragraph (n)(2)(i)(B) of this section shall show the following information:
(A) The affected investor's proportionate share of the items described in paragraph (n)(1)(i) of this section for the calendar year,
(B) The name and address of the nominee,
(C) The name and address of the affected investor, and
(D) If the nominee is required to report the affected investor's share of the allocable investment expenses to the Internal Revenue Service pursuant to paragraph (n)(2)(i)(A) of this section, a statement to that effect.
(iii) Return not required. A nominee is not required to make an information return with respect to an affected investor pursuant to paragraph (n)(2)(i)(A) of this section if the nominee is excluded from the requirements of section 6042 pursuant to § 1.6042-2(a)(1) (ii) or (iii).
(iv) Statement not required. A nominee is not required to furnish a written statement to an affected investor pursuant to paragraph (n)(2)(i)(B) of this section if the nonpublicly offered regulated investment company furnishes the written statement to the affected investor pursuant to an agreement with the nominee described in § 1.6042-2(a)(1)(iii).
(v) Special rule. Paragraph (n)(1) (i) and (ii) of this section applies to a nonpublicly offered regulated investment company that agrees with the nominee to satisfy the requirements of section 6042 as described in § 1.6042-2(a)(1)(iii) with respect to the affected investor.
(3) Time and place for furnishing returns. The returns required by paragraph (n)(1)(i) and (2)(i)(A) of this section for any calendar year shall be filed at the time and place that a return required under section 6042 is required to be filed. See § 1.6042-2(c) .
(4) Time for furnishing statements. The statements required by paragraph (n)(1)(ii) and (2)(i)(B) of this section to be furnished by a nonpublicly offered regulated investment company and a nominee, respectively, to an affected investor for a calendar year shall be furnished to such affected investor on or before January 31 of the following year.
(5) Duplicative returns and statements not required—(i) Information return. The requirements of paragraph (n)(1)(i) and (2)(i)(A) of this section for the making of an information return shall be met by the timely filing of an information return pursuant to section 6042 that contains the information required by paragraph (n)(1)(i).
(ii) Written statement. The requirements of paragraph (n)(1)(ii) and (2)(i)(B) of this section for the furnishing of a written statement (including the statement required by paragraph (n)(1)(ii)(D) and (2)(ii)(D) of this section) shall be met by furnishing the affected investor a copy of the information return to which section 6042 applies (whether or not the nonpublicly offered regulated investment company or nominee is required to file an information return with respect to the affected investor pursuant to section 6042) that contains the information required by paragraph (n)(1)(ii) or (2)(ii), whichever is applicable, of this section. Nonpublicly offered regulated investment companies and nominees may use a substitute form that contains provisions substantially similar to those of the prescribed form if the nonpublicly offered regulated investment company or nominee complies with all revenue procedures relating to substitute forms in effect at the time. The statement shall be furnished either in person or in a statement mailed by first-class mail that includes adequate notice that the statement is enclosed. A statement shall be considered to be furnished to an affected investor within the meaning of this section if it is mailed to such affected investor at its last known address.
(o) Return of information by a common trust fund. With respect to each affected investor to which paragraph (d) of this section applies, the common trust fund shall state on the return it is required to make pursuant to section 6032 for its taxable year, the following information:
(1) The amount of the affected investor's proportionate share of the affected expenses for the taxable year as described in paragraph (d)(1)(ii) of this section.
(2) The amount of the affected investor's proportionate share of ordinary taxable income or ordinary net loss for the taxable year determined pursuant to paragraph (d)(1)(i) of this section, and
(3) Such other information as may be specified by the form or its instructions.
(p) Publicly offered regulated investment companies. [Reserved]
[T.D. 8189, 53 FR 9876, Mar. 28, 1988; 53 FR 13464, Apr. 25, 1988]
§ 1.67-3 Allocation of expenses by real estate mortgage investment conduits.
(a) Allocation of allocable investment expenses. [Reserved]
(b) Treatment of allocable investment expenses. [Reserved]
(c) Computation of proportionate share. [Reserved]
(d) Example. [Reserved]
(e) Allocable investment expenses not subject to backup withholding. [Reserved]
(f) Notice to pass-through interest holders—(1) Information required. A REMIC must provide to each pass-through interest holder to which an allocation of allocable investment expense is required to be made under § 1.67-3T(a)(1) notice of the following—
(i) If, pursuant to paragraph (f)(2)(i) or (ii) of this section, notice is provided for a calendar quarter, the aggregate amount of expenses paid or accrued during the calendar quarter for which the REMIC is allowed a deduction under section 212;
(ii) If, pursuant to paragraph (f)(2)(ii) of this section, notice is provided to a regular interest holder for a calendar year, the aggregate amount of expenses paid or accrued during each calendar quarter that the regular interest holder held the regular interest in the calendar year and for which the REMIC is allowed a deduction under section 212; and
(iii) The proportionate share of these expenses allocated to that pass-through interest holder, as determined under § 1.67-3T(c).
(2) Statement to be furnished—(i) To residual interest holder. For each calendar quarter, a REMIC must provide to each pass-through interest holder who holds a residual interest during the calendar quarter the notice required under paragraph (f)(1) of this section on Schedule Q (Form 1066), as required in § 1.860F-4(e).
(ii) To regular interest holder. For each calendar year, a single-class REMIC (as described in § 1.67-3T(a)(2)(ii)(B)) must provide to each pass-through interest holder who held a regular interest during the calendar year the notice required under paragraph (f)(1) of this section. Quarterly reporting is not required. The information required to be included in the notice may be separately stated on the statement described in § 1.6049-7(f) instead of on a separate statement provided in a separate mailing. See § 1.6049-7(f)(4). The separate statement provided in a separate mailing must be furnished to each pass-through interest holder no later than the last day of the month following the close of the calendar year.
(3) Returns to the Internal Revenue Service—(i) With respect to residual interest holders. Any REMIC required under paragraphs (f)(1) and (2)(i) of this section to furnish information to any pass-through interest holder who holds a residual interest must also furnish such information to the Internal Revenue Service as required in § 1.860F-4(e)(4).
(ii) With respect to regular interest holders. A single-class REMIC (as described in § 1.67-3T(a)(2)(ii)(B)) must make an information return on Form 1099 for each calendar year, with respect to each pass-through interest holder who holds a regular interest to which an allocation of allocable investment expenses is required to be made pursuant to § 1.67-3T(a)(1) and (2)(ii). The preceding sentence applies with respect to a holder for a calendar year only if the REMIC is required to make an information return to the Internal Revenue Service with respect to that holder for that year pursuant to section 6049 and § 1.6049-7(b)(2)(i) (or would be required to make an information return but for the $10 threshold described in section 6049(a)(1) and § 1.6049-7(b)(2)(i)). The REMIC must state on the information return—
(A) The sum of—
(1) The aggregate amounts includible in gross income as interest (as defined in § 1.6049-7(a)(1)(i) and (ii)), for the calendar year; and
(2) The sum of the amount of allocable investment expenses required to be allocated to the pass-through interest holder for each calendar quarter during the calendar year pursuant to § 1.67-3T(a); and
(B) Any other information specified by the form or its instructions.
(4) Interest held by nominees and other specified persons—(i) Pass-through interest holder's interest held by a nominee. If a pass-through interest holder's interest in a REMIC is held in the name of a nominee, the REMIC may make the information return described in paragraphs (f)(3)(i) and (ii) of this section with respect to the nominee in lieu of the pass-through interest holder and may provide the written statement described in paragraphs (f)(2)(i) and (ii) of this section to that nominee in lieu of the pass-through interest holder.
(ii) Regular interests in a single-class REMIC held by certain persons. If a person specified in § 1.6049-7(e)(4) holds a regular interest in a single-class REMIC (as described in § 1.67-3T(a)(2)(ii)(B)), then the single-class REMIC must provide the information described in paragraphs (f)(1) and (f)(3)(ii)(A) and (B) of this section to that person with the information specified in § 1.6049-7(e)(2) as required in § 1.6049-7(e).
(5) Nominee reporting—(i) In general. In any case in which a REMIC provides information pursuant to paragraph (f)(4) of this section to a nominee of a pass-through interest holder for a calendar quarter or, as provided in paragraph (f)(2)(ii) of this section, for a calendar year—
(A) The nominee must furnish each pass-through interest holder with a written statement described in paragraph (f)(2)(i) or (ii) of this section, whichever is applicable, showing the information described in paragraph (f)(1) of this section; and
(B) The nominee must make an information return on Form 1099 for each calendar year, with respect to the pass-through interest holder and state on this information return the information described in paragraphs (f)(3)(ii) (A) and (B) of this section, if—
(1) The nominee is a nominee for a pass-through interest holder who holds a regular interest in a single-class REMIC (as described in § 1.67-3T(a)(2)(ii)(B)); and
(2) The nominee is required to make an information return pursuant to section 6049 and § 1.6049-7 (b)(2)(i) and (b)(2)(ii)(B) (or would be required to make an information return but for the $10 threshold described in section 6049(a)(2) and § 1.6049-7(b)(2)(i)) with respect to the pass-through interest holder.
(ii) Time for furnishing statement. The statement required by paragraph (f)(5)(i)(A) of this section to be furnished by a nominee to a pass-through interest holder for a calendar quarter or calendar year must be furnished to this holder no later than 30 days after receiving the written statement described in paragraph (f)(2)(i) or (ii) of this section from the REMIC. If, however, pursuant to paragraph (f)(2)(ii) of this section, the information is separately stated on the statement described in § 1.6049-7(f), then the information must be furnished to the pass-through interest holder in the time specified in § 1.6049-7(f)(5).
(6) Special rules—(i) Time and place for furnishing returns. The returns required by paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for any calendar year must be filed at the time and place that a return required under section 6049 and § 1.6049-7(b)(2) is required to be filed. See § 1.6049-4(g) and § 1.6049-7(b)(2)(iv).
(ii) Duplicative returns not required. The requirements of paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for the making of an information return are satisfied by the timely filing of an information return pursuant to section 6049 and § 1.6049-7(b)(2) that contains the information required by paragraph (f)(3)(ii) of this section.
[T.D. 8431, 57 FR 40321, Sept. 3, 1992]
§ 1.67-3T Allocation of expenses by real estate mortgage investment conduits (temporary).
(a) Allocation of allocable investment expenses—(1) In general. A real estate mortgage investment conduit or REMIC (as defined in section 860D) shall allocate to each of its pass-through interest holders that holds an interest at any time during the calendar quarter the holder's proportionate share (as determined under paragraph (c) of this section) of the aggregate amount of allocable investment expenses of the REMIC for the calendar quarter.
(2) Pass-through interest holder—(i) In general—(A) Meaning of term. Except as provided in paragraph (a)(2)(ii) of this section, the term “pass-through interest holder” means any holder of a REMIC residual interest (as definition in section 860G(a)(2)) that is—
(1) An individual (other than a nonresident alien whose income with respect to his or her interest in the REMIC is not effectively connected with the conduct of a trade or business within the United States),
(2) A person, including a trust or estate, that computes its taxable income in the same manner as in the case of an individual, or
(3) A pass-through entity (as defined in paragraph (a)(3) of this section) if one or more of its partners, shareholders, beneficiaries, participants, or other interest holders is (i) a pass-through entity or (ii) a person described in paragraph (a)(2)(i)(A) (1) or (2) of this section.
(B) Examples. The provisions of this paragraph (a)(2)(i) may be illustrated by the following examples:
Example 1.Corporation X holds a residual interest in REMIC R in its capacity as a nominee or custodian for individual A, the beneficial owner of the interest. Because the owner of the interest for Federal income tax purposes is an individual, the interest is owned by a pass-through interest holder.
Example 2.Individual retirement account I holds a residual interest in a REMIC. Because an individual retirement account is not a person described in paragraph (a)(2)(i)(A) of this section, the interest is not held by a pass-through interest holder.
(ii) Single-class REMIC—(A) In general. In the case of a single-class REMIC, the term “pass-through interest holder” means any holder of either—
(1) A REMIC regular interest (as defined in section 860G(a)(1)), or
(2) A REMIC residual interest, that is described in paragraph (a)(2)(i)(A) (1), (2), or (3) of this section.
(B) Single-class REMIC. For purposes of paragraph (a)(2)(ii)(A) of this section, a single-class REMIC IS either—
(1) A REMIC that would be classified as an investment trust under § 301.7701-4(c)(1) but for its qualification as a REMIC under section 860D and § 1.860D-1T, or
(2) A REMIC that—
(i) Is substantially similar to an investment trust under § 301.7701-4(c)(1), and
(ii) Is structured with the principal purpose of avoiding the requirement of paragraphs (a)(1) and (2)(ii)(A) of this section to allocate allocable investment expenses to pass-through interest holders that hold regular interests in the REMIC.
For purposes of this paragraph (a)(2)(ii)(B), in determining whether a REMIC would be classified as an investment trust or is substantially similar to an investment trust, all interests in the REMIC shall be treated as ownership interests in the REMIC, without regard to whether or not they would be classified as debt for Federal income tax purposes in the absence of a REMIC election.
(C) Examples. The provisions of paragraph (a)(2)(ii) of this section must be illustrated by the following examples:
Example 1.Corporation M transfers mortgages to a bank under a trust agreement as described in Example (2) of § 301.7701-4(c)(2). There are two classes of certificates. Holders of class C certificates are entitled to receive 90 percent of the payment of principal and interest on the mortgages; holders of class D certificates are entitled to receive the remaining 10 percent. The two classes of certificates are identical except that, in the event of a default on the underlying mortgages, the payment rights of class D certificates holders are subordinated to the rights of class C certificate holders. M sells the class C certificates to investors and retains the class D certificates. The trust would be classified as an investment trust under § 301.7701-4(c)(1) but for its qualification a REMIC under section 860D the class C certificates represent regular interests in the REMIC and the class D certificates represent residual interest in the REMIC. The REMIC is a single-class REMIC within the meaning of paragraph (a)(2)(ii)(B)(1) of this section and, accordingly, holders of both the class C and class D certificates who are described in paragraph (a)(2)(i)(A) (1), (2), or (3) of this section are treated as pass-through interest holders.
Example 2.Assume that the facts are the same as in Example (1) except that M structures the REMIC to include a second regular interest represented by class E certificates. The principal purpose of M in structuring the REMIC to include class E certificates is to avoid allocating allocable investment expenses to class C certificate holders. The class E certificate holders are entitled to receive the payments otherwise due the class D certificate holders until they have been paid a stated amount of principal plus interest. The fair market value of the class E certificate is ten percent of the fair market value of the class D certificate and, therefore, less than one percent of the fair market value of the REMIC. The REMIC would not be classified as an investment trust under § 301.7701-4(c)(1) because the existence of the class E certificates is not incidental to the trust's purpose of facilitating direct investment in the assets of the trust. Nevertheless, because the fair market value of the class E certificates is de minimis, the REMIC is substantially similar to an investment trust under § 301.7701-4(c)(1). In addition, avoidance of the requirement to allocate allocable investment expenses to regular interest holders is the principal purpose of M in structuring the REMIC to include class E certificates. Therefore, the REMIC is a single-class REMIC within the meaning of paragraph (a)(2)(ii)(B)(2) of this section, and, accordingly, holders of both residual and regular interests who are described in paragraph (a)(2)(i)(A) (1), (2), or (3) of this section are treated as pass-through interest holders.
(3) Pass-through entity—(i) In general. Except as provided in paragraph (a)(3)(ii) of this section, for purposes of this section, a pass-through entity is—
(A) A trust (or any portion thereof) to which Subpart E, Part 1, Subchapter J, Chapter 1 of the Code applies,
(B) A partnership,
(C) An S corporation,
(D) A common trust fund described in section 584,
(E) A nonpublicly offered regulated investment company (as defined in paragraph (a)(5)(i) of this section),
(F) A REMIC, and
(G) Any other person—
(1) Which is not subject to income tax imposed by Subtitle A, Chapter 1, or which is allowed a deduction in computing such tax for distributions to owners or beneficiaries, and
(2) The character of the income of which may affect the character of the income recognized with respect to that person by its owners or beneficiaries.
Entities that do not meet the requirements of paragraphs (a)(3)(i)(G) (1) and (2), such as qualified pension plans, individual retirement accounts, and insurance companies holding assets in separate asset accounts to fund variable contracts defined in section 817(d), are not described in this paragraph (a)(3)(i).
(ii) Exception. For purposes of this section, a pass-through entity does not include—
(A) An estate,
(B) A trust (or any portion thereof) not described in paragraph (a)(3)(i)(A) of this section,
(C) A cooperative described without regard to subparagraphs (A) and (C) thereof, or
(D) A real estate investment trust.
(4) Allocable investment expenses. The term “allocable investment expenses” means the aggregate amount of the expenses paid or accrued in the calendar quarter for which a deduction is allowable under section 212 in determining the taxable income of the REMIC for the calendar quarter.
(5) Nonpublicly offered regulated investment company—(i) In general. For purposes of this section, the term “nonpublicly offered regulated investment company” means a regulated investment company to which Part I of Subchapter M of the Code applies that is not a publicly offered regulated investment company.
(ii) Publicly offered regulated investment company. For purposes of this section, the term “publicly offered regulated investment company” means a regulated investment company to which Part I of subchapter M of the Code applies, the shares of which are—
(A) Continuously offered pursuant to a public offering (within the meaning of section 4 of the Securities Act of 1933, as amended (15 U.S.C. 77a to 77aa)),
(B) Regularly traded on an established securities market, or
(C) Held by or for no fewer than 500 persons at all times during the taxable year.
(b) Treatment of allocable investment expenses—(1) By pass-through interest holders—(i) Taxable year ending with calendar quarter. A pass-through interest holder whose taxable year is the calendar year or ends with a calendar quarter shall be treated as having—
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section 212 (or section 162 in the case of a pass-through interest holder that is a regulated investment company), in an amount equal to the pass-through interest holder's proportionate share of the allocable investment expenses of the REMIC for those calendar quarters that fall within the holder's taxable year.
(ii) Taxable year not ending with calendar quarter. A pass-through interest holder whose taxable year does not end with a calendar quarter shall be treated as having—
(A) Received or accrued income, and
(B) Paid or incurred an expense described in section 212 (or section 162 in the case of a pass-through interest holder that is a regulated investment company), in an amount equal to the sum of—
(C) The pass-through interest holder's proportionate share of the allocable investment expenses of the REMIC for those calendar quarters that fall within the holder's taxable year, and
(D) For each calendar quarter that overlaps the beginning or end of the taxable year, the sum of the daily amounts of the allocable investment expenses allocated to the holder pursuant to paragraph (c)(1)(ii) of this section for the days in the quarter that fall within the holder's taxable year.
(2) Proportionate share of allocable investment expenses. For purposes of paragraph (b) of this section, a pass-through interest holder's proportionate share of the allocable investment expenses is the amount allocated to the pass-through interest holder pursuant to paragraph (a)(1) of this section.
(3) Cross-reference. See § 1.67-1T with respect to limitations on deductions for expenses described in section 212 (including amounts treated as such expenses under this section).
(4) Interest income to holders of regular interests in certain REMICs. Any amount allocated under this section to the holder of a regular interest in a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section) shall be treated as interest income.
(5) No adjustment to basis. The basis of any holder's interest in a REMIC shall not be increased or decreased by the amount of the holder's proportionate share of allocable investment expenses.
(6) Interest holders other than pass-through interest holders. An interest holder of a REMIC that is not a pass-through interest holder shall not take into account in computing its taxable income any amount of income or expense with respect to its proportionate share of allocable investment expenses.
(c) Computation of proportionate share—(1) In general. For purposes of paragraph (a)(1) of this section, a REMIC shall compute a pass-through interest holder's proportionate share of the REMIC's allocable investment expenses by—
(i) Determining the daily amount of the allocable investment expenses for the calendar quarter by dividing the total amount of such expenses by the number of days in that calendar quarter.
(ii) Allocating the daily amount of the allocable investment expenses to the pass-through interest holder in proportion to its respective holdings on that day, and
(iii) Totaling the interest holder's daily amounts of allocable investment expenses for the calendar quarter.
(2) Other holders taken into account. For purposes of paragraph (c)(1)(ii) of this section, a pass-through interest holder's proportionate share of the daily amount of the allocable investment expenses is determined by taking into account all holders of residual interests in the REMIC, whether or not pass-through interest holders.
(3) Single-class REMIC—(i) Daily allocation. In lieu of the allocation specified in paragraph (c)(1)(ii) of this section, a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section) shall allocate the daily amount of the allocable investment expenses to each pass-through interest holder in proportion to the amount of income accruing to the holder with respect to its interest in the REMIC on that day.
(ii) Other holders taken into account. For purposes of paragraph (c)(3)(i) of this section, the amount of the allocable investment expenses that is allocated on any day to each pass-through interest holder shall be determined by multiplying the daily amount of allocable investment expenses (determined pursuant to paragraph (c)(1)(i) of this section) by a fraction, the numerator of which is equal to the amount of income that accrues (but not less than zero) to the pass-through interest holder on that day and the denominator of which is the total amount of income (as determined under paragraph (c)(3)(iii) of this section) that accrues to all regular and residual interest holders, whether or not pass-through interest holders, on that day.
(iii) Total income accruing. The total amount of income that accrues to all regular and residual interest holders is the sum of—
(A) The amount includible under section 860B in the gross income (but not less than zero) of the regular interest holders, and
(B) The amount of REMIC taxable income (but not less than zero) taken into account under section 860C by the residual interest holders.
(4) Dates of purchase and disposition. For purposes of this section, a pass-through interest holder holds an interest on the date of its purchase but not on the date of its disposition.
(d) Example. The provisions of this section may be illustrated by the following example:
Example. (i) During the calendar quarter ending March 31, 1989, REMIC X, which is not a single-class REMIC, incurs $900 of allocable investment expenses. At the beginning of the calendar quarter, X has 4 residual interest holders, who hold equal proportionate shares, and 10 regular interest holders. The residual interest holders, all of whom have calendar-year taxable years, are as follows:
A, an individual,
C, a C corporation that is a nominee for individual I.
S, an S corporation, and
M, a C corporation that is not a nominee.
(ii) Except for A, all of the residual interest holders hold their interests in X for the entire calendar quarter. On January 31, 1989, A sells his interest to S. Thus, for the first month of the calendar quarter, each residual interest holder holds a 25 percent interest (100%/4 interest holders) in X. For the last two months, S's holding is increased to 50 percent and A's holding is decreased to zero. The daily amount of allocable investment expenses for the calendar quarter is $10 ($900/90 days).
(iii) The amount of allocable investment expenses apportioned to the residual interest holders is as follows:
(A) $75 ($10 × 25% × 30 days) is allocated to A for the 30 days that A holds an interest in X during the calendar quarter. A includes $75 in gross income in calendar year 1989. The amount of A's expenses described in section 212 is increased by $75 in calendar year 1989. A's deduction under section 212 (including the $75 amount of the allocation) is subject to the limitations contained in section 67.
(B) $225 ($10 × 25% × 90 days) is allocated to C. Because C is a nominee for I, C does not include $225 in gross income or increase its deductible expenses by $225. Instead, I includes $225 in gross income in calendar year 1989, her taxable year. The amount of I's expenses described in section 212 is increased by $225. I's deduction under section 212 (including the $225 amount of the allocation) is subject to the limitations contained in section 67.
(C) $375 (($10 × 25% × 30 days) + ($10 × 50% × 60 days)) is allocated to S. S includes in gross income $375 of allocable investment expenses in calendar year 1989. The amount of S's expenses described in section 212 for that taxable year is increased by $375. S allocates the $375 to its shareholders in accordance with the rules described in sections 1366 and 1377 in calendar year 1989. Thus, each shareholder of S includes its pro rata share of the $375 in gross income in its taxable year in which or with which calendar year 1989 ends. The amount of each shareholder's expenses described in section 212 is increased by the amount of the shareholder's allocation for the shareholder's taxable year in which or with which calendar year 1989 ends. The shareholder's deduction under section 212 (including the allocation under this section) is subject to the limitations contained in section 67.
(D) No amount is allocated to M. However, M's interest is taken into account for purposes of determining the proportionate share of those residual interest holders to whom an allocation is required to be made.
(iv) No allocation is made to the 10 regular interest holders pursuant to paragraph (a) of this section. In addition, the interests held by these interest holders are not taken into account for purposes of determining the proportionate share of the residual interest holders to whom an allocation is required to be made.
(e) Allocable investment expenses not subject to backup withholding. The amount of allocable investment expenses required to be allocated to a pass-through interest holder pursuant to paragraph (a)(1) of this section is not subject to backup withholding under section 3406.
(f) Notice to pass-through interest holders—(1) Information required. A REMIC must provide to each pass-through interest holder to which an allocation of allocable investment expense is required to be made under paragraph (a)(1) of this section notice of the following—
(i) If, pursuant to paragraph (f)(2) (i) or (ii) of this section, notice is provided for a calendar quarter, the aggregate amount of expenses paid or accrued during the calendar quarter for which the REMIC is allowed a deduction under section 212;
(ii) If, pursuant to paragraph (f)(2)(ii) of this section, notice is provided to a regular interest holder for a calendar year, the aggregate amount of expenses paid or accrued during each calendar quarter that the regular interest holder held the regular interest in the calendar year and for which the REMIC is allowed a deduction under section 212; and
(iii) The proportionate share of these expenses allocated to that pass-through interest holder, as determined under paragraph (c) of this section.
(2) Statement to be furnished—(i) To residual interest holder. For each calendar quarter, a REMIC shall provide to each pass-through interest holder who holds a residual interest during the calendar quarter the notice required under paragraph (f)(1) of this section on Schedule Q (Form 1066), as required in § 1.860F-4(e).
(ii) To regular interest holder—(A) In general. For each calendar year, a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section) must provide to each pass-through interest holder who held a regular interest during the calendar year the notice required under paragraph (f)(1) of this section. Quarterly reporting is not required. The information required to be included in the notice may be separately stated on the statement described in § 1.6049-7(f) instead of on a separate statement provided in a separate mailing. See § 1.6049-7(f)(4). The separate statement provided in a separate mailing must be furnished to each pass-through interest holder no later than the last day of the month following the close of the calendar year.
(B) Special rule for 1987. The information required under paragraph (f)(2)(ii)(A) of this section for any calendar quarter of 1987 shall be mailed (or otherwise delivered) to each pass-through interest holder who holds a regular interest during that calendar quarter no later than March 28, 1988.
(3) Returns to the Internal Revenue Service—(i) With respect to residual interest holders. Any REMIC required under paragraphs (f)(1) and (2)(i) of this section to furnish information to any pass-through interest holder who holds a residual interest shall also furnish such information to the Internal Revenue Service as required in § 1.860F-4(e)(4).
(ii) With respect to regular interest holders. A single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section) shall make an information return on Form 1099 for each calendar year beginning after December 31, 1987, with respect to each pass-through interest holder who holds a regular interest to which an allocation of allocable investment expenses is required to be made pursuant to paragraphs (a)(1) and (2)(ii) of this section. The preceding sentence applies with respect to a holder for a calendar year only if the REMIC is required to make an information return to the Internal Revenue Service with respect to that holder for that year pursuant to section 6049 and § 1.6049-7(b)(2)(i) (or would be required to make an information return but for the $10 threshold described in section 6049(a)(1) and § 1.6049-7(b)(2)(i)). The REMIC shall state on the information return—
(A) The sum of—
(1) The aggregate amounts includible in gross income as interest (as defined in § 1.6049-7(a)(1) (i) and (ii)), for the calendar year, and
(2) The sum of the amount of allocable investment expenses required to be allocated to the pass-through interest holder for each calendar quarter during the calendar year pursuant to paragraph (a) of this section, and
(B) Any other information specified by the form or its instructions.
(4) Interest held by nominees and other specified persons—(i) Pass-through interest holder's interest held by a nominee. If a pass-through interest holder's interest in a REMIC is held in the name of a nominee, the REMIC may make the information return described in paragraphs (f)(3) (i) and (ii) of this section with respect to the nominee in lieu of the pass-through interest holder and may provide the written statement described in paragraphs (f)(2) (i) and (ii) of this section to that nominee in lieu of the pass-through interest holder.
(ii) Regular interests in a single-class REMIC held by certain persons. For calendar quarters and calendar years after December 31, 1991, if a person specified in § 1.6049-7(e)(4) holds a regular interest in a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section), then the single-class REMIC must provide the information described in paragraphs (f)(1) and (f)(3)(ii) (A) and (B) of this section to that person with the information specified in § 1.6049-7(e)(2) as required in § 1.6049-7(e).
(5) Nominee reporting—(i) In general. In any case in which a REMIC provides information pursuant to paragraph (f)(4) of this section to a nominee of a pass-through interest holder for a calendar quarter or, as provided in paragraph (f)(2)(ii) of this section, for a calendar year—
(A) The nominee shall furnish each pass-through interest holder with a written statement described in paragraph (f)(2) (i) or (ii) of this section, whichever is applicable, showing the information described in paragraph (f)(1) of this section, and
(B) If—
(1) The nominee is a nominee for a pass-through interest holder who holds a regular interest in a single-class REMIC (as described in paragraph (a)(2)(ii)(B) of this section), and
(2) The nominee is required to make an information return pursuant to section 6049 and § 1.6049-7(b)(2)(i) and (b)(2)(ii)(B) (or would be required to make an information return but for the $10 threshold described in section 6049(a)(2) and § 1.6049-7(b)(2)(i)) with respect to the pass-through interest holder,
the nominee shall make an information return on Form 1099 for each calendar year beginning after December 31, 1987, with respect to the pass-through interest holder and state on this information return the information described in paragraph (f)(3)(ii) (A) and (B) of this section.
(ii) Time for furnishing statement. The statement required by paragraph (f)(5)(i)(A) of this section to be furnished by a nominee to a pass-through interest holder for a calendar quarter or calendar year shall be furnished to this holder no later than 30 days after receiving the written statement described in paragraph (f)(2) (i) or (ii) of this section from the REMIC. If, however, pursuant to paragraph (f)(2)(ii) of this section, the information is separately stated on the statement described in § 1.6049-7(f), then the information must be furnished to the pass-through interest holder in the time specified in § 1.6049-7(f)(5).
(6) Special rules—(i) Time and place for furnishing returns. The returns required by paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for any calendar year shall be filed at the time and place that a return required under section 6049 and § 1.6049-7(b)(2) is required to be filed. See § 1.6049-4(g) and § 1.6049-7(b)(2)(iv).
(ii) Duplicative returns not required. The requirements of paragraphs (f)(3)(ii) and (f)(5)(i)(B) of this section for the making of an information return shall be met by the timely filing of an information return pursuant to section 6049 and § 1.6049-7(b)(2) that contains the information required by paragraph (f)(3)(ii) of this section.
[T.D. 8186, 53 FR 7507, Mar. 9, 1988, as amended by T.D. 8366, 56 FR 49515, Sept. 30, 1991]
§ 1.67-4 Costs paid or incurred by estates or non-grantor trusts.
(a) Deductions—(1) Section 67(e) deductions—(i) In general. An estate or trust (including the S portion of an electing small business trust) not described in § 1.67-2T(g)(1)(i) (a non-grantor trust) must compute its adjusted gross income in the same manner as an individual, except that the following deductions (section 67(e) deductions) are allowed in arriving at adjusted gross income:
(A) Costs that are paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in such estate or trust; and
(B) Deductions allowable under section 642(b) (relating to the personal exemption) and sections 651 and 661 (relating to distributions).
(ii) Not disallowed under section 67(g). Section 67(e) deductions are not itemized deductions under section 63(d) and are not miscellaneous itemized deductions under section 67(b). Therefore, section 67(e) deductions are not disallowed under section 67(g).
(2) Deductions subject to 2-percent floor. A cost is not a section 67(e) deduction and thus is subject to both the 2-percent floor in section 67(a) and section 67(g) to the extent that it is included in the definition of miscellaneous itemized deductions under section 67(b), is incurred by an estate or non-grantor trust (including the S portion of an electing small business trust), and commonly or customarily would be incurred by a hypothetical individual holding the same property.
(b) “Commonly” or “Customarily” Incurred—(1) In general. In analyzing a cost to determine whether it commonly or customarily would be incurred by a hypothetical individual owning the same property, it is the type of product or service rendered to the estate or non-grantor trust in exchange for the cost, rather than the description of the cost of that product or service, that is determinative. In addition to the types of costs described as commonly or customarily incurred by individuals in paragraphs (b)(2), (3), (4), and (5) of this section, costs that are incurred commonly or customarily by individuals also include, for example, costs incurred in defense of a claim against the estate, the decedent, or the non-grantor trust that are unrelated to the existence, validity, or administration of the estate or trust.
(2) Ownership costs. Ownership costs are costs that are chargeable to or incurred by an owner of property simply by reason of being the owner of the property. Thus, for purposes of section 67(e), ownership costs are commonly or customarily incurred by a hypothetical individual owner of such property. Such ownership costs include, but are not limited to, partnership costs deemed to be passed through to and reportable by a partner if these costs are defined as miscellaneous itemized deductions pursuant to section 67(b), condominium fees, insurance premiums, maintenance and lawn services, and automobile registration and insurance costs. Other expenses incurred merely by reason of the ownership of property may be fully deductible under other provisions of the Code, such as sections 62(a)(4), 162, or 164(a), which would not be miscellaneous itemized deductions subject to section 67(e).
(3) Tax preparation fees. Costs relating to all estate and generation-skipping transfer tax returns, fiduciary income tax returns, and the decedent's final individual income tax returns are not subject to the 2-percent floor. The costs of preparing all other tax returns (for example, gift tax returns) are costs commonly and customarily incurred by individuals and thus are subject to the 2-percent floor.
(4) Investment advisory fees. Fees for investment advice (including any related services that would be provided to any individual investor as part of an investment advisory fee) are incurred commonly or customarily by a hypothetical individual investor and therefore are subject to the 2-percent floor. However, certain incremental costs of investment advice beyond the amount that normally would be charged to an individual investor are not subject to the 2-percent floor. For this purpose, such an incremental cost is a special, additional charge that is added solely because the investment advice is rendered to a trust or estate rather than to an individual or attributable to an unusual investment objective or the need for a specialized balancing of the interests of various parties (beyond the usual balancing of the varying interests of current beneficiaries and remaindermen) such that a reasonable comparison with individual investors would be improper. The portion of the investment advisory fees not subject to the 2-percent floor by reason of the preceding sentence is limited to the amount of those fees, if any, that exceeds the fees normally charged to an individual investor.
(5) Appraisal fees. Appraisal fees incurred by an estate or a non-grantor trust to determine the fair market value of assets as of the decedent's date of death (or the alternate valuation date), to determine value for purposes of making distributions, or as otherwise required to properly prepare the estate's or trust's tax returns, or a generation-skipping transfer tax return, are not incurred commonly or customarily by an individual and thus are not subject to the 2-percent floor. The cost of appraisals for other purposes (for example, insurance) is commonly or customarily incurred by individuals and is subject to the 2-percent floor.
(6) Certain fiduciary expenses. Certain other fiduciary expenses are not commonly or customarily incurred by individuals, and thus are not subject to the 2-percent floor. Such expenses include without limitation the following: Probate court fees and costs; fiduciary bond premiums; legal publication costs of notices to creditors or heirs; the cost of certified copies of the decedent's death certificate; and costs related to fiduciary accounts.
(c) Bundled fees—(1) In general. If an estate or a non-grantor trust pays a single fee, commission, or other expense (such as a fiduciary's commission, attorney's fee, or accountant's fee) for both costs that are subject to the 2-percent floor and costs (in more than a de minimis amount) that are not, then, except to the extent provided otherwise by guidance published in the Internal Revenue Bulletin, the single fee, commission, or other expense (bundled fee) must be allocated, for purposes of computing the adjusted gross income of the estate or non-grantor trust in compliance with section 67(e), between the costs that are subject to the 2-percent floor and those that are not.
(2) Exception. If a bundled fee is not computed on an hourly basis, only the portion of that fee that is attributable to investment advice is subject to the 2-percent floor; the remaining portion is not subject to that floor.
(3) Expenses not subject to allocation. Out-of-pocket expenses billed to the estate or non-grantor trust are treated as separate from the bundled fee. In addition, payments made from the bundled fee to third parties that would have been subject to the 2-percent floor if they had been paid directly by the estate or non-grantor trust are subject to the 2-percent floor, as are any fees or expenses separately assessed by the fiduciary or other payee of the bundled fee (in addition to the usual or basic bundled fee) for services rendered to the estate or non-grantor trust that are commonly or customarily incurred by an individual.
(4) Reasonable method. Any reasonable method may be used to allocate a bundled fee between those costs that are subject to the 2-percent floor and those costs that are not, including without limitation the allocation of a portion of a fiduciary commission that is a bundled fee to investment advice. Facts that may be considered in determining whether an allocation is reasonable include, but are not limited to, the percentage of the value of the corpus subject to investment advice, whether a third party advisor would have charged a comparable fee for similar advisory services, and the amount of the fiduciary's attention to the trust or estate that is devoted to investment advice as compared to dealings with beneficiaries and distribution decisions and other fiduciary functions. The reasonable method standard does not apply to determine the portion of the bundled fee attributable to payments made to third parties for expenses subject to the 2-percent floor or to any other separately assessed expense commonly or customarily incurred by an individual, because those payments and expenses are readily identifiable without any discretion on the part of the fiduciary or return preparer.
(d) Applicability date. This section applies to taxable years beginning after December 31, 2014. Paragraph (a) of this section applies to taxable years beginning after October 19, 2020. Taxpayers may choose to apply paragraph (a) of this section to taxable years beginning after December 31, 2017, and on or before October 19, 2020.
[T.D. 9664, 79 FR 26619, May 9, 2014, as amended at 79 FR 41636, July 17, 2014; T.D. 9918, 85 FR 66224, Oct. 19, 2020]
3 Items Specifically Included in Gross Income
§ 1.71-1 Alimony and separate maintenance payments; income to wife or former wife.
(a) In general. Section 71 provides rules for treatment in certain cases of payments in the nature of or in lieu of alimony or an allowance for support as between spouses who are divorced or separated. For convenience, the payee spouse will hereafter in this section be referred to as the “wife” and the spouse from whom she is divorced or separated as the “husband.” See section 7701(a)(17). For rules relative to the deduction by the husband of periodic payments not attributable to transferred property, see section 215 and the regulations thereunder. For rules relative to the taxable status of income of an estate or trust in case of divorce, etc., see section 682 and the regulations thereunder.
(b) Alimony or separate maintenance payments received from the husband—(1) Decree of divorce or separate maintenance. (i) In the case of divorce or legal separation, paragraph (1) of section 71(a) requires the inclusion in the gross income of the wife of periodic payments (whether or not made at regular intervals) received by her after a decree of divorce or of separate maintenance. Such periodic payments must be made in discharge of a legal obligation imposed upon or incurred by the husband because of the marital or family relationship under a court order or decree divorcing or legally separating the husband and wife or a written instrument incident to the divorce status or legal separation status.
(ii) For treatment of payments attributable to property transferred (in trust or otherwise), see paragraph (c) of this section.
(2) Written separation agreement. (i) Where the husband and wife are separated and living apart and do not file a joint income tax return for the taxable year, paragraph (2) of section 71(a) requires the inclusion in the gross income of the wife of periodic payments (whether or not made at regular intervals) received by her pursuant to a written separation agreement executed after August 16, 1954. The periodic payments must be made under the terms of the written separation agreement after its execution and because of the marital or family relationship. Such payments are includable in the wife's gross income whether or not the agreement is a legally enforceable instrument. Moreover, if the wife is divorced or legally separated subsequent to the written separation agreement, payments made under such agreement continue to fall within the provisions of section 71(a)(2).
(ii) For purposes of section 71(a)(2) any written separation agreement executed on or before August 16, 1954, which is altered or modified in writing by the parties in any material respect after that date will be treated as an agreement executed after August 16, 1954, with respect to payments made after the date of alteration or modification.
(iii) For treatment of payments attributable to property transferred (in trust or otherwise), see paragraph (c) of this section.
(3) Decree for support. (i) Where the husband and wife are separated and living apart and do not file a joint income tax return for the taxable year, paragraph (3) of section 71(a) requires the inclusion in the gross income of the wife of periodic payments (whether or not made at regular intervals) received by her after August 16, 1954, from her husband under any type of court order or decree (including an interlocutory decree of divorce or a decree of alimony pendente lite) entered after March 1, 1954, requiring the husband to make the payments for her support or maintenance. It is not necessary for the wife to be legally separated or divorced from her husband under a court order or decree; nor is it necessary for the order or decree for support to be for the purpose of enforcing a written separation agreement.
(ii) For purposes of section 71(a)(3), any decree which is altered or modified by a court order entered after March 1, 1954, will be treated as a decree entered after such date.
(4) Scope of section 71(a). Section 71(a) applies only to payments made because of the family or marital relationship in recognition of the general obligation to support which is made specific by the decree, instrument, or agreement. Thus, section 71(a) does not apply to that part of any periodic payment which is attributable to the repayment by the husband of, for example, a bona fide loan previously made to him by the wife, the satisfaction of which is specified in the decree, instrument, or agreement as a part of the general settlement between the husband and wife.
(5) Year of inclusion. Periodic payments are includible in the wife's income under section 71(a) only for the taxable year in which received by her. As to such amounts, the wife is to be treated as if she makes her income tax returns on the cash receipts and disbursements method, regardless of whether she normally makes such returns on the accrual method. However, if the periodic payments described in section 71(a) are to be made by an estate or trust, such periodic payments are to be included in the wife's taxable year in which they are includible according to the rules as to income of estates and trusts provided in sections 652, 662, and 682, whether or not such payments are made out of the income of such estates or trusts.
(6) Examples. The foregoing rules are illustrated by the following examples in which it is assumed that the husband and wife file separate income tax returns on the calendar year basis:
Example 1.W files suit for divorce from H in 1953. In consideration of W's promise to relinquish all marital rights and not to make public H's financial affairs, H agrees in writing to pay $200 a month to W during her lifetime if a final decree of divorce is granted without any provision for alimony. Accordingly, W does not request alimony and no provision for alimony is made under a final decree of divorce entered December 31, 1953. During 1954, H pays W $200 a month, pursuant to the promise. The $2,400 thus received by W is includible in her gross income under the provisions of section 71(a)(1). Under section 215, H is entitled to a deduction of $2,400 from his gross income.
Example 2.During 1945, H and W enter into an antenuptial agreement, under which, in consideration of W's relinquishment of all marital rights (including dower) in H's property, and, in order to provide for W's support and household expenses, H promises to pay W $200 a month during her lifetime. Ten years after their marriage, W sues H for divorce but does not ask for or obtain alimony because of the provision already made for her support in the antenuptial agreement. Likewise, the divorce decree is silent as to such agreement and H's obligation to support W. Section 71(a) does not apply to such a case. If, however, the decree were modified so as to refer to the antenuptial agreement, or if reference had been made to the antenuptial agreement in the court's decree or in a written instrument incident to the divorce status, section 71(a)(1) would require the inclusion in W's gross income of the payments received by her after the decree. Similarly, if a written separation agreement were executed after August 16, 1954, and incorporated the payment provisions of the antenuptial agreement, section 71(a)(2) would require the inclusion in W's income of payments received by W after W begins living apart from H, whether or not the divorce decree was subsequently entered and whether or not W was living apart from H when the separation agreement was executed, provided that such payments were made after such agreement was executed and pursuant to its terms. As to including such payments in W's income, if made by a trust created under the antenuptial agreement, regardless of whether referred to in the decree or a later instrument, or created pursuant to the written separation agreement, see section 682 and the regulations thereunder.
Example 3.H and W are separated and living apart during 1954. W sues H for support and on February 1, 1954, the court enters a decree requiring H to pay $200 a month to W for her support and maintenance. No part of the $200 a month support payments is includible in W's income under section 71(a)(3) or deductible by H under section 215. If, however, the decree had been entered after March 1, 1954, or had been altered or modified by a court order entered after March 1, 1954, the payments received by W after August 16, 1954, under the decree as altered or modified would be includible in her income under section 71(a)(3) and deductible by H under section 215.
Example 4.W sues H for divorce in 1954. On January 15, 1954, the court awards W temporary alimony of $25 a week pending the final decree. On September 1, 1954, the court grants W a divorce and awards her $200 a month permanent alimony. No part of the $25 a week temporary alimony received prior to the decree is includible in W's income under section 71(a), but the $200 a month received during the remainder of 1954 by W is includible in her income for 1954. Under section 215, H is entitled to deduct such $200 payments from his income. If, however, the decree awarding W temporary alimony had been entered after March 1, 1954, or had been altered or modified by a court order entered after March 1, 1954, temporary alimony received by her after August 16, 1954, would be includible in her income under section 71(a)(3) and deductible by H under section 215.
(c) Alimony and separate maintenance payments attributable to property. (1)(i) In the case of divorce or legal separation, paragraph (1) of section 71(a) requires the inclusion in the gross income of the wife of periodic payments (whether or not made at regular intervals) attributable to property transferred, in trust or otherwise, and received by her after a decree of divorce or of separate maintenance. Such property must have been transferred in discharge of a legal obligation imposed upon or incurred by the husband because of the marital or family relationship under a decree of divorce or separate maintenance or under a written instrument incident to such divorce status or legal separation status.
(ii) Where the husband and wife are separated and living apart and do not file a joint income tax return for the taxable year, paragraph (2) of section 71(a) requires the inclusion in the gross income of the wife of periodic payments (whether or not made at regular intervals) received by her which are attributable to property transferred, in trust or otherwise, under a written separation agreement executed after August 16, 1954. The property must be transferred because of the marital or family relationship. The periodic payments attributable to the property must be received by the wife after the written separation agreement is executed.
(iii) The periodic payments received by the wife attributable to property transferred under subdivisions (i) and (ii) of this subparagraph and includible in her gross income are not to be included in the gross income of the husband.
(2) The full amount of periodic payments received under the circumstances described in section 71(a) (1), (2), and (3) is required to be included in the gross income of the wife regardless of the source of such payments. Thus, it matters not that such payments are attributable to property in trust, to life insurance, endowment, or annuity contracts, or to any other interest in property, or are paid directly or indirectly by the husband from his income or capital. For example, if in order to meet an alimony or separate maintenance obligation of $500 a month the husband purchases or assigns for the benefit of his wife a commercial annuity contract paying such amount, the full $500 a month received by the wife is includible in her income, and no part of such amount is includible in the husband's income or deductible by him. See section 72(k) and the regulations thereunder. Likewise, if property is transferred by the husband, subject to an annual charge of $5,000, payable to his wife in discharge of his alimony or separate maintenance obligation under the divorce or separation decree or written instrument incident to the divorce status or legal separation status or if such property is transferred pursuant to a written separation agreement and subject to a similar annual charge, the $5,000 received annually is, under section 71(a) (1) or (2), includible in the wife's income, regardless of whether such amount is paid out of income or principal of the property.
(3) The same rule applies to periodic payments attributable to property in trust. The full amount of periodic payments to which section 71(a) (1) and (2) applies is includible in the wife's income regardless of whether such payments are made out of trust income. Such periodic payments are to be included in the wife's income under section 71(a) (1) or (2) and are to be excluded from the husband's income even though the income of the trust would otherwise be includible in his income under Subpart E, Part I, Subchapter J, Chapter 1 of the Code, relating to trust income attributable to grantors and others as substantial owners. As to periodic payments received by a wife attributable to property in trust in cases to which section 71(a) (1) or (2) does not apply because the husband's obligation is not specified in the decree or an instrument incident to the divorce status or legal separation status or the property was not transferred under a written separation agreement, see section 682 and the regulations thereunder.
(4) Section 71(a) (1) or (2) does not apply to that part of any periodic payment attributable to that portion of any interest in property transferred in discharge of the husband's obligation under the decree or instrument incident to the divorce status or legal separation status, or transferred pursuant to the written separation agreement, which interest originally belonged to the wife. It will apply, however, if she received such interest from her husband in contemplation of or as an incident to the divorce or separation without adequate and full consideration in money or money's worth, other than the release of the husband or his property from marital obligations. An example of the first rule is a case where the husband and wife transfer securities, which were owned by them jointly, in trust to pay an annuity to the wife. In this case, the full amount of that part of the annuity received by the wife attributable to the husband's interest in the securities transferred in discharge of his obligation under the decree, or instrument incident to the divorce status or legal separation status, or transferred under the written separation agreement, is taxable to her under section 71(a) (1) or (2), while that portion of the annuity attributable to the wife's interest in the securities so transferred is taxable to her only to the extent it is out of trust income as provided in Part I (sections 641 and following), Subchapter J, Chapter 1 of the Code. If, however, the husband's transfer to his wife is made before such property is transferred in discharge of his obligation under the decree or written instrument, or pursuant to the separation agreement in an attempt to avoid the application of section 71(a) (1) or (2) to part of such payments received by his wife, such transfers will be considered as a part of the same transfer by the husband of his property in discharge of his obligation or pursuant to such agreement. In such a case, section 71(a) (1) or (2) will be applied to the full amount received by the wife. As to periodic payments received under a joint purchase of a commercial annuity contract, see section 72 and the regulations thereunder.
(d) Periodic and installment payments. (1) In general, installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree, instrument, or agreement are not considered “periodic payments” and therefore are not to be included under section 71(a) in the wife's income.
(2) An exception to the general rule stated in subparagraph (1) of this paragraph is provided, however, in cases where such principal sum, by the terms of the decree, instrument, or agreement, may be or is to be paid over a period ending more than 10 years from the date of such decree, instrument, or agreement. In such cases, the installment payment is considered a periodic payment for the purposes of section 71(a) but only to the extent that the installment payment, or sum of the installment payments, received during the wife's taxable year does not exceed 10 percent of the principal sum. This 10-percent limitation applies to installment payments made in advance but does not apply to delinquent installment payments for a prior taxable year of the wife made during her taxable year.
(3)(i) Where payments under a decree, instrument, or agreement are to be paid over a period ending 10 years or less from the date of such decree, instrument, or agreement, such payments are not installment payments discharging a part of an obligation the principal sum of which is, in terms of money or property, specified in the decree, instrument, or agreement (and are considered periodic payments for the purposes of section 71(a)) only if such payments meet the following two conditions:
(a) Such payments are subject to any one or more of the contingencies of death of either spouse, remarriage of the wife, or change in the economic status of either spouse, and
(b) Such payments are in the nature of alimony or an allowance for support.
(ii) Payments meeting the requirements of subdivision (i) are considered periodic payments for the purposes of section 71(a) regardless of whether—
(a) The contingencies described in subdivision (i)(a) of this subparagraph are set forth in the terms of the decree, instrument, or agreement, or are imposed by local law, or
(b) The aggregate amount of the payments to be made in the absence of the occurrence of the contingencies described in subdivision (i)(a) of this subparagraph is explicitly stated in the decree, instrument, or agreement or may be calculated from the face of the decree, instrument, or agreement, or
(c) The total amount which will be paid may be calculated actuarially.
(4) Where payments under a decree, instrument, or agreement are to be paid over a period ending more than ten years from the date of such decree, instrument, or agreement, but where such payments meet the conditions set forth in subparagraph (3)(i) of this paragraph, such payments are considered to be periodic payments for the purpose of section 71 without regard to the rule set forth in subparagraph (2) of this paragraph. Accordingly, the rules set forth in subparagraph (2) of this paragraph are not applicable to such payments.
(5) The rules as to periodic and installment payments are illustrated by the following examples:
Example 1.Under the terms of a written instrument, H is required to make payments to W which are in the nature of alimony, in the amount of $100 a month for nine years. The instrument provides that if H or W dies the payments are to cease. The payments are periodic.
Example 2.The facts are the same as in example (1) except that the written instrument explicitly provides that H is to pay W the sum of $10,800 in monthly payments of $100 over a period of nine years. The payments are periodic.
Example 3.Under the terms of a written instrument, H is to pay W $100 a month over a period of nine years. The monthly payments are not subject to any of the contingencies of death of H or W, remarriage of W, or change in the economic status of H or W under the terms of the written instrument or by reason of local law. The payments are not periodic.
Example 4.A divorce decree in 1954 provides that H is to pay W $20,000 each year for the next five years, beginning with the date of the decree, and then $5,000 each year for the next ten years. Assuming the wife makes her returns on the calendar year basis, each payment received in the years 1954 to 1958, inclusive, is treated as a periodic payment under section 71(a)(1), but only to the extent of 10 percent of the principal sum of $150,000. Thus, for such taxable years, only $15,000 of the $20,000 received is includible under section 71(a)(1) in the wife's income and is deductible by the husband under section 215. For the years 1959 to 1968, inclusive, the full $5,000 received each year by the wife is includible in her income and is deductible from the husband's income.
(e) Payments for support of minor children. Section 71(a) does not apply to that part of any periodic payment which, by the terms of the decree, instrument, or agreement under section 71(a), is specifically designated as a sum payable for the support of minor children of the husband. The statute prescribes the treatment in cases where an amount or portion is so fixed but the amount of any periodic payment is less than the amount of the periodic payment specified to be made. In such cases, to the extent of the amount which would be payable for the support of such children out of the originally specified periodic payment, such periodic payment is considered a payment for such support. For example, if the husband is by terms of the decree, instrument, or agreement required to pay $200 a month to his divorced wife, $100 of which is designated by the decree, instrument, or agreement to be for the support of their minor children, and the husband pays only $150 to his wife, $100 is nevertheless considered to be a payment by the husband for the support of the children. If, however, the periodic payments are received by the wife for the support and maintenance of herself and of minor children of the husband without such specific designation of the portion for the support of such children, then the whole of such amounts is includible in the income of the wife as provided in section 71(a). Except in cases of a designated amount or portion for the support of the husband's minor children, periodic payments described in section 71(a) received by the wife for herself and any other person or persons are includible in whole in the wife's income, whether or not the amount or portion for such other person or persons is designated.
§ 1.71-1T Alimony and separate maintenance payments (temporary).
(a) In general.
Q-1 What is the income tax treatment of alimony or separate maintenance payments?
A-1 Alimony or separate maintenance payments are, under section 71, included in the gross income of the payee spouse and, under section 215, allowed as a deduction from the gross income of the payor spouse.
Q-2 What is an alimony or separate maintenance payment?
A-2 An alimony or separate maintenance payment is any payment received by or on behalf of a spouse (which for this purpose includes a former spouse) of the payor under a divorce or separation instrument that meets all of the following requirements:
(a) The payment is in cash (see A-5).
(b) The payment is not designated as a payment which is excludible from the gross income of the payee and nondeductible by the payor (see A-8).
(c) In the case of spouses legally separated under a decree of divorce or separate maintenance, the spouses are not members of the same household at the time the payment is made (see A-9).
(d) The payor has no liability to continue to make any payment after the death of the payee (or to make any payment as a substitute for such payment) and the divorce or separation instrument states that there is no such liability (see A-10).
(e) The payment is not treated as child support (see A-15).
(f) To the extent that one or more annual payments exceed $10,000 during any of the 6-post-separation years, the payor is obligated to make annual payments in each of the 6-post-separation years (see A-19).
Q-3 In order to be treated as alimony or separate maintenance payments, must the payments be “periodic” as that term was defined prior to enactment of the Tax Reform Act of 1984 or be made in discharge of a legal obligation of the payor to support the payee arising out of a marital or family relationship?
A-3 No. The Tax Reform Act of 1984 replaces the old requirements with the requirements described in A-2 above. Thus, the requirements that alimony or separate maintenance payments be “periodic” and be made in discharge of a legal obligation to support arising out of a marital or family relationship have been eliminated.
Q-4 Are the instruments described in section 71(a) of prior law the same as divorce or separation instruments described in section 71, as amended by the Tax Reform Act of 1984?
A-4 Yes.
(b) Specific requirements.
Q-5 May alimony or separate maintenance payments be made in a form other than cash?
A-5 No. Only cash payments (including checks and money orders payable on demand) qualify as alimony or separate maintenance payments. Transfers of services or property (including a debt instrument of a third party or an annuity contract), execution of a debt instrument by the payor, or the use of property of the payor do not qualify as alimony or separate maintenance payments.
Q-6 May payments of cash to a third party on behalf of a spouse qualify as alimony or separate maintenance payments if the payments are pursuant to the terms of a divorce or separation instrument?
A-6 Yes. Assuming all other requirements are satisfied, a payment of cash by the payor spouse to a third party under the terms of the divorce or separation instrument will qualify as a payment of cash which is received “on behalf of a spouse”. For example, cash payments of rent, mortgage, tax, or tuition liabilities of the payee spouse made under the terms of the divorce or separation instrument will qualify as alimony or separate maintenance payments. Any payments to maintain property owned by the payor spouse and used by the payee spouse (including mortgage payments, real estate taxes and insurance premiums) are not payments on behalf of a spouse even if those payments are made pursuant to the terms of the divorce or separation instrument. Premiums paid by the payor spouse for term or whole life insurance on the payor's life made under the terms of the divorce or separation instrument will qualify as payments on behalf of the payee spouse to the extent that the payee spouse is the owner of the policy.
Q-7 May payments of cash to a third party on behalf of a spouse qualify as alimony or separate maintenance payments if the payments are made to the third party at the written request of the payee spouse?
A-7 Yes. For example, instead of making an alimony or separate maintenance payment directly to the payee, the payor spouse may make a cash payment to a charitable organization if such payment is pursuant to the written request, consent or ratification of the payee spouse. Such request, consent or ratification must state that the parties intend the payment to be treated as an alimony or separate maintenance payment to the payee spouse subject to the rules of section 71, and must be received by the payor spouse prior to the date of filing of the payor's first return of tax for the taxable year in which the payment was made.
Q-8 How may spouses designate that payments otherwise qualifying as alimony or separate maintenance payments shall be excludible from the gross income of the payee and nondeductible by the payor?
A-8 The spouses may designate that payments otherwise qualifying as alimony or separate maintenance payments shall be nondeductible by the payor and excludible from gross income by the payee by so providing in a divorce or separation instrument (as defined in section 71(b)(2)). If the spouses have executed a written separation agreement (as described in section 71(b)(2)(B)), any writing signed by both spouses which designates otherwise qualifying alimony or separate maintenance payments as nondeductible and excludible and which refers to the written separation agreement will be treated as a written separation agreement (and thus a divorce or separation instrument) for purposes of the preceding sentence. If the spouses are subject to temporary support orders (as described in section 71(b)(2)(C)), the designation of otherwise qualifying alimony or separate payments as nondeductible and excludible must be made in the original or a subsequent temporary support order. A copy of the instrument containing the designation of payments as not alimony or separate maintenance payments must be attached to the payee's first filed return of tax (Form 1040) for each year in which the designation applies.
Q-9 What are the consequences if, at the time a payment is made, the payor and payee spouses are members of the same household?
A-9 Generally, a payment made at the time when the payor and payee spouses are members of the same household cannot qualify as an alimony or separate maintenance payment if the spouses are legally separated under a decree of divorce or of separate maintenance. For purposes of the preceding sentence, a dwelling unit formerly shared by both spouses shall not be considered two separate households even if the spouses physically separate themselves within the dwelling unit. The spouses will not be treated as members of the same household if one spouse is preparing to depart from the household of the other spouse, and does depart not more than one month after the date the payment is made. If the spouses are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement or a decree described in section 71(b)(2)(C) may qualify as an alimony or separate maintenance payment notwithstanding that the payor and payee are members of the same household at the time the payment is made.
Q-10 Assuming all other requirements relating to the qualification of certain payments as alimony or separate maintenance payments are met, what are the consequences if the payor spouse is required to continue to make the payments after the death of the payee spouse?
A-10 None of the payments before (or after) the death of the payee spouse qualify as alimony or separate maintenance payments.
Q-11 What are the consequences if the divorce or separation instrument fails to state that there is no liability for any period after the death of the payee spouse to continue to make any payments which would otherwise qualify as alimony or separate maintenance payments?
A-11 If the instrument fails to include such a statement, none of the payments, whether made before or after the death of the payee spouse, will qualify as alimony or separate maintenance payments.
Example 1.A is to pay B $10,000 in cash each year for a period of 10 years under a divorce or separation instrument which does not state that the payments will terminate upon the death of B. None of the payments will qualify as alimony or separate maintenance payments.
Example 2.A is to pay B $10,000 in cash each year for a period of 10 years under a divorce or separation instrument which states that the payments will terminate upon the death of B. In addition, under the instrument, A is to pay B or B's estate $20,000 in cash each year for a period of 10 years. Because the $20,000 annual payments will not terminate upon the death of B, these payments will not qualify as alimony or separate maintenance payments. However, the separate $10,000 annual payments will qualify as alimony or separate maintenance payments.
Q-12 Will a divorce or separation instrument be treated as stating that there is no liability to make payments after the death of the payee spouse if the liability to make such payments terminates pursuant to applicable local law or oral agreement?
A-12 No. Termination of the liability to make payments must be stated in the terms of the divorce or separation instrument.
Q-13 What are the consequences if the payor spouse is required to make one or more payments (in cash or property) after the death of the payee spouse as a substitute for the continuation of pre-death payments which would otherwise qualify as alimony or separate maintenance payments?
A-13 If the payor spouse is required to make any such substitute payments, none of the otherwise qualifying payments will qualify as alimony or separate maintenance payments. The divorce or separation instrument need not state, however, that there is no liability to make any such substitute payment.
Q-14 Under what circumstances will one or more payments (in cash or property) which are to occur after the death of the payee spouse be treated as a substitute for the continuation of payments which would otherwise qualify as alimony or separate maintenance payments?
A-14 To the extent that one or more payments are to begin to be made, increase in amount, or become accelerated in time as a result of the death of the payee spouse, such payments may be treated as a substitute for the continuation of payments terminating on the death of the payee spouse which would otherwise qualify as alimony or separate maintenance payments. The determination of whether or not such payments are a substitute for the continuation of payments which would otherwise qualify as alimony or separate maintenance payments, and of the amount of the otherwise qualifying alimony or separate maintenance payments for which any such payments are a substitute, will depend on all of the facts and circumstances.
Example 1.Under the terms of a divorce decree, A is obligated to make annual alimony payments to B of $30,000, terminating on the earlier of the expiration of 6 years or the death of B. B maintains custody of the minor children of A and B. The decree provides that at the death of B, if there are minor children of A and B remaining, A will be obligated to make annual payments of $10,000 to a trust, the income and corpus of which are to be used for the benefit of the children until the youngest child attains the age of majority. These facts indicate that A's liability to make annual $10,000 payments in trust for the benefit of his minor children upon the death of B is a substitute for $10,000 of the $30,000 annual payments to B. Accordingly, $10,000 of each of the $30,000 annual payments to B will not qualify as alimony or separate maintenance payments.
Example 2.Under the terms of a divorce decree, A is obligated to make annual alimony payments to B of $30,000, terminating on the earlier of the expiration of 15 years or the death of B. The divorce decree provides that if B dies before the expiration of the 15 year period, A will pay to B's estate the difference between the total amount that A would have paid had B survived, minus the amount actually paid. For example, if B dies at the end of the 10th year in which payments are made, A will pay to B's estate $150,000 ($450,000-$300,000). These facts indicate that A's liability to make a lump sum payment to B's estate upon the death of B is a substitute for the full amount of each of the annual $30,000 payments to B. Accordingly, none of the annual $30,000 payments to B will qualify as alimony or separate maintenance payments. The result would be the same if the lump sum payable at B's death were discounted by an appropriate interest factor to account for the prepayment.
(c) Child support payments.
Q-15 What are the consequences of a payment which the terms of the divorce or separation instrument fix as payable for the support of a child of the payor spouse?
A-15 A payment which under the terms of the divorce or separation instrument is fixed (or treated as fixed) as payable for the support of a child of the payor spouse does not qualify as an alimony or separate maintenance payment. Thus, such a payment is not deductible by the payor spouse or includible in the income of the payee spouse.
Q-16 When is a payment fixed (or treated as fixed) as payable for the support of a child of the payor spouse?
A-16 A payment is fixed as payable for the support of a child of the payor spouse if the divorce or separation instrument specifically designates some sum or portion (which sum or portion may fluctuate) as payable for the support of a child of the payor spouse. A payment will be treated as fixed as payable for the support of a child of the payor spouse if the payment is reduced (a) on the happening of a contingency relating to a child of the payor, or (b) at a time which can clearly be associated with such a contingency. A payment may be treated as fixed as payable for the support of a child of the payor spouse even if other separate payments specifically are designated as payable for the support of a child of the payor spouse.
Q-17 When does a contingency relate to a child of the payor?
A-17 For this purpose, a contingency relates to a child of the payor if it depends on any event relating to that child, regardless of whether such event is certain or likely to occur. Events that relate to a child of the payor include the following: the child's attaining a specified age or income level, dying, marrying, leaving school, leaving the spouse's household, or gaining employment.
Q-18 When will a payment be treated as to be reduced at a time which can clearly be associated with the happening of a contingency relating to a child of the payor?
A-18 There are two situations, described below, in which payments which would otherwise qualify as alimony or separate maintenance payments will be presumed to be reduced at a time clearly associated with the happening of a contingency relating to a child of the payor. In all other situations, reductions in payments will not be treated as clearly associated with the happening of a contingency relating to a child of the payor.
The first situation referred to above is where the payments are to be reduced not more than 6 months before or after the date the child is to attain the age of 18, 21, or local age of majority. The second situation is where the payments are to be reduced on two or more occasions which occur not more than one year before or after a different child of the payor spouse attains a certain age between the ages of 18 and 24, inclusive. The certain age referred to in the preceding sentence must be the same for each such child, but need not be a whole number of years.
The presumption in the two situations described above that payments are to be reduced at a time clearly associated with the happening of a contingency relating to a child of the payor may be rebutted (either by the Service or by taxpayers) by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to the children of the payor. The presumption in the first situation will be rebutted conclusively if the reduction is a complete cessation of alimony or separate maintenance payments during the sixth post-separation year (described in A-21) or upon the expiration of a 72-month period. The presumption may also be rebutted in other circumstances, for example, by showing that alimony payments are to be made for a period customarily provided in the local jurisdiction, such as a period equal to one-half the duration of the marriage.
Example:A and B are divorced on July 1, 1985, when their children, C (born July 15, 1970) and D (born September 23, 1972), are 14 and 12, respectively. Under the divorce decree, A is to make alimony payments to B of $2,000 per month. Such payments are to be reduced to $1,500 per month on January 1, 1991 and to $1,000 per month on January 1, 1995. On January 1, 1991, the date of the first reduction in payments, C will be 20 years 5 months and 17 days old. On January 1, 1995, the date of the second reduction in payments, D will be 22 years 3 months and 9 days old. Each of the reductions in payments is to occur not more than one year before or after a different child of A attains the age of 21 years and 4 months. (Actually, the reductions are to occur not more than one year before or after C and D attain any of the ages 21 years 3 months and 9 days through 21 years 5 months and 17 days.) Accordingly, the reductions will be presumed to clearly be associated with the happening of a contingency relating to C and D. Unless this presumption is rebutted, payments under the divorce decree equal to the sum of the reduction ($1,000 per month) will be treated as fixed for the support of the children of A and therefore will not qualify as alimony or separate maintenance payments.
(d) Excess front-loading rules.
Q-19 What are the excess front-loading rules?
A-19 The excess front-loading rules are two special rules which may apply to the extent that payments in any calendar year exceed $10,000. The first rule is a minimum term rule, which must be met in order for any annual payment, to the extent in excess of $10,000, to qualify as an alimony or separate maintenance payment (see A-2(f)). This rule requires that alimony or separate maintenance payments be called for, at a minimum, during the 6 “post-separation years”. The second rule is a recapture rule which characterizes payments retrospectively by requiring a recalculation and inclusion in income by the payor and deducation by the payee of previously paid alimony or separate maintenance payment to the extent that the amount of such payments during any of the 6 “post-separation years” falls short of the amount of payments during a prior year by more than $10,000.
Q-20 Do the excess front-loading rules apply to payments to the extent that annual payments never exceed $10,000?
A-20 No. For example, A is to make a single $10,000 payment to B. Provided that the other requirements of section 71 are met, the payment will qualify as an alimony or separate maintenance payment. If A were to make a single $15,000 payment to B, $10,000 of the payment would qualify as an alimony or separate maintenance payment and $5,000 of the payment would be disqualified under the minimum term rule because payments were not to be made for the minimum period.
Q-21 Do the excess front-loading rules apply to payments received under a decree described in section 71(b)(2)(C)?
A-21 No. Payments under decrees described in section 71(b)(2)(C) are to be disregarded entirely for purposes of applying the excess front-loading rules.
Q-22 Both the minimum term rule and the recapture rule refer to 6 “post-separation years”. What are the 6 “post separation years”?
A-22 The 6 “post-separation years” are the 6 consecutive calendar years beginning with the first calendar year in which the payor pays to the payee an alimony or separate maintenance payment (except a payment made under a decree described in section 71(b)(2)(C)). Each year within this period is referred to as a “post-separation year”. The 6-year period need not commence with the year in which the spouses separate or divorce, or with the year in which payments under the divorce or separation instrument are made, if no payments during such year qualify as alimony or separate maintenance payments. For example, a decree for the divorce of A and B is entered in October, 1985. The decree requires A to make monthly payments to B commencing November 1, 1985, but A and B are members of the same household until February 15, 1986 (and as a result, the payments prior to January 16, 1986, do not qualify as alimony payments). For purposes of applying the excess front-loading rules to payments from A to B, the 6 calendar years 1986 through 1991 are post-separation years. If a spouse has been making payments pursuant to a divorce or separation instrument described in section 71(b)(2) (A) or (B), a modification of the instrument or the substitution of a new instrument (for example, the substitution of a divorce decree for a written separation agreement) will not result in the creation of additional post-separation years. However, if a spouse has been making payments pursuant to a divorce or separation instrument described in section 71(b)(2)(C), the 6-year period does not begin until the first calendar year in which alimony or separate maintenance payments are made under a divorce or separation instrument described in section 71(b)(2) (A) or (B).
Q-23 How does the minimum term rule operate?
A-23 The minimum term rule operates in the following manner. To the extent payments are made in excess of $10,000, a payment will qualify as an alimony or separate maintenance payment only if alimony or separate maintenance payments are to be made in each of the 6 post-separation years. For example, pursuant to a divorce decree, A is to make alimony payments to B of $20,000 in each of the 5 calendar years 1985 through 1989. A is to make no payment in 1990. Under the minimum term rule, only $10,000 will qualify as an alimony payment in each of the calendar years 1985 through 1989. If the divorce decree also required A to make a $1 payment in 1990, the minimum term rule would be satisfied and $20,000 would be treated as an alimony payment in each of the calendar years 1985 through 1989. The recapture rule would, however, apply for 1990. For purposes of determining whether alimony or separate maintenance payments are to be made in any year, the possible termination of such payments upon the happening of a contingency (other than the passage of time) which has not yet occurred is ignored (unless such contingency may cause all or a portion of the payment to be treated as a child support payment).
Q-24 How does the recapture rule operate?
A-24 The recapture rule operates in the following manner. If the amount of alimony or separate maintenance payments paid in any post-separation year (referred to as the “computation year”) falls short of the amount of alimony or separate maintenance payments paid in any prior post-separation year by more than $10,000, the payor must compute an “excess amount” for the computation year. The excess amount for any computation year is the sum of excess amounts determined with respect to each prior post-separation year. The excess amount determined with respect to a prior post-separation year is the excess of (1) the amount of alimony or separate maintenance payments paid by the payor spouse during such prior post-separation year, over (2) the amount of the alimony or separate maintenance payments paid by the payor spouse during the computation year plus $10,000. For purposes of this calculation, the amount of alimony or separate maintenance payments made by the payor spouse during any post-separation year preceding the computation year is reduced by any excess amount previously determined with respect to such year. The rules set forth above may be illustrated by the following example. A makes alimony payments to B of $25,000 in 1985 and $12,000 in 1986. The excess amount with respect to 1985 that is recaptured in 1986 is $3,000 ($25,000− ($12,000 + $10,000)). For purposes of subsequent computation years, the amount deemed paid in 1985 is $22,000. If A makes alimony payments to B of $1,000 in 1987, the excess amount that is recaptured in 1987 will be $12,000. This is the sum of an $11,000 excess amount with respect to 1985 ($22,000−$1,000 + $10,000)) and a $1,000 excess amount with respect to 1986 ($12,000−($1,000 + $10,000)). If, prior to the end of 1990, payments decline further, additional recapture will occur. The payor spouse must include the excess amount in gross income for his/her taxable year begining with or in the computation year. The payee spouse is allowed a deduction for the excess amount in computing adjusted gross income for his/her taxable year beginning with or in the computation year. However, the payee spouse must compute the excess amount by reference to the date when payments were made and not when payments were received.
Q-25 What are the exceptions to the recapture rule?
A-25 Apart from the $10,000 threshold for application of the recapture rule, there are three exceptions to the recapture rule. The first exception is for payments received under temporary support orders described in section 71(b)(2)(C) (see A-21). The second exception is for any payment made pursuant to a continuing liability over the period of the post-separation years to pay a fixed portion of the payor's income from a business or property or from compensation for employment or self-employment. The third exception is where the alimony or separate manitenance payments in any post-separation year cease by reason of the death of the payor or payee or the remarriage (as defined under applicable local law) of the payee before the close of the computation year. For example, pursuant to a divorce decree, A is to make cash payments to B of $30,000 in each of the calendar years 1985 through 1990. A makes cash payments of $30,000 in 1985 and $15,000 in 1986, in which year B remarries and A's alimony payments cease. The recapture rule does not apply for 1986 or any subsequent year. If alimony or separate maintenance payments made by A decline or cease during a post-separation year for any other reason (including a failure by the payor to make timely payments, a modification of the divorce or separation instrument, a reduction in the support needs of the payee, or a reduction in the ability of the payor to provide support) excess amounts with respect to prior post-separation years will be subject to recapture.
(e) Effective dates.
Q-26 When does section 71, as amended by the Tax Reform Act of 1984, become effective?
A-26 Generally, section 71, as amended, is effective with respect to divorce or separation instruments (as defined in section 71(b)(2)) executed after December 31, 1984. If a decree of divorce or separate maintenance executed after December 31, 1984, incorporates or adopts without change the terms of the alimony or separate maintenance payments under a divorce or separation instrument executed before January 1, 1985, such decree will be treated as executed before January 1, 1985. A change in the amount of alimony or separate maintenance payments or the time period over which such payments are to continue, or the addition or deletion of any contingencies or conditions relating to such payments is a change in the terms of the alimony or separate maintenance payments. For example, in November 1984, A and B executed a written separation agreement. In February 1985, a decree of divorce is entered in substitution for the written separation agreement. The decree of divorce does not change the terms of the alimony A pays to B. The decree of divorce will be treated as executed before January 1, 1985 and hence alimony payments under the decree will be subject to the rules of section 71 prior to amendment by the Tax Reform Act of 1984. If the amount or time period of the alimony or separate maintenance payments are not specified in the pre-1985 separation agreement or if the decree of divorce changes the amount or term of such payments, the decree of divorce will not be treated as executed before January 1, 1985, and alimony payments under the decree will be subject to the rules of section 71, as amended by the Tax Reform Act of 1984.
Section 71, as amended, also applies to any divorce or separation instrument executed (or treated as executed) before January 1, 1985 that has been modified on or after January 1, 1985, if such modification expressly provides that section 71, as amended by the Tax Reform Act of 1984, shall apply to the instrument as modified. In this case, section 71, as amended, is effective with respect to payments made after the date the instrument is modified.
(Secs. 1041(d)(4) (98 Stat. 798, 26 U.S.C. 1041(d)(4), 152(e)(2)(A) (98 Stat. 802, 26 U.S.C. 152(e)(2)(A), 215(c) (98 Stat. 800, 26 U.S.C. 215(c)) and 7805 (68A Stat. 917, 26 U.S.C. 7805) of the Internal Revenue Code of 1954.
[T.D. 7973, 49 FR 34455, Aug. 31, 1984; 49 FR 36645, Sept. 19, 1984]
§ 1.71-2 Effective date; taxable years ending after March 31, 1954, subject to the Internal Revenue Code of 1939.
Pursuant to section 7851(a)(1)(C), the regulations prescribed in § 1.71-1, to the extent that they relate to payments under a written separation agreement executed after August 16, 1954, and to the extent that they relate to payments under a decree for support received after August 16, 1954, under a decree entered after March 1, 1954, shall also apply to taxable years beginning before January 1, 1954, and ending after August 16, 1954, although such years are subject to the Internal Revenue Code of 1939.
§ 1.72-1 Introduction.
(a) General principle. Section 72 prescribes rules relating to the inclusion in gross income of amounts received under a life insurance, endowment, or annuity contract unless such amounts are specifically excluded from gross income under other provisions of Chapter 1 of the Code. In general, these rules provide that amounts subject to the provisions of section 72 are includible in the gross income of the recipient except to the extent that they are considered to represent a reduction or return of premiums or other consideration paid.
(b) Amounts to be considered as a return of premiums. For the purpose of determining the extent to which amounts received represent a reduction or return of premiums or other consideration paid, the provisions of section 72 distinguish between “amounts received as an annuity” and “amounts not received as an annuity”. In general, “amounts received as an annuity” are amounts which are payable at regular intervals over a period of more than one full year from the date on which they are deemed to begin, provided the total of the amounts so payable or the period for which they are to be paid can be determined as of that date. See paragraph (b) (2) and (3) of § 1.72-2. Any other amounts to which the provisions of section 72 apply are considered to be “amounts not received as an annuity”. See § 1.72-11.
(c) “Amounts received as an annuity.” (1) In the case of “amounts received as an annuity” (other than certain employees' annuities described in section 72(d) and in § 1.72-13), a proportionate part of each amount so received is considered to represent a return of premiums or other consideration paid. The proportionate part of each annuity payment which is thus excludable from gross income is determined by the ratio which the investment in the contract as of the date on which the annuity is deemed to begin bears to the expected return under the contract as of that date. See § 1.72-4.
(2) In the case of employees' annuities of the type described in section 72(d), no amount received as an annuity in a taxable year to which the Internal Revenue Code of 1954 applies is includible in the gross income of a recipient until the aggregate of all amounts received thereunder and excluded from gross income under the applicable income tax law exceeds the consideration contributed (or deemed contributed) by the employee under § 1.72-8. Thereafter, all amounts so received are includible in the gross income of the recipient. See § 1.72-13.
(d) “Amounts not received as an annuity”. In the case of “amounts not received as an annuity”, if such amounts are received after an annuity has begun and during its continuance, amounts so received are generally includible in the gross income of the recipient. Amounts not received as an annuity which are received at any other time are generally includible in the gross income of the recipient only to the extent that such amounts, when added to all amounts previously received under the contract which were excludable from the gross income of the recipient under the income tax law applicable at the time of receipt, exceed the premiums or other consideration paid (see § 1.72-11). However, if the aggregate of premiums or other consideration paid for the contract includes amounts for which a deduction was allowed under section 404 as contributions on behalf of an owner-employee, the amounts received under the circumstances of the preceding sentence shall be includible in gross income until the amount so included equals the amount for which the deduction was so allowed. See paragraph (b) of § 1.72-17.
(e) Classification of recipients. For the purpose of the regulations under section 72, a recipient shall be considered an “annuitant” if he receives amounts under an annuity contract during the period that the annuity payments are to continue, whether for a term certain or during the continuing life or lives of the person or persons whose lives measure the duration of such annuity. However, a recipient shall be considered a “beneficiary” rather than an “annuitant” if the amounts he receives under a contract are received after the term of the annuity for a life or lives has expired and such amounts are paid by reason of the fact that the contract guarantees that payments of some minimum amount or for some minimum period shall be made. For special rules with respect to beneficiaries, see paragraphs (a)(1)(iii) and (c) of § 1.72-11.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR 10134, Sept. 17, 1963]
§ 1.72-2 Applicability of section.
(a) Contracts. (1) The contracts under which amounts paid will be subject to the provisions of section 72 include contracts which are considered to be life insurance, endowment, and annuity contracts in accordance with the customary practice of life insurance companies. For the purposes of section 72, however, it is immaterial whether such contracts are entered into with an insurance company. The term “endowment contract” also includes the “face-amount certificates” described in section 72(1).
(2) If two or more annuity obligations or elements to which section 72 applies are acquired for a single consideration, such as an obligation to pay an annuity to A for his life accompanied by an obligation to pay an annuity to B for his life, there being a single consideration paid for both obligations (whether paid by one or more persons in equal or different amounts, and whether paid in a single sum or otherwise), such annuity elements shall be considered to comprise a single contract for the purpose of the application of section 72 and the regulations thereunder. For rules relating to the allocation of investment in the contract in the case of annuity elements payable to two or more persons, see paragraph (b) of § 1.72-6.
(3)(i) Sections 402 and 403 provide that certain distributions by employees' trusts and certain payments under employee plans are taxable under section 72. For taxable years beginning before January 1, 1964, section 72(e)(3), as in effect before such date, does not apply to such distributions or payments. For purposes of applying section 72 to such distributions and payments (other than those described in subdivision (iii) of this subparagraph), each separate program of the employer consisting of interrelated contributions and benefits shall be considered a single contract. Therefore, all distributions or payments (other than those described in subdivision (iii) of this subparagraph) which are attributable to a separate program of interrelated contributions and benefits are considered as received under a single contract. A separate program of interrelated contributions and benefits may be financed by the purchase from an insurance company of one or more group contracts or one or more individual contracts, or may be financed partly by the purchase of contracts from an insurance company and partly through an investment fund, or may be financed completely through an investment fund. A program may be considered separate for purposes of section 72 although it is only a part of a plan which qualifies under section 401. There may be several trusts under one separate program, or several separate programs may make use of a single trust. See, however, subdivision (iii) of this subparagraph for rules relating to what constitutes a “contract” for purposes of applying section 72 to distributions commencing before October 20, 1960.
(ii) The following types of benefits, and the contributions used to provide them, are examples of separate programs of interrelated contributions and benefits:
(a) Definitely determinable retirement benefits.
(b) Definitely determinable benefits payable prior to retirement in case of disability.
(c) Life insurance.
(d) Accident and health insurance.
However, retirement benefits and life insurance will be considered part of a single separate program of interrelated contributions and benefits to the extent they are provided under retirement income, endowment, or other contracts providing life insurance protection. See examples (6), (7), and (8) contained in subdivision (iv) of this subparagraph for illustrations of the principles of this subdivision. See, also, § 1.72-15 for rules relating to the taxation of amounts received under an employee plan which provides both retirement benefits and accident and health benefits.
(iii) If any amount which is taxable under section 72 by reason of section 402 or 403 is actually distributed or made available to any person under an employees' trust or plan (other than the Civil Service Retirement Act, 5 U.S.C. ch. 14) before October 20, 1960, section 72 shall, notwithstanding any other provisions in this subparagraph, be applied to all the distributions with respect to such person (or his beneficiaries) under such trust or plan (whether received before or after October 20, 1960) as though such distributions were provided under a single contract. For purposes of applying section 72 to distributions to which this subdivision applies, therefore, the term “contract” shall be considered to include the entire interest of an employee in each trust or plan described in sections 402 and 403 to the extent that distributions thereunder are subject to the provisions of section 72. Section 72 shall be applied to distributions received under the Civil Service Retirement Act in the manner prescribed in subdivision (i) of this subparagraph (see example (4) in subdivision (iv) of this subparagraph).
(iv) The application of this subparagraph may be illustrated by the following examples:
Example 1.On January 1, 1961, X Corporation established a noncontributory profit-sharing plan for its employees providing that the amount standing to the account of each participant will be paid to him at the time of his retirement and also established a contributory pension plan for its employees providing for the payment to each participant of a lifetime pension after retirement. The profit-sharing plan is designed to enable the employees to participate in the profits of X Corporation; the amount of the contributions to it are determined by reference to the profits of X Corporation; and the amount of any distribution is determined by reference to the amount of contributions made on behalf of any participant and the earnings thereon. On the other hand, the pension plan is designed to provide a lifetime pension for a retired employee; the amount of the pension is to be determined by a formula set forth in the plan; and the amount of contributions to the plan is the amount necessary to provide such pensions. In view of the fact that each of these plans constitutes a separate program of interrelated contributions and benefits, the distributions from each shall be treated as received under a separate contract. If these plans had been established before October 20, 1960, then, in the case of an employee who receives a distribution under the plans before October 20, 1960, the determination as to whether that distribution and all subsequent distributions to such employee are received under a single contract or under more than one contract shall be made by applying the rules in subdivision (iii) of this subparagraph. On the other hand, in the case of an employee who does not receive any distribution under these plans before October 20, 1960, the determination as to whether distributions to him are received under a single contract or under more than one contract shall be made in accordance with the rules illustrated by this example.
Example 2.On January 1, 1961, Z Corporation established a profit-sharing plan for its employees providing that any employee may make contributions, not in excess of 6 percent of his compensation, to a trust and that the employer would make matching contributions out of profits. Under the plan, a participant may receive a periodic distribution of the amount standing in his account during any period that he is absent from work due to a personal injury or sickness. On separation from service, the participant is entitled to receive a distribution of the balance standing in his account in accordance with one of several options. One option provides for the immediate distribution of one-half of the account and for the periodic distribution of the remaining one-half of the account. In addition, any participant may, after the completion of five years of participation, withdraw any part of his account, but in the case of such a withdrawal, the participant forfeits his rights to participate in the plan for a period of two years. Thus, a participant may receive distributions before separation from service; he may receive a distribution of a lump sum upon separation from service; he may also receive periodic distributions upon separation from service. However, since it is the total amount received under all the options that is interrelated with the contributions to the plan and not the amount received under any one option, this profit-sharing plan consists of only one separate program of interrelated contributions and benefits and all distributions under the plan (regardless of the option under which received) are treated as received under one contract. However, if, instead of providing that the amount standing in an employee's account would be paid to him during any period that he is absent from work due to a personal injury or sickness, the plan provided that a portion of the amount in the employee's account would be used to purchase incidental accident and health insurance, this plan would consist of two separate programs of interrelated contributions and benefits. The accident and health insurance, and the contributions used to purchase it, would be considered as one separate program of interrelated contributions and benefits and, therefore, a separate contract; whereas, the remaining contributions and benefits would be considered another separate program of interrelated contributions and benefits and, consequently, another separate contract.
Example 3.On January 1, 1961, N Corporation established a profit-sharing plan for its employees providing that the employees may make contributions, not in excess of 6 percent of their compensation, to a trust and that N Corporation would make matching contributions out of its profits. Under the plan, the employee may elect each year to have his and the employer's contributions for such year placed in either a savings arrangement or a retirement arrangement. Such an election is irrevocable. Under the savings arrangement, contributions to such arrangement for any one year and the earnings thereon will be distributed five years later. The retirement arrangement provides that all contributions thereto and the earnings thereon will be distributed when the employee is separated from the service of N Corporation. Since the distributions under the retirement arrangement are attributable solely to the contributions made to such arrangement and are not affected in any manner by contributions or distributions under the savings arrangement or any other plan, such distributions are treated as received under a separate program of interrelated contributions and benefits. Similarly, since distributions during any year under the savings arrangement are attributable only to contributions to such arrangement made during the fifth preceding year and are not affected in any manner by any other contributions to or distributions from such arrangement or any other plan, the savings arrangement constitutes a series of separate programs of interrelated contributions and benefits. The contributions to the savings arrangement for any year and the distribution in a subsequent year based thereon constitute a separate contract for purposes of section 72.
Example 4.The Civil Service Retirement Act (5 U.S.C. Ch. 14) which provides retirement benefits for participating employees, consists of a compulsory program and a voluntary program. Under the compulsory program, all participating employees are required to make certain contributions and, upon retirement, are provided retirement benefits computed on the basis of compensation and length of service. Under the voluntary program, such participating employees are permitted to make contributions in addition to those required under the compulsory program and, upon retirement, are provided additional retirement benefits computed on the basis of their voluntary contributions. Distributions received under the Act constitute distributions from two separate contracts for purposes of section 72. Distributions received under the compulsory program are considered as received under a separate program of interrelated contributions and benefits since they are computed solely under the compulsory program and are not affected by any contributions or distributions under the voluntary program or under any other plan. For similar reasons, distributions which are attributable to the voluntary contributions are considered as received under a separate program of interrelated contributions and benefits.
Example 5.On January 1, 1961, M Corporation established a contributory pension plan for its employees and created a trust to which it makes contributions to fund such plan. The plan provides that each participant will receive after age 65 a pension of 1 1/2 percent of his compensation for each year of service performed subsequent to the establishment of such plan. In order to fund part of the benefits under the plan, the trustee purchased a group annuity contract. The remaining part of the benefits are to be paid out of a separate investment fund. This pension plan constitutes a single program of interrelated contributions and benefits and, therefore, all distributions received by an employee under the plan are considered as received under a single contract for purposes of section 72.
Example 6.On January 1, 1961, Y Corporation established a noncontributory pension plan (including incidental death benefits) for its employees and created a trust to which it makes contributions to fund such plan. The plan provides that each participant will receive after age 65 a pension of 1 1/2 percent of his compensation for each year of service performed subsequent to the establishment of such plan. In addition, such plan provides for the payment of a death benefit if the employee dies before age 65. The trustee funded the death benefits through the purchase of a group term insurance policy and funded the retirement benefits through the purchase of a group annuity contract. Because of a subsequent change in funding from the deferred annuity method to the deposit administration method, the trustee purchased a second group annuity contract to provide the retirement benefits under the plan accruing after the effective date of the change in method of funding. Thus, retirement benefits distributed to an employee whose service with Y Corporation commenced before the effective date of the change in method of funding will be attributable to both group annuity contracts. This pension plan includes two separate programs of interrelated contributions and benefits. The death benefits, and the contributions required to provide them, are considered as one separate program of interrelated contributions and benefits; whereas, the retirement benefits, and the contributions required to provide them, are considered as another separate program of interrelated contributions and benefits. Therefore, any retirement benefits received by an employee, whether attributable to one or both of the group annuity contracts, shall be considered as received under a single contract for purposes of section 72. In determining the tax treatment of any such retirement benefits under section 72, no amount of the premiums used to purchase the group term insurance policy shall be taken into account, since such premiums, and the death benefits which they purchased, constitute a separate program of interrelated contributions and benefits.
Example 7.Assume the same facts as in example (6) except that, in lieu of funding the benefits in the manner described in that example, the trustee purchased individual retirement income contracts from an insurance company. Additional individual retirement income contracts are purchased in order to fund any increase in benefits resulting from increases in salary. Therefore, distributions to a particular employee may be attributable to a single retirement income contract or to more than one such contract. All distributions received by an employee under the pension plan, whether attributable to one or more retirement income contracts and whether made directly from the insurance company to the employee or made through the trustee, are considered as received under a single contract for purposes of section 72. For rules relating to the tax treatment of contributions and distributions under retirement income, endowment, or other life insurance contracts purchased by a trust described in section 401(a) and exempt under section 501(a), see paragraph (a) (2), (3), and (4) of § 1.402(a)-1.
Example 8.Assume the same facts as in example (6) except that, in lieu of funding the benefits in the manner described in that example, the trustee funded the death benefits and part of the retirement benefits by purchasing individual retirement income contracts from an insurance company. The remaining part of the retirement benefits (such as any increase in benefits resulting from increases in salary) are to be paid out of a separate investment fund. This pension plan includes, with respect to each participant, two separate contracts for purposes of section 72. The retirement income contract purchased by the trust for each participant is a separate program of interrelated contributions and benefits and all distributions attributable to such contract (whether made directly from the insurance company to the employee or made through the trustee) are considered as received under a single contract. For rules relating to the tax treatment of contributions and distributions under retirement income, endowment, or other life insurance contracts purchased by a trust described in section 401(a) and exempt under section 501(a), see paragraph (a) (2), (3), and (4) of § 1.402(a)-1. The remaining distributions under the plan are considered as received under another separate program of interrelated contributions and benefits.
(b) Amounts. (1)(i) In general, the amounts to which section 72 applies are any amounts received under the contracts described in paragraph (a)(1) of this section. However, if such amounts are specifically excluded from gross income under other provisions of Chapter 1 of the Code, section 72 shall not apply for the purpose of including such amounts in gross income. For example, section 72 does not apply to amounts received under a life insurance contract if such amounts are paid by reason of the death of the insured and are excludable from gross income under section 101(a). See also sections 101(d), relating to proceeds of life insurance paid at a date later than death, and 104(a)(4), relating to compensation for injuries or sickness.
(ii) Section 72 does not exclude from gross income any amounts received under an agreement to hold an amount and pay interest thereon. See paragraph (a) of § 1.72-14. However, section 72 does apply to amounts received by a surviving annuitant under a joint and survivor annuity contract since such amounts are not considered to be paid by reason of the death of an insured. For a special deduction for the estate tax attributable to the inclusion of the value of the interest of a surviving annuitant under a joint and survivor annuity contract in the estate of the deceased primary annuitant, see section 691(d) and the regulations thereunder.
(2) Amounts subject to section 72 in accordance with subparagraph (1) of this paragraph are considered “amounts received as an annuity” only in the event that all of the following tests are met:
(i) They must be received on or after the “annuity starting date” as that term is defined in paragraph (b) of § 1.72-4;
(ii) They must be payable in periodic installments at regular intervals (whether annually, semiannually, quarterly, monthly, weekly, or otherwise) over a period of more than one full year from the annuity starting date; and
(iii) Except as indicated in subparagraph (3) of this paragraph, the total of the amounts payable must be determinable at the annuity starting date either directly from the terms of the contract or indirectly by the use of either mortality tables or compound interest computations, or both, in conjunction with such terms and in accordance with sound actuarial theory.
For the purpose of determining whether amounts subject to section 72(d) and § 1.72-13 are “amounts received as an annuity”, however, the provisions of subdivision (i) of this subparagraph shall be disregarded. In addition, the term “amounts received as an annuity” does not include amounts received to which the provisions of paragraph (b) or (c) of § 1.72-11 apply, relating to dividends and certain amounts received by a beneficiary in the nature of a refund. If an amount is to be paid periodically until a fund plus interest at a fixed rate is exhausted, but further payments may be made thereafter because of earnings at a higher interest rate, the requirements of subdivision (iii) of this subparagraph are met with respect to the payments determinable at the outset by means of computations involving the fixed interest rate, but any payments received after the expiration of the period determinable by such computations shall be taxable as dividends received after the annuity starting date in accordance with paragraph (b)(2) of § 1.72-11.
(3)(i) Notwithstanding the requirement of subparagraph (2)(iii) of this paragraph, if amounts are to be received for a definite or determinable time (whether for a period certain or for a life or lives) under a contract which provides:
(a) That the amount of the periodic payments may vary in accordance with investment experience (as in certain profit-sharing plans), cost of living indices, or similar fluctuating criteria, or
(b) For specified payments the value of which may vary for income tax purposes, such as in the case of any annuity payable in foreign currency,
each such payment received shall be considered as an amount received as an annuity only to the extent that it does not exceed the amount computed by dividing the investment in the contract, as adjusted for any refund feature, by the number of periodic payments anticipated during the time that the periodic payments are to be made. If payments are to be made more frequently than annually, the amount so computed shall be multiplied by the number of periodic payments to be made during the taxable year for the purpose of determining the total amount which may be considered received as an annuity during such year. To this extent, the payments received shall be considered to represent a return of premium or other consideration paid and shall be excludable from gross income in the taxable year in which received. See paragraph (d) (2) and (3) of § 1.72-4. To the extent that the payments received under the contract during the taxable year exceed the total amount thus considered to be received as an annuity during such year, they shall be considered to be amounts not received as an annuity and shall be included in the gross income of the recipient. See section 72(e) and paragraph (b)(2) of § 1.72-11.
(ii) For purposes of subdivision (i) of this subparagraph, the number of periodic payments anticipated during the time payments are to be made shall be determined by multiplying the number of payments to be made each year (a) by the number of years payments are to be made, or (b) if payments are to be made for a life or lives, by the multiple found by the use of the appropriate tables contained in § 1.72-9, as adjusted in accordance with the table in paragraph (a)(2) of § 1.72-5.
(iii) For an example of the computation to be made in accordance with this subparagraph and a special election which may be made in a taxable year subsequent to a taxable year in which the total payments received under a contract described in this subparagraph are less than the total of the amounts excludable from gross income in such year under subdivision (i) of this subparagraph, see paragraph (d)(3) of § 1.72-4.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6497, 25 FR 10019, Oct. 20, 1960; T.D. 6885, 31 FR 7798, June 2, 1966]
§ 1.72-3 Excludable amounts not income.
In general, amounts received under contracts described in paragraph (a)(1) of § 1.72-2 are not to be included in the income of the recipient to the extent that such amounts are excludable from gross income as the result of the application of section 72 and the regulations thereunder.
§ 1.72-4 Exclusion ratio.
(a) General rule. (1)(i) To determine the proportionate part of the total amount received each year as an annuity which is excludable from the gross income of a recipient in the taxable year of receipt (other than amounts received under (a) certain employee annuities described in section 72(d) and § 1.72-13, or (b) certain annuities described in section 72(o) and § 1.122-1), an exclusion ratio is to be determined for each contract. In general, this ratio is determined by dividing the investment in the contract as found under § 1.72-6 by the expected return under such contract as found under § 1.72-5. Where a single consideration is given for a particular contract which provides for two or more annuity elements, an exclusion ratio shall be determined for the contract as a whole by dividing the investment in such contract by the aggregate of the expected returns under all the annuity elements provided thereunder. However, where the provisions of paragraph (b)(3) of § 1.72-2 apply to payments received under such a contract, see paragraph (b)(3) of § 1.72-6. In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, the exclusion ratio for purposes of this paragraph (a) is determined in accordance with § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(i).
(ii) The exclusion ratio for the particular contract is then applied to the total amount received as an annuity during the taxable year by each recipient. See, however, paragraph (e)(3) of § 1.72-5. Any excess of the total amount received as an annuity during the taxable year over the amount determined by the application of the exclusion ratio to such total amount shall be included in the gross income of the recipient for the taxable year of receipt.
(2) The principles of subparagraph (1) may be illustrated by the following example:
Example.Taxpayer A purchased an annuity contract providing for payments of $100 per month for a consideration of $12,650. Assuming that the expected return under this contract is $16,000 the exclusion ratio to be used by A is $12,650 ÷ 16,000; or 79.1 percent (79.06 rounded to the nearest tenth). If 12 such monthly payments are received by A during his taxable year, the total amount he may exclude from his gross income in such year is $949.20 ($1,200 × 79.1 percent).The balance of $250.80 ($1,200 less $949.20) is the amount to be included in gross income. If A instead received only five such payments during the year, he should exclude $395.50 (500 × 79.1 percent) of the total amounts received.
For examples of the computation of the exclusion ratio in cases where two annuity elements are acquired for a single consideration, see paragraph (b)(1) of § 1.72-6.
(3) The exclusion ratio shall be applied only to amounts received as an annuity within the meaning of that term under paragraph (b) (2) and (3) of § 1.72-2. Where the periodic payments increase in amount after the annuity starting date in a manner not provided by the terms of the contract at such date, the portion of such payments representing the increase is not an amount received as an annuity. For the treatment of amounts not received as an annuity, see section 72(e) and § 1.72-11. For special rules where paragraph (b)(3) of § 1.72-2 applies to amounts received, see paragraph (d)(3) of this section.
(4) After an exclusion ratio has been determined for a particular contract, it shall be applied to any amounts received as an annuity thereunder unless or until one of the following occurs:
(i) The contract is assigned or transferred for a valuable consideration (see section 72(g) and paragraph (a) of § 1.72-10);
(ii) The contract matures or is surrendered, redeemed, or discharged in accordance with the provisions of paragraph (c) or (d) of § 1.72-11;
(iii) The contract is exchanged (or is considered to have been exchanged) in a manner described in paragraph (e) of § 1.72-11.
(b) Annuity starting date. (1) Except as provided in subparagraph (2) of this paragraph, the annuity starting date is the first day of the first period for which an amount is received as an annuity, except that if such date was before January 1, 1954, then the annuity starting date is January 1, 1954. The first day of the first period for which an amount is received as an annuity shall be whichever of the following is the later:
(i) The date upon which the obligations under the contract became fixed, or
(ii) The first day of the period (year, half-year, quarter, month, or otherwise, depending on whether payments are to be made annually, semiannually, quarterly, monthly, or otherwise) which ends on the date of the first annuity payment.
(2) Notwithstanding the provisions of paragraph (b)(1) of this section, the annuity starting date shall be determined in accordance with whichever of the following provisions is appropriate:
(i) In the case of a joint and survivor annuity contract described in section 72(i) and paragraph (b)(3) of § 1.72-5, the annuity starting date is January 1, 1954, or the first day of the first period for which an amount is received as an annuity by the surviving annuitant, whichever is the later;
(ii) In the case of the transfer of an annuity contract for a valuable consideration, as described in section 72(g) and paragraph (a) of § 1.72-10, the annuity starting date shall be January 1, 1954, or the first day of the first period for which the transferee received an amount as an annuity, whichever is the later;
(iii) If the provisions of paragraph (e) of § 1.72-11 apply to an exchange of one contract for another, or to a transaction deemed to be such an exchange, the annuity starting date of the contract received (or deemed received) in exchange shall be January 1, 1954, or the first day of the first period for which an amount is received as an annuity under such contract, whichever is the later; and
(iv) In the case of an employee who has retired from work because of personal injuries or sickness, and who is receiving amounts under a plan that is a wage continuation plan under section 105(d) and § 1.105-4, the annuity starting date shall be the date the employee reaches mandatory retirement age, as defined in § 1.105-4(a)(3)(i)(B). (See also §§ 1.72-15 and 1.105-6 for transitional and other special rules.)
(c) Fiscal year taxpayers. Fiscal year taxpayers receiving amounts as annuities in a taxable year to which the Internal Revenue Code of 1954 applies shall determine the annuity starting date in accordance with section 72(c)(4) and this section. The annuity starting date for fiscal year taxpayers receiving amounts as an annuity in a taxable year to which the Internal Revenue Code of 1939 applies shall be January 1, 1954, except where the first day of the first period for which an amount is received by such a taxpayer as an annuity is subsequent thereto and before the end of a fiscal year to which the Internal Revenue Code of 1939 applied. In such case, the latter date shall be the annuity starting date. In all cases where a fiscal year taxpayer received an amount as an annuity in a taxable year to which the Internal Revenue Code of 1939 applied and subsequent to the annuity starting date determined in accordance with the provisions of this paragraph, such amount shall be disregarded for the purposes of section 72 and the regulations thereunder.
(d) Exceptions to the general rule. (1) Where the provisions of section 72 would otherwise require an exclusion ratio to be determined, but the investment in the contract (determined under § 1.72-6) is an amount of zero or less, no exclusion ratio shall be determined and all amounts received under such a contract shall be includible in the gross income of the recipient for the purposes of section 72.
(2) Where the investment in the contract is equal to or greater than the total expected return under such contract found under § 1.72-5, the exclusion ratio shall be considered to be 100 percent and all amounts received as an annuity under such contract shall be excludable from the recipient's gross income. See, for example, paragraph (f)(1) of § 1.72-5. In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this paragraph (d)(2) is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(ii).
(3)(i) If a contract provides for payments to be made to a taxpayer in the manner described in paragraph (b)(3) of § 1.72-2, the investment in the contract shall be considered to be equal to the expected return under such contract and the resulting exclusion ratio (100%) shall be applied to all amounts received as an annuity under such contract. For any taxable year, payments received under such a contract shall be considered to be amounts received as an annuity only to the extent that they do not exceed the portion of the investment in the contract which is properly allocable to that year and hence excludable from gross income as a return of premiums or other consideration paid for the contract. The portion of the investment in the contract which is properly allocable to any taxable year shall be determined by dividing the investment in the contract (adjusted for any refund feature in the manner described in paragraph (d) of § 1.72-7) by the applicable multiple (whether for a term certain, life, or lives) which would otherwise be used in determining the expected return for such a contract under § 1.72-5. The multiple shall be adjusted in accordance with the provisions of the table in paragraph (a)(2) of § 1.72-5, if any adjustment is necessary, before making the above computation. If payments are to be made more frequently than annually and the number of payments to be made in the taxable year in which the annuity begins are less than the number of payments to be made each year thereafter, the amounts considered received as an annuity (as otherwise determined under this subdivision) shall not exceed, for such taxable year (including a short taxable year), an amount which bears the same ratio to the portion of the investment in the contract considered allocable to each taxable year as the number of payments to be made in the first year bears to the number of payments to be made in each succeeding year. Thus, if payments are to be made monthly, only seven payments will be made in the first taxable year, and the portion of the investment in the contract allocable to a full year of payments is $600, the amounts considered received as an annuity in the first taxable year cannot exceed $350 ($600 × 7/12). See subdivision (iii) of this subparagraph for an example illustrating the determination of the portion of the investment in the contract allocable to one taxable year of the taxpayer.
(ii) If subdivision (i) of this subparagraph applies to amounts received by a taxpayer and the total amount of payments he receives in a taxable year is less than the total amount excludable for such year under subdivision (i) of this subparagraph, the taxpayer may elect, in a succeeding taxable year in which he receives another payment, to redetermine the amounts to be received as an annuity during the current and succeeding taxable years. This shall be computed in accordance with the provisions of subdivision (i) of this subparagraph except that:
(a) The difference between the portion of the investment in the contract allocable to a taxable year, as found in accordance with subdivision (i) of this subparagraph, and the total payments actually received in the taxable year prior to the election shall be divided by the applicable life expectancy of the annuitant (or annuitants), found in accordance with the appropriate table in § 1.72-9 (and adjusted in accordance with paragraph (a)(2) of § 1.72-5), or by the remaining term of a term certain annuity, computed as of the first day of the first period for which an amount is received as an annuity in the taxable year of the election; and
(b) The amount determined under (a) of this subdivision shall be added to the portion of the investment in the contract allocable to each taxable year (as otherwise found). To the extent that the total periodic payments received under the contract in the taxable year of the election or any succeeding taxable year does not equal this total sum, such payments shall be excludable from the gross income of the recipient. To the extent such payments exceed the sum so found, they shall be fully includible in the recipient's gross income. See subdivision (iii) of this subparagraph for an example illustrating the redetermination of amounts to be received as an annuity and subdivision (iv) of this subparagraph for the method of making the election provided by this subdivision.
(iii) The application of the principles of paragraph (d)(3) (i) and (ii) of this section may be illustrated by the following example:
Example.Taxpayer A, a 64 year old male, files his return on a calendar year basis and has a life expectancy of 15.6 years on June 30, 1954, the annuity starting date of a contract to which § 1.72-2(b)(3) applies and which he purchased for $20,000. The contract provides for variable annual payments for his life. He receives a payment of $1,000 on June 30, 1955, but receives no other payment until June 30, 1957. He excludes the $1,000 payment from his gross income for the year 1955 since this amount is less than $1,324.50, the amount determined by dividing his investment in the contract ($20,000) by his life expectancy adjusted for annual payments, 15.1 (15.6−0.5), as of the original annuity starting date. Taxpayer A may elect, in his return for the taxable year 1957, to redetermine amounts to be received as an annuity under his contract as of June 30, 1956. For the purpose of determining the extent to which amounts received in 1957 or thereafter shall be considered amounts received as an annuity (to which a 100 percent exclusion ratio shall apply) he shall add $118.63 to the $1,324.50 originally determined to be receivable as an annuity under the contract, making a total of $1,443.13. This is determined by dividing the difference between what was excludable in 1955 and 1956, $2,649 (2 × $1,324.50) and what he actually received in those years ($1,000) by his life expectancy adjusted for annual payments, 13.9 (14.4−0.5), as of his age at his nearest birthday (66) on the first day of the first period for which he received an amount as an annuity in the taxable year of election (June 30, 1956). The result, $1,443.13, is excludable in that year and each year thereafter as an amount received as an annuity to which the 100% exclusion ratio applies. It will be noted that in this example the taxpayer received amounts less than the excludable amounts in two successive years and deferred making his election until the third year, and thus was able to accumulate the portion of the investment in the contract allocable to each taxable year to the extent he failed to receive such portion in both years. Assuming that he received $1,500 in the taxable year of his election, he would include $56.87 in his gross income and exclude $1,443.13 therefrom for that year.
(iv) If the taxpayer chooses to make the election described in subdivision (ii) of this subparagraph, he shall file with his return a statement that he elects to make a redetermination of the amounts excludable from gross income under his annuity contract in accordance with the provisions of paragraph (d)(3) of § 1.72-4. This statement shall also contain the following information:
(a) The original annuity starting date and his age on that date,
(b) The date of the first day of the first period for which he received an amount in the current taxable year,
(c) The investment in the contract originally determined (as adjusted for any refund feature), and
(d) The aggregate of all amounts received under the contract between the date indicated in (a) of this subdivision and the day after the date indicated in (b) of this subdivision to the extent such amounts were excludable from gross income.
He shall include in gross income any amounts received during the taxable year for which the return is made in accordance with the redetermination made under this subparagraph.
(v) In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this paragraph (d)(3) is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(iii). This application may be illustrated by the following example:
Example. B, a male calendar year taxpayer, purchases a contract which provides for variable annual payments for life and to which § 1.72-2(b)(3) applies. The annuity starting date of the contract is June 30, 1990, when B is 64 years old. B receives a payment of $1,000 on June 30, 1991, but receives no other payment until June 30, 1993. B's total investment in the contract is $25,000. B's pre-July 1986 investment in the contract is $12,000. If B makes the election described in § 1.72-6(d)(6), separate computations are required to determine the amounts received as an annuity and excludable from gross income with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. In the separate computations, B first determines the applicable portions of the total payment received which are allocable to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. The portion of the payment received allocable to the pre-July 1986 investment in the contract is $480 ($12,000/$25,000 × $1,000). The portion of the payment received allocable to the post-June 1986 investment in the contract is $520 ($13,000/$25,000 × $1,000).
Second, B determines the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract allocable to the taxable year by dividing the pre-July 1986 and post-June 1986 investments in the contract by the applicable life expectancy multiple. The life expectancy multiple applicable to pre-July 1986 investment in the contract is B's life expectancy as of the original annuity starting date adjusted for annual payments and is determined under Table I of § 1.72-9 [15.1 (15.6−0.5)]. The life expectancy multiple applicable to post-June 1986 investment in the contract is determined under Table V of § 1.72-9 (20.3 (20.8-0.5)). Thus, the pre-July 1986 investment in the contract allocable to each taxable year is $794.70 ($12,000 ÷ 15.1), and the post-June 1986 investment in the contract so allocable is $640.39 ($13,000 ÷ 20.3). Because the applicable portions of the total payment received in 1991 under the contract ($480 allocable to the pre-July 1986 investment in the contract and $520 allocable to the post-June 1986 investment in the contract) are treated as amounts received as an annuity and are excludable from gross income to the extent they do not exceed the portion of the corresponding investment in the contract allocable to 1991 ($794.70 pre-July 1986 investment in the contract and $640.39 post-June 1986 investment in the contract), the entire amount of each applicable portion of the total payment is excludable from gross income. B may elect, in the return filed for taxable year 1993, to redetermine amounts to be received as an annuity under the contract as of June 30, 1992. The extent to which the amounts received in 1993 or thereafter shall be considered amounts received as an annuity is determined as follows:
Pre-July 1986 investment in the contract allocable to taxable years 1991 and 1992 ($794.70 × 2) | $1,589.40
Less: Portion of total payments allocable to pre-July 1986 investment in the contract actually received as an annuity in taxable years 1991 and 1992 | 480.00
1,109.40
Divided by: Life expectancy multiple applicable to pre-July 1986 investment in the contract for B, age 66 (14.4—0.5) | 13.9
79.81
Plus: Amount originally determined with respect to pre-July 1986 investment in the contract | 794.70
Pre-July 1986 amount | 874.51
Post-June 1986 investment in the contract allocable to taxable years 1991 and 1992 ($640.39 × 2) | $1,280.78
Less: Portion of total payments allocable to post-June 1986 investment in the contract actually received as an annuity in taxable years 1991 and 1992 | 520.00
760.78
Divided by: Life expectancy multiple applicable to post-June 1986 investment in the contract for B, age 66 (19.2−0.5) | 18.7
40.68
Plus: Amount originally determined with respect to post-June 1986 investment in the contract | 640.39
Post-June 1986 amount | 681.07
(vi) The method of making an election to perform the separate computations illustrated in paragraph (d)(3)(v) of this section is described in § 1.72-6(d)(6).
(e) Exclusion ratio in the case of two or more annuity elements acquired for a single consideration. (1)(i) Where two or more annuity elements are provided under a contract described in paragraph (a)(2) of § 1.72-2, an exclusion ratio shall be determined for the contract as a whole and applied to all amounts received as an annuity under any of the annuity elements. To obtain this ratio, the investment in the contract determined in accordance with § 1.72-6 shall be divided by the aggregate of the expected returns found with respect to each of the annuity elements in accordance with § 1.72-5. For this purpose, it is immaterial that payments under one or more of the annuity elements involved have not commenced at the time when an amount is first received as an annuity under one or more of the other annuity elements.
(ii) The exclusion ratio found under subdivision (i) of this subparagraph does not apply to:
(a) An annuity element payable to a surviving annuitant under a joint and survivor annuity contract to which section 72(i) and paragraphs (b)(3) and (e)(3) of § 1.72-5 apply, or to
(b) A contract under which one or more of the constituent annuity elements provides for payments described in paragraph (b)(3) of § 1.72-2.
For rules with respect to a contract providing for annuity elements described in (b) of this subdivision, see subparagraph (2) of this paragraph.
(2) If one or more of the annuity elements under a contract described in paragraph (a)(2) of § 1.72-2 provides for payments to which paragraph (b)(3) of § 1.72-2 applies:
(i) With respect to the annuity elements to which paragraph (b)(3) of § 1.72-2 does not apply, an exclusion ratio shall be determined by dividing the portion of the investment in the entire contract which is properly allocable to all such elements (in the manner provided in paragraph (b)(3)(ii) of § 1.72-6) by the aggregate of the expected returns thereunder and such ratio shall be applied in the manner described in subdivision (i) of subparagraph (1); and
(ii) With respect to the annuity elements to which paragraph (b)(3) of § 1.72-2 does apply, the investment in the entire contract shall be reduced by the portion thereof found in subdivision (i) of this subparagraph and the resulting amount shall be used to determine the extent to which the aggregate of the payments received during the taxable year under all such elements is excludable from gross income. The amount so excludable shall be allocated to each recipient under such elements in the same ratio that the total of payments he receives each year bears to the total of the payments received by all such recipients during the year. The exclusion ratio with respect to the amounts so allocated shall be 100 percent. See paragraph (f)(2) of § 1.72-5 and paragraph (b)(3) of § 1.72-6.
(iii) In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this paragraph (e) is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(iv).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 7352, 40 FR 16663, Apr. 14, 1975; T.D. 8115, 51 FR 45691, Dec. 19, 1986; 52 FR 10223, Mar. 31, 1987]
§ 1.72-5 Expected return.
(a) Expected return for but one life. (1) If a contract to which section 72 applies provides that one annuitant is to receive a fixed monthly income for life, the expected return is determined by multiplying the total of the annuity payments to be received annually by the multiple shown in Table I or V (whichever is applicable) of § 1.72-9 under the age (as of the annuity starting date) and, if applicable, sex of the measuring life (usually the annuitant's). Thus, where a male purchases a contract before July 1, 1986, providing for an immediate annuity of $100 per month for his life and, as of the annuity starting date (in this case the date of purchase), the annuitant's age at his nearest birthday is 66, the expected return is computed as follows:
Monthly payment of $100 × 12 months equals annual payment of | $1,200
Multiple shown in Table I, male, age 66 | 14.4
Expected return (1,200 × 14.4) | 17,280
If, however, the taxpayer had purchased the contract after June 30, 1986, the expected return would be $23,040, determined by multiplying 19.2 (multiple shown in Table V, age 66) by $1,200.
(2)(i) If payments are to be made quarterly, semiannually, or annually, an adjustment of the applicable multiple shown in Table I or V (whichever is applicable) may be required. A further adjustment may be required where the interval between the annuity starting date and the date of the first payment is less than the interval between future payments. Neither adjustment shall be made, however, if the payments are to be made more frequently than quarterly. The amount of the adjustment, if any, is to be found in accordance with the following table:
If the number of whole months from the annuity starting date to the first payment date is— | 0-1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12
And the payments under the contract are to be made:
Annually | + 0.5 | + 0.4 | + 0.3 | + 0.2 | + 0.1 | 0 | 0 | −0.1 | −0.2 | −0.3 | −0.4 | −0.5
Semiannually | + .2 | + .1 | 0 | 0 | −.1 | −.2
Quarterly | + .1 | 0 | −.1
Thus, for a male, age 66, the multiple found in Table I, adjusted for quarterly payments the first of which is to be made one full month after the annuity starting date, is 14.5 (14.4 + 0.1); for semiannual payments the first of which is to be made six full months from the annuity starting date, the adjusted multiple is 14.2 (14.4−0.2); for annual payments the first of which is to be made one full month from the annuity starting date, the adjusted multiple is 14.9 (14.4 + 0.5). If the annuitant in the example shown in subparagraph (1) of this paragraph were to receive an annual payment of $1,200 commencing 12 full months after his annuity starting date, the amount of the expected return would be $16,680 ($1,200 × 13.9 [14.4−0.5]). Similarly, for an annuitant, age 50, the multiple found in Table V, adjusted for quarterly payments the first of which is to be made one full month after the annuity starting date, is 33.2 (33.1 + 0.1); for semiannual payments the first of which is to be made six full months from the annuity starting date, the adjusted multiple is 32.9 (33.1−0.2); for annual payments the first of which is to be made one full month from the annuity starting date, the adjusted multiple is 33.6 (33.1 + 0.5).
(ii) Notwithstanding the table in subdivision (i) of this subparagraph, adjustments of multiples for early or other than monthly payments determined prior to February 19, 1956, under the table prescribed in paragraph 1(b)(4) of T.D. 6118 (19 FR 9897, C.B. 1955-1, 699), approved December 30, 1954, need not be redetermined.
(3) If the contract provides for fixed payments to be made to an annuitant until death or until the expiration of a specified limited period, whichever occurs earlier, the expected return of such temporary life annuity is determined by multiplying the total of the annuity payments to be received annually by the multiple shown in Table IV or VIII (whichever is applicable) of § 1.72-9 for the age (as of the annuity starting date) and, if applicable, sex of the annuitant and the nearest whole number of years in the specified period. For example, if a male annuitant, age 60 (at his nearest birthday), is to receive $60 per month for five years or until he dies, whichever is earlier, and there is no post-June 1986, investment in the contract, the expected return under such a contract is $3,456, computed as follows:
Monthly payments of $60 × 12 months equals annual payment of | $720
Multiple shown in Table IV for male, age 60, for term of 5 years | 4.8
Expected return for 5 year temporary life annuity of $720 per year ($720 × 4.8) | $3,456
If the annuitant purchased the same contract after June 30, 1986, the expected return under the contract would be $3,528, computed as follows:
Monthly payments of $60 × 12 months equals annual payment of | $720.00
Multiple shown in Table VIII for annuitant, age 60, for term of 5 years | 4.9
Expected return for 5-year temporary life annuity of $720 per year ($720 × 4.9) | $3,528.00
The adjustment provided by subparagraph (2) of this paragraph shall not be made with respect to the multiple found in Table IV or VIII (whichever is applicable).
(4) If the contract provides for payments to be made to an annuitant for the annuitant's lifetime, but the amount of the annual payments is to be decreased after the expiration of a specified limited period, the expected return is computed by considering the contract as a combination of a whole life annuity for the smaller amount plus a temporary life annuity for an amount equal to the difference between the larger and the smaller amount. For example, if a male annuitant, age 60, is to receive $150 per month for five years or until his earlier death, and is to receive $90 per month for the remainder of his lifetime after such five years, the expected return is computed as if the annuitant's contract consisted of a whole life annuity for $90 per month plus a five year temporary life annuity of $60 per month. In such circumstances, the expected return if there is no post-June 1986 investment in the contract is computed as follows:
Monthly payments of $90 × 12 months equals annual payment of | $1,080
Multiple shown in Table I for male, age 60 | 18.2
Expected return for whole life annuity of $1,080 per year | $19,656
Expected return for 5-year temporary life annuity of $720 per year (as found in subparagraph (3) of this paragraph (a)) | $3,456
Total expected return | $23,112
If the annuitant purchased the same contract after June 30, 1986, the expected return would be $29,664, computed as follows:
Monthly payments of $90 × 12 months equals annual payment of | $1,080
Multiple shown in Table V for annuitant, age 60 | 24.2
Expected return for whole life annuity of $1,080 per year | $26,136
Plus: Expected return for 5-year temporary life annuity of $720 per year (as found in subparagraph (3) of this paragraph (a)) | $3,528
Total expected return | $29,664
If payments are to be made quarterly, semiannually, or annually, an appropriate adjustment of the multiple found in Table I or V (whichever is applicable) for the whole life annuity should be made in accordance with subparagraph (2) of this paragraph.
(5) If the contract described in subparagraph (4) of this paragraph provided that the amount of the annual payments to the annuitant were to be increased (instead of decreased) after the expiration of a specified limited period, the expected return would be computed as if the annuitant's contract consisted of a whole life annuity for the larger amount minus a temporary life annuity for an amount equal to the difference between the larger and smaller amount. Thus, if the annuitant described in subparagraph (4) of this paragraph were to receive $90 per month for five years or until his earlier death, and to receive $150 per month for the remainder of his lifetime after such five years, the expected return would be computed by subtracting the expected return under a five year temporary life annuity of $60 per month from the expected return under a whole life annuity of $150 per month. In such circumstances, the expected return if there is no post-June 1986 investment in the contract is computed as follows:
Monthly payments of $150 × 12 months equals annual payment of | $1,800
Multiple shown in Table 1 (male, age 60) | 18.2
Expected return for annuity for whole life of $1,800 per year | $32,760
Less expected return for 5-year temporary life annuity of $720 per year (as found in subparagraph (3)) | $3,456
Net expected return | $29,304
If the annuitant purchased the same contract after June 30, 1986, the expected return would be $40,032, computed as follows:
Monthly payments of $150 × 12 months equals annual payments of | $1,800
Multiple shown in Table V (age 60) | 24.2
Expected return for annuity for whole life of $1,800 per year | $43,560
Less expected return for 5-year temporary life annuity of $720 per year (as found in subparagraph (3) of this paragraph (a)) | $3,528
Net expected return | $40,032
If payments are to be made quarterly, semiannually, or annually, an appropriate adjustment of the multiple found in Table I or V (whichever is applicable) for the whole life annuity should be made in accordance with subparagraph (2) of this paragraph.
(b) Expected return under joint and survivor and joint annuities. (1) In the case of a joint and survivor annuity contract involving two annuitants which provides the first annuitant with a fixed monthly income for life and, after the death of the first annuitant, provides an identical monthly income for life to a second annuitant, the expected return shall be determined by multiplying the total amount of the payments to be received annually by the multiple obtained from Table II or VI (whichever is applicable) of § 1.72-9 under the ages (as of the annuity starting date) and, if applicable, sexes of the living annuitants. For example, a husband purchases a joint and survivor annuity contract providing for payments of $100 per month for life and, after his death, for the same amount to his wife for the remainder of her life. As of the annuity starting date his age at his nearest birthday is 70 and that of his wife at her nearest birthday is 67. If there is no post-June 1986 investment in the contract, the expected return is computed as follows:
Monthly payments of $100 × 12 months equals annual payment of | $1,200
Multiple shown in Table II (male, age 70, female, age 67) | 19.7
Expected return ($1,200 × 19.7) | $23,640
If the annuitants purchased the same contract after June 30, 1986, the expected return would be $26,400, computed as follows:
Monthly payments of $100 × 12 months equals annual payment of | $1,200
Multiple shown in Table VI (ages 70, 67) | 22.0
Expected return ($1,200 × 22.0) | $26,400
If payments are to be made quarterly, semiannually, or annually, an appropriate adjustment of the multiple found in Table II or VI (whichever is applicable) should be made in accordance with paragraph (a)(2) of this section.
(2) If a contract of the type described in subparagraph (1) of this paragraph provides that a different (rather than an identical) monthly income is payable to the second annuitant, the expected return is computed in the following manner. The applicable multiple in Table II or VI (whichever is applicable) is first found as in the example in subparagraph (1) of this paragraph. The multiple applicable to the first annuitant is then found in Table I or V (whichever is applicable) as though the contract were for a single life annuity. The multiple from Table I or V is then subtracted from the multiple obtained from Table II or VI and the resulting multiple is applied to the total payments to be received annually under the contract by the second annuitant. The result is the expected return with respect to the second annuitant. The portion of the expected return with respect to payments to be made during the first annuitant's life is then computed by applying the multiple found in Table I or V to the total annual payments to be received by such annuitant under the contract. The expected returns with respect to each of the annuitants separately are then aggregated to obtain the expected return under the entire contract.
Example 1. A husband purchases a joint and survivor annuity providing for payments of $100 per month for his life and, after his death, payments to his wife of $50 per month for her life. As of the annuity starting date his age at his nearest birthday is 70 and that of his wife at her nearest birthday is 67. There is no post-June 1986 investment in the contract.
Multiple from Table II (male, age 70, female, age 67) | 19.7
Multiple from Table I (male, age 70) | 12.1
Difference (multiple applicable to second annuitant) | 7.6
Portion of expected return, second annuitant ($600 × 7.6) | $4,560
Portion of expected return, first annuitant ($1,200 × 12.1) | $14,520
Expected return under the contract | $19,080
The expected return thus found, $19,080, is to be used in computing the amount to be excluded from gross income. Thus, if the investment in the contract in this example is $14,310, the exclusion ratio is $14,310 ÷ $19,080; or 75 percent. The amount excludable from each monthly payment made to the husband is 75 percent of $100, or $75, and the remaining $25 of each payment received by him shall be included in his gross income. After the husband's death, the amount excludable by the second annuitant (the surviving wife) would be 75 percent of each monthly payment of $50, or $37.50, and the remaining $12.50 of each payment shall be included in her gross income.
Example 2. If the same contract were purchased after June 30, 1986, the expected return would be $22,800, computed as follows:
Multiple from Table VI (ages 70, 67) | 22.0
Multiple from Table V (age 70) | 16.0
Difference (multiple applicable to second annuitant) | 6.0
Portion of expected return, second annuitant ($600 × 6.0) | $3,600
Plus: Portion of expected return, first annuitant ($1,200 × 16.0) | $19,200
Expected return under the contract | $22,800
If the investment in the contract is $14,310, the exclusion ratio is $14,310 ÷ $22,800, or 62.8 percent. Thus, the husband would exclude $62.80 of each $100 payment received by him. After his death, his wife would exclude 62.8 percent, or $31.40, of each $50 monthly payment.
Example 3.If amounts were invested in the same contract both before July 1, 1986, and after June 30, 1986, and the election described in § 1.72-6(d)(6) were made, two exclusion ratios would be determined pursuant to § 1.72-6(d). Assume that the husband's total investment in the contract is $14,310 and that $7,310 is the pre-July 1986 investment in the contract. The pre-July 1986 exclusion ratio would be $7,310 ÷ $19,080, or 38.3 percent. The post-June 1986 exclusion ratio would be $7,000 ÷ $22,800, or 30.7 percent. The husband would exclude $69.00 ($38.30 + $30.70) of the $100 monthly payment received by him. The remaining $31.00 would be included in his gross income. After the husband's death, the amount excludable by his wife would be $34.50 (38.3 percent of $50 plus 30.7 percent of $50). The remaining $15.50 would be included in gross income.
The same method is used if the payments are to be increased after the death of the first annuitant. Thus, if the payments to be made until the husband's death were $50 per month and his widow were to receive $100 per month thereafter until her death, the 7.6 multiple in example (1) above would be applied to the $100 payments, yielding an expected return with respect to this portion of the annuity contract of $9,120 ($1,200 × 7.6). An expected return of $7,260 ($600 × 12.1) would be obtained with respect to the payments to be made to the husband, yielding a total expected return under the contract of $16,380 ($9,120 plus $7,260). If payments are to be made quarterly, semiannually, or annually, an appropriate adjustment of the multiples found in Tables I and II or Tables V and VI (whichever are applicable) should be made in accordance with paragraph (a)(2) of this section.
(3) In the case of a joint and survivor annuity contract in respect of which the first annuitant died in 1951, 1952, or 1953, and the basis of the surviving annuitant's interest in the contract was determinable under section 113(a)(5) of the Internal Revenue Code of 1939, such basis shall be considered the “aggregate of premiums or other consideration paid” by the surviving annuitant for the contract. (For rules governing this determination, see 26 CFR (1939) 39.22(b)(2)-2 and 39.113(a)(5)-1 (Regulations 118).) In determining such an annuitant's investment in the contract, such aggregate shall be reduced by any amounts received under the contract by the surviving annuitant before the annuity starting date, to the extent such amounts were excludable from his gross income at the time of receipt. The expected return of the surviving annuitant in such cases shall be determined in the manner prescribed in paragraph (a) of this section, as though the surviving annuitant alone were involved. For this purpose, the appropriate multiple for the survivor shall be obtained from Table I as of the annuity starting date determined in accordance with paragraph (b)(2)(i) of § 1.72-4.
(4) If a contract involving two annuitants provides for fixed monthly payments to be made as a joint life annuity until the death of the first annuitant to die (in other words, only as long as both remain alive), the expected return under such contract shall be determined by multiplying the total of the annuity payments to be received annually under the contract by the multiple obtained from Table IIA or VIA (whichever is applicable) of § 1.72-9 under the ages (as of the annuity starting date) and, if applicable, sexes of the annuitants. If, however, payments are to be made under the contract quarterly, semiannually, or annually, an appropriate adjustment of the multiple found in Table IIA or VIA shall be made in accordance with paragraph (a)(2) of this section.
(5) If a joint and survivor annuity contract involving two annuitants provides that a specified amount shall be paid during their joint lives and a different specified amount shall be paid to the survivor upon the death of whichever of the annuitants is the first to die, the following preliminary computation shall be made in all cases preparatory to determining the expected return under the contract:
(i) From Table II or VI (whichever is applicable), obtain the multiple under both of the annuitants' ages (as of the annuity starting date) and, if applicable, their appropriate sexes;
(ii) From Table IIA or VIA (whichever is applicable), obtain the multiple applicable to both annuitants' ages (as of the annuity starting date) and, if applicable, their appropriate sexes;
(iii) Apply the multiple found in subdivision (i) of this subparagraph to the total of the amounts to be received annually after the death of the first to die; and
(iv) Apply the multiple found in subdivision (ii) of this subparagraph to the difference between the total of the amounts to be received annually before and the total of the amounts to be received annually after the death of the first to die.
If the original annual payment is in excess of the annual payment to be made after the death of the first to die, the expected return is the sum of the amounts determined under subdivisions (iii) and (iv) of this subparagraph. This may be illustrated by the following examples:
Example 1. A husband purchases a joint and survivor annuity providing for payments of $100 a month for as long as both he and his wife live, and, after the death of the first to die, payments to the survivor of $75 a month for life. As of the annuity starting date, his age at his nearest birthday is 70 and that of his wife at her nearest birthday is 67. If there is no post-June 1986 investment in the contract, the expected return under the contract is computed as follows:
Multiple from Table II (male age 70, female age 67) | 19.7
Multiple from Table IIA (male age 70, female age 67) | 9.3
Portion of expected return ($900 × 19.7—sum per year after first death) | $17,730
Plus: Portion of expected return ($300 × 9.3—amount of change in sum at first death) | $2,790
Expected return under the contract | $20,520
The total expected return in this example, $20,520, is to be used in computing the amount to be excluded from gross income. Thus, if the investment in the contract is $17,887, the exclusion ratio is $17,887 ÷ $20,520, or 87.2 percent. The amount excludable from each monthly payment made while both are alive is 87.2 percent of $100, or $87.20, and the remaining $12.80 of each payment shall be included in gross income. After the death of the first to die, the amount excludable by the survivor shall be 87.2 percent of each monthly payment of $75, or $65.40, and the remaining $9.60 of each payment shall be included in gross income.
Example 2. Assume the same facts as in example (1), except that the contract is purchased after June 30, 1986.
The expected return under the contract is computed as follows:
Multiple from Table VI (ages 70, 67) | 22.0
Multiple from Table VIA (ages 70, 67) | 12.4
Portion of expected return ($900 × 22.0—sum per year after first death) | $19,800
Plus: Portion of expected return ($300 × 12.4—amount of change in sum at first death) | $3,720
Expected return under the contract | $23,520
Thus, if the investment in the contract is $17,887, the exclusion ratio is $17,887 ÷ $23,520, or 76.1 percent. The amount excludable from each monthly payment made while both are alive would be 76.1 percent of $100, or $76.10, and the remaining $23.90 of each payment would be included in gross income. After the death of the first to die, the amount excludable by the survivor would be 76.1 percent of each monthly payment of $75, or $57.08, and the remaining $17.92 of each payment would be included in gross income.
Example 3.Assume the same facts as in examples (1) and (2), except that the total investment in the contract is $17,887, and that the pre-July 1986 investment in the contract is $8,000. Assume also that one of the annuitants makes the election described in § 1.72-6(d)(6). Separate computations shall be performed pursuant to § 1.72-6(d) to determine the amount excludable from gross income. The pre-July 1986 exclusion ratio would be $8,000 ÷ $20,520, or 39 percent. The post-June 1986 exclusion ratio would be $9,887 ÷ $23,520, or 42 percent. The amount excludable from each monthly payment made while both are alive would be $81 ((.39 × 100) + (.42 × 100)), and the remaining $19 would be included in gross income. After the death of the first to die, the amount excludable by the survivor would be $60.75 ((.39 × 75) + (.42 × 75)), and the remaining $14.25 would be included in gross income.
If the original annual payment is less than the annual payment to be made after the death of the first to die, the expected return is the difference between the amounts determined under subdivisions (iii) and (iv) of this subparagraph. If, however, payments are to be made quarterly, semiannually, or annually under the contract, the multiples obtained from both Tables II and IIA or Tables VI and VIA (whichever are applicable) shall first be adjusted in a manner prescribed in paragraph (a)(2) of this section.
(6) If a contract provides for the payment of life annuities to two persons during their respective lives and, after the death of one (without regard to which one dies first), provides that the survivor shall receive for life both his own annuity payments and the payments made formerly to the deceased person, the expected return shall be determined in accordance with paragraph (e)(4) of this section.
(7) If paragraph (b)(3) of § 1.72-2 applies to payments provided under a contract and this paragraph applies to such payments, the principles of this paragraph shall be used in making the computations described in paragraph (d)(3) of § 1.72-4. This may be illustrated by the following examples, examples (1) through (3) of which assume that there is no post-June 1986 investment in the contract:
Example 1. Taxpayer A, a male age 63, pays $24,000 for a contract which provides that the proceeds (both income and return of capital) from eight units of an investment fund shall be paid monthly to him for his life and that after his death the proceeds from six such units shall be paid monthly to B, a female age 55, for her life. The portion of the investment in the contract allocable to each taxable year of A is $955.20 and that allocable to each taxable year of B is $716.40. This is determined in the following manner:
Multiple from Table II (male, age 63, and female, age 55) | 28.1
Number of units to be paid, in effect, as a joint and survivor annuity | × 6
Number of total annual unit payments anticipatable with respect to the joint and survivor annuity element | 168.6
Multiple from Table I (male, age 63) | 16.2
Number of units to be paid, in effect, as a single life annuity | × 2
Number of total annual unit payments anticipatable with respect to A alone | 32.4
Total number of unit payments anticipatable | 201
Portion of investment in the contract allocable to unit payments ($24,000 ÷ 201) on an annual basis | $119.40
Number of units payable to A while he continues to live | × 8
Portion of the investment in the contract allocable to each taxable year of A | $955.20
Portion of investment in the contract allocable to unit payments ($24,000 ÷ 201) on an annual basis | $119.40
Number of units payable to B for her life after A's death | × 6
Portion of the investment in the contract allocable to each taxable year of B | $716.40
For the purpose of the above computation it is immaterial whether or not A lives to or beyond the life expectancy shown for him in Table I.
Example 2.Assume that Taxpayer A in example (1) receives payments for five years which are at least as large as the portion of the investment in the contract allocable to such years, but in the sixth year he receives a total of only $626.40 rather than the $955.20 allocable to such year. A is 69 and B is 61 at the beginning of the first monthly period for which an amount is payable in the seventh taxable year. A makes the election in that year provided under paragraph (d)(3) of § 1.72-4. The difference between the portion of the investment in the contract allocable to the sixth year and the amount actually received in that year is $328.80 ($955.20 less $626.40). In this case, 139.2 unit payments are anticipatable (on an annual basis), since the appropriate multiple from Table II of § 1.72-9, 23.2, multiplied by the number of units payable, in effect, as a joint and survivor annuity yields this result (6 × 23.2). A's appropriate multiple from Table I of § 1.72-9 for the two units which will cease to be paid at his death is 12.6, and the total number of unit payments anticipatable (on an annual basis) is, therefore, 164.4 (2 × 12.6 plus 139.2). Dividing the difference previously found ($328.80) by the total number of unit payments thus determined (164.4) indicates that A will have an additional allocation of the investment in the contract of $16 to the seventh and every succeeding full taxable year (8 units × $2), and B will have an additional allocation of the investment in the contract of $12 (6 units × $2) to each taxable year in which she receives 12 monthly payments subsequent to the death of A. The total allocable to each taxable year of A is, therefore, $971.20, and that allocable to each taxable year of B will be $728.40.
Example 3.If, in example (2), A had died at the end of the fifth year, in the sixth year B would have received a payment of $469.80 (that portion of the $626.40 that A would have received which is in the same ratio that 6 units bear to 8 units) and would thus have received $246.60 less than the portion of the investment in the contract originally determined to be allocable to each of her taxable years. In these circumstances, B would be entitled to elect to redetermine the portion of the investment in the contract allocable to the taxable year of election and all subsequent years. The new amount allocable thereto would be found by dividing the $246.60 difference by her life expectancy as of the first day of the first period for which she received an amount as an annuity in the seventh year of the annuity contract, and adding the result to her originally determined allocation of $716.40.
Example 4. On July 1, 1986, Taxpayer C, age 60, pays $28,000 for a contract which provides that the proceeds (both income and return of capital) from 10 units of an investment fund shall be paid monthly to C for C's life and that after C's death the proceeds from 4 such units shall be paid monthly to D, age 57, for D's life. The portion of the investment in the contract allocable to each taxable year of C is $1,037.00 and that allocable to each taxable year of D is $414.80. This is determined as follows:
Multiple from Table VI (ages 60, 57) | 31.2
Number of units to be paid, in effect, as a joint and survivor annuity | × 4
Number of total annual unit payments anticipatable with respect to the joint and survivor annuity element | 124.8
Multiple from Table V (age 60) | 24.2
Number of units to be paid, in effect, as a single life annuity | × 6
Number of total annual unit payments anticipatable with respect to C alone | 145.2
Total number of unit payments anticipatable | 270
Portion of investment in the contract allocable to unit payments ($28,000 ÷ 270) on an annual basis | 103.70
Number of units payable to C while C continues to live | × 10
Portion of the investment in the contract allocable to each taxable year of C | $1,037.00
Portion of investment in the contract allocable to unit payments ($28,000 ÷ 270) on an annual basis | $103.70
Number of units payable to D for D's life after C's death | × 4
Portion of the investment in the contract allocable to each taxable year of D | $414.80
For purposes of the above computation it is immaterial whether or not C lives to or beyond the life expectancy shown in Table V.
Example 5. Assume the same facts as in example (4), except that C's total investment in the contract is $28,000, and C's pre-July 1986 investment in the contract is $16,000. If C makes the election described in § 1.72-6(d)(6), separate computations are required to determine the amount excludable from gross income with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. The annuitant shall apply the appropriate pre-July 1986 and post-June 1986 life expectancy multiples to the applicable portions of the units to be paid as a joint and survivor annuity, and as a single life annuity.
Pre-July 1986 Computation (all references to unit payments are to the pre-July 1986 applicable portion of such payments):
Multiple from Table II (male, age 60, female, age 57) | 27.6
Number of units to be paid, in effect, as a joint and survivor annuity | × 4
Number of total annual unit payments anticipatable with respect to the joint and survivor annuity element | 110.40
Multiple from Table I (male, age 60) | 18.2
Number of units to be paid, in effect, as a single life annuity | × 6
Number of total annual unit payments anticipatable with respect to C alone | 109.20
Total number of unit payments anticipatable | 219.6
Portion of pre-July 1986 investment in the contract allocable to unit payments ($16,000 ÷ 219.60) on an annual basis | $72.86
Number of units payable to C while C continues to live | × 10
Portion of pre-July 1986 investment in the contract allocable to each taxable year of C | 728.60
Portion of pre-July 1986 investment in the contract allocable to unit payments ($16,000 ÷ 219.60) on an annual basis | 72.86
Number of units payable to D for D's life after C's death | × 4
Portion of pre-July 1986 investment in the contract allocable to each taxable year of D | $291.44
Post-June 1986 Computation (all references to unit payments are to the post-June 1986 applicable portion of such payments):
Multiple from Table VI (ages 60, 57) | 31.2
Number of units to be paid, in effect, as a joint and survivor annuity | x4
Number of total annual unit payments anticipatable with respect to the joint and survivor annuity element | 124.80
Multiple from Table V (age 60) | 24.2
Number of units to be paid, in effect, as a single life annuity | × 6
Number of total annual unit payments anticipatable with respect to C alone | 145.20
Total number of unit payments anticipatable | 270
Portion of post-June 1986 investment in the contract allocable to unit payments ($12,000 ÷ 270) on an annual basis | $44.44
Number of units payable to C while C continues to live | × 10
Portion of post-June 1986 investment in the contract allocable to each taxable year of C | $444.40
Portion of post-June 1986 investment in the contract allocable to unit payments ($12,000 ÷ 270) on an annual basis | 44.44
Number of units payable to D for D's life after C's death | × 4
Portion of post-June 1986 investment in the contract allocable to each taxable year of D | $177.78
Total computation:
Total portion of the investment in the contract allocable to each taxable year of C ($728.60 + $444.40) | $1,173.00
Total portion of the investment in the contract allocable to each taxable year of D ($291.44 + $177.78) | $469.22
Example 6.Assume that taxpayer C in example (4) receives payments for four years which are at least as large as the portion of the investment in the contract allocable to such years, but in the fifth year receives a total of only $600 rather than the $1,037 allocable to such year. C is 65 and D is 62 at the beginning of the first monthly period for which an amount is payable in the sixth taxable year. C makes the election in that year provided under paragraph (d)(3) of § 1.72-4. The difference between the portion of the investment in the contract allocable to the fifth year and the amount actually received in that year is $437 ($1,037−$600). In this case, 106 unit payments are anticipatable with respect to the joint and survivor annuity element, since the appropriate multiple from Table VI of § 1.72-9, 26.5, multiplied by the number of units payable, in effect, as a joint and survivor annuity yields this result (4 × 26.0). C's appropriate multiple from Table V of § 1.72-9 for the six units which will cease to be paid at C's death is 20.0, and the number of unit payments anticipatable with respect to C alone is 120 (6 × 20). The total number of unit payments anticipatable is, therefore, 226 (120 plus 106). Dividing the difference previously found ($437) by the total number of unit payments thus determined (226) indicates that C will have an additional allocation of the investment in the contract of $19.30 to the sixth and every succeeding full taxable year (10 units × $1.93), and D will have an additional allocation of the investment in the contract of $7.72 (4 units × $1.93) to each taxable year in which D receives 12 monthly payments subsequent to the death of C. The total allocable to each taxable year of C is, therefore, $1,056.30, and that allocable to each taxable year of D will be $422.52.
Example 7.If, in example (6), C had died at the end of the fourth year, in the fifth year D would have received a payment of $240 (that portion of the $600 that C would have received which is in the same ratio that 4 units bear to 10 units) and would thus have received $174.80 less than the portion of the investment in the contract allocable to each of D's taxable years. In these circumstances, D would be entitled to elect to redetermine the portion of the investment in the contract allocable to the taxable year of election and all subsequent years. The new amount allocable thereto would be found by dividing the $174.80 difference by D's life expectancy as of the first day of the first period for which D received an amount as an annuity in the sixth year of the annuity contract, and adding the result to D's originally determined allocation of $414.80.
(c) Expected return for term certain. In the case of a contract providing for specific periodic payments which are to be paid for a term certain such as a fixed number of months or years, without regard to life expectancy, the expected return is determined by multiplying the fixed number of years or months for which payments are to be made on or after the annuity starting date by the amount of the payment provided in the contract for each such period.
(d) Expected return with respect to amount certain. In the case of contracts involving no life or lives as a measurement of their duration, but under which a determinable total amount is to be paid in installments of lesser amounts paid at periodic intervals, the expected return shall be the total amount guaranteed. If an amount is to be paid periodically until a fund plus interest at a fixed rate is exhausted, but further payments may be made thereafter because of earnings at a higher interest rate, this paragraph shall apply to the total amount anticipatable as a result of the amount of the fund plus the fixed interest thereon. Any amount which may be paid as the result of earnings at a greater interest rate shall be disregarded in determining the expected return. If such an amount is later received, it shall be considered an amount not received as an annuity after the annuity starting date. See paragraph (b)(2) of § 1.72-11.
(e) Expected return where two or more annuity elements providing for fixed payments are acquired for a single consideration. (1) In the case of a contract described in paragraph (a)(2) of § 1.72-2, which provides for specified payments to be made under two or more annuity elements, the expected return shall be found for the contract as a whole by aggregating the expected returns found with respect to each annuity element. If individual life annuity elements are involved (including joint and survivor annuities where the primary annuitant died before January 1, 1954) the expected return for each of them shall be determined in the manner prescribed in paragraph (a) of this section. If joint and survivor annuity elements are involved, the expected return for such elements shall be determined under the appropriate subparagraph of paragraph (b) of this section. If terms certain or amounts certain are involved, the expected returns for such elements shall be determined under paragraph (c) or (d) of this section, respectively.
(2) The aggregate expected return found in accordance with the rules set forth in subparagraph (1) of this paragraph shall constitute the expected return for the contract as a whole. The investment in the contract shall be divided by the amount thus determined to obtain the exclusion ratio for the contract as a whole, This exclusion ratio shall be applied to all amounts received as an annuity under the contract by any recipient (in accordance with the provisions of § 1.72-4), except in the case of amounts received by a surviving annuitant under a joint and survivor annuity element to which the provisions of section 72(i) and paragraph (b)(3) of this section would apply if it were a separate contract. See subparagraph (3) of this paragraph.
(3) In the case of a contract providing two or more annuity elements, one of which is a joint and survivor annuity element of the type described in section 72(i) and paragraph (b)(3) of this section, the general exclusion ratio for the contract as a whole, for the purpose of computations with respect to all the other annuity elements shall be determined in accordance with the principles of subparagraphs (1) and (2) of this paragraph. A special exclusion ratio shall thereafter be determined for the surviving annuitant receiving payments under the annuity element described in section 72(i) and paragraph (b)(3) of this section by using the investment in the contract and the expected return determined in accordance with the provisions of paragraph (b)(3) of this section.
(4) In the case of a contract providing for payments to be made to two persons in the manner described in paragraph (b)(6) of this section, the expected return is to be computed as though there were two joint and survivor annuities under the same contract, in the following manner. First, the multiple appropriate to the ages (as of the annuity starting date) and, if applicable, sexes of the annuitants involved shall be found in Table II or VI (whichever is applicable) of § 1.72-9 and adjusted, if necessary, in the manner described in paragraph (a)(2) of this section. Second, the multiple so found shall be applied to the sum of the payments to be made each year to both annuitants. The result is the expected return for the contract as a whole.
(5) For rules relating to expected return where two or more annuity elements are acquired for a single consideration and one or more of such elements does not specify a fixed payment for each period, see paragraph (f) of this section.
(f) Expected return with respect to obligations providing for payments described in paragraph (b)(3) of § 1.72-2. (1) If a contract to which section 72 applies provides only for payments to be made in a manner described in paragraph (b)(3) of § 1.72-2, the expected return for such contract as a whole shall be an amount equal to the investment in the contract found in accordance with section 72(c)(1) and § 1.72-6, as adjusted for any refund feature in accordance with § 1.72-7.
(2) If a contract to which section 72 applies provides for annuity elements, one or more of which (but not all) provide for payments to be made in a manner described in paragraph (b)(3) of § 1.72-2:
(i) With respect to the portion of the contract providing for annuity elements to which paragraph (b)(3) of § 1.72-2 does not apply, the expected return shall be the aggregate of the expected returns found for each of such elements in accordance with the appropriate paragraph of this section; and
(ii) With respect to all annuity elements to which paragraph (b)(3) of § 1.72-2 does apply, the expected return for all such elements shall be an amount equal to the portion of the investment in the contract allocable to such elements in accordance with the provisions of paragraph (e)(2)(ii) of § 1.72-4 and paragraph (b)(3)(ii)(b) of § 1.72-6.
(g) Expected return with respect to contracts subject to § 1.72-6(d). In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, an expected return is computed using the multiples in Tables I through IV of § 1.72-9 with respect to the pre-July 1986 investment in the contract and a second expected return is computed using the multiples in Tables V through VIII of § 1.72-9 with respect to the post-June 1986 investment in the contract.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as amended by T.D. 8115, 51 FR 45694, Dec. 19, 1986]
§ 1.72-6 Investment in the contract.
(a) General rule. (1) For the purpose of computing the “investment in the contract”, it is first necessary to determine the “aggregate amount of premiums or other consideration paid” for such contract. See section 72(c)(1). This determination is made as of the later of the annuity starting date of the contract or the date on which an amount is first received thereunder as an annuity. The amount so found is then reduced by the sum of the following amounts in order to find the investment in the contract:
(i) The total amount of any return of premiums or dividends received (including unrepaid loans or dividends applied against the principal or interest on such loans) on or before the date on which the foregoing determination is made, and
(ii) The total of any other amounts received with respect to the contract on or before such date which were excludable from the gross income of the recipient under the income tax law applicable at the time of receipt.
Amounts to which subdivision (ii) of this subparagraph applies shall include, for example, amounts considered to be return of premiums or other consideration paid under section 22(b)(2) of the Internal Revenue Code of 1939 and amounts considered to be an employer-provided death benefit under section 22(b)(1)(B) of such Code. For rules relating to the extent to which an employee or his beneficiary may include employer contributions in the aggregate amount of premiums or other consideration paid, see § 1.72-8. If the aggregate amount of premiums or other consideration paid for the contract includes amounts for which deductions were allowed under section 404 as contributions on behalf of a self-employed individual, such amounts shall not be included in the investment in the contract.
(2) For the purpose of subparagraph (1) of this paragraph, amounts received subsequent to the receipt of an amount as an annuity or subsequent to the annuity starting date, whichever is the later, shall be disregarded. See, however, § 1.72-11.
(3) The application of this paragraph may be illustrated by the following examples:
Example 1.In 1950, B purchased an annuity contract for $10,000 which was to provide him with an annuity of $1,000 per year for life. He received $1,000 in each of the years 1950, 1951, 1952, and 1953, prior to the annuity starting date (January 1, 1954). Under the Internal Revenue Code of 1939, $300 of each of these payments (3 percent of $10,000) was includible in his gross income, and the remaining $700 was excludable therefrom during each of the taxable years mentioned. In computing B's investment in the contract as of January 1, 1954, the total amount excludable from his gross income during the years 1950 through 1953 ($2,800) must be subtracted from the consideration paid ($10,000). Accordingly, B's investment in the contract as of January 1, 1954, is $7,200 ($10,000 less $2,800).
Example 2.In 1945, C contracted for an annuity to be paid to him beginning December 31, 1960. In 1945 and in each successive year until 1960, he paid a premium of $5,000. Assuming he receives no payments of any kind under the contract until the date on which he receives the first annual payment as an annuity (December 31, 1960), his investment in the contract as of the annuity starting date (December 31, 1959) will be $75,000 ($5,000 paid each year for the 15 years from 1945 to 1959, inclusive).
Example 3.Assume the same facts as in example (2), except that prior to the annuity starting date C has already received from the insurer dividends of $1,000 each in 1949, 1954, and 1959, such dividends not being includible in his gross income in any of those years. C's investment in the contract, as of the annuity starting date, will then be $72,000 ($75,000-$3,000).
(b) Allocation of the investment in the contract where two or more annuity elements are acquired for a single consideration. (1) In the case of a contract described in § 1.72-2(a)(2) which provides for two or more annuity elements, the investment in the contract determined under paragraph (a) shall be allocated to each of the annuity elements in the ratio that the expected return under each annuity element bears to the aggregate of the expected returns under all the annuity elements. The exclusion ratio for the contract as a whole shall be determined by dividing the investment in the contract (after adjustment for the present value of any or all refund features) by the aggregate of the expected returns under all the annuity elements. This may be illustrated by the following examples:
Example 1. If a contract provides for annuity payments of $1,000 per year for life (with no refund feature) to both A and B, a male and female, respectively, each 70 years of age as of the annuity starting date, such contract is acquired for consideration of $19,575 (without regard to whether paid by A, B, or both), and there is no post-June 1986 investment in the contract, the investment in the contract shall be allocated by determining the exclusion ratio for the contract as a whole in the following manner:
Expectancy of A under Table I and § 1.72-5(a)(2), 11.6 (12.1-0.5), multiplied by $1,000 | $11,600
Plus: Expectancy of B computed in a similar manner ($1,000 × 14.5 [15.0−0.5]) | 14,500
Total expected return | 26,100
The exclusion ratio for both A and B is then $19,575 ÷ $26,100, or 75 percent. A and B shall each exclude from gross income three-fourths ($750) of each $1,000 annual payment received and shall include the remaining one-fourth ($250) of each $1,000 annual payment received in gross income.
Example 2. Assume the same facts as in example (1) except that of the total investment in the contract of $19,575, the pre-July 1986 investment in the contract is $10,000. If the election described in § 1.72-6(d)(6) is made with respect to the contract, the investment in the contract shall be allocated by determining an exclusion ratio for the contract as a whole based on separately computed exclusion ratios with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract in the following manner:
Expectancy of A under Table I and § 1.72-5(a)(2), 11.6 (12.1-0.5), multiplied by $1,000 | $11,600
Plus: Expectancy of B under Table I and § 1.72-5(a)(2), 14.5 (15.0-0.5), multiplied by $1,000 | $14,500
Pre-July 1986 expected return | $26,100
Expectancy of A under Table V and § 1.72-5(a)(2), 15.5 (16.0-0.5), multiplied by $1,000 | $15,500
Plus: Expectancy of B under Table V and § 1.72-5(a)(2), 15.5 (16.0-0.5), multiplied by $1,000 | $15,500
Post-June 1986 expected return | $31,000
Pre-July 1986 exclusion ratio ($10,000 ÷ $26,100) | 38.3
Post-June 1986 exclusion ratio ($9,575 ÷ 31,000) | 30.9
A and B shall each exclude from gross income $692 (38.3 percent of $1,000 + 30.9 percent of $1,000) of each $1,000 payment and include the remaining $308 in gross income
(2) In the case of a contract providing for specified annual annuity payments to be made to two persons during their joint lives and the payment of the aggregate of the two individual payments to the survivor for his life, the investment in the contract shall be allocated in accordance with the provisions of subparagraph (1) of this paragraph. For this purpose, the investment in the contract (without regard to the fact that differing amounts may have been contributed by the two annuitants) shall be divided by the expected return determined in accordance with paragraph (e)(4) of § 1.72-5. The resulting exclusion ratio shall then be applied to any amounts received as an annuity by either annuitant.
(3) In the case of a contract providing two or more annuity elements, one or more of which provides for payments to be made in a manner described in paragraph (b)(3) of § 1.72-2, the investment in the contract shall be allocated to the various annuity elements in the following manner.
(i) If all the annuity elements provide for payments to be made in the manner described in paragraph (b)(3) of § 1.72-2, the investment in the contract shall be allocated on the basis of the amounts received by each recipient by apportioning the amount determined to be excludable under that section to each recipient in the same ratio as the total of the amounts received by him in the taxable year bears to the total of the amounts received by all recipients during the same period; and
(ii) If one or more, but not all, of the annuity elements provide for payments to be made in a manner described in paragraph (b)(3) of § 1.72-2:
(a) With respect to all annuity elements to which that section does not apply, the investment in the contract for all such elements shall be the portion of the investment in the contract as a whole (found in accordance with the provisions of this section) which is properly allocable to all such elements; and
(b) With respect to all annuity elements to which paragraph (b)(3) of § 1.72-2 does apply, the investment in the contract for all such elements shall be the investment in the contract as a whole (found in accordance with the provisions of this section) as reduced by the portion thereof determined under (a) of this subdivision.
For the purpose of determining, pursuant to (a) of this subdivision, the portion of the investment in the contract as a whole properly allocable to a particular annuity element, reference shall be made to the present value of such annuity element determined in accordance with paragraph (e)(1)(iii) (b) of § 1.101-2.
(iii) In the case of a contract to which paragraph (d) of this section applies, this paragraph (b) is applied in the manner prescribed in paragraph (d) and, in particular, paragraph (d)(5)(v) of this section.
(c) Special rules. (1) For the special rule for determining the investment in the contract for a surviving annuitant in cases where the prior annuitant of a joint and survivor annuity contract died in 1951, 1952, or 1953, see paragraph (b)(3) of § 1.72-5.
(2) For special rules relating to the determination of the investment in the contract where employer contributions are involved, see § 1.72-8. See also paragraph (b) of § 1.72-16 for a special rule relating to the determination of the premiums or other consideration paid for a contract where an employee is taxable on the premiums paid for life insurance protection that is purchased by and considered to be a distribution from an exempt employees' trust.
(3) For the determination of an adjustment in investment in the contract in cases where a contract contains a refund feature, see § 1.72-7.
(4) In the case of “face-amount certificates” described in section 72(1), the amount of consideration paid for purposes of computing the investment in the contract shall include any amount added to the holder's basis by reason of section 1232(a)(3)(E) (relating to basis adjustment for amount of original issue discount ratably included in gross income as interest under section 1232(a)(3)).
(d) Pre-July 1986 and post-June 1986 investment in the contract. (1) This paragraph (d) applies to an annuity contract if:
(i) The investment in the contract includes a pre-July 1986 investment in the contract and a post-June 1986 investment in the contract (both as defined in § 1.72-6(d)(3));
(ii) The use of a multiple found in Tables I through VIII of § 1.72-9 is required to determine the expected return under the contract; and
(iii) The election described in paragraph (d)(6) of this section is made with respect to the contract.
(2) In the case of annuity contract to which this paragraph (d) applies—
(i) All computations required to determine the amount excludable from gross income shall be performed separately with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract as if each such amount were the entire investment in the contract;
(ii) The multiples in Tables I through IV shall be used for computations involving the pre-July 1986 investment in the contract and the multiples in Tables V through VIII shall be used for computations involving the post-June 1986 investment in the contract; and
(iii) The amount excludable from gross income shall be the sum of the amounts determined under the separate computations required by paragraph (d)(2)(i) of this section.
(3) For purposes of the regulations under section 72, the pre-July 1986 investment in the contract and post-June 1986 investment in the contract are determined in accordance with the following rules:
(i)(A) Except as provided in § 1.72-9, if the annuity starting date of the contract occurs before July 1, 1986, the pre-July 1986 investment in the contract is the total investment in the contract as of the annuity starting date;
(B) Except as provided in § 1.72-9, if the annuity starting date of the contract occurs after June 30, 1986, and the contract does not provide for a disqualifying form of payment or settlement, the pre-July 1986 investment in the contract is the investment in the contract computed as of June 30, 1986, as if June 30, 1986, had been the later of the annuity starting date of the contract or the date on which an amount is first received thereunder as an annuity;
(C) If the annuity starting date of the contract occurs after June 30, 1986, and the contract provides, at the option of the annuitant or of any other person (including, in the case of an employee's annuity, an option exercisable only by, or with the consent of, the employer), for a disqualifying form of payment or settlement, the pre-July 1986 investment in the contract is zero (i.e., the total investment in the contract is post-June 1986 investment in the contract).
(ii) The post-June 1986 investment in the contract is the amount by which the total investment in the contract as of the annuity starting date exceeds the pre-July 1986 investment in the contract.
(iii) For purposes of paragraph (d)(3)(i) of this section, a disqualifying form of payment or settlement is any form of payment or settlement (whether or not selected) that permits the receipt of amounts under the contract in a form other than a life annuity. For example, each of the following options provides for a disqualifying form of payment or settlement:
(A) An option to receive a lump sum in full discharge of the obligation under the contract.
(B) An option to receive an amount under the contract after June 30, 1986, and before the annuity starting date.
(C) An option to receive an annuity for a period certain.
(D) An option to receive payments under a refund feature (within the meaning of paragraphs (b) and (c) of § 1.72-7) that is substantially equivalent to an annuity for a period certain.
(E) An option to receive a temporary life annuity (within the meaning of § 1.72-5 (a)(3)) that is substantially equivalent to an annuity for a period certain.
An option to receive alternative forms of life annuity is not a disqualifying option for purposes of paragraph (d)(3)(i) of this section. Thus, if the sole options provided under a contract are a single life annuity and a joint and survivor life annuity, paragraph (d)(3)(i) (C) of this section does not apply to such contract.
(iv) For purposes of paragraph (d)(3)(iii) of this section, a refund feature is substantially equivalent to an annuity for a period certain if its value determined under Table VII of § 1.72-9 exceeds 50 percent. Similarly, a temporary life annuity is substantially equivalent to an annuity for a period certain if the multiple determined under Table VIII of § 1.72-9 exceeds 50 percent of the maximum duration of the annuity.
(4) In any separate computation under this paragraph (d), only the applicable portion of other amounts (such as the total expected return under the contract, or the total amount guaranteed under the contract as of the annuity starting date) shall be taken into account if the use of the entire amount in such computation is inconsistent with the use in the computation of only a portion of the investment in the contract. For example, such use is generally inconsistent if the computation requires a comparison of the investment in the contract and such other amount for the purpose of using the greater (or lesser) amount or the difference between the two. For purposes of the first sentence of this paragraph (d)(4), the applicable portion is the amount that bears the same ratio to the entire amount as the pre-July 1986, investment in the contract or the post-June 1986 investment in the contract, whichever is applicable, bears to the total investment in the contract as of the annuity starting date.
(5) Application to particular computations. (i) In the case of a contract to which this paragraph (d) applies, the exclusion ratio for purposes of § 1.72-4 (a) is the sum of the exclusion ratios separately computed in accordance with this paragraph (d). The exclusion ratio with respect to the pre-July 1986 investment in the contract is determined by dividing the pre-July 1986 investment in the contract by the expected return as found under § 1.72-5 by applying the appropriate multiples of Tables I through IV of § 1.72-9. Similarly, the exclusion ratio with respect to the post-June 1986 investment in the contract is determined by dividing the post-June 1986 investment in the contract by the expected return as found under § 1.72-5 by applying the appropriate multiples in Tables V through VIII of § 1.72-9.
(ii) The applicability of § 1.72-4(d)(2) to a contract to which this paragraph (d) applies shall be determined separately with respect to the post-June 1986 investment in the contract and the pre-July 1986 investment in the contract and in each such determination only the applicable portion of the total expected return under the contract shall be taken into account. If § 1.72-4(d)(2) applies with respect to either such investment in the contract, the separately computed exclusion ratio shall be considered to be the applicable portion of 100 percent.
(iii) If § 1.72-4(d)(3) applies to a contract to which this paragraph (d) applies—
(A) The applicable portions (as defined in paragraph (d)(4) of this section) of payments received under the contract for a taxable year shall be separately computed;
(B) The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract shall be separately allocated to the taxable year; and
(C) The separate applicable portions of the payments received under the contract for the taxable year shall be considered to be amounts received as an annuity (for which the exclusion ratio is 100 percent) only to the extent they do not exceed the portions of the corresponding investments in the contract which are properly allocable to that year.
See the example in § 1.72-4(d)(3)(v).
(iv) If § 1.72-4(e) applies to a contract to which this paragraph (d) applies, the exclusion ratio shall be separately computed with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. For purposes of the separate computations under § 1.72-4(e)(2)(ii), only the applicable portion of payments received shall be taken into account and the exclusion ratio (100%) shall be applied to the separately computed portion allocated to each participant.
(v) If paragraph (b)(3) of this section applies to a contract to which this paragraph (d) applies, separate allocations are required with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract.
For purposes of the separate computations required to determine the portion of the investment in the contract properly allocable to a particular annuity element, only the applicable portion of the present value of the annuity element determined in accordance with § 1.101-2(e)(1)(iii)(b) is taken into account.
(vi) If § 1.72-7 applies to a contract to which this paragraph (d) applies, separate computations are required to determine the adjustment to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract. For purposes of such separate computations, only the applicable portions of the amounts described in § 1.72-7 (b)(3)(ii), (c)(1)(ii)(B), (c)(2)(vii)(B), and (d)(1)(ii) are taken into account. Similarly, in the case of computations with respect to the guarantee of a specified amount under § 1.72-7(d)(1), only the applicable portion of such amount is taken into account.
(6) This paragraph (d) applies to a contract only if the first taxpayer to receive an amount as an annuity under the contract elects to perform separate computations with respect to the pre-July 1986 investment in the contract and the post-June 1986 investment in the contract as if each such amount were the entire investment in contract. If two or more annuitants receive an amount as an annuity under the contract at the same time (such as under a joint-and-last-survivorship annuity contract), an election by one of the annuitants is treated as an election by each of the annuitants. The election is made by attaching a statement to the first return filed by the taxpayer for the first taxable year in which an amount is received as an annuity under the contract. The statement must indicate that the taxpayer is electing to apply the provisions of paragraph (d) of § 1.72-6, and must also contain the name, address, and taxpayer identification number of each annuitant under the contract, and the amount of the pre-July 1986 investment in the contract.
(7) If the investment in the contract includes a post-June 1986 investment in the contract and the election described in paragraph (d)(6) of this section is not made—
(i) The amount excludable from gross income shall be determined without regard to the separate computations described in this paragraph (d); and
(ii) Only the multiples found in Tables V through VIII shall be used in determining the amount excludable from gross income.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR 10134, Sept. 17, 1963; T.D. 7311, 39 FR 11880, Apr. 1, 1974; T.D. 8115, 51 FR 45700, Dec. 19, 1986; 52 FR 10223, Mar. 31, 1987]
§ 1.72-7 Adjustment in investment where a contract contains a refund feature.
(a) Definition of a contract containing a refund feature. A contract to which section 72 applies, contains a refund feature if:
(1) The total amount receivable as an annuity under such contract depends, in whole or in part, on the continuing life of one or more persons,
(2) The contract provides for payments to be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a specified amount or a stated number of payments has not been paid to the annuitant or annuitants prior to death, and
(3) Such payments are in the nature of a refund of the consideration paid. See paragraph (c)(1) of § 1.72-11.
(b) Adjustment of investment for the refund feature in the case of a single life annuity. Where a single life annuity contract to which section 72 applies contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
(1) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract to the extent such amount reduces the guaranteed amount. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
(2) Consult Table III or VII (whichever is applicable) of § 1.72-9 for the appropriate percentage under the whole number of years found in subparagraph (1) of this paragraph and the age (as of the annuity starting date) and, if applicable, sex of the annuitant.
(3) Multiply the percentage found in subparagraph (2) of this paragraph by whichever of the following is the smaller: (i) The investment in the contract found in accordance with § 1.72-6 or (ii) the total amount guaranteed as of the annuity starting date.
(4) Subtract the amount found in subparagraph (3) of this paragraph from the investment in the contract found in accordance with § 1.72-6.
The resulting amount is the investment in the contract adjusted for the present value of the refund feature without discount for interest and is to be used in determining the exclusion ratio to be applied to the payments received as an annuity. The percentage found in Tables III or VII shall not be adjusted in a manner described in paragraph (a)(2) of § 1.72-5. These principles may be illustrated by the following examples:
Example 1. On January 1, 1954, a husband, age 65, purchased for $21,053, an immediate installment refund annuity payable $100 per month for life. The contract provided that in the event the husband did not live long enough to recover the full purchase price, payments were to be made to his wife until the total payments under the contract equaled the purchase price. The investment in the contract adjusted for the purpose of determining the exclusion ratio is computed in the following manner:
Cost of the annuity contract (investment in the contract, unadjusted) | $21,053
Amount to be received annually | $1,200
Number of years for which payment guaranteed ($21,053 divided by $1,200) | 17.5
Rounded to nearest whole number of years | 18
Percentage located in Table III for age 65 (age of the annuitant as of the annuity starting date) and 18 (the number of whole years) (percent) | 30
Subtract value of the refund feature to the nearest dollar (30 percent of $21,053) | $6,316
Investment in the contract adjusted for the present value of the refund feature without discount for interest | $14,737
Example 2. Assume the same facts as in example (1), except that the total investment in the contract was made after June 30, 1986. The investment in the contract adjusted for the purpose of determining the exclusion ratio is computed as follows:
Cost of the annuity contract (investment in the contract, unadjusted) | $21,053
Amount to be received annually | $1,200
Number of years for which payment guaranteed ($21,053 ÷ $1,200) | 17.5
Rounded to nearest whole number of years | 18
Percentage in Table VII for age 65 and 18 years (percent) | 15
Subtract value of the refund feature to the nearest dollar (15 percent of $21,053) | $3,158
Investment in the contract adjusted for the present value of the refund feature without discount for interest | $17,895
Example 3. Assume the same facts as in example (1), except that the pre-July 1986 investment in the contract is $10,000 and the post-June 1986 investment in the contract is $11,053. If the annuitant makes the election described in § 1.72-6(d)(6), separate computations must be performed pursuant to § 1.72-6(d) to determine the adjusted investment in the contract. The pre-July 1986 investment in the contract and the post-June 1986 investment in the contract adjusted for the purpose of determining the exclusion ratios are, respectively, $7,000 and $9,395, determined as follows:
Pre-July 1986 investment in the contract (unadjusted) | $10,000
Pre-July 1986 portion of the amount to be received annually ($10,000/$21,053 × $1,200) | $570.00
Number of years for which payment guaranteed ($10,000 ÷ $570) | 17.50
Rounded to nearest whole number of years | 18
Percentage in Table III for age 65 and 18 years (percent) | 30
Subtract value of the refund feature to the nearest dollar (30 percent of $10,000) | $3,000
Pre-July 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest | $7,000
Post-June 1986 investment in the contract (unadjusted) | $11,053
Post-June 1986 portion of the amount to be received annually ($11,053/$21,053 × $1,200) | $630
Number of years for which payment guaranteed ($11,053 ÷ $630) | 17.54
Rounded to nearest whole number of years | 18
Percentage in Table VII for age 65 and 18 years (percent) | 15
Subtract value of the refund feature to the nearest dollar (15 percent of $11,053) | $1,658
Post-June 1986 investment in the contract adjusted for the present value of the refund feature without discount for interest | $9,395
If, in the above examples, the guaranteed amount had exceeded the investment in the contract (or applicable portion thereof), the percentage found in Table III or VII (whichever is applicable) should have been applied to the lesser of these amounts since any excess of the guaranteed amount over the investment in the contract (as found under § 1.72-6) would not have constituted a refund of premiums or other consideration paid. In such a case, however, a different multiple might have been obtained from Table III or VII (whichever is applicable) since the number of years for which payments were guaranteed would have been greater.
(c) Adjustment of investment for the refund feature in the case of a joint and survivor annuity. (1) Except as provided in paragraph (c)(2) of this section, if a joint and survivor annuity contract described in paragraph (b) (1), (2) or (6) of § 1.72-5 contains a refund feature and the special rule of paragraph (d) of this section does not apply, the investment in the contract shall be adjusted in the following manner:
(i) Find the percentage determined under the following formula:
In which: V = The percentage, rounded to the nearest whole percent, x = The age at the nearest birthday of the primary annuitant, y = The age at the nearest birthday of the survivor annuitant, N = The guaranteed amount divided by the annual annuity payable to the primary annuitant, rounded to the nearest integer, P = The annual annuity continued to the survivor annuitant divided by the annual annuity payable to the primary annuitant,
(ii) Multiply the percentage found in paragraph (c)(1)(i) of this section by the lesser of (A) the investment in the contract found in accordance with § 1.72-6, or (B) the total amount guaranteed as of the annuity starting date.
(iii) Subtract the amount found in paragraph (c)(1)(ii) of this section from the investment in the contract found in accordance with § 1.72-6.
In the case of a contract providing for payments to be made to two persons in the manner described in paragraph (b)(6) of § 1.72-5, this paragraph (c)(1) is applied as though the older person were the primary annuitant and the younger person were the survivor annuitant. For purposes of this paragraph (c)(1), the number of survivors at agex (lx) is determined under the following table:
x | lx
5 | 1000000.
6 | 999729.
7 | 999493.
8 | 999284.
9 | 999069.
10 | 998849.
11 | 998620.
12 | 998382.
13 | 998135.
14 | 997876.
15 | 997606.
16 | 997322.
17 | 997025.
18 | 996714.
19 | 996387.
20 | 996044.
21 | 995684.
22 | 995304.
23 | 994905.
24 | 994484.
25 | 994041.
26 | 993573.
27 | 993080.
28 | 992563.
29 | 992024.
30 | 991461.
31 | 990876.
32 | 990269.
33 | 989638.
34 | 988984.
35 | 988303.
36 | 987593.
37 | 986846.
38 | 986055.
39 | 985210.
40 | 984298.
41 | 983310.
42 | 982230.
43 | 981046.
44 | 979742.
45 | 978302.
46 | 976709.
47 | 974945.
48 | 972992.
49 | 970832.
50 | 968447.
51 | 966000.
52 | 963313.
53 | 960375.
54 | 957175.
55 | 953705.
56 | 949954.
57 | 945912.
58 | 941568.
59 | 936908.
60 | 931903.
61 | 926451.
62 | 920540.
63 | 914090.
64 | 907011.
65 | 899221.
66 | 890428.
67 | 880797.
68 | 870298.
69 | 858904.
70 | 846565.
71 | 832316.
72 | 816861.
73 | 800078.
74 | 781837.
75 | 762012.
76 | 740743.
77 | 717689.
78 | 692780.
79 | 665977.
80 | 637260.
81 | 607339.
82 | 575531.
83 | 541919.
84 | 506647.
85 | 469931.
86 | 432459.
87 | 394138.
88 | 355393.
89 | 316712.
90 | 278663.
91 | 242020.
92 | 207150.
93 | 174602.
94 | 144828.
95 | 118151.
96 | 94871.7
97 | 74863.6
98 | 58042.2
99 | 44176.1
100 | 32956.4
101 | 24044.8
102 | 17104.1
103 | 11815.5
104 | 7886.75
105 | 5054.94
106 | 3086.95
107 | 1778.82
108 | 955.465
109 | 470.955
110 | 208.668
111 | 80.7899
112 | 26.2340
113 | 6.69620
114 | 1.19385
115 | .111460
(2) If the multiples in Tables I through IV of § 1.72-9 are used to determine any portion of the expected return under a contract described in paragraph (c)(1) of this section, only the post-June 1986 investment in the contract (if any) shall be adjusted in the manner described in paragraph (c)(1) of this section, and the pre-July 1986 investment in the contract shall, in the case of a contract described in paragraph (b) (1) or (6) of § 1.72-5, be adjusted in the following manner:
(i) Determine the number of years necessary for the guaranteed amount to be fully paid by dividing the maximum amount guaranteed as of the annuity starting date by the amount to be received annually under the contract. The number of years should be stated in terms of the nearest whole year, considering for this purpose a fraction of one-half or more as an additional whole year.
(ii) Consult Table III of § 1.72-9 for the appropriate percentages under the whole number of years found in subdivision (i) of this subparagraph and the age (as of the annuity starting date) and sex of each annuitant. If the annuitants are not of the same sex, substitute for the female annuitant a male annuitant 5 years younger, or for the male annuitant a female annuitant 5 years older, so that Table III will be entered in both cases with the ages of annuitants of the same sex.
(iii) Find the sum of the two percentages found in accordance with subdivision (ii) of this subparagraph.
(iv) To the age of the elder of the two annuitants (as determined under subdivision (ii) of this subparagraph), add the number of years (indicated in the table below) opposite the number of years by which such annuitants' ages differ:
Number of years difference in age (2 male annuitants or 2 female annuitants) | Addition to older age in years
0 to 1, inclusive | 9
2 to 3, inclusive | 8
4 to 5, inclusive | 7
6 to 8, inclusive | 6
9 to 11, inclusive | 5
12 to 15, inclusive | 4
16 to 20, inclusive | 3
21 to 27, inclusive | 2
28 to 42, inclusive | 1
Over 42 | 0
(v) Consult Table III for the appropriate percentage under the whole number of years found in subdivision (i) of this subparagraph and the age and sex of the elder annuitant as adjusted under subdivision (iv) of this subparagraph.
(vi) Subtract the percentage obtained in subdivision (v) of this subparagraph from the sum of the percentages found under subdivision (iii) of this subparagraph. If the result is less than one, subdivisions (vii) and (viii) of this subparagraph shall be disregarded and no adjustment made to the investment in the contract.
(vii) Multiply the percentage found in subdivision (vi) of this subparagraph by whichever of the following is the smaller: (A) the investment in the contract found in accordance with § 1.72-6 or (B) the total amount guaranteed as of the annuity starting date.
(viii) Subtract the amount found in subdivision (vii) of this subparagraph from the investment in the contract found in accordance with § 1.72-6.
(3) The principles of this paragraph (c) may be illustrated by the following examples:
Example 1. Prior to July 1, 1986, Taxpayer A, a 70-year-old male, purchases a joint and last survivor annuity for $33,050. The contract provides for payments of $100 a month to be paid first to himself for life and then to B, his 40-year-old daughter, if she survives him. The contract further provides that in the event both die before ten years' payments have been made, payments will be continued to C, a beneficiary, or to C's estate, until ten years' payments have been made. If there is no post-June 1986 investment in the contract, the investment in the contract adjusted for the purpose of determining the exclusion ratio is computed in the following manner:
Cost of the annuity contract (investment in the contract unadjusted) | $33,050
Guaranteed amount ($1,200 × 10) | $12,000
Percentage in Table III for male, age 70 (or female, age 75) for duration of the guarantee (10) | 21
Percentage in Table III for female, age 40 (or male, age 35) for duration of the guarantee (10) | 2
Sum of percentages obtained | 23
Difference in years of age between two males, aged 70 and 35 (or 2 females, aged 75 and 40) | 35
Addition, in years, to older age | 1
Percentage in Table III for male one year older than A | 22
Difference between percentages obtained (23 percent less 22 percent) | 1
Value of the refund feature to the nearest dollar (1 percent of $12,000) | $120
Investment in the contract adjusted for present value of the refund feature | $32,930
Example 2.The facts are the same as in example (1), except that the total investment in the contract was made after June 30, 1986, A is 73 years of age, and B is A's 70 year old spouse. The percentage determined under the formula in paragraph (c)(1)(i) of this section is two percent. Thus, the amount determined under paragraph (c)(1)(ii) of this section is $240 (2 percent of $12,000), and the investment in the contract adjusted for the present value of the refund feature is $32,810 ($33,050—$240).
(4) If an annuity described in paragraph (b) of § 1.72-5 contains a refund feature and the manner of determining the adjustment to the investment in the contract (or to any part of such investment) is not prescribed or requires use of the formula in paragraph (c)(1)(i) of this section, the Commissioner will determine the amount of the adjustment upon request. The request must contain the date of birth of each annuitant, the guaranteed amount, the annual annuity payable to each annuitant, and the annuity starting date. Send the request to the Commissioner of Internal Revenue, Attention: OP:E:EP:GA, Washington, D.C. 20224.
(d) Adjustment of investment in the contract where paragraph (b)(3) of § 1.72-2 applies to payments. (1) If paragraph (b)(3) of § 1.72-2 applies to payments to be made under a contract and this section also applies because of the provision for a refund feature, an adjustment shall be made to the investment in the contract in accordance with this paragraph before making the computations required by paragraph (d)(3) of § 1.72-4 and paragraph (d)(7) of § 1.72-5. In the case of the guarantee of a specified amount, the adjustment shall be made by applying the appropriate multiple from Table III or VII (whichever is applicable), as otherwise determined under this section, to the investment in the contract or the guranteed amount, whichever is the lesser. The guarantee period shall be found by dividing the amount guaranteed by the amount determined by placing the payments received during the first taxable year (to guaranteed amount) on an annual basis. Thus, if monthly payments are first received by a taxpayer on a calendar year basis in August, his total payments (to the extent that they reduce the guaranteed amount) for the taxable year would be divided by 5 and multiplied by 12. The guaranteed amount would then be divided by the result of this computation to obtain the guarantee period. If the contract merely guarantees that proceeds from a unit or units of a fund shall be paid for a fixed number of years or the life (or lives) of an annuitant (or annuitants), whichever is the longer, the fixed number of years is the guarantee period. The appropriate percentage in Table III or VII shall be applied to whichever of the following is the smaller: (i) the investment in the contract; or (ii) the product of the payments received in the first taxable year, placed on an annual basis, multiplied by the number of years for which payment of the proceeds of a unit or units is guaranteed.
(2) The principles of this paragraph may be illustrated by the following examples:
Example 1.Taxpayer A, a 50-year-old male purchases for $25,000 a contract which provides for variable monthly payments to be paid to him for his life. The contract also provides that if he should die before receiving payments for fifteen years, payments shall continue according to the original formula to his estate or beneficiary until payments have been made for that period. Beginning with the month of September, A receives payments which total $450 for the first taxable year of receipt. This amount, placed on an annual basis, is $1,350 ($450 divided by 4, or $112.50; $112.50 multiplied by 12, or $1,350). If there is no post-June 1986 investment in the contract, the guaranteed amount is considered to be $20,250 ($1,350 × 15), and the multiple from Table III (found in the same manner as in paragraph (b) of this section), 9 percent, applied to $20,250 (since this amount is less than the investment in the contract), results in a refund adjustment of $1,822,50. The latter amount, subtracted from the investment in the contract of $25,000, results in an adjusted investment in the contract of $23,177.50. If A dies before receiving payments for 15 years and the remaining payments are made to B, his beneficiary, B shall exclude the entire amount of such payments from his gross income until the amounts so received by B, together with the amount received by A and excludable from A's gross income, equal or exceed $25,000. Any excess and any payments thereafter received by B shall be fully includible in gross income.
Example 2.Assume the same facts as in example (1), except that the total investment in the contract was made after June 30, 1986. The applicable multiple found in Table VII is 3 percent. When this is applied to the guaranteed amount of $20,250, it results in a refund adjustment of $607.50. The adjusted investment in the contract in $24,392.50 ($25,000—$607.50).
(e) Adjustment of the investment in the contract where more than one annuity element is provided for a single consideration. In the case of contracts to which paragraph (b) of § 1.72-6 applies for the purpose of allocating the investment in the contract to two or more annuity elements which are provided for a single consideration, if one or more of such elements involves a refund feature, the portion of the investment in the contract properly allocable to each such element shall be adjusted for the refund feature before aggregating all the investments in order to obtain the exclusion ratio which is to apply to the contract as a whole.
Example 1. If taxpayer A, an insured 70 years of age, upon maturity of an endowment policy which cost him a net amount of $86,000, elected a dual settlement consisting of (1) monthly payments for his life aggregating $4,146 per year with 10 years' payments certain, and (2) monthly payments for his 60-year-old brother, B, aggregating $2,820 per year with 20 years' payments certain, the exclusion ratio to be used by both A and B if there is no post-June 1986 investment in the contract would be determined in the following manner:
A's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table 1 of 12.1) | $50,166.60
B's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table 1 of 18.2) | $51,324.00
Sum of expected returns to be used in determining exclusion ratio | $101,490.60
Percentage of total expected return attributable to A's expectancy of life ($50,166.60 ÷ $101,490.60) | 49.4
Percentage of total expected return attributable to B's expectancy of life ($51,324 ÷ $101,490.60) | 50.6
Portion of investment in the contract allocable to A's annuity (49.4 percent of $86,000) | $42,484.00
Portion of investment in the contract allocable to B's annuity (50.6 percent of $86,000) | $43,516.00
Value of the refund feature with respect to A's annuity (percentage from Table III for male, age 70, and duration 10, or 21 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $41,460) | $8,707.00
A's allocable portion of the investment in the contract adjusted for refund feature ($42,484 less $8,707.00) | $33,777.00
Value of the refund feature with respect to B's annuity (percentage from Table III for male, age 60, and duration 20, or 25 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,516) | $10,879.00
B's allocable portion of the investment in the contract adjusted for refund feature ($43,516 less $10,879.00) | $32,637.00
Sum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature | $66,414.00
Exclusion ratio for the contract as a whole (total adjusted investment in the contract, $66,414, divided by the total expected return from above, $101,490.60) (percent) | 65.4
Example 2. Assume the same facts as in example (1) except that the total investment in the contract was made after June 30, 1986. The exclusion ratio to be used by both A and B would be 56.9 percent, determined as follows:
A's expected return (A's payments per year of $4,146 multiplied by his life expectancy from Table V of 16.0) | $66,336.00
B's expected return (B's payments per year of $2,820 multiplied by his life expectancy from Table V of 24.2) | $68,244.00
Sum of expected returns to be used in determining exclusion ratio | $134,580.00
Percentage of total expected return attributable to A's expectancy of life ($66,336.00 ÷ $134,580.00) | 49.3
Percentage of total expected return attributable to B's expectancy of life ($68,244.00 ÷ $134,580.00) | 50.7
Portion of investment in the contract allocable to A's annuity (49.3 percent of $86,000) | $42,398.00
Portion of investment in the contract allocable to B's annuity (50.7 percent of $86,000) | $43,602.00
Value of the refund feature with respect to A's annuity (percentage from Table VII for age 70 and duration 10, or 11 percent, multiplied by lesser of the guaranteed amount and allocable portion of investment in the contract, $41,460) | $4,560.60
A's allocable portion of the investment in the contract adjusted for refund feature ($42,398 less $4,560.60) | $37,837.40
Value of the refund feature with respect to B's annuity (percentage from Table VII for age 60 and duration 20, or 11 percent, multiplied by lesser of guaranteed amount and allocable portion of investment in the contract, $43,602) | $4,796.22
B's allocable portion of the investment in the contract adjusted for refund feature ($43,602 less $4,796.22) | $38,805.78
Sum of A's and B's allocable portions of the investment in the contract after adjustment for the refund feature | $76,643.18
Exclusion ratio for the contract as a whole (total adjusted investment in the contract, $76,643.18, divided by the total expected return from above, $134,580.00) (percent) | 56.9
(f) Adjustment of investment in the contract with respect to contracts subject to § 1.72-6(d). In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, this section is applied in the manner prescribed in § 1.72-6(d) and, in particular, § 1.72-6(d)(5)(vi).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as amended by T.D. 8115, 51 FR 45702, Dec. 19, 1986]
§ 1.72-8 Effect of certain employer contributions with respect to premiums or other consideration paid or contributed by an employee.
(a) Contributions in the nature of compensation—(1) Amounts includible in gross income of employee under subtitle A of the Code or prior income tax laws. Section 72(f) provides that for the purposes of section 72 (c), (d), and (e), amounts contributed by an employer for the benefit of an employee or his beneficiaries shall constitute consideration paid or contributed by the employee to the extent that such amounts were includible in the gross income of the employee under subtitle A of the Code or prior income tax laws. Amounts to which this paragraph applies include, for example, contributions made by an employer to or under a trust or plan which fails to qualify under the provisions of section 401(a), provided that the employee's rights to such contributions are nonforfeitable at the time the contributions are made. See sections 402(b) and 403(c) and the regulations thereunder. This subparagraph also applies to premiums paid by an employer (other than premiums paid on behalf of an owner-employee) for life insurance protection for an employee if such premiums are includible in the gross income of the employee when paid. See § 1.72-16. However, such premiums shall only be considered as premiums and other consideration paid by the employee with respect to any benefits attributable to the contract providing the life insurance protection. See § 1.72-16.
(2) Amounts not includible in gross income of employee at time contributed if paid directly to employee at that time. Except as provided in subparagraph (3) of this paragraph, section 72(f) provides that for the purposes of section 72 (c), (d), and (e), amounts contributed by an employer for the benefit of an employee or his beneficiaries shall constitute consideration paid or contributed by the employee to the extent that such amounts would not have been includible in the gross income of the employee at the time contributed had they been paid directly to the employee at that time. Amounts to which this subparagraph applies include, for example, contributions made by an employer after December 31, 1950, and before January 1, 1963, if made on account of foreign services rendered by an employee during a period in which the employee qualified as a bona fide resident of a foreign country under section 911(a) of the Internal Revenue Code of 1954, or under section 116(a) of the Internal Revenue Code of 1939. In such a case, it would be immaterial whether such contributions were made under a qualified plan or otherwise. See subparagraph (4) of this paragraph for rules governing the determination of the amount of employer foreign service contributions to which this subparagraph applies. On the other hand, if contributions are made by an employer to a qualified plan at a time when compensation paid directly to the employee concerned with respect to the same services rendered would have been includible in the gross income of the employee, such as in the case of an employee of a State government where contributions are made in 1955 with respect to services rendered by the employee prior to the year 1939, this subparagraph does not apply to such contributions.
(3) Limitation—(i) In general. Except as provided in subdivision (ii) of this subparagraph, the provisions of subparagraph (2) of this paragraph shall not apply to amounts which were contributed by the employer after December 31, 1962, and which would not have been includible in the gross income of the employee by reason of the application of section 911, if such amounts had been paid directly to the employee at the time of contribution. Employer contributions attributable to foreign services performed by the employee after December 31, 1962, do not constitute, for purposes of section 72 (c), (d), and (e), consideration paid or contributed by the employee.
(ii) Exception. The provisions of subdivision (i) of this subparagraph shall not apply to amounts which were contributed by the employer to provide pension or annuity credits (determined in accordance with the provisions of subparagraph (4) of this paragraph) to the extent such credits are—
(a) Attributable to foreign services performed before January 1, 1963, with respect to which the employee qualified for the benefits of section 911(a) (or corresponding provisions of prior revenue laws), and
(b) Provided pursuant to pension or annuity plan provisions in existence on March 12, 1962, and on that date applicable to such services.
Amounts described in this subdivision constitute, for purposes of section 72 (c), (d), and (e), consideration paid or contributed by the employee even though such amounts are contributed by the employer after December 31, 1962.
(4) Determination of employer foreign service contributions which constitute consideration paid or contributed by employee. For purposes of subparagraphs (2) and (3)(ii) of this paragraph, employer foreign service contributions which constitute, for purposes of section 72 (c), (d), and (e), consideration paid or contributed by the employee shall be determined as follows:
(i) Treatment of identifiable contributions. If, under the terms of the pension or annuity plan under which employer contributions were made, such contributions may be identified as—
(a) Attributable to foreign services performed before January 1, 1963, with respect to which the employee qualified for the benefits of section 911(a) (or corresponding provisions of prior revenue laws), and
(b) Made under pension or annuity plan provisions in existence on March 12, 1962, which were applicable to the services referred to in (a) of this subdivision on that date,
the amount of employer contributions so identified shall be considered paid or contributed by the employee.
(ii) Alternative rule for unidentifiable contributions. If employer contributions may not be identified in the manner described in subdivision (i) of this subparagraph, the amount of employer contributions attributable to foreign services performed before January 1, 1963, and considered paid or contributed by the employee shall be determined on the basis of an estimated allocation which is reasonable and consistent with the circumstances and the provisions of the pension or annuity plan under which such contributions are made. For example, if an employee's benefits under a pension or annuity plan, which is unchanged after March 12, 1962, are determined with respect to his basic compensation during his entire period of credited service, the amount of employer contributions considered paid or contributed by the employee shall be an amount which bears the same ratio to total employer contributions for such employee under the pension or annuity plan as his basic compensation attributable to foreign services performed before January 1, 1963, with respect to which he qualified for the benefits of section 911(a) (or corresponding provisions of prior revenue laws) bears to his total basic compensation. On the other hand, if an employee's benefits under a pension or annuity plan, which is unchanged after March 12, 1962, are determined with respect to his basic compensation during his final five years of credited service, the amount of employer contributions considered paid or contributed by the employee shall be an amount which bears the same ratio to total employer contributions for such employee as his number of years of credited service before January 1, 1963, with respect to which he qualified for the benefits of section 911(a) (or corresponding provisions of prior revenue laws) bears to his total number of years of credited service.
(5) Amounts not includible in gross income of employee under subtitle A of the Code or prior income tax laws. Amounts contributed by an employer which were not includible in the gross income of the employee under Subtitle A of the Code or prior income tax laws, but which would have been includible therein had they been paid directly to the employee, do not constitute consideration paid or contributed by the employee for the purposes of section 72. For example, contributions made by an employer under a qualified employees' trust or plan, which contributions would have been includible in the gross income of the employee had such contributions been paid to him directly as compensation, do not constitute consideration paid or contributed by the employee. Accordingly, the aggregate amount of premiums or other consideration paid or contributed by an employee, insofar as compensatory employer contributions are concerned, consists solely of the (i) sum of all amounts actually contributed by the employee, plus (ii) contributions in the nature of compensation which are deemed to be paid or contributed by the employee under this paragraph.
(b) Contributions in the nature of death benefits. In the case of an employee's beneficiary, the aggregate amount of premiums or other consideration paid or deemed to be paid or contributed by the employee shall also include:
(1) Amounts (other than amounts paid as an annuity) to the extent such amounts are excludable from the beneficiary's gross income as a death benefit under section 101(b), and
(2) Any amount or amounts of death benefits which are treated as additional consideration contributed by the employee under section 101(b)(2)(D) and the regulations thereunder, or which were excludable from the beneficiary's gross income as a death benefit under section 22(b)(1)(B) of the Internal Revenue Code of 1939 and the regulations thereunder.
Accordingly, in the case of an employee's beneficiary, any such amount shall be added to any amount or amounts deemed paid or contributed by the employee under paragraph (a)(1) of this section and to any amounts actually contributed by the employee for the purpose of finding the aggregate amount of premiums or other consideration paid or contributed by the employee.
(c) Amounts “made available” to an employee or his beneficiary. Any amount which, although not actually paid, is made available to and includable in the gross income of an employee or his beneficiary under the rules of sections 402 and 403 and the regulations thereunder, shall be considered an amount contributed by the employee and shall be aggregated with amounts, if any, to which paragraphs (a) and (b) of this section apply for the purpose of determining the aggregate amount of premiums or other consideration paid by the employee.
(d) Amounts includable in gross income of employee when his rights under annuity contract change to nonforfeitable rights. Any amount which, by reason of section 403(d) and after the application of paragraph (b) of § 1.403 (b)-1, is required to be included in an employee's gross income for the year when his rights under an annuity contract change from forfeitable to nonforfeitable rights shall be considered an amount contributed by the employee and shall be aggregated with amounts, if any, to which paragraphs (a), (b), and (c) of this section apply for the purpose of determining the aggregate amount of premiums or other consideration paid or contributed by the employee for such annuity contract. In other words, if, under section 403(d), an employee of an organization exempt from tax under section 501(a) or 521(a) is required to include an amount in gross income by reason of his rights under an annuity contract changing from forfeitable to nonforfeitable rights, such amount, to the extent it is not excludable from gross income under paragraph (b) of § 1.403 (b)-1, shall be considered an amount contributed by such employee for the annuity contract.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6665, 28 FR 7245, July 16, 1963; T.D. 6783, 29 FR 18356, Dec. 24, 1964]
§ 1.72-9 Tables.
The following tables are to be used in connection with computations under section 72 and the regulations thereunder. Tables I, II, IIA, III, and IV are to be used if the investment in the contract does not include a post-June 1986 investment in the contract (as defined in § 1.72-6(d)(3)). Tables V, VI, VIA, VII, and VIII are to be used if the investment in the contract includes a post-June 1986 investment in the contract (as defined in § 1.72-6(d)(3)).
In the case of a contract under which amounts are received as an annuity after June 30, 1986, a taxpayer receiving such amounts may elect to treat the entire investment in the contract as post-June 1986 investment in the contract and thus apply Tables V through VIII. A taxpayer may make the election for any taxable year in which such amounts are received by attaching to the taxpayer's return for such taxable year a statement that the taxpayer is electing under § 1.72-9 to treat the entire investment in the contract as post-June 1986 investment in the contract. The statement must contain the taxpayer's name, address, and taxpayer identification number. The election is irrevocable and applies with respect to all amounts that the taxpayer receives as an annuity under the contract in the taxable year for which the election is made or in any subsequent taxable year. (Note that for purposes of the examples in §§ 1.72-4 through 1.72-11 the election described in this section is disregarded (i.e., it assumed that the taxpayer does not make an election under this section).) See also § 1.72-6(d)(3) for rules treating the entire investment in a contract as post-June 1986 investment in a contract if the annuity starting date of the contract is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract. In addition, see § 1.72-6(d) for special rules concerning the tables to be used and the separate computations required if the investment in the contract includes both a pre-July 1986 investment in the contract and a post-June 1986 investment in the contract and the election described in § 1.72-6(d)(6) is made with respect to the contract.
Table I—Ordinary Life Annuities—One Life—Expected Return Multiples
Ages | Multiples
Male | Female
6 | 11 | 65.0
7 | 12 | 64.1
8 | 13 | 63.2
9 | 14 | 62.3
10 | 15 | 61.4
11 | 16 | 60.4
12 | 17 | 59.5
13 | 18 | 58.6
14 | 19 | 57.7
15 | 20 | 56.7
16 | 21 | 55.8
17 | 22 | 54.9
18 | 23 | 53.9
19 | 24 | 53.0
20 | 25 | 52.1
21 | 26 | 51.1
22 | 27 | 50.2
23 | 28 | 49.3
24 | 29 | 48.3
25 | 30 | 47.4
26 | 31 | 46.5
27 | 32 | 45.6
28 | 33 | 44.6
29 | 34 | 43.7
30 | 35 | 42.8
31 | 36 | 41.9
32 | 37 | 41.0
33 | 38 | 40.0
34 | 39 | 39.1
35 | 40 | 38.2
36 | 41 | 37.3
37 | 42 | 36.5
38 | 43 | 35.6
39 | 44 | 34.7
40 | 45 | 33.8
41 | 46 | 33.0
42 | 47 | 32.1
43 | 48 | 31.2
44 | 49 | 30.4
45 | 50 | 29.6
46 | 51 | 28.7
47 | 52 | 27.9
48 | 53 | 27.1
49 | 54 | 26.3
50 | 55 | 25.5
51 | 56 | 24.7
52 | 57 | 24.0
53 | 58 | 23.2
54 | 59 | 22.4
55 | 60 | 21.7
56 | 61 | 21.0
57 | 62 | 20.3
58 | 63 | 19.6
59 | 64 | 18.9
60 | 65 | 18.2
61 | 66 | 17.5
62 | 67 | 16.9
63 | 68 | 16.2
64 | 69 | 15.6
65 | 70 | 15.0
66 | 71 | 14.4
67 | 72 | 13.8
68 | 73 | 13.2
69 | 74 | 12.6
70 | 75 | 12.1
71 | 76 | 11.6
72 | 77 | 11.0
73 | 78 | 10.5
74 | 79 | 10.1
75 | 80 | 9.6
76 | 81 | 9.1
77 | 82 | 8.7
78 | 83 | 8.3
79 | 84 | 7.8
80 | 85 | 7.5
81 | 86 | 7.1
82 | 87 | 6.7
83 | 88 | 6.3
84 | 89 | 6.0
85 | 90 | 5.7
86 | 91 | 5.4
87 | 92 | 5.1
88 | 93 | 4.8
89 | 94 | 4.5
90 | 95 | 4.2
91 | 96 | 4.0
92 | 97 | 3.7
93 | 98 | 3.5
94 | 99 | 3.3
95 | 100 | 3.1
96 | 101 | 2.9
97 | 102 | 2.7
98 | 103 | 2.5
99 | 104 | 2.3
100 | 105 | 2.1
101 | 106 | 1.9
102 | 107 | 1.7
103 | 108 | 1.5
104 | 109 | 1.3
105 | 110 | 1.2
106 | 111 | 1.0
107 | 112 | .8
108 | 113 | .7
109 | 114 | .6
110 | 115 | .5
111 | 116 | 0
Table II—Ordinary Joint Life and Last Survivor Annuities—Two Lives—Expected Return Multiples
Male | Female | Ages
Male 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20
Female 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25
6 | 11 | 73.5 | 73.0 | 72.6 | 72.2 | 71.8 | 71.4 | 71.0 | 70.7 | 70.4 | 70.0 | 69.7 | 69.5 | 69.2 | 68.9 | 68.7
7 | 12 | 73.0 | 72.6 | 72.1 | 71.7 | 71.3 | 70.9 | 70.5 | 70.1 | 69.8 | 69.4 | 69.1 | 68.8 | 68.5 | 68.3 | 68.0
8 | 13 | 72.6 | 72.1 | 71.6 | 71.2 | 70.8 | 70.4 | 70.0 | 69.6 | 69.2 | 68.9 | 68.5 | 68.2 | 67.9 | 67.6 | 67.3
9 | 14 | 72.2 | 71.7 | 71.2 | 70.7 | 70.3 | 69.9 | 69.4 | 69.0 | 68.7 | 68.3 | 67.9 | 67.6 | 67.3 | 67.0 | 66.7
10 | 15 | 71.8 | 71.3 | 70.8 | 70.3 | 69.8 | 69.4 | 68.9 | 68.5 | 68.1 | 67.7 | 67.4 | 67.0 | 66.7 | 66.4 | 66.1
11 | 16 | 71.4 | 70.9 | 70.4 | 69.9 | 69.4 | 68.9 | 68.5 | 68.0 | 67.6 | 67.2 | 66.8 | 66.5 | 66.1 | 65.8 | 65.4
12 | 17 | 71.0 | 70.5 | 70.0 | 69.4 | 68.9 | 68.5 | 68.0 | 67.5 | 67.1 | 66.7 | 66.3 | 65.9 | 65.5 | 65.2 | 64.8
13 | 18 | 70.7 | 70.1 | 69.6 | 69.0 | 68.5 | 68.0 | 67.5 | 67.1 | 66.6 | 66.2 | 65.8 | 65.4 | 65.0 | 64.6 | 64.2
14 | 19 | 70.4 | 69.8 | 69.2 | 68.7 | 68.1 | 67.6 | 67.1 | 66.6 | 66.1 | 65.7 | 65.3 | 64.8 | 64.4 | 64.0 | 63.7
15 | 20 | 70.0 | 69.4 | 68.9 | 68.3 | 67.7 | 67.2 | 66.7 | 66.2 | 65.7 | 65.2 | 64.8 | 64.3 | 63.9 | 63.5 | 63.1
16 | 21 | 69.7 | 69.1 | 68.5 | 67.9 | 67.4 | 66.8 | 66.3 | 65.8 | 65.3 | 64.8 | 64.3 | 63.8 | 63.4 | 63.0 | 62.6
17 | 22 | 69.5 | 68.8 | 68.2 | 67.6 | 67.0 | 66.5 | 65.9 | 65.4 | 64.8 | 64.3 | 63.8 | 63.4 | 62.9 | 62.5 | 62.0
18 | 23 | 69.2 | 68.5 | 67.9 | 67.3 | 66.7 | 66.1 | 65.5 | 65.0 | 64.4 | 63.9 | 63.4 | 62.9 | 62.4 | 62.0 | 61.5
19 | 24 | 68.9 | 68.3 | 67.6 | 67.0 | 66.4 | 65.8 | 65.2 | 64.6 | 64.0 | 63.5 | 63.0 | 62.5 | 62.0 | 61.5 | 61.0
20 | 25 | 68.7 | 68.0 | 67.3 | 66.7 | 66.1 | 65.4 | 64.8 | 64.2 | 63.7 | 63.1 | 62.6 | 62.0 | 61.5 | 61.0 | 60.6
Male | Female | Ages
Male 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34
Female 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39
6 | 11 | 68.4 | 68.2 | 68.0 | 67.8 | 67.6 | 67.5 | 67.3 | 67.1 | 67.0 | 66.8 | 66.7 | 66.6 | 66.5 | 66.4
7 | 12 | 67.8 | 67.5 | 67.3 | 67.1 | 66.9 | 66.7 | 66.5 | 66.4 | 66.2 | 66.1 | 65.9 | 65.8 | 65.7 | 65.6
8 | 13 | 67.1 | 66.8 | 66.6 | 66.4 | 66.2 | 66.0 | 65.8 | 65.6 | 65.4 | 65.3 | 65.1 | 65.0 | 64.9 | 64.7
9 | 14 | 66.4 | 66.2 | 65.9 | 65.7 | 65.4 | 65.2 | 65.0 | 64.8 | 64.7 | 64.5 | 64.3 | 64.2 | 64.1 | 63.9
10 | 15 | 65.8 | 65.5 | 65.2 | 65.0 | 64.7 | 64.5 | 64.3 | 64.1 | 63.9 | 63.7 | 63.6 | 63.4 | 63.3 | 63.1
11 | 16 | 65.1 | 64.8 | 64.6 | 64.3 | 64.1 | 63.8 | 63.6 | 63.4 | 63.2 | 63.0 | 62.8 | 62.6 | 62.5 | 62.3
12 | 17 | 64.5 | 64.2 | 63.9 | 63.6 | 63.4 | 63.1 | 62.9 | 62.7 | 62.4 | 62.2 | 62.0 | 61.9 | 61.7 | 61.5
13 | 18 | 63.9 | 63.6 | 63.3 | 63.0 | 62.7 | 62.4 | 62.2 | 61.9 | 61.7 | 61.5 | 61.3 | 61.1 | 60.9 | 60.8
14 | 19 | 63.3 | 63.0 | 62.7 | 62.3 | 62.0 | 61.8 | 61.5 | 61.2 | 61.0 | 60.8 | 60.6 | 60.4 | 60.2 | 60.0
15 | 20 | 62.7 | 62.4 | 62.0 | 61.7 | 61.4 | 61.1 | 60.8 | 60.6 | 60.3 | 60.1 | 59.8 | 59.6 | 59.4 | 59.2
16 | 21 | 62.2 | 61.8 | 61.4 | 61.1 | 60.8 | 60.5 | 60.2 | 59.9 | 59.6 | 59.4 | 59.1 | 58.9 | 58.7 | 58.5
17 | 22 | 61.6 | 61.2 | 60.9 | 60.5 | 60.2 | 59.8 | 59.5 | 59.2 | 58.9 | 58.7 | 58.4 | 58.2 | 57.9 | 57.7
18 | 23 | 61.1 | 60.7 | 60.3 | 59.9 | 59.6 | 59.2 | 58.9 | 58.6 | 58.3 | 58.0 | 57.7 | 57.5 | 57.2 | 57.0
19 | 24 | 60.6 | 60.2 | 59.7 | 59.4 | 59.0 | 58.6 | 58.3 | 57.9 | 57.6 | 57.3 | 57.0 | 56.8 | 56.5 | 56.3
20 | 25 | 60.1 | 59.6 | 59.2 | 58.8 | 58.4 | 58.0 | 57.7 | 57.3 | 57.0 | 56.7 | 56.4 | 56.1 | 55.8 | 55.6
21 | 26 | 59.6 | 59.1 | 58.7 | 58.3 | 57.9 | 57.5 | 57.1 | 56.7 | 56.4 | 56.0 | 55.7 | 55.4 | 55.1 | 54.9
22 | 27 | 59.1 | 58.7 | 58.2 | 57.7 | 57.3 | 56.9 | 56.5 | 56.1 | 55.8 | 55.4 | 55.1 | 54.8 | 54.5 | 54.2
23 | 28 | 58.7 | 58.2 | 57.7 | 57.2 | 56.8 | 56.4 | 55.9 | 55.5 | 55.2 | 54.8 | 54.4 | 54.1 | 53.8 | 53.5
24 | 29 | 58.3 | 57.7 | 57.2 | 56.8 | 56.3 | 55.8 | 55.4 | 55.0 | 54.6 | 54.2 | 53.8 | 53.5 | 53.2 | 52.8
25 | 30 | 57.9 | 57.3 | 56.8 | 56.3 | 55.8 | 55.3 | 54.9 | 54.4 | 54.0 | 53.6 | 53.2 | 52.9 | 52.5 | 52.2
26 | 31 | 57.5 | 56.9 | 56.4 | 55.8 | 55.3 | 54.8 | 54.4 | 53.9 | 53.5 | 53.1 | 52.7 | 52.3 | 51.9 | 51.6
27 | 32 | 57.1 | 56.5 | 55.9 | 55.4 | 54.9 | 54.4 | 53.9 | 53.4 | 53.0 | 52.5 | 52.1 | 51.7 | 51.3 | 50.9
28 | 33 | 56.7 | 56.1 | 55.5 | 55.0 | 54.4 | 53.9 | 53.4 | 52.9 | 52.4 | 52.0 | 51.6 | 51.1 | 50.7 | 50.3
29 | 34 | 56.4 | 55.8 | 55.2 | 54.6 | 54.0 | 53.5 | 53.0 | 52.4 | 52.0 | 51.5 | 51.0 | 50.6 | 50.2 | 49.3
30 | 35 | 56.0 | 55.4 | 54.8 | 54.2 | 53.6 | 53.1 | 52.5 | 52.0 | 51.5 | 51.0 | 50.5 | 50.1 | 49.6 | 49.2
31 | 36 | 55.7 | 55.1 | 54.4 | 53.8 | 53.2 | 52.7 | 52.1 | 51.6 | 51.0 | 50.5 | 50.0 | 49.5 | 49.1 | 48.7
32 | 37 | 55.4 | 54.8 | 54.1 | 53.5 | 52.9 | 52.3 | 51.7 | 51.1 | 50.6 | 50.1 | 49.5 | 49.1 | 48.6 | 48.1
33 | 38 | 55.1 | 54.5 | 53.8 | 53.2 | 52.5 | 51.9 | 51.3 | 50.7 | 50.2 | 49.6 | 49.1 | 48.6 | 48.1 | 47.6
34 | 39 | 54.9 | 54.2 | 53.5 | 52.8 | 52.2 | 51.6 | 50.9 | 50.3 | 49.8 | 49.2 | 48.7 | 48.1 | 47.6 | 47.1
Male | Female | Ages
Male 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49
Female 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52 | 53 | 54
6 | 11 | 66.3 | 66.2 | 66.1 | 66.0 | 65.9 | 65.9 | 65.8 | 65.7 | 65.7 | 65.6 | 65.6 | 65.5 | 65.5 | 65.5 | 65.4
7 | 12 | 65.4 | 65.3 | 65.3 | 65.2 | 65.1 | 65.0 | 64.9 | 64.9 | 64.8 | 64.8 | 64.7 | 64.7 | 64.6 | 64.6 | 64.5
8 | 13 | 64.6 | 64.5 | 64.4 | 64.3 | 64.2 | 64.2 | 64.1 | 64.0 | 64.0 | 63.9 | 63.8 | 63.8 | 63.7 | 63.7 | 63.7
9 | 14 | 63.8 | 63.7 | 63.6 | 63.5 | 63.4 | 63.3 | 63.2 | 63.2 | 63.1 | 63.0 | 63.0 | 62.9 | 62.9 | 62.8 | 62.8
10 | 15 | 63.0 | 62.9 | 62.8 | 62.7 | 62.6 | 62.5 | 62.4 | 62.3 | 62.2 | 62.2 | 62.1 | 62.0 | 62.0 | 61.9 | 61.9
11 | 16 | 62.2 | 62.1 | 61.9 | 61.8 | 61.7 | 61.6 | 61.5 | 61.4 | 61.4 | 61.3 | 61.2 | 61.2 | 61.1 | 61.0 | 61.0
12 | 17 | 61.4 | 61.3 | 61.1 | 61.0 | 60.9 | 60.8 | 60.7 | 60.6 | 60.5 | 60.4 | 60.4 | 60.3 | 60.2 | 60.2 | 60.1
13 | 18 | 60.6 | 60.5 | 60.3 | 60.2 | 60.1 | 60.0 | 59.9 | 59.8 | 59.7 | 59.6 | 59.5 | 59.4 | 59.4 | 59.3 | 59.2
14 | 19 | 59.8 | 59.7 | 59.5 | 59.4 | 59.3 | 59.1 | 59.0 | 58.9 | 58.8 | 58.7 | 58.6 | 58.6 | 58.5 | 58.4 | 58.4
15 | 20 | 59.0 | 58.9 | 58.7 | 58.6 | 58.4 | 58.3 | 58.2 | 58.1 | 58.0 | 57.9 | 57.8 | 57.7 | 57.6 | 57.6 | 57.5
16 | 21 | 58.3 | 58.1 | 57.9 | 57.8 | 57.6 | 57.5 | 57.4 | 57.2 | 57.1 | 57.0 | 56.9 | 56.8 | 56.8 | 56.7 | 56.6
17 | 22 | 57.5 | 57.3 | 57.2 | 57.0 | 56.8 | 56.7 | 56.6 | 56.4 | 56.3 | 56.2 | 56.1 | 56.0 | 55.9 | 55.8 | 55.7
18 | 23 | 56.8 | 56.6 | 56.4 | 56.2 | 56.0 | 55.9 | 55.7 | 55.6 | 55.5 | 55.4 | 55.2 | 55.1 | 55.1 | 55.0 | 54.9
19 | 24 | 56.0 | 55.8 | 55.6 | 55.4 | 55.3 | 55.1 | 54.9 | 54.8 | 54.7 | 54.5 | 54.4 | 54.3 | 54.2 | 54.1 | 54.0
20 | 25 | 55.3 | 55.1 | 54.9 | 54.7 | 54.5 | 54.3 | 54.1 | 54.0 | 53.8 | 53.7 | 53.6 | 53.5 | 53.4 | 53.3 | 53.2
21 | 26 | 54.6 | 54.4 | 54.1 | 53.9 | 53.7 | 53.5 | 53.4 | 53.2 | 53.0 | 52.9 | 52.8 | 52.6 | 52.5 | 52.4 | 52.3
22 | 27 | 53.9 | 53.6 | 53.4 | 53.2 | 53.0 | 52.8 | 52.6 | 52.4 | 52.2 | 52.1 | 51.9 | 51.8 | 51.7 | 51.6 | 51.5
23 | 28 | 53.2 | 52.9 | 52.7 | 52.5 | 52.2 | 52.0 | 51.8 | 51.6 | 51.5 | 51.3 | 51.1 | 51.0 | 50.9 | 50.7 | 50.6
24 | 29 | 52.5 | 52.3 | 52.0 | 51.7 | 51.5 | 51.3 | 51.1 | 50.9 | 50.7 | 50.5 | 50.3 | 50.2 | 50.0 | 49.9 | 49.8
25 | 30 | 51.9 | 51.6 | 51.3 | 51.0 | 50.8 | 50.5 | 50.3 | 50.1 | 49.9 | 49.7 | 49.6 | 49.4 | 49.2 | 49.1 | 49.0
26 | 31 | 51.2 | 50.9 | 50.6 | 50.3 | 50.1 | 49.8 | 49.6 | 49.4 | 49.2 | 49.0 | 48.8 | 48.6 | 48.4 | 48.3 | 48.1
27 | 32 | 50.6 | 50.3 | 50.0 | 49.7 | 49.4 | 49.1 | 48.9 | 48.6 | 48.4 | 48.2 | 48.0 | 47.8 | 47.6 | 47.5 | 47.3
28 | 33 | 50.0 | 49.6 | 49.3 | 49.0 | 48.7 | 48.4 | 48.2 | 47.9 | 47.7 | 47.5 | 47.2 | 47.1 | 46.9 | 46.7 | 46.5
29 | 34 | 49.4 | 49.0 | 48.7 | 48.3 | 48.0 | 47.7 | 47.5 | 47.2 | 47.0 | 46.7 | 46.5 | 46.3 | 46.1 | 45.9 | 45.7
30 | 35 | 48.8 | 48.4 | 48.1 | 47.7 | 47.4 | 47.1 | 46.8 | 46.5 | 46.2 | 46.0 | 45.8 | 45.5 | 45.3 | 45.2 | 45.0
31 | 36 | 48.2 | 47.8 | 47.5 | 47.1 | 46.8 | 46.4 | 46.1 | 45.8 | 45.6 | 45.3 | 45.0 | 44.8 | 44.6 | 44.4 | 44.2
32 | 37 | 47.7 | 47.3 | 46.9 | 46.5 | 46.1 | 45.8 | 45.5 | 45.2 | 44.9 | 44.6 | 44.3 | 44.1 | 43.9 | 43.7 | 43.4
33 | 38 | 47.2 | 46.7 | 46.3 | 45.9 | 45.5 | 45.2 | 44.8 | 44.5 | 44.2 | 43.9 | 43.7 | 43.4 | 43.2 | 42.9 | 42.7
34 | 39 | 46.7 | 46.2 | 45.8 | 45.4 | 45.0 | 44.6 | 44.2 | 43.9 | 43.6 | 43.3 | 43.0 | 42.7 | 42.5 | 42.2 | 42.0
Male | Female | Ages
Male 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63
Female 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64 | 65 | 66 | 67 | 68
6 | 11 | 65.4 | 65.4 | 65.3 | 65.3 | 65.3 | 65.3 | 65.3 | 65.2 | 65.2 | 65.2 | 65.2 | 65.2 | 65.2 | 65.2
7 | 12 | 64.5 | 64.5 | 64.4 | 64.4 | 64.4 | 64.4 | 64.3 | 64.3 | 64.3 | 64.3 | 64.3 | 64.3 | 64.3 | 64.2
8 | 13 | 63.6 | 63.6 | 63.5 | 63.5 | 63.5 | 63.5 | 63.4 | 63.4 | 63.4 | 63.4 | 63.4 | 63.4 | 63.3 | 63.3
9 | 14 | 62.7 | 62.7 | 62.7 | 62.6 | 62.6 | 62.6 | 62.5 | 62.5 | 62.5 | 62.5 | 62.5 | 62.4 | 62.4 | 62.4
10 | 15 | 61.8 | 61.8 | 61.8 | 61.7 | 61.7 | 61.7 | 61.6 | 61.6 | 61.6 | 61.6 | 61.6 | 61.5 | 61.5 | 61.5
11 | 16 | 61.0 | 60.9 | 60.9 | 60.8 | 60.8 | 60.8 | 60.7 | 60.7 | 60.7 | 60.7 | 60.6 | 60.6 | 60.6 | 60.6
12 | 17 | 60.1 | 60.0 | 60.0 | 59.9 | 59.9 | 59.9 | 59.8 | 59.8 | 59.8 | 59.8 | 59.7 | 59.7 | 59.7 | 59.7
13 | 18 | 59.2 | 59.1 | 59.1 | 59.0 | 59.0 | 59.0 | 58.9 | 58.9 | 58.9 | 58.9 | 58.8 | 58.8 | 58.8 | 58.8
14 | 19 | 58.3 | 58.2 | 58.2 | 58.2 | 58.1 | 58.1 | 58.0 | 58.0 | 58.0 | 57.9 | 57.9 | 57.9 | 57.9 | 57.9
15 | 20 | 57.4 | 57.4 | 57.3 | 57.3 | 57.2 | 57.2 | 57.1 | 57.1 | 57.1 | 57.0 | 57.0 | 57.0 | 57.0 | 56.9
16 | 21 | 56.5 | 56.5 | 56.4 | 56.4 | 56.3 | 56.3 | 56.2 | 56.2 | 56.2 | 56.1 | 56.1 | 56.1 | 56.1 | 56.0
17 | 22 | 55.7 | 55.6 | 55.5 | 55.5 | 55.4 | 55.4 | 55.3 | 55.3 | 55.3 | 55.2 | 55.2 | 55.2 | 55.1 | 55.1
18 | 23 | 54.8 | 54.7 | 54.7 | 54.6 | 54.6 | 54.5 | 54.5 | 54.4 | 54.4 | 54.3 | 54.3 | 54.3 | 54.2 | 54.2
19 | 24 | 53.9 | 53.9 | 53.8 | 53.7 | 53.7 | 53.6 | 53.6 | 53.5 | 53.5 | 53.4 | 53.4 | 53.4 | 53.3 | 53.3
20 | 25 | 53.1 | 53.0 | 52.9 | 52.8 | 52.8 | 52.7 | 52.7 | 52.6 | 52.6 | 52.5 | 52.5 | 52.4 | 52.4 | 52.4
21 | 26 | 52.2 | 52.1 | 52.0 | 52.0 | 51.9 | 51.8 | 51.8 | 51.7 | 51.7 | 51.6 | 51.6 | 51.5 | 51.5 | 51.5
22 | 27 | 51.4 | 51.3 | 51.2 | 51.1 | 51.0 | 51.0 | 50.9 | 50.8 | 50.8 | 50.7 | 50.7 | 50.6 | 50.6 | 50.6
23 | 28 | 50.5 | 50.4 | 50.3 | 50.2 | 50.2 | 50.1 | 50.0 | 50.0 | 49.9 | 49.8 | 49.8 | 49.7 | 49.7 | 49.7
24 | 29 | 49.7 | 49.6 | 49.5 | 49.4 | 49.3 | 49.2 | 49.1 | 49.1 | 49.0 | 49.0 | 48.9 | 48.9 | 48.8 | 48.8
25 | 30 | 48.8 | 48.7 | 48.6 | 48.5 | 48.4 | 48.3 | 48.3 | 48.2 | 48.1 | 48.1 | 48.0 | 48.0 | 47.9 | 47.9
26 | 31 | 48.0 | 47.9 | 47.8 | 47.7 | 47.6 | 47.5 | 47.4 | 47.3 | 47.3 | 47.2 | 47.1 | 47.1 | 47.0 | 47.0
27 | 32 | 47.2 | 47.1 | 46.9 | 46.8 | 46.7 | 46.6 | 46.5 | 46.5 | 46.4 | 46.3 | 46.2 | 46.2 | 46.1 | 46.1
28 | 33 | 46.4 | 46.3 | 46.1 | 46.0 | 45.9 | 45.8 | 45.7 | 45.6 | 45.5 | 45.4 | 45.4 | 45.3 | 45.2 | 45.2
29 | 34 | 45.6 | 45.4 | 45.3 | 45.2 | 45.1 | 44.9 | 44.8 | 44.7 | 44.7 | 44.6 | 44.5 | 44.4 | 44.4 | 44.3
30 | 35 | 44.8 | 44.6 | 44.5 | 44.4 | 44.2 | 44.1 | 44.0 | 43.9 | 43.8 | 43.7 | 43.6 | 43.6 | 43.5 | 43.4
31 | 36 | 44.0 | 43.9 | 43.7 | 43.6 | 43.4 | 43.3 | 43.2 | 43.1 | 43.0 | 42.9 | 42.8 | 42.7 | 42.6 | 42.0
32 | 37 | 43.3 | 43.1 | 42.9 | 42.8 | 42.6 | 42.5 | 42.4 | 42.2 | 42.1 | 42.0 | 41.9 | 41.9 | 41.8 | 41.7
33 | 38 | 42.5 | 42.3 | 42.1 | 42.0 | 41.8 | 41.7 | 41.5 | 41.4 | 41.3 | 41.2 | 41.1 | 41.0 | 40.9 | 40.8
34 | 39 | 41.8 | 41.6 | 41.4 | 41.2 | 41.0 | 40.9 | 40.7 | 40.6 | 40.5 | 40.4 | 40.3 | 40.2 | 40.1 | 40.0
Male | Female | Ages
Male 64 | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78
Female 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83
6 | 11 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1
7 | 12 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.2 | 64.1 | 64.1
8 | 13 | 63.3 | 63.3 | 63.3 | 63.3 | 63.3 | 63.3 | 63.3 | 63.3 | 63.3 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2
9 | 14 | 62.4 | 62.4 | 62.4 | 62.4 | 62.4 | 62.4 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3
10 | 15 | 61.5 | 61.5 | 61.5 | 61.5 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4
11 | 16 | 60.6 | 60.6 | 60.6 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5
12 | 17 | 59.7 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.6 | 59.5 | 59.5
13 | 18 | 58.8 | 58.7 | 58.7 | 58.7 | 58.7 | 58.7 | 58.7 | 58.7 | 58.7 | 58.7 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6
14 | 19 | 57.8 | 57.8 | 57.8 | 57.8 | 57.8 | 57.8 | 57.8 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7
15 | 20 | 56.9 | 56.9 | 56.9 | 56.9 | 56.9 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8
16 | 21 | 56.0 | 56.0 | 56.0 | 56.0 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.9 | 55.8
17 | 22 | 55.1 | 55.1 | 55.1 | 55.0 | 55.0 | 55.0 | 55.0 | 55.0 | 55.0 | 55.0 | 55.0 | 54.9 | 54.9 | 54.9 | 54.9
18 | 23 | 54.2 | 54.2 | 54.1 | 54.1 | 54.1 | 54.1 | 54.1 | 54.1 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0
19 | 24 | 53.3 | 53.2 | 53.2 | 53.2 | 53.2 | 53.2 | 53.2 | 53.1 | 53.1 | 53.1 | 53.1 | 53.1 | 53.1 | 53.1 | 53.1
20 | 25 | 52.4 | 52.3 | 52.3 | 52.3 | 52.3 | 52.2 | 52.2 | 52.2 | 52.2 | 52.2 | 52.2 | 52.2 | 52.2 | 52.1 | 52.1
21 | 26 | 51.4 | 51.4 | 51.4 | 51.4 | 51.3 | 51.3 | 51.3 | 51.3 | 51.3 | 51.3 | 51.3 | 51.2 | 51.2 | 51.2 | 51.2
22 | 27 | 50.5 | 50.5 | 50.5 | 50.5 | 50.4 | 50.4 | 50.4 | 50.4 | 50.4 | 50.3 | 50.3 | 50.3 | 50.3 | 50.3 | 50.3
23 | 28 | 49.6 | 49.6 | 49.6 | 49.5 | 49.5 | 49.5 | 49.5 | 49.5 | 49.4 | 49.4 | 49.4 | 49.4 | 49.4 | 49.4 | 49.4
24 | 29 | 48.7 | 48.7 | 48.7 | 48.6 | 48.6 | 48.6 | 48.6 | 48.5 | 48.5 | 48.5 | 48.5 | 48.5 | 48.5 | 48.4 | 48.4
25 | 30 | 47.8 | 47.8 | 47.8 | 47.7 | 47.7 | 47.7 | 47.6 | 47.6 | 47.6 | 47.6 | 47.6 | 47.5 | 47.5 | 47.5 | 47.5
26 | 31 | 46.9 | 46.9 | 46.8 | 46.8 | 46.8 | 46.8 | 46.7 | 46.7 | 46.7 | 46.7 | 46.6 | 46.6 | 46.6 | 46.6 | 46.6
27 | 32 | 46.0 | 46.0 | 45.9 | 45.9 | 45.9 | 45.8 | 45.8 | 45.8 | 45.8 | 45.7 | 45.7 | 45.7 | 45.7 | 45.7 | 45.7
28 | 33 | 45.1 | 45.1 | 45.1 | 45.0 | 45.0 | 44.9 | 44.9 | 44.9 | 44.9 | 44.8 | 44.8 | 44.8 | 44.8 | 44.8 | 44.8
29 | 34 | 44.3 | 44.2 | 44.2 | 44.1 | 44.1 | 44.0 | 44.0 | 44.0 | 44.0 | 43.9 | 43.9 | 43.9 | 43.9 | 43.9 | 43.8
30 | 35 | 43.4 | 43.3 | 43.3 | 43.2 | 43.2 | 43.1 | 43.1 | 43.1 | 43.1 | 43.0 | 43.0 | 43.0 | 43.0 | 42.9 | 42.9
31 | 36 | 42.5 | 42.4 | 42.4 | 42.3 | 42.3 | 42.3 | 42.2 | 42.2 | 42.2 | 42.1 | 42.1 | 42.1 | 42.1 | 42.0 | 42.0
32 | 37 | 41.6 | 41.6 | 41.5 | 41.5 | 41.4 | 41.4 | 41.3 | 41.3 | 41.3 | 41.2 | 41.2 | 41.2 | 41.2 | 41.1 | 41.1
33 | 38 | 40.8 | 40.7 | 40.7 | 40.6 | 40.5 | 40.5 | 40.5 | 40.4 | 40.4 | 40.3 | 40.3 | 40.3 | 40.3 | 40.2 | 40.2
34 | 39 | 39.9 | 39.9 | 39.8 | 39.7 | 39.7 | 39.6 | 39.6 | 39.5 | 39.5 | 39.5 | 39.4 | 39.4 | 39.4 | 39.3 | 39.3
Male | Female | Ages
Male 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92
Female 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97
6 | 11 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.1 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0
7 | 12 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1
8 | 13 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2
9 | 14 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3
10 | 15 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4
11 | 16 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.5 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4
12 | 17 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5
13 | 18 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6
14 | 19 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7
15 | 20 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.8 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7
16 | 21 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8
17 | 22 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9
18 | 23 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 54.0 | 53.9
19 | 24 | 53.1 | 53.1 | 53.1 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0
20 | 25 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1
21 | 26 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2
22 | 27 | 50.3 | 50.3 | 50.3 | 50.3 | 50.3 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2
23 | 28 | 49.4 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3
24 | 29 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4
25 | 30 | 47.5 | 47.5 | 47.5 | 47.5 | 47.5 | 47.5 | 47.5 | 47.5 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4
26 | 31 | 46.6 | 46.6 | 46.6 | 46.6 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5
27 | 32 | 45.7 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6
28 | 33 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7 | 44.7
29 | 34 | 43.8 | 43.8 | 43.8 | 43.8 | 43.8 | 43.8 | 43.8 | 43.8 | 43.8 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7
30 | 35 | 42.9 | 42.9 | 42.9 | 42.9 | 42.9 | 42.9 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8
31 | 36 | 42.0 | 42.0 | 42.0 | 42.0 | 42.0 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9
32 | 37 | 41.1 | 41.1 | 41.1 | 41.1 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0
33 | 38 | 40.2 | 40.2 | 40.2 | 40.2 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1
34 | 39 | 39.3 | 39.3 | 39.3 | 39.3 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2
Male | Female | Ages
Male 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
6 | 11 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0 | 65.0
7 | 12 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1 | 64.1
8 | 13 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2 | 63.2
9 | 14 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3 | 62.3
10 | 15 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4 | 61.4
11 | 16 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4 | 60.4
12 | 17 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5 | 59.5
13 | 18 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6 | 58.6
14 | 19 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7 | 57.7
15 | 20 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7 | 56.7
16 | 21 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8 | 55.8
17 | 22 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9 | 54.9
18 | 23 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9 | 53.9
19 | 24 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0 | 53.0
20 | 25 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1 | 52.1
21 | 26 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.2 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1 | 51.1
22 | 27 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2 | 50.2
23 | 28 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3 | 49.3
24 | 29 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.4 | 48.3 | 48.3
25 | 30 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4 | 47.4
26 | 31 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5 | 46.5
27 | 32 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6 | 45.6
28 | 33 | 44.7 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6 | 44.6
29 | 34 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7 | 43.7
30 | 35 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8 | 42.8
31 | 36 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9 | 41.9
32 | 37 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0 | 41.0
33 | 38 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.1 | 40.0
34 | 39 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.2 | 39.1 | 39.1 | 39.1 | 39.1 | 39.1
Male | Female | Ages
Male 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47
Female 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52
35 | 40 | 46.2 | 45.7 | 45.3 | 44.8 | 44.4 | 44.0 | 43.6 | 43.3 | 43.0 | 42.6 | 42.3 | 42.0 | 41.8
36 | 41 | 45.7 | 45.2 | 44.8 | 44.3 | 43.9 | 43.5 | 43.1 | 42.7 | 42.3 | 42.0 | 41.7 | 41.4 | 41.1
37 | 42 | 45.3 | 44.8 | 44.3 | 43.8 | 43.4 | 42.9 | 42.5 | 42.1 | 41.8 | 41.4 | 41.1 | 40.7 | 40.4
38 | 43 | 44.8 | 44.3 | 43.8 | 43.3 | 42.9 | 42.4 | 42.0 | 41.6 | 41.2 | 40.8 | 40.5 | 40.1 | 39.8
39 | 44 | 44.4 | 43.9 | 43.4 | 42.9 | 42.4 | 41.9 | 41.5 | 41.0 | 40.6 | 40.2 | 39.9 | 39.5 | 39.2
40 | 45 | 44.0 | 43.5 | 42.9 | 42.4 | 41.9 | 41.4 | 41.0 | 40.5 | 40.1 | 39.7 | 39.3 | 38.9 | 38.6
41 | 46 | 43.6 | 43.1 | 42.5 | 42.0 | 41.5 | 41.0 | 40.5 | 40.0 | 39.6 | 39.2 | 38.8 | 38.4 | 38.0
42 | 47 | 43.3 | 42.7 | 42.1 | 41.6 | 41.0 | 40.5 | 40.0 | 39.6 | 39.1 | 38.7 | 38.2 | 37.8 | 37.5
43 | 48 | 43.0 | 42.3 | 41.8 | 41.2 | 40.6 | 40.1 | 39.6 | 39.1 | 38.6 | 38.2 | 37.7 | 37.3 | 36.9
44 | 49 | 42.6 | 42.0 | 41.4 | 40.8 | 40.2 | 39.7 | 39.2 | 38.7 | 38.2 | 37.7 | 37.2 | 36.8 | 36.4
45 | 50 | 42.3 | 41.7 | 41.1 | 40.5 | 39.9 | 39.3 | 38.8 | 38.2 | 37.7 | 37.2 | 36.8 | 36.3 | 35.9
46 | 51 | 42.0 | 41.4 | 40.7 | 40.1 | 39.5 | 38.9 | 38.4 | 37.8 | 37.3 | 36.8 | 36.3 | 35.9 | 35.4
47 | 52 | 41.8 | 41.1 | 40.4 | 39.8 | 39.2 | 38.6 | 38.0 | 37.5 | 36.9 | 36.4 | 35.9 | 35.4 | 35.0
Male | Female | Ages
Male 48 | 49 | 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60
Female 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64 | 65
35 | 40 | 41.5 | 41.3 | 41.0 | 40.8 | 40.6 | 40.4 | 40.3 | 40.1 | 40.0 | 39.8 | 39.7 | 39.6 | 39.5
36 | 41 | 40.8 | 40.6 | 40.3 | 40.1 | 39.9 | 39.7 | 39.5 | 39.3 | 39.2 | 39.0 | 38.9 | 38.8 | 38.6
37 | 42 | 40.2 | 39.9 | 39.6 | 39.4 | 39.2 | 39.0 | 38.8 | 38.6 | 38.4 | 38.3 | 38.1 | 38.0 | 37.9
38 | 43 | 39.5 | 39.2 | 39.0 | 38.7 | 38.5 | 38.3 | 38.1 | 37.9 | 37.7 | 37.5 | 37.3 | 37.2 | 37.1
39 | 44 | 38.9 | 38.6 | 38.3 | 38.0 | 37.8 | 37.6 | 37.3 | 37.1 | 36.9 | 36.8 | 36.6 | 36.4 | 36.3
40 | 45 | 38.3 | 38.0 | 37.7 | 37.4 | 37.1 | 36.9 | 36.6 | 36.4 | 36.2 | 36.0 | 35.9 | 35.7 | 35.5
41 | 46 | 37.7 | 37.3 | 37.0 | 36.7 | 36.5 | 36.2 | 36.0 | 35.7 | 35.5 | 35.3 | 35.1 | 35.0 | 34.8
42 | 47 | 37.1 | 36.8 | 36.4 | 36.1 | 35.8 | 35.6 | 35.3 | 35.1 | 34.8 | 34.6 | 34.4 | 34.2 | 34.1
43 | 48 | 36.5 | 36.2 | 35.8 | 35.5 | 35.2 | 34.9 | 34.7 | 34.4 | 34.2 | 33.9 | 33.7 | 33.5 | 33.3
44 | 49 | 36.0 | 35.6 | 35.3 | 34.9 | 34.6 | 34.3 | 34.0 | 33.8 | 33.5 | 33.3 | 33.0 | 32.8 | 32.6
45 | 50 | 35.5 | 35.1 | 34.7 | 34.4 | 34.0 | 33.7 | 33.4 | 33.1 | 32.9 | 32.6 | 32.4 | 32.2 | 31.9
46 | 51 | 35.0 | 34.6 | 34.2 | 33.8 | 33.5 | 33.1 | 32.8 | 32.5 | 32.2 | 32.0 | 31.7 | 31.5 | 31.3
47 | 52 | 34.5 | 34.1 | 33.7 | 33.3 | 32.9 | 32.6 | 32.2 | 31.9 | 31.6 | 31.4 | 31.1 | 30.9 | 30.6
48 | 53 | 34.0 | 33.6 | 33.2 | 32.8 | 32.4 | 32.0 | 31.7 | 31.4 | 31.1 | 30.8 | 30.5 | 30.2 | 30.0
49 | 54 | 33.6 | 33.1 | 32.7 | 32.3 | 31.9 | 31.5 | 31.2 | 30.8 | 30.5 | 30.2 | 29.9 | 29.6 | 29.4
50 | 55 | 33.2 | 32.7 | 32.3 | 31.8 | 31.4 | 31.0 | 30.6 | 30.3 | 29.9 | 29.6 | 29.3 | 29.0 | 28.8
51 | 56 | 32.8 | 32.3 | 31.8 | 31.4 | 30.9 | 30.5 | 30.1 | 29.8 | 29.4 | 29.1 | 28.8 | 28.5 | 28.2
52 | 57 | 32.4 | 31.9 | 31.4 | 30.9 | 30.5 | 30.1 | 29.7 | 29.3 | 28.9 | 28.6 | 28.2 | 27.9 | 27.6
53 | 58 | 32.0 | 31.5 | 31.0 | 30.5 | 30.1 | 29.6 | 29.2 | 28.8 | 28.4 | 28.1 | 27.7 | 27.4 | 27.1
54 | 59 | 31.7 | 31.2 | 30.6 | 30.1 | 29.7 | 29.2 | 28.8 | 28.3 | 27.9 | 27.6 | 27.2 | 26.9 | 26.5
55 | 60 | 31.4 | 30.8 | 30.3 | 29.8 | 29.3 | 28.8 | 28.3 | 27.9 | 27.5 | 27.1 | 26.7 | 26.4 | 26.0
56 | 61 | 31.1 | 30.5 | 29.9 | 29.4 | 28.9 | 28.4 | 27.9 | 27.5 | 27.1 | 26.7 | 26.3 | 25.9 | 25.5
57 | 62 | 30.8 | 30.2 | 29.6 | 29.1 | 28.6 | 28.1 | 27.6 | 27.1 | 26.7 | 26.2 | 25.8 | 25.4 | 25.1
58 | 63 | 30.5 | 29.9 | 29.3 | 28.8 | 28.2 | 27.7 | 27.2 | 26.7 | 26.3 | 25.8 | 25.4 | 25.0 | 24.6
59 | 64 | 30.2 | 29.6 | 29.0 | 28.5 | 27.9 | 27.4 | 26.9 | 26.4 | 25.9 | 25.4 | 25.0 | 24.6 | 24.2
60 | 65 | 30.0 | 29.4 | 28.8 | 28.2 | 27.6 | 27.1 | 26.5 | 26.0 | 25.5 | 25.1 | 24.6 | 24.2 | 23.8
Male | Female | Ages
Male 61 | 62 | 63 | 64 | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73
Female 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78
35 | 40 | 39.4 | 39.3 | 39.2 | 39.1 | 39.0 | 38.9 | 38.9 | 38.8 | 38.8 | 38.7 | 38.7 | 38.6 | 38.6
36 | 41 | 38.5 | 38.4 | 38.3 | 38.2 | 38.2 | 38.1 | 38.0 | 38.0 | 37.9 | 37.9 | 37.8 | 37.8 | 37.7
37 | 42 | 37.7 | 37.6 | 37.5 | 37.4 | 37.3 | 37.3 | 37.2 | 37.1 | 37.1 | 37.0 | 36.9 | 36.9 | 36.9
38 | 43 | 36.9 | 36.8 | 36.7 | 36.6 | 36.5 | 36.4 | 36.4 | 36.3 | 36.2 | 36.2 | 36.1 | 36.0 | 36.0
39 | 44 | 36.2 | 36.0 | 35.9 | 35.8 | 35.7 | 35.6 | 35.5 | 35.5 | 35.4 | 35.3 | 35.3 | 35.2 | 35.2
40 | 45 | 35.4 | 35.3 | 35.1 | 35.0 | 34.9 | 34.8 | 34.7 | 34.6 | 34.6 | 34.5 | 34.4 | 34.4 | 34.3
41 | 46 | 34.6 | 34.5 | 34.4 | 34.2 | 34.1 | 34.0 | 33.9 | 33.8 | 33.8 | 33.7 | 33.6 | 33.5 | 33.5
42 | 47 | 33.9 | 33.7 | 33.6 | 33.5 | 33.4 | 33.2 | 33.1 | 33.0 | 33.0 | 32.9 | 32.8 | 32.7 | 32.7
43 | 48 | 33.2 | 33.0 | 32.9 | 32.7 | 32.6 | 32.5 | 32.4 | 32.3 | 32.2 | 32.1 | 32.0 | 31.9 | 31.9
44 | 49 | 32.5 | 32.3 | 32.1 | 32.0 | 31.8 | 31.7 | 31.6 | 31.5 | 31.4 | 31.3 | 31.2 | 31.1 | 31.1
45 | 50 | 31.8 | 31.6 | 31.4 | 31.3 | 31.1 | 31.0 | 30.8 | 30.7 | 30.6 | 30.5 | 30.4 | 30.4 | 30.3
46 | 51 | 31.1 | 30.9 | 30.7 | 30.5 | 30.4 | 30.2 | 30.1 | 30.0 | 29.9 | 29.8 | 29.7 | 29.6 | 29.5
47 | 52 | 30.4 | 30.2 | 30.0 | 29.8 | 29.7 | 29.5 | 29.4 | 29.3 | 29.1 | 29.0 | 28.9 | 28.8 | 28.7
48 | 53 | 29.8 | 29.5 | 29.3 | 29.2 | 29.0 | 28.8 | 28.7 | 28.5 | 28.4 | 28.3 | 28.2 | 28.1 | 28.0
49 | 54 | 29.1 | 28.9 | 28.7 | 28.5 | 28.3 | 28.1 | 28.0 | 27.8 | 27.7 | 27.6 | 27.5 | 27.4 | 27.3
50 | 55 | 28.5 | 28.3 | 28.1 | 27.8 | 27.6 | 27.5 | 27.3 | 27.1 | 27.0 | 26.9 | 26.7 | 26.6 | 26.5
51 | 56 | 27.9 | 27.7 | 27.4 | 27.2 | 27.0 | 26.8 | 26.6 | 26.5 | 26.3 | 26.2 | 26.0 | 25.9 | 25.8
52 | 57 | 27.3 | 27.1 | 26.8 | 26.6 | 26.4 | 26.2 | 26.0 | 25.8 | 25.7 | 25.5 | 25.4 | 25.2 | 25.1
53 | 58 | 26.8 | 26.5 | 26.2 | 26.0 | 25.8 | 25.6 | 25.4 | 25.2 | 25.0 | 24.8 | 24.7 | 24.6 | 24.4
54 | 59 | 26.2 | 25.9 | 25.7 | 25.4 | 25.2 | 25.0 | 24.7 | 24.6 | 24.4 | 24.2 | 24.0 | 23.9 | 23.8
55 | 60 | 25.7 | 25.4 | 25.1 | 24.9 | 24.6 | 24.4 | 24.1 | 23.9 | 23.8 | 23.6 | 23.4 | 23.3 | 23.1
56 | 61 | 25.2 | 24.9 | 24.6 | 24.3 | 24.1 | 23.8 | 23.6 | 23.4 | 23.2 | 23.0 | 22.8 | 22.6 | 22.5
57 | 62 | 24.7 | 24.4 | 24.1 | 23.8 | 23.5 | 23.3 | 23.0 | 22.8 | 22.6 | 22.4 | 22.2 | 22.0 | 21.9
58 | 63 | 24.3 | 23.9 | 23.6 | 23.3 | 23.0 | 22.7 | 22.5 | 22.2 | 22.0 | 21.8 | 21.6 | 21.4 | 21.3
59 | 64 | 23.8 | 23.5 | 23.1 | 22.8 | 22.5 | 22.2 | 21.9 | 21.7 | 21.5 | 21.2 | 21.0 | 20.9 | 20.7
60 | 65 | 23.4 | 23.0 | 22.7 | 22.3 | 22.0 | 21.7 | 21.4 | 21.2 | 20.9 | 20.7 | 20.5 | 20.3 | 20.1
61 | 66 | 23.0 | 22.6 | 22.2 | 21.9 | 21.6 | 21.3 | 21.0 | 20.7 | 20.4 | 20.2 | 20.0 | 19.8 | 19.6
62 | 67 | 22.6 | 22.2 | 21.8 | 21.5 | 21.1 | 20.8 | 20.5 | 20.2 | 19.9 | 19.7 | 19.5 | 19.2 | 19.0
63 | 68 | 22.2 | 21.8 | 21.4 | 21.1 | 20.7 | 20.4 | 20.1 | 19.8 | 19.5 | 19.2 | 19.0 | 18.7 | 18.5
64 | 69 | 21.9 | 21.5 | 21.1 | 20.7 | 20.3 | 20.0 | 19.6 | 19.3 | 19.0 | 18.7 | 18.5 | 18.2 | 18.0
65 | 70 | 21.6 | 21.1 | 20.7 | 20.3 | 19.9 | 19.6 | 19.2 | 18.9 | 18.6 | 18.3 | 18.0 | 17.8 | 17.5
66 | 71 | 21.3 | 20.8 | 20.4 | 20.0 | 19.6 | 19.2 | 18.8 | 18.5 | 18.2 | 17.9 | 17.6 | 17.3 | 17.1
67 | 72 | 21.0 | 20.5 | 20.1 | 19.6 | 19.2 | 18.8 | 18.5 | 18.1 | 17.8 | 17.5 | 17.2 | 16.9 | 16.7
68 | 73 | 20.7 | 20.2 | 19.8 | 19.3 | 18.9 | 18.5 | 18.1 | 17.8 | 17.4 | 17.1 | 16.8 | 16.5 | 16.2
69 | 74 | 20.4 | 19.9 | 19.5 | 19.0 | 18.6 | 18.2 | 17.8 | 17.4 | 17.1 | 16.7 | 16.4 | 16.1 | 15.8
70 | 75 | 20.2 | 19.7 | 19.2 | 18.7 | 18.3 | 17.9 | 17.5 | 17.1 | 16.7 | 16.4 | 16.1 | 15.8 | 15.5
71 | 76 | 20.0 | 19.5 | 19.0 | 18.5 | 18.0 | 17.6 | 17.2 | 16.8 | 16.4 | 16.1 | 15.7 | 15.4 | 15.1
72 | 77 | 19.8 | 19.2 | 18.7 | 18.2 | 17.8 | 17.3 | 16.9 | 16.5 | 16.1 | 15.8 | 15.4 | 15.1 | 14.8
73 | 78 | 19.6 | 19.0 | 18.5 | 18.0 | 17.5 | 17.1 | 16.7 | 16.2 | 15.8 | 15.5 | 15.1 | 14.8 | 14.4
Male | Female | Ages
Male 74 | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83 | 84 | 85
Female 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90
35 | 40 | 38.6 | 38.5 | 38.5 | 38.5 | 38.4 | 38.4 | 38.4 | 38.4 | 38.4 | 38.4 | 38.3 | 38.3
36 | 41 | 37.7 | 37.6 | 37.6 | 37.6 | 37.6 | 27.5 | 37.5 | 37.5 | 37.5 | 37.5 | 37.5 | 37.4
37 | 42 | 36.8 | 36.8 | 36.7 | 36.7 | 36.7 | 36.7 | 36.6 | 36.6 | 36.6 | 36.6 | 36.6 | 36.6
38 | 43 | 36.0 | 35.9 | 35.9 | 35.9 | 35.8 | 35.8 | 35.8 | 35.8 | 35.7 | 35.7 | 35.7 | 35.7
39 | 44 | 35.1 | 35.1 | 35.0 | 35.0 | 35.0 | 34.9 | 34.9 | 34.9 | 34.9 | 34.8 | 34.8 | 34.8
40 | 45 | 34.3 | 34.2 | 34.2 | 34.1 | 34.1 | 34.1 | 34.1 | 34.0 | 34.0 | 34.0 | 34.0 | 34.0
41 | 46 | 33.4 | 33.4 | 33.3 | 33.3 | 33.3 | 33.2 | 33.2 | 33.2 | 33.2 | 33.1 | 33.1 | 33.1
42 | 47 | 32.6 | 32.6 | 32.5 | 32.5 | 32.4 | 32.4 | 32.4 | 32.3 | 32.3 | 32.3 | 32.3 | 32.3
43 | 48 | 31.8 | 31.8 | 31.7 | 31.7 | 31.6 | 31.6 | 31.5 | 31.5 | 31.5 | 31.5 | 31.4 | 31.4
44 | 49 | 31.0 | 30.9 | 30.9 | 30.8 | 30.8 | 30.8 | 30.7 | 30.7 | 30.7 | 30.6 | 30.6 | 30.6
45 | 50 | 30.2 | 30.1 | 30.1 | 30.0 | 30.0 | 29.9 | 29.9 | 29.9 | 29.8 | 29.8 | 29.8 | 29.8
46 | 51 | 29.4 | 29.4 | 29.3 | 29.2 | 29.2 | 29.2 | 29.1 | 29.1 | 29.0 | 29.0 | 29.0 | 28.9
47 | 52 | 28.7 | 28.6 | 28.5 | 28.5 | 28.4 | 28.4 | 28.3 | 28.3 | 28.2 | 28.2 | 28.2 | 28.1
48 | 53 | 27.9 | 27.8 | 27.8 | 27.7 | 27.6 | 27.6 | 27.5 | 27.5 | 27.5 | 27.4 | 27.4 | 27.4
49 | 54 | 27.2 | 27.1 | 27.0 | 26.9 | 26.9 | 26.8 | 26.8 | 26.7 | 26.7 | 26.6 | 26.6 | 26.6
50 | 55 | 26.4 | 26.3 | 26.3 | 26.2 | 26.1 | 26.1 | 26.0 | 26.0 | 25.9 | 25.9 | 25.8 | 25.8
51 | 56 | 25.7 | 25.6 | 25.5 | 25.5 | 25.4 | 25.3 | 25.3 | 25.2 | 25.2 | 25.1 | 25.1 | 25.0
52 | 57 | 25.0 | 24.9 | 24.8 | 24.7 | 24.7 | 24.6 | 24.5 | 24.5 | 24.4 | 24.4 | 24.3 | 24.3
53 | 58 | 24.3 | 24.2 | 24.1 | 24.0 | 23.9 | 23.9 | 23.8 | 23.7 | 23.7 | 23.6 | 23.6 | 23.5
54 | 59 | 23.6 | 23.5 | 23.4 | 23.3 | 23.2 | 23.2 | 23.1 | 23.0 | 23.0 | 22.9 | 22.9 | 22.8
55 | 60 | 23.0 | 22.9 | 22.8 | 22.7 | 22.6 | 22.5 | 22.4 | 22.3 | 22.3 | 22.2 | 22.2 | 22.1
56 | 61 | 22.3 | 22.2 | 22.1 | 22.0 | 21.9 | 21.8 | 21.7 | 21.6 | 21.6 | 21.5 | 21.5 | 21.4
57 | 62 | 21.7 | 21.6 | 21.5 | 21.3 | 21.2 | 21.1 | 21.1 | 21.0 | 20.9 | 20.8 | 20.8 | 20.7
58 | 63 | 21.1 | 21.0 | 20.8 | 20.7 | 20.6 | 20.5 | 20.4 | 20.3 | 20.2 | 20.2 | 20.1 | 20.0
59 | 64 | 20.5 | 20.4 | 20.2 | 20.1 | 20.0 | 19.9 | 19.8 | 19.7 | 19.6 | 19.5 | 19.4 | 19.4
60 | 65 | 19.9 | 19.8 | 19.6 | 19.5 | 19.4 | 19.3 | 19.1 | 19.0 | 19.0 | 18.9 | 18.8 | 18.7
61 | 66 | 19.4 | 19.2 | 19.1 | 18.9 | 18.8 | 18.7 | 18.5 | 18.4 | 18.3 | 18.3 | 18.2 | 18.1
62 | 67 | 18.8 | 18.7 | 18.5 | 18.3 | 18.2 | 18.1 | 18.0 | 17.8 | 17.7 | 17.7 | 17.6 | 17.5
63 | 68 | 18.3 | 18.1 | 18.0 | 17.8 | 17.6 | 17.5 | 17.4 | 17.3 | 17.2 | 17.1 | 17.0 | 16.9
64 | 69 | 17.8 | 17.6 | 17.4 | 17.3 | 17.1 | 17.0 | 16.8 | 16.7 | 16.6 | 16.5 | 16.4 | 16.3
65 | 70 | 17.3 | 17.1 | 16.9 | 16.7 | 16.6 | 16.4 | 16.3 | 16.2 | 16.0 | 15.9 | 15.8 | 15.8
66 | 71 | 16.9 | 16.6 | 16.4 | 16.3 | 16.1 | 15.9 | 15.8 | 15.6 | 15.5 | 15.4 | 15.3 | 15.2
67 | 72 | 16.4 | 16.2 | 16.0 | 15.8 | 15.6 | 15.4 | 15.3 | 15.1 | 15.0 | 14.9 | 14.8 | 14.7
68 | 73 | 16.0 | 15.7 | 15.5 | 15.3 | 15.1 | 15.0 | 14.8 | 14.6 | 14.5 | 14.4 | 14.3 | 14.2
69 | 74 | 15.6 | 15.3 | 15.1 | 14.9 | 14.7 | 14.5 | 14.3 | 14.2 | 14.0 | 13.9 | 13.8 | 13.7
70 | 75 | 15.2 | 14.9 | 14.7 | 14.5 | 14.3 | 14.1 | 13.9 | 13.7 | 13.6 | 13.4 | 13.3 | 13.2
71 | 76 | 14.8 | 14.5 | 14.3 | 14.1 | 13.8 | 13.6 | 13.5 | 13.3 | 13.1 | 13.0 | 12.8 | 12.7
72 | 77 | 14.5 | 14.2 | 13.9 | 13.7 | 13.5 | 13.2 | 13.0 | 12.9 | 12.7 | 12.5 | 12.4 | 12.3
73 | 78 | 14.1 | 13.8 | 13.6 | 13.3 | 13.1 | 12.9 | 12.7 | 12.5 | 12.3 | 12.1 | 12.0 | 11.8
74 | 79 | 13.8 | 13.5 | 13.2 | 13.0 | 12.7 | 12.5 | 12.3 | 12.1 | 11.9 | 11.7 | 11.6 | 11.4
75 | 80 | 13.5 | 13.2 | 12.9 | 12.6 | 12.4 | 12.2 | 11.9 | 11.7 | 11.5 | 11.4 | 11.2 | 11.0
76 | 81 | 13.2 | 12.9 | 12.6 | 12.3 | 12.1 | 11.8 | 11.6 | 11.4 | 11.2 | 11.0 | 10.8 | 10.7
77 | 82 | 13.0 | 12.6 | 12.3 | 12.1 | 11.8 | 11.5 | 11.3 | 11.1 | 10.8 | 10.7 | 10.5 | 10.3
78 | 83 | 12.7 | 12.4 | 12.1 | 11.8 | 11.5 | 11.2 | 11.0 | 10.7 | 10.5 | 10.3 | 10.1 | 10.0
79 | 84 | 12.5 | 12.2 | 11.8 | 11.5 | 11.2 | 11.0 | 10.7 | 10.5 | 10.2 | 10.0 | 9.8 | 9.6
80 | 85 | 12.3 | 11.9 | 11.6 | 11.3 | 11.0 | 10.7 | 10.4 | 10.2 | 10.0 | 9.7 | 9.5 | 9.3
81 | 86 | 12.1 | 11.7 | 11.4 | 11.1 | 10.7 | 10.5 | 10.2 | 9.9 | 9.7 | 9.5 | 9.3 | 9.1
82 | 87 | 11.9 | 11.5 | 11.2 | 10.8 | 10.5 | 10.2 | 10.0 | 9.7 | 9.4 | 9.2 | 9.0 | 8.8
83 | 88 | 11.7 | 11.4 | 11.0 | 10.7 | 10.3 | 10.0 | 9.7 | 9.5 | 9.2 | 9.0 | 8.7 | 8.5
84 | 89 | 11.6 | 11.2 | 10.8 | 10.5 | 10.1 | 9.8 | 9.5 | 9.3 | 9.0 | 8.7 | 8.5 | 8.3
85 | 90 | 11.4 | 11.0 | 10.7 | 10.3 | 10.0 | 9.6 | 9.3 | 9.1 | 8.8 | 8.5 | 8.3 | 8.1
Male | Female | Ages
Male 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97
Female 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102
35 | 40 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3
36 | 41 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4
37 | 42 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5
38 | 43 | 35.7 | 35.7 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6
39 | 44 | 34.8 | 34.8 | 34.8 | 34.8 | 34.8 | 34.8 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7
40 | 45 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9 | 33.9
41 | 46 | 33.1 | 33.1 | 33.1 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0
42 | 47 | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 | 32.2 | 32.1 | 32.1 | 32.1
43 | 48 | 31.4 | 31.4 | 31.4 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3
44 | 49 | 30.6 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.5 | 30.4
45 | 50 | 29.7 | 29.7 | 29.7 | 29.7 | 29.7 | 29.7 | 29.7 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6
46 | 51 | 28.9 | 28.9 | 28.9 | 28.9 | 28.9 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8
47 | 52 | 28.1 | 28.1 | 28.1 | 28.1 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0
48 | 53 | 27.3 | 27.3 | 27.3 | 27.3 | 27.2 | 27.2 | 27.2 | 27.2 | 27.2 | 27.2 | 27.2 | 27.2
49 | 54 | 26.5 | 26.5 | 26.5 | 26.5 | 26.5 | 26.4 | 26.4 | 26.4 | 26.4 | 26.4 | 26.4 | 26.4
50 | 55 | 25.8 | 25.7 | 25.7 | 25.7 | 25.7 | 25.7 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6
51 | 56 | 25.0 | 25.0 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.8 | 24.8 | 24.8 | 24.8
52 | 57 | 24.3 | 24.2 | 24.2 | 24.2 | 24.1 | 24.1 | 24.1 | 24.1 | 24.1 | 24.1 | 24.1 | 24.0
53 | 58 | 23.5 | 23.5 | 23.4 | 23.4 | 23.4 | 23.4 | 23.4 | 23.3 | 23.3 | 23.3 | 23.3 | 23.3
54 | 59 | 22.8 | 22.7 | 22.7 | 22.7 | 22.7 | 22.6 | 22.6 | 22.6 | 22.6 | 22.6 | 22.6 | 22.5
55 | 60 | 22.1 | 22.0 | 22.0 | 22.0 | 21.9 | 21.9 | 21.9 | 21.9 | 21.8 | 21.8 | 21.8 | 21.8
56 | 61 | 21.4 | 21.3 | 21.3 | 21.3 | 21.2 | 21.2 | 21.2 | 21.1 | 21.1 | 21.1 | 21.1 | 21.1
57 | 62 | 20.7 | 20.6 | 20.6 | 20.6 | 20.5 | 20.5 | 20.5 | 20.4 | 20.4 | 20.4 | 20.4 | 20.4
58 | 63 | 20.0 | 19.9 | 19.9 | 19.9 | 19.8 | 19.8 | 19.8 | 19.8 | 19.7 | 19.7 | 19.7 | 19.7
59 | 64 | 19.3 | 19.3 | 19.2 | 19.2 | 19.2 | 19.1 | 19.1 | 19.1 | 19.0 | 19.0 | 19.0 | 19.0
Male | Female | Ages
Male 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
35 | 40 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.3 | 38.2 | 38.2 | 38.2 | 38.2 | 38.2
36 | 41 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.4 | 37.3
37 | 42 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5 | 36.5
38 | 43 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6 | 35.6
39 | 44 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7 | 34.7
40 | 45 | 33.9 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8
41 | 46 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0 | 33.0
42 | 47 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1 | 32.1
43 | 48 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3 | 31.3
44 | 49 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4 | 30.4
45 | 50 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6 | 29.6
46 | 51 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.8 | 28.7
47 | 52 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 28.0 | 27.9 | 27.9 | 27.9 | 27.9
48 | 53 | 27.2 | 27.2 | 27.2 | 27.2 | 27.2 | 27.1 | 27.1 | 27.1 | 27.1 | 27.1 | 27.1
49 | 54 | 26.4 | 26.4 | 26.4 | 26.4 | 26.4 | 26.3 | 26.3 | 26.3 | 26.3 | 26.3 | 26.3
50 | 55 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6 | 25.5 | 25.5 | 25.5
51 | 56 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.7
52 | 57 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0
53 | 58 | 23.3 | 23.3 | 23.3 | 23.3 | 23.3 | 23.3 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2
54 | 59 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5 | 22.5
55 | 60 | 21.8 | 21.8 | 21.8 | 21.8 | 21.8 | 21.8 | 21.8 | 21.8 | 21.8 | 21.7 | 21.7
56 | 61 | 21.1 | 21.1 | 21.1 | 21.1 | 21.1 | 21.0 | 21.0 | 21.0 | 21.0 | 21.0 | 21.0
57 | 62 | 20.4 | 20.4 | 20.4 | 20.3 | 20.3 | 20.3 | 20.3 | 20.3 | 20.3 | 20.3 | 20.3
58 | 63 | 19.7 | 19.7 | 19.7 | 19.6 | 19.6 | 19.6 | 19.6 | 19.6 | 19.6 | 19.6 | 19.6
59 | 64 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0 | 18.9 | 18.9 | 18.9 | 18.9 | 18.9 | 18.9
Male | Female | Ages
Male 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97
Female 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102
60 | 65 | 18.7 | 18.6 | 18.6 | 18.5 | 18.5 | 18.5 | 18.4 | 18.4 | 18.4 | 18.4 | 18.3 | 18.3
61 | 66 | 18.1 | 18.0 | 17.9 | 17.9 | 17.9 | 17.8 | 17.8 | 17.8 | 17.7 | 17.7 | 17.7 | 17.7
62 | 67 | 17.4 | 17.4 | 17.3 | 17.3 | 17.2 | 17.2 | 17.1 | 17.1 | 17.1 | 17.1 | 17.0 | 17.0
63 | 68 | 16.8 | 16.8 | 16.7 | 16.7 | 16.6 | 16.6 | 16.5 | 16.5 | 16.5 | 16.4 | 16.4 | 16.4
64 | 69 | 16.2 | 16.2 | 16.1 | 16.1 | 16.0 | 16.0 | 15.9 | 15.9 | 15.9 | 15.8 | 15.8 | 15.8
65 | 70 | 15.7 | 15.6 | 15.5 | 15.5 | 15.4 | 15.4 | 15.3 | 15.3 | 15.3 | 15.2 | 15.2 | 15.2
66 | 71 | 15.1 | 15.0 | 15.0 | 14.9 | 14.8 | 14.8 | 14.7 | 14.7 | 14.7 | 14.6 | 14.6 | 14.6
67 | 72 | 14.6 | 14.5 | 14.4 | 14.4 | 14.3 | 14.2 | 14.2 | 14.1 | 14.1 | 14.1 | 14.1 | 14.0
68 | 73 | 14.1 | 14.0 | 13.9 | 13.8 | 13.8 | 13.7 | 13.6 | 13.6 | 13.6 | 13.5 | 13.5 | 13.5
69 | 74 | 13.6 | 13.5 | 13.4 | 13.3 | 13.2 | 13.2 | 13.1 | 13.1 | 13.0 | 13.0 | 13.0 | 12.9
70 | 75 | 13.1 | 13.0 | 12.9 | 12.8 | 12.7 | 12.7 | 12.6 | 12.5 | 12.5 | 12.5 | 12.4 | 12.4
71 | 76 | 12.6 | 12.5 | 12.4 | 12.3 | 12.2 | 12.2 | 12.1 | 12.1 | 12.0 | 12.0 | 11.9 | 11.9
72 | 77 | 12.1 | 12.0 | 11.9 | 11.8 | 11.8 | 11.7 | 11.6 | 11.6 | 11.5 | 11.5 | 11.4 | 11.4
73 | 78 | 11.7 | 11.6 | 11.5 | 11.4 | 11.3 | 11.2 | 11.2 | 11.1 | 11.0 | 11.0 | 11.0 | 10.9
74 | 79 | 11.3 | 11.2 | 11.1 | 11.0 | 10.9 | 10.8 | 10.7 | 10.7 | 10.6 | 10.6 | 10.5 | 10.5
75 | 80 | 10.9 | 10.8 | 10.7 | 10.5 | 10.5 | 10.4 | 10.3 | 10.2 | 10.2 | 10.1 | 10.1 | 10.0
76 | 81 | 10.5 | 10.4 | 10.3 | 10.2 | 10.1 | 10.0 | 9.9 | 9.8 | 9.7 | 9.7 | 9.7 | 9.6
77 | 82 | 10.2 | 10.0 | 9.9 | 9.8 | 9.7 | 9.6 | 9.5 | 9.4 | 9.3 | 9.3 | 9.2 | 9.2
78 | 83 | 9.8 | 9.7 | 9.5 | 9.4 | 9.3 | 9.2 | 9.1 | 9.0 | 9.0 | 8.9 | 8.9 | 8.8
79 | 84 | 9.5 | 9.3 | 9.2 | 9.2 | 8.9 | 8.8 | 8.8 | 8.7 | 8.6 | 8.5 | 8.5 | 8.4
80 | 85 | 9.2 | 9.0 | 8.9 | 8.7 | 8.6 | 8.5 | 8.4 | 8.3 | 8.3 | 8.2 | 8.1 | 8.1
81 | 86 | 8.9 | 8.7 | 8.6 | 8.4 | 8.3 | 8.2 | 8.1 | 8.0 | 7.9 | 7.9 | 7.8 | 7.7
82 | 87 | 8.6 | 8.4 | 8.3 | 8.1 | 8.0 | 7.9 | 7.8 | 7.7 | 7.6 | 7.5 | 7.5 | 7.4
83 | 88 | 8.3 | 8.2 | 8.0 | 7.9 | 7.7 | 7.6 | 7.5 | 7.4 | 7.3 | 7.2 | 7.2 | 7.1
84 | 89 | 8.1 | 7.9 | 7.8 | 7.6 | 7.5 | 7.3 | 7.2 | 7.1 | 7.0 | 7.0 | 6.9 | 6.8
Male | Female | Ages
Male 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
60 | 65 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.2 | 18.2 | 18.2 | 18.2
61 | 66 | 17.7 | 17.7 | 17.6 | 17.6 | 17.6 | 17.6 | 17.6 | 17.6 | 17.6 | 17.6 | 17.5
62 | 67 | 17.0 | 17.0 | 17.0 | 17.0 | 17.0 | 17.0 | 16.9 | 16.9 | 16.9 | 16.9 | 16.9
63 | 68 | 16.4 | 16.4 | 16.4 | 16.3 | 16.3 | 16.3 | 16.3 | 16.3 | 16.3 | 16.3 | 16.2
64 | 69 | 15.8 | 15.8 | 15.7 | 15.7 | 15.7 | 15.7 | 15.7 | 15.7 | 15.7 | 15.7 | 15.6
65 | 70 | 15.2 | 15.2 | 15.1 | 15.1 | 15.1 | 15.1 | 15.1 | 15.1 | 15.1 | 15.0 | 15.0
66 | 71 | 14.6 | 14.6 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.4 | 14.4
67 | 72 | 14.0 | 14.0 | 14.0 | 14.0 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.8
68 | 73 | 13.5 | 13.4 | 13.4 | 13.4 | 13.4 | 13.4 | 13.3 | 13.3 | 13.3 | 13.3 | 13.2
69 | 74 | 12.9 | 12.9 | 12.9 | 12.8 | 12.8 | 12.8 | 12.8 | 12.8 | 12.8 | 12.7 | 12.7
70 | 75 | 12.4 | 12.4 | 12.3 | 12.3 | 12.3 | 12.3 | 12.3 | 12.2 | 12.2 | 12.2 | 12.1
71 | 76 | 11.9 | 11.9 | 11.8 | 11.8 | 11.8 | 11.8 | 11.7 | 11.7 | 11.7 | 11.7 | 11.6
72 | 77 | 11.4 | 11.4 | 11.3 | 11.3 | 11.3 | 11.3 | 11.2 | 11.2 | 11.2 | 11.2 | 11.1
73 | 78 | 10.9 | 10.9 | 10.9 | 10.8 | 10.8 | 10.8 | 10.7 | 10.7 | 10.7 | 10.7 | 10.6
74 | 79 | 10.5 | 10.4 | 10.4 | 10.4 | 10.3 | 10.3 | 10.3 | 10.3 | 10.2 | 10.2 | 10.1
75 | 80 | 10.0 | 10.0 | 9.9 | 9.9 | 9.9 | 9.8 | 9.8 | 9.8 | 9.8 | 9.7
76 | 81 | 9.6 | 9.5 | 9.5 | 9.5 | 9.4 | 9.4 | 9.4 | 9.4 | 9.3 | 9.3
77 | 82 | 9.2 | 9.1 | 9.1 | 9.1 | 9.0 | 9.0 | 9.0 | 8.9 | 8.9 | 8.9
78 | 83 | 8.8 | 8.7 | 8.7 | 8.7 | 8.6 | 8.6 | 8.5 | 8.5 | 8.5 | 8.4
79 | 84 | 8.4 | 8.4 | 8.3 | 8.3 | 8.2 | 8.2 | 8.2 | 8.1 | 8.1 | 8.0
80 | 85 | 8.0 | 8.0 | 7.9 | 7.9 | 7.9 | 7.8 | 7.8 | 7.7 | 7.7 | 7.6
81 | 86 | 7.7 | 7.6 | 7.6 | 7.6 | 7.5 | 7.5 | 7.4 | 7.4 | 7.3 | 7.3
82 | 87 | 7.4 | 7.3 | 7.3 | 7.2 | 7.2 | 7.1 | 7.1 | 7.0 | 7.0 | 6.9
83 | 88 | 7.1 | 7.0 | 6.9 | 6.9 | 6.8 | 6.8 | 6.7 | 6.7 | 6.7 | 6.6
84 | 89 | 6.8 | 6.7 | 6.6 | 6.6 | 6.5 | 6.5 | 6.4 | 6.4 | 6.3
Male | Female | Ages
Male 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96
Female 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101
85 | 90 | 7.9 | 7.7 | 7.5 | 7.4 | 7.2 | 7.1 | 7.0 | 6.9 | 6.8 | 6.7 | 6.6
86 | 91 | 7.7 | 7.5 | 7.3 | 7.1 | 7.0 | 6.8 | 6.7 | 6.6 | 6.5 | 6.4 | 6.4
87 | 92 | 7.5 | 7.3 | 7.1 | 6.9 | 6.8 | 6.6 | 6.5 | 6.4 | 6.3 | 6.2 | 6.1
88 | 93 | 7.3 | 7.1 | 6.9 | 6.7 | 6.6 | 6.4 | 6.3 | 6.2 | 6.1 | 6.0 | 5.9
89 | 94 | 7.1 | 6.9 | 6.7 | 6.5 | 6.4 | 6.2 | 6.1 | 6.0 | 5.9 | 5.8 | 5.7
90 | 95 | 7.0 | 6.8 | 6.6 | 6.4 | 6.2 | 6.1 | 5.9 | 5.8 | 5.7 | 5.6 | 5.5
91 | 96 | 6.8 | 6.6 | 6.4 | 6.2 | 6.1 | 5.9 | 5.8 | 5.7 | 5.5 | 5.4 | 5.3
92 | 97 | 6.7 | 6.5 | 6.3 | 6.1 | 5.9 | 5.8 | 5.6 | 5.5 | 5.4 | 5.3 | 5.2
93 | 98 | 6.6 | 6.4 | 6.2 | 6.0 | 5.8 | 5.7 | 5.5 | 5.4 | 5.2 | 5.1 | 5.0
94 | 99 | 6.5 | 6.3 | 6.1 | 5.9 | 5.7 | 5.5 | 5.4 | 5.2 | 5.1 | 5.0 | 4.9
95 | 100 | 6.4 | 6.2 | 6.0 | 5.8 | 5.6 | 5.4 | 5.3 | 5.1 | 5.0 | 4.9 | 4.7
96 | 101 | 6.4 | 6.1 | 5.9 | 5.7 | 5.5 | 5.3 | 5.2 | 5.0 | 4.9 | 4.7 | 4.6
97 | 102 | 6.3 | 6.1 | 5.8 | 5.6 | 5.4 | 5.2 | 5.1 | 4.9 | 4.8 | 4.6 | 4.5
98 | 103 | 6.2 | 6.0 | 5.8 | 5.5 | 5.3 | 5.1 | 5.0 | 4.8 | 4.7 | 4.5 | 4.4
99 | 104 | 6.2 | 5.9 | 5.7 | 5.5 | 5.2 | 5.1 | 4.9 | 4.7 | 4.6 | 4.4 | 4.3
Male | Female | Ages
Male 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106
Female 102 | 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111
85 | 90 | 6.6 | 6.5 | 6.4 | 6.4 | 6.3 | 6.2 | 6.2 | 6.1 | 6.1 | 6.0
86 | 91 | 6.3 | 6.2 | 6.2 | 6.1 | 6.0 | 6.0 | 5.9 | 5.9 | 5.8 | 5.7
87 | 92 | 6.1 | 6.0 | 5.9 | 5.8 | 5.8 | 5.7 | 5.6 | 5.6 | 5.5 | 5.4
88 | 93 | 5.8 | 5.8 | 5.7 | 5.6 | 5.5 | 5.5 | 5.4 | 5.3 | 5.3 | 5.1
89 | 94 | 5.6 | 5.5 | 5.5 | 5.4 | 5.3 | 5.2 | 5.2 | 5.1 | 5.0
90 | 95 | 5.4 | 5.3 | 5.2 | 5.2 | 5.1 | 5.0 | 4.9 | 4.9 | 4.8
91 | 96 | 5.2 | 5.1 | 5.1 | 5.0 | 4.9 | 4.8 | 4.7 | 4.6 | 4.5
92 | 97 | 5.1 | 5.0 | 4.9 | 4.8 | 4.7 | 4.6 | 4.5 | 4.4
93 | 98 | 4.9 | 4.8 | 4.7 | 4.6 | 4.5 | 4.4 | 4.3 | 4.2
94 | 99 | 4.8 | 4.7 | 4.6 | 4.5 | 4.4 | 4.3 | 4.1
95 | 100 | 4.6 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0
96 | 101 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 3.9
97 | 102 | 4.4 | 4.3 | 4.1 | 4.0 | 3.9 | 3.7
98 | 103 | 4.3 | 4.1 | 4.0 | 3.9 | 3.7
99 | 104 | 4.1 | 4.0 | 3.9 | 3.7
Table IIa—Annuities for Joint Life Only—Two Lives—Expected Return Multiples
Male | Female | Ages
Male 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20
Female 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25
6 | 11 | 56.6 | 56.1 | 55.7 | 55.1 | 54.6 | 54.1 | 53.5 | 52.9 | 52.3 | 51.7 | 51.1 | 50.5 | 49.8 | 49.1 | 48.4
7 | 12 | 56.1 | 55.7 | 55.2 | 54.7 | 54.2 | 53.7 | 53.1 | 52.6 | 52.0 | 51.4 | 50.8 | 50.2 | 49.5 | 48.9 | 48.2
8 | 13 | 55.7 | 55.2 | 54.8 | 54.3 | 53.8 | 53.3 | 52.8 | 52.2 | 51.6 | 51.1 | 50.5 | 49.9 | 49.2 | 48.6 | 47.9
9 | 14 | 55.1 | 54.7 | 54.3 | 53.8 | 53.3 | 52.9 | 52.3 | 51.8 | 51.3 | 50.7 | 50.1 | 49.5 | 48.9 | 48.3 | 47.7
10 | 15 | 54.6 | 54.2 | 53.8 | 53.3 | 52.9 | 52.4 | 51.9 | 51.4 | 50.9 | 50.3 | 49.8 | 49.2 | 48.6 | 48.0 | 47.4
11 | 16 | 54.1 | 53.7 | 53.3 | 52.9 | 52.4 | 52.0 | 51.5 | 51.0 | 50.5 | 50.0 | 49.4 | 48.8 | 48.3 | 47.7 | 47.1
12 | 17 | 53.5 | 53.1 | 52.8 | 52.3 | 51.9 | 51.5 | 51.0 | 50.6 | 50.1 | 49.6 | 49.0 | 48.5 | 47.9 | 47.3 | 46.7
13 | 18 | 52.9 | 52.6 | 52.2 | 51.8 | 51.4 | 51.0 | 50.6 | 50.1 | 49.6 | 49.1 | 48.6 | 48.1 | 47.5 | 47.0 | 46.4
14 | 19 | 52.3 | 52.0 | 51.6 | 51.3 | 50.9 | 50.5 | 50.1 | 49.6 | 49.2 | 48.7 | 48.2 | 47.7 | 47.2 | 46.6 | 46.1
15 | 20 | 51.7 | 51.4 | 51.1 | 50.7 | 50.3 | 50.0 | 49.6 | 49.1 | 48.7 | 48.2 | 47.8 | 47.3 | 46.8 | 46.2 | 45.7
16 | 21 | 51.1 | 50.8 | 50.5 | 50.1 | 49.8 | 49.4 | 49.0 | 48.6 | 48.2 | 47.8 | 47.3 | 46.8 | 46.3 | 45.8 | 45.3
17 | 22 | 50.5 | 50.2 | 49.9 | 49.5 | 49.2 | 48.8 | 48.5 | 48.1 | 47.7 | 47.3 | 46.8 | 46.4 | 45.9 | 45.4 | 44.9
18 | 23 | 49.8 | 49.5 | 49.2 | 48.9 | 48.6 | 48.3 | 47.9 | 47.5 | 47.2 | 46.8 | 46.3 | 45.9 | 45.4 | 45.0 | 44.5
19 | 24 | 49.1 | 48.9 | 48.6 | 48.3 | 48.0 | 47.7 | 47.3 | 47.0 | 46.6 | 46.2 | 45.8 | 45.4 | 45.0 | 44.5 | 44.0
20 | 25 | 48.4 | 48.2 | 47.9 | 47.7 | 47.4 | 47.1 | 46.7 | 46.4 | 46.1 | 45.7 | 45.3 | 44.9 | 44.5 | 44.0 | 43.6
Male | Female | Ages
Male 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34
Female 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39
6 | 11 | 47.7 | 47.0 | 46.3 | 45.6 | 44.8 | 44.1 | 43.3 | 42.5 | 41.8 | 41.0 | 40.2 | 39.4 | 38.6 | 37.8
7 | 12 | 47.5 | 46.8 | 46.1 | 45.4 | 44.6 | 43.9 | 43.2 | 42.4 | 41.6 | 40.9 | 40.1 | 39.3 | 38.5 | 37.7
8 | 13 | 47.3 | 46.6 | 45.9 | 45.2 | 44.5 | 43.7 | 43.0 | 42.2 | 41.5 | 40.7 | 39.9 | 39.2 | 38.4 | 37.6
9 | 14 | 47.0 | 46.3 | 45.6 | 45.0 | 44.2 | 43.5 | 42.8 | 42.1 | 41.3 | 40.6 | 39.8 | 39.0 | 38.3 | 37.5
10 | 15 | 46.7 | 46.1 | 45.4 | 44.7 | 44.0 | 43.3 | 42.6 | 41.9 | 41.1 | 40.4 | 39.7 | 38.9 | 38.1 | 37.4
11 | 16 | 46.4 | 45.8 | 45.1 | 44.5 | 43.8 | 43.1 | 42.4 | 41.7 | 41.0 | 40.2 | 39.5 | 38.8 | 38.0 | 37.2
12 | 17 | 46.1 | 45.5 | 44.9 | 44.2 | 43.6 | 42.9 | 42.2 | 41.5 | 40.8 | 40.1 | 39.3 | 38.6 | 37.9 | 37.1
13 | 18 | 45.8 | 45.2 | 44.6 | 43.9 | 43.3 | 42.6 | 42.0 | 41.3 | 40.6 | 39.9 | 39.2 | 38.4 | 37.7 | 37.0
14 | 19 | 45.5 | 44.9 | 44.3 | 43.7 | 43.0 | 42.4 | 41.7 | 41.0 | 40.4 | 39.7 | 39.0 | 38.3 | 37.5 | 36.8
15 | 20 | 45.1 | 44.6 | 44.0 | 43.4 | 42.7 | 42.1 | 41.5 | 40.8 | 40.1 | 39.5 | 38.8 | 38.1 | 37.4 | 36.6
16 | 21 | 44.8 | 44.2 | 43.6 | 43.0 | 42.4 | 41.8 | 41.2 | 40.5 | 39.9 | 39.2 | 38.6 | 37.9 | 37.2 | 36.5
17 | 22 | 44.4 | 43.8 | 43.3 | 42.7 | 42.1 | 41.5 | 40.9 | 40.3 | 39.6 | 39.0 | 38.3 | 37.7 | 37.0 | 36.3
18 | 23 | 44.0 | 43.5 | 42.9 | 42.4 | 41.8 | 41.2 | 40.6 | 40.0 | 39.4 | 38.7 | 38.1 | 37.4 | 36.8 | 36.1
19 | 24 | 43.6 | 43.1 | 42.5 | 42.0 | 41.4 | 40.9 | 40.3 | 39.7 | 39.1 | 38.5 | 37.8 | 37.2 | 36.5 | 35.9
20 | 25 | 43.1 | 42.6 | 42.1 | 41.6 | 41.1 | 40.5 | 40.0 | 39.4 | 38.8 | 38.2 | 37.6 | 36.9 | 36.3 | 35.7
21 | 26 | 42.7 | 42.2 | 41.7 | 41.2 | 40.7 | 40.2 | 39.6 | 39.1 | 38.5 | 37.9 | 37.3 | 36.7 | 36.1 | 35.4
22 | 27 | 42.2 | 41.8 | 41.3 | 40.8 | 40.3 | 39.8 | 39.3 | 38.7 | 38.2 | 37.6 | 37.0 | 36.4 | 35.8 | 35.2
23 | 28 | 41.7 | 41.3 | 40.8 | 40.4 | 39.9 | 39.4 | 38.9 | 38.4 | 37.8 | 37.3 | 36.7 | 36.1 | 35.5 | 34.9
24 | 29 | 41.2 | 40.8 | 40.4 | 39.9 | 39.5 | 39.0 | 38.5 | 38.0 | 37.5 | 36.9 | 36.4 | 35.8 | 35.2 | 34.6
25 | 30 | 40.7 | 40.3 | 39.9 | 39.5 | 39.0 | 38.6 | 38.1 | 37.6 | 37.1 | 36.6 | 36.0 | 35.5 | 34.9 | 34.4
26 | 31 | 40.2 | 39.8 | 39.4 | 39.0 | 38.6 | 38.1 | 37.7 | 37.2 | 36.7 | 36.2 | 35.7 | 35.2 | 34.6 | 34.1
27 | 32 | 39.6 | 39.3 | 38.9 | 38.5 | 38.1 | 37.7 | 37.2 | 36.8 | 36.3 | 35.8 | 35.3 | 34.8 | 34.3 | 33.7
28 | 33 | 39.1 | 38.7 | 38.4 | 38.0 | 37.6 | 37.2 | 36.8 | 36.3 | 35.9 | 35.4 | 34.9 | 34.5 | 33.9 | 33.4
29 | 34 | 38.5 | 38.2 | 37.8 | 37.5 | 37.1 | 36.7 | 36.3 | 35.9 | 35.5 | 35.0 | 34.6 | 34.1 | 33.6 | 33.1
30 | 35 | 37.9 | 37.6 | 37.3 | 36.9 | 36.6 | 36.2 | 35.8 | 35.4 | 35.0 | 34.6 | 34.1 | 33.7 | 33.2 | 32.7
31 | 36 | 37.3 | 37.0 | 36.7 | 36.4 | 36.0 | 35.7 | 35.3 | 34.9 | 34.6 | 34.1 | 33.7 | 33.3 | 32.8 | 32.3
32 | 37 | 36.7 | 36.4 | 36.1 | 35.8 | 35.5 | 35.2 | 34.8 | 34.5 | 34.1 | 33.7 | 33.3 | 32.9 | 32.4 | 32.0
33 | 38 | 36.1 | 35.8 | 35.5 | 35.2 | 34.9 | 34.6 | 34.3 | 33.9 | 33.6 | 33.2 | 32.8 | 32.4 | 32.0 | 31.6
34 | 39 | 35.4 | 35.2 | 34.9 | 34.6 | 34.4 | 34.1 | 33.7 | 33.4 | 33.1 | 32.7 | 32.3 | 32.0 | 31.6 | 31.1
Male | Female | Ages
Male 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49
Female 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52 | 53 | 54
6 | 11 | 37.0 | 36.2 | 35.4 | 34.6 | 33.8 | 33.0 | 32.2 | 31.4 | 30.6 | 29.8 | 29.0 | 28.2 | 27.5 | 26.7 | 25.9
7 | 12 | 36.9 | 36.1 | 35.3 | 34.5 | 33.7 | 32.9 | 32.1 | 31.3 | 30.5 | 29.8 | 29.0 | 28.2 | 27.4 | 26.7 | 25.9
8 | 13 | 36.8 | 36.0 | 35.2 | 34.4 | 33.7 | 32.9 | 32.1 | 31.3 | 30.5 | 29.7 | 28.9 | 28.2 | 27.4 | 26.6 | 25.9
9 | 14 | 36.7 | 35.9 | 35.1 | 34.4 | 33.6 | 32.8 | 32.0 | 31.2 | 30.4 | 29.7 | 28.9 | 28.1 | 27.3 | 26.6 | 25.8
10 | 15 | 36.6 | 35.8 | 35.1 | 34.3 | 33.5 | 32.7 | 31.9 | 31.2 | 30.4 | 29.6 | 28.8 | 28.1 | 27.3 | 26.5 | 25.8
11 | 16 | 36.5 | 35.7 | 34.9 | 34.2 | 33.4 | 32.6 | 31.9 | 31.1 | 30.3 | 29.5 | 28.8 | 28.0 | 27.3 | 26.5 | 25.7
12 | 17 | 36.4 | 35.6 | 34.8 | 34.1 | 33.3 | 32.5 | 31.8 | 31.0 | 30.2 | 29.5 | 28.7 | 28.0 | 27.2 | 26.4 | 25.7
13 | 18 | 36.2 | 35.5 | 34.7 | 34.0 | 33.2 | 32.4 | 31.7 | 30.9 | 30.2 | 29.4 | 28.7 | 27.9 | 27.1 | 26.4 | 25.7
14 | 19 | 36.1 | 35.3 | 34.6 | 33.8 | 33.1 | 32.3 | 31.6 | 30.8 | 30.1 | 29.3 | 28.6 | 27.8 | 27.1 | 26.3 | 25.6
15 | 20 | 35.9 | 35.2 | 34.5 | 33.7 | 33.0 | 32.2 | 31.5 | 30.7 | 30.0 | 29.3 | 28.5 | 27.8 | 27.0 | 26.3 | 25.6
16 | 21 | 35.8 | 35.0 | 34.3 | 33.6 | 32.9 | 32.1 | 31.4 | 30.6 | 29.9 | 29.2 | 28.4 | 27.7 | 27.0 | 26.2 | 25.5
17 | 22 | 35.6 | 34.9 | 34.2 | 33.4 | 32.7 | 32.0 | 31.3 | 30.5 | 29.8 | 29.1 | 28.3 | 27.6 | 26.9 | 26.2 | 25.4
18 | 23 | 35.4 | 34.7 | 34.0 | 33.3 | 32.6 | 31.9 | 31.2 | 30.4 | 29.7 | 29.0 | 28.3 | 27.5 | 26.8 | 26.1 | 25.4
19 | 24 | 35.2 | 34.5 | 33.8 | 33.1 | 32.4 | 31.7 | 31.0 | 30.3 | 29.6 | 28.9 | 28.2 | 27.4 | 26.7 | 26.0 | 25.3
20 | 25 | 35.0 | 34.3 | 33.7 | 33.0 | 32.3 | 31.6 | 30.9 | 30.2 | 29.5 | 28.8 | 28.1 | 27.3 | 26.6 | 25.9 | 25.2
21 | 26 | 34.8 | 34.1 | 33.5 | 32.8 | 32.1 | 31.4 | 30.7 | 30.0 | 29.3 | 28.6 | 27.9 | 27.2 | 26.5 | 25.8 | 25.1
22 | 27 | 34.5 | 33.9 | 33.3 | 32.6 | 31.9 | 31.3 | 30.6 | 29.9 | 29.2 | 28.5 | 27.8 | 27.1 | 26.4 | 25.7 | 25.1
23 | 28 | 34.3 | 33.7 | 33.0 | 32.4 | 31.7 | 31.1 | 30.4 | 29.7 | 29.1 | 28.4 | 27.7 | 27.0 | 26.3 | 25.6 | 25.0
24 | 29 | 34.0 | 33.4 | 32.8 | 32.2 | 31.5 | 30.9 | 30.2 | 29.6 | 28.9 | 28.2 | 27.6 | 26.9 | 26.2 | 25.5 | 24.9
25 | 30 | 33.8 | 33.2 | 32.6 | 32.0 | 31.3 | 30.7 | 30.1 | 29.4 | 28.8 | 28.1 | 27.4 | 26.8 | 26.1 | 25.4 | 24.8
26 | 31 | 33.5 | 32.9 | 32.3 | 31.7 | 31.1 | 30.5 | 29.9 | 29.2 | 28.6 | 27.9 | 27.3 | 26.6 | 26.0 | 25.3 | 24.6
27 | 32 | 33.2 | 32.6 | 32.1 | 31.5 | 30.9 | 30.3 | 29.6 | 29.0 | 28.4 | 27.8 | 27.1 | 26.5 | 25.8 | 25.2 | 24.5
28 | 33 | 32.9 | 32.3 | 31.8 | 31.2 | 30.6 | 30.0 | 29.4 | 28.8 | 28.2 | 27.6 | 27.0 | 26.3 | 25.7 | 25.0 | 24.4
29 | 34 | 32.6 | 32.0 | 31.5 | 30.9 | 30.4 | 29.8 | 29.2 | 28.6 | 28.0 | 27.4 | 26.8 | 26.2 | 25.5 | 24.9 | 24.3
30 | 35 | 32.2 | 31.7 | 31.2 | 30.6 | 30.1 | 29.5 | 29.0 | 28.4 | 27.8 | 27.2 | 26.6 | 26.0 | 25.4 | 24.7 | 24.1
31 | 36 | 31.9 | 31.4 | 30.9 | 30.3 | 29.8 | 29.3 | 28.7 | 28.1 | 27.6 | 27.0 | 26.4 | 25.8 | 25.2 | 24.6 | 24.0
32 | 37 | 31.5 | 31.0 | 30.5 | 30.0 | 29.5 | 29.0 | 28.4 | 27.9 | 27.3 | 26.8 | 26.2 | 25.6 | 25.0 | 24.4 | 23.8
33 | 38 | 31.1 | 30.7 | 30.2 | 29.7 | 29.2 | 28.7 | 28.2 | 27.6 | 27.1 | 26.5 | 26.0 | 25.4 | 24.8 | 24.2 | 23.6
34 | 39 | 30.7 | 30.3 | 29.8 | 29.3 | 28.9 | 28.4 | 27.9 | 27.3 | 26.8 | 26.3 | 25.7 | 25.2 | 24.6 | 24.0 | 23.5
Male | Female | Ages
Male 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63
Female 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64 | 65 | 66 | 67 | 68
6 | 11 | 25.2 | 24.4 | 23.7 | 22.9 | 22.2 | 21.5 | 20.8 | 20.1 | 19.4 | 18.7 | 18.0 | 17.4 | 16.7 | 16.1
7 | 12 | 25.1 | 24.4 | 23.6 | 22.9 | 22.2 | 21.5 | 20.8 | 20.1 | 19.4 | 18.7 | 18.0 | 17.4 | 16.7 | 16.1
8 | 13 | 25.1 | 24.4 | 23.6 | 22.9 | 22.2 | 21.4 | 20.7 | 20.0 | 19.4 | 18.7 | 18.0 | 17.4 | 16.7 | 16.1
9 | 14 | 25.1 | 24.3 | 23.6 | 22.9 | 22.1 | 21.4 | 20.7 | 20.0 | 19.3 | 18.7 | 18.0 | 17.3 | 16.7 | 16.1
10 | 15 | 25.0 | 24.3 | 23.6 | 22.8 | 22.1 | 21.4 | 20.7 | 20.0 | 19.3 | 18.6 | 18.0 | 17.3 | 16.7 | 16.1
11 | 16 | 25.0 | 24.3 | 23.5 | 22.8 | 22.1 | 21.4 | 20.7 | 20.0 | 19.3 | 18.6 | 18.0 | 17.3 | 16.7 | 16.1
12 | 17 | 25.0 | 24.2 | 23.5 | 22.8 | 22.1 | 21.4 | 20.7 | 20.0 | 19.3 | 18.6 | 18.0 | 17.3 | 16.7 | 16.0
13 | 18 | 24.9 | 24.2 | 23.5 | 22.7 | 22.0 | 21.3 | 20.6 | 19.9 | 19.3 | 18.6 | 17.9 | 17.3 | 16.7 | 16.0
14 | 19 | 24.9 | 24.1 | 23.4 | 22.7 | 22.0 | 21.3 | 20.6 | 19.9 | 19.2 | 18.6 | 17.9 | 17.3 | 16.6 | 16.0
15 | 20 | 24.8 | 24.1 | 23.4 | 22.7 | 22.0 | 21.3 | 20.6 | 19.9 | 19.2 | 18.5 | 17.9 | 17.3 | 16.6 | 16.0
16 | 21 | 24.8 | 24.0 | 23.3 | 22.6 | 21.9 | 21.2 | 20.5 | 19.9 | 19.2 | 18.5 | 17.9 | 17.2 | 16.6 | 16.0
17 | 22 | 24.7 | 24.0 | 23.3 | 22.6 | 21.9 | 21.2 | 20.5 | 19.8 | 19.2 | 18.5 | 17.8 | 17.2 | 16.6 | 16.0
18 | 23 | 24.7 | 23.9 | 23.2 | 22.5 | 21.8 | 21.1 | 20.5 | 19.8 | 19.1 | 18.5 | 17.8 | 17.2 | 16.6 | 15.9
19 | 24 | 24.6 | 23.9 | 23.2 | 22.5 | 21.8 | 21.1 | 20.4 | 19.8 | 19.1 | 18.4 | 17.8 | 17.2 | 16.5 | 15.9
20 | 25 | 24.5 | 23.8 | 23.1 | 22.4 | 21.7 | 21.1 | 20.4 | 19.7 | 19.1 | 18.4 | 17.8 | 17.1 | 16.5 | 15.9
21 | 26 | 24.4 | 23.7 | 23.1 | 22.4 | 21.7 | 21.0 | 20.3 | 19.7 | 19.0 | 18.4 | 17.7 | 17.1 | 16.5 | 15.9
22 | 27 | 24.4 | 23.7 | 23.0 | 22.3 | 21.6 | 21.0 | 20.3 | 19.6 | 19.0 | 18.3 | 17.7 | 17.1 | 16.5 | 15.9
23 | 28 | 24.3 | 23.6 | 22.9 | 22.2 | 21.6 | 20.9 | 20.2 | 19.6 | 18.9 | 18.3 | 17.7 | 17.0 | 16.4 | 15.8
24 | 29 | 24.2 | 23.5 | 22.8 | 22.2 | 21.5 | 20.8 | 20.2 | 19.5 | 18.9 | 18.3 | 17.6 | 17.0 | 16.4 | 15.8
25 | 30 | 24.1 | 23.4 | 22.8 | 22.1 | 21.4 | 20.8 | 20.1 | 19.5 | 18.8 | 18.2 | 17.6 | 17.0 | 16.4 | 15.8
26 | 31 | 24.0 | 23.3 | 22.7 | 22.0 | 21.4 | 20.7 | 20.1 | 19.4 | 18.8 | 18.2 | 17.5 | 16.9 | 16.3 | 15.7
27 | 32 | 23.9 | 23.2 | 22.6 | 21.9 | 21.3 | 20.6 | 20.0 | 19.4 | 18.7 | 18.1 | 17.5 | 16.9 | 16.3 | 15.7
28 | 33 | 23.8 | 23.1 | 22.5 | 21.8 | 21.2 | 20.6 | 19.9 | 19.3 | 18.7 | 18.1 | 17.4 | 16.8 | 16.2 | 15.6
29 | 34 | 23.6 | 23.0 | 22.4 | 21.7 | 21.1 | 20.5 | 19.8 | 19.2 | 18.6 | 18.0 | 17.4 | 16.8 | 16.2 | 15.6
30 | 35 | 23.5 | 22.9 | 22.3 | 21.6 | 21.0 | 20.4 | 19.8 | 19.1 | 18.5 | 17.9 | 17.3 | 16.7 | 16.1 | 15.6
31 | 36 | 23.4 | 22.7 | 22.1 | 21.5 | 20.9 | 20.3 | 19.7 | 19.1 | 18.5 | 17.9 | 17.3 | 16.7 | 16.1 | 15.5
32 | 37 | 23.2 | 22.6 | 22.0 | 21.4 | 20.8 | 20.2 | 19.6 | 19.0 | 18.4 | 17.8 | 17.2 | 16.6 | 16.0 | 15.5
33 | 38 | 23.1 | 22.5 | 21.9 | 21.3 | 20.7 | 20.1 | 19.5 | 18.9 | 18.3 | 17.7 | 17.1 | 16.5 | 16.0 | 15.4
34 | 39 | 22.9 | 22.3 | 21.7 | 21.1 | 20.5 | 20.0 | 19.4 | 18.8 | 18.2 | 17.6 | 17.0 | 16.5 | 15.9 | 15.3
Male | Female | Ages
Male 64 | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78
Female 69 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83
6 | 11 | 15.5 | 14.9 | 14.3 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.6 | 9.1 | 8.7 | 8.2
7 | 12 | 15.5 | 14.9 | 14.3 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.6 | 9.1 | 8.7 | 8.2
8 | 13 | 15.5 | 14.9 | 14.3 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.6 | 9.1 | 8.7 | 8.2
9 | 14 | 15.5 | 14.9 | 14.3 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.7 | 8.2
10 | 15 | 15.4 | 14.8 | 14.3 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.7 | 8.2
11 | 16 | 15.4 | 14.8 | 14.2 | 13.7 | 13.1 | 12.6 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.7 | 8.2
12 | 17 | 15.4 | 14.8 | 14.2 | 13.7 | 13.1 | 12.5 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
13 | 18 | 15.4 | 14.8 | 14.2 | 13.6 | 13.1 | 12.5 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
14 | 19 | 15.4 | 14.8 | 14.2 | 13.6 | 13.1 | 12.5 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
15 | 20 | 15.4 | 14.8 | 14.2 | 13.6 | 13.1 | 12.5 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
16 | 21 | 15.4 | 14.8 | 14.2 | 13.6 | 13.1 | 12.5 | 12.0 | 11.5 | 11.0 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
17 | 22 | 15.4 | 14.8 | 14.2 | 13.6 | 13.0 | 12.5 | 12.0 | 11.5 | 10.9 | 10.5 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
18 | 23 | 15.3 | 14.7 | 14.2 | 13.6 | 13.0 | 12.5 | 12.0 | 11.4 | 10.9 | 10.4 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
19 | 24 | 15.3 | 14.7 | 14.1 | 13.6 | 13.0 | 12.5 | 12.0 | 11.4 | 10.9 | 10.4 | 10.0 | 9.5 | 9.1 | 8.6 | 8.2
20 | 25 | 15.3 | 14.7 | 14.1 | 13.6 | 13.0 | 12.5 | 11.9 | 11.4 | 10.9 | 10.4 | 10.0 | 9.5 | 9.0 | 8.6 | 8.2
21 | 26 | 15.3 | 14.7 | 14.1 | 13.5 | 13.0 | 12.5 | 11.9 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.0 | 8.6 | 8.2
22 | 27 | 15.3 | 14.7 | 14.1 | 13.5 | 13.0 | 12.4 | 11.9 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.0 | 8.6 | 8.2
23 | 28 | 15.2 | 14.6 | 14.1 | 13.5 | 13.0 | 12.4 | 11.9 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.0 | 8.6 | 8.2
24 | 29 | 15.2 | 14.6 | 14.0 | 13.5 | 12.9 | 12.4 | 11.9 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.0 | 8.6 | 8.2
25 | 30 | 15.2 | 14.6 | 14.0 | 13.5 | 12.9 | 12.4 | 11.9 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.0 | 8.6 | 8.2
26 | 31 | 15.1 | 14.6 | 14.0 | 13.4 | 12.9 | 12.4 | 11.9 | 11.3 | 10.8 | 10.4 | 9.9 | 9.4 | 9.0 | 8.6 | 8.2
27 | 32 | 15.1 | 14.5 | 14.0 | 13.4 | 12.9 | 12.4 | 11.8 | 11.3 | 10.8 | 10.4 | 9.9 | 9.4 | 9.0 | 8.6 | 8.2
28 | 33 | 15.1 | 14.5 | 13.9 | 13.4 | 12.9 | 12.3 | 11.8 | 11.3 | 10.8 | 10.3 | 9.9 | 9.4 | 9.0 | 8.6 | 8.1
29 | 34 | 15.0 | 14.5 | 13.9 | 13.4 | 12.8 | 12.3 | 11.8 | 11.3 | 10.8 | 10.3 | 9.9 | 9.4 | 9.0 | 8.5 | 8.1
30 | 35 | 15.0 | 14.4 | 13.9 | 13.3 | 12.8 | 12.3 | 11.8 | 11.3 | 10.8 | 10.3 | 9.8 | 9.4 | 9.0 | 8.5 | 8.1
31 | 36 | 14.9 | 14.4 | 13.8 | 13.3 | 12.8 | 12.2 | 11.7 | 11.2 | 10.8 | 10.3 | 9.8 | 9.4 | 8.9 | 8.5 | 8.1
32 | 37 | 14.9 | 14.3 | 13.8 | 13.3 | 12.7 | 12.2 | 11.7 | 11.2 | 10.7 | 10.3 | 9.8 | 9.4 | 8.9 | 8.5 | 8.1
33 | 38 | 14.8 | 14.3 | 13.8 | 13.2 | 12.7 | 12.2 | 11.7 | 11.2 | 10.7 | 10.2 | 9.8 | 9.3 | 8.9 | 8.5 | 8.1
34 | 39 | 14.8 | 14.2 | 13.7 | 13.2 | 12.7 | 12.2 | 11.7 | 11.2 | 10.7 | 10.2 | 9.8 | 9.3 | 8.9 | 8.5 | 8.1
Male | Female | Ages
Male 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93
Female 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97 | 98
6 | 11 | 7.8 | 7.4 | 7.1 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
7 | 12 | 7.8 | 7.4 | 7.1 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
8 | 13 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
9 | 14 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
10 | 15 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
11 | 16 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
12 | 17 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
13 | 18 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
14 | 19 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
15 | 20 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
16 | 21 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
17 | 22 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
18 | 23 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
19 | 24 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
20 | 25 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
21 | 26 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
22 | 27 | 7.8 | 7.4 | 7.0 | 6.7 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
23 | 28 | 7.8 | 7.4 | 7.0 | 6.6 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.8 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
24 | 29 | 7.8 | 7.4 | 7.0 | 6.6 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
25 | 30 | 7.8 | 7.4 | 7.0 | 6.6 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
26 | 31 | 7.8 | 7.4 | 7.0 | 6.6 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
27 | 32 | 7.7 | 7.4 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
28 | 33 | 7.7 | 7.4 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
29 | 34 | 7.7 | 7.3 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
30 | 35 | 7.7 | 7.3 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
31 | 36 | 7.7 | 7.3 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
32 | 37 | 7.7 | 7.3 | 7.0 | 6.6 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 4.0 | 3.7 | 3.5
33 | 38 | 7.7 | 7.3 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2 | 3.9 | 3.7 | 3.5
34 | 39 | 7.7 | 7.3 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5
Male | Female | Ages
Male 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
6 | 11 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
7 | 12 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
8 | 13 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
9 | 14 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
10 | 15 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
11 | 16 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
12 | 17 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
13 | 18 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
14 | 19 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
15 | 20 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
16 | 21 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
17 | 22 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
18 | 23 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
19 | 24 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
20 | 25 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
21 | 26 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
22 | 27 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
23 | 28 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
24 | 29 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
25 | 30 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
26 | 31 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
27 | 32 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
28 | 33 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
29 | 34 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
30 | 35 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
31 | 36 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
32 | 37 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
33 | 38 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
34 | 39 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
Male | Female | Ages
Male 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47
Female 40 | 41 | 42 | 43 | 44 | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52
35 | 40 | 30.3 | 29.9 | 29.4 | 29.0 | 28.5 | 28.0 | 27.5 | 27.0 | 26.5 | 26.0 | 25.5 | 24.9 | 24.4
36 | 41 | 29.9 | 29.5 | 29.0 | 28.6 | 28.2 | 27.7 | 27.2 | 26.7 | 26.2 | 25.7 | 25.2 | 24.7 | 24.2
37 | 42 | 29.4 | 29.0 | 28.6 | 28.2 | 27.8 | 27.3 | 26.9 | 26.4 | 25.9 | 25.5 | 25.0 | 24.4 | 23.9
38 | 43 | 29.0 | 28.6 | 28.2 | 27.8 | 27.4 | 27.0 | 26.5 | 26.1 | 25.6 | 25.2 | 24.7 | 24.2 | 23.7
39 | 44 | 28.5 | 28.2 | 27.8 | 27.4 | 27.0 | 26.6 | 26.2 | 25.8 | 25.3 | 24.8 | 24.4 | 23.9 | 23.4
40 | 45 | 28.0 | 27.7 | 27.3 | 27.0 | 26.6 | 26.2 | 25.8 | 25.4 | 25.0 | 24.5 | 24.1 | 23.6 | 23.1
41 | 46 | 27.5 | 27.2 | 26.9 | 26.5 | 26.2 | 25.8 | 25.4 | 25.0 | 24.6 | 24.2 | 23.8 | 23.3 | 22.9
42 | 47 | 27.0 | 26.7 | 26.4 | 26.1 | 25.8 | 25.4 | 25.0 | 24.6 | 24.2 | 23.8 | 23.4 | 23.0 | 22.6
43 | 48 | 26.5 | 26.2 | 25.9 | 25.6 | 25.3 | 25.0 | 24.6 | 24.2 | 23.9 | 23.5 | 23.1 | 22.7 | 22.2
44 | 49 | 26.0 | 25.7 | 25.5 | 25.2 | 24.8 | 24.5 | 24.2 | 23.8 | 23.5 | 23.1 | 22.7 | 22.3 | 21.9
45 | 50 | 25.5 | 25.2 | 25.0 | 24.7 | 24.4 | 24.1 | 23.8 | 23.4 | 23.1 | 22.7 | 22.4 | 22.0 | 21.6
46 | 51 | 24.9 | 24.7 | 24.4 | 24.2 | 23.9 | 23.6 | 23.3 | 23.0 | 22.7 | 22.3 | 22.0 | 21.6 | 21.2
47 | 52 | 24.4 | 24.2 | 23.9 | 23.7 | 23.4 | 23.1 | 22.9 | 22.6 | 22.2 | 21.9 | 21.6 | 21.2 | 20.9
Male | Female | Ages
Male 48 | 49 | 50 | 51 | 52 | 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60
Female 53 | 54 | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64 | 65
35 | 40 | 23.8 | 23.3 | 22.7 | 22.1 | 21.6 | 21.0 | 20.4 | 19.8 | 19.3 | 18.7 | 18.1 | 17.5 | 17.0
36 | 41 | 23.6 | 23.1 | 22.5 | 22.0 | 21.4 | 20.8 | 20.3 | 19.7 | 19.1 | 18.6 | 18.0 | 17.4 | 16.9
37 | 42 | 23.4 | 22.9 | 22.3 | 21.8 | 21.2 | 20.7 | 20.1 | 19.6 | 19.0 | 18.4 | 17.9 | 17.3 | 16.8
38 | 43 | 23.2 | 22.6 | 22.1 | 21.6 | 21.1 | 20.5 | 20.0 | 19.4 | 18.9 | 18.3 | 17.8 | 17.2 | 16.7
39 | 44 | 22.9 | 22.4 | 21.9 | 21.4 | 20.9 | 20.3 | 19.8 | 19.3 | 18.7 | 18.2 | 17.7 | 17.1 | 16.6
40 | 45 | 22.7 | 22.2 | 21.7 | 21.2 | 20.7 | 20.1 | 19.6 | 19.1 | 18.6 | 18.0 | 17.5 | 17.0 | 16.5
41 | 46 | 22.4 | 21.9 | 21.4 | 20.9 | 20.4 | 19.9 | 19.4 | 18.9 | 18.4 | 17.9 | 17.4 | 16.9 | 16.3
42 | 47 | 22.1 | 21.6 | 21.2 | 20.7 | 20.2 | 19.7 | 19.2 | 18.7 | 18.2 | 17.7 | 17.2 | 16.7 | 16.2
43 | 48 | 21.8 | 21.4 | 20.9 | 20.5 | 20.0 | 19.5 | 19.0 | 18.6 | 18.1 | 17.6 | 17.1 | 16.6 | 16.1
44 | 49 | 21.5 | 21.1 | 20.6 | 20.2 | 19.8 | 19.3 | 18.8 | 18.4 | 17.9 | 17.4 | 16.9 | 16.4 | 15.9
45 | 50 | 21.2 | 20.8 | 20.4 | 19.9 | 19.5 | 19.1 | 18.6 | 18.1 | 17.7 | 17.2 | 16.7 | 16.3 | 15.8
46 | 51 | 20.9 | 20.5 | 20.1 | 19.7 | 19.2 | 18.8 | 18.4 | 17.9 | 17.5 | 17.0 | 16.6 | 16.1 | 15.6
47 | 52 | 20.5 | 20.1 | 19.8 | 19.4 | 19.0 | 18.5 | 18.1 | 17.7 | 17.3 | 16.8 | 16.4 | 15.9 | 15.5
48 | 53 | 20.2 | 19.8 | 19.4 | 19.1 | 18.7 | 18.3 | 17.9 | 17.5 | 17.0 | 16.6 | 16.2 | 15.7 | 15.3
49 | 54 | 19.8 | 19.5 | 19.1 | 18.8 | 18.4 | 18.0 | 17.6 | 17.2 | 16.8 | 16.4 | 16.0 | 15.5 | 15.1
50 | 55 | 19.4 | 19.1 | 18.8 | 18.4 | 18.1 | 17.7 | 17.3 | 16.9 | 16.6 | 16.2 | 15.8 | 15.3 | 14.9
51 | 56 | 19.1 | 18.8 | 18.4 | 18.1 | 17.8 | 17.4 | 17.0 | 16.7 | 16.3 | 15.9 | 15.5 | 15.1 | 14.7
52 | 57 | 18.7 | 18.4 | 18.1 | 17.8 | 17.4 | 17.1 | 16.8 | 16.4 | 16.0 | 15.7 | 15.3 | 14.9 | 14.5
53 | 58 | 18.3 | 18.0 | 17.7 | 17.4 | 17.1 | 16.8 | 16.4 | 16.1 | 15.8 | 15.4 | 15.1 | 14.7 | 14.3
54 | 59 | 17.9 | 17.6 | 17.3 | 17.0 | 16.8 | 16.4 | 16.1 | 15.8 | 15.5 | 15.1 | 14.8 | 14.4 | 14.1
55 | 60 | 17.5 | 17.2 | 16.9 | 16.7 | 16.4 | 16.1 | 15.8 | 15.5 | 15.2 | 14.9 | 14.5 | 14.2 | 13.9
56 | 61 | 17.0 | 16.8 | 16.6 | 16.3 | 16.0 | 15.8 | 15.5 | 15.2 | 14.9 | 14.6 | 14.3 | 13.9 | 13.6
57 | 62 | 16.6 | 16.4 | 16.2 | 15.9 | 15.7 | 15.4 | 15.1 | 14.9 | 14.6 | 14.3 | 14.0 | 13.7 | 13.4
58 | 63 | 16.2 | 16.0 | 15.8 | 15.5 | 15.3 | 15.1 | 14.8 | 14.5 | 14.3 | 14.0 | 13.7 | 13.4 | 13.1
59 | 64 | 15.7 | 15.5 | 15.3 | 15.1 | 14.9 | 14.7 | 14.4 | 14.2 | 13.9 | 13.7 | 13.4 | 13.1 | 12.8
60 | 65 | 15.3 | 15.1 | 14.9 | 14.7 | 14.5 | 14.3 | 14.1 | 13.9 | 13.6 | 13.4 | 13.1 | 12.8 | 12.6
Male | Female | Ages
Male 61 | 62 | 63 | 64 | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73
Female 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 74 | 76 | 77 | 78
35 | 40 | 16.4 | 15.8 | 15.3 | 14.7 | 14.2 | 13.7 | 13.1 | 12.6 | 12.1 | 11.6 | 11.1 | 10.7 | 10.2
36 | 41 | 16.3 | 15.8 | 15.2 | 14.7 | 14.1 | 13.6 | 13.1 | 12.6 | 12.1 | 11.6 | 11.1 | 10.6 | 10.2
37 | 42 | 16.2 | 15.7 | 15.1 | 14.6 | 14.1 | 13.6 | 13.0 | 12.5 | 12.0 | 11.5 | 11.1 | 10.6 | 10.1
38 | 43 | 16.1 | 15.6 | 15.1 | 14.5 | 14.0 | 13.5 | 13.0 | 12.5 | 12.0 | 11.5 | 11.0 | 10.6 | 10.1
39 | 44 | 16.0 | 15.5 | 15.0 | 14.5 | 13.9 | 13.4 | 12.9 | 12.4 | 11.9 | 11.5 | 11.0 | 10.5 | 10.1
40 | 45 | 15.9 | 15.4 | 14.9 | 14.4 | 13.9 | 13.4 | 12.9 | 12.4 | 11.9 | 11.4 | 11.0 | 10.5 | 10.0
41 | 46 | 15.8 | 15.3 | 14.8 | 14.3 | 13.8 | 13.3 | 12.8 | 12.3 | 11.8 | 11.4 | 10.9 | 10.5 | 10.0
42 | 47 | 15.7 | 15.2 | 14.7 | 14.2 | 13.7 | 13.2 | 12.7 | 12.3 | 11.8 | 11.3 | 10.9 | 10.4 | 10.0
43 | 48 | 15.6 | 15.1 | 14.6 | 14.1 | 13.6 | 13.1 | 12.7 | 12.2 | 11.7 | 11.3 | 10.8 | 10.4 | 9.9
44 | 49 | 15.5 | 15.0 | 14.5 | 14.0 | 13.5 | 13.1 | 12.6 | 12.1 | 11.7 | 11.2 | 10.8 | 10.3 | 9.9
45 | 50 | 15.3 | 14.8 | 14.4 | 13.9 | 13.4 | 13.0 | 12.5 | 12.0 | 11.6 | 11.1 | 10.7 | 10.3 | 9.8
46 | 51 | 15.2 | 14.7 | 14.2 | 13.8 | 13.3 | 12.9 | 12.4 | 12.0 | 11.5 | 11.1 | 10.6 | 10.2 | 9.8
47 | 52 | 15.0 | 14.6 | 14.1 | 13.7 | 13.2 | 12.8 | 12.3 | 11.9 | 11.4 | 11.0 | 10.6 | 10.1 | 9.7
48 | 53 | 14.9 | 14.4 | 14.0 | 13.5 | 13.1 | 12.6 | 12.2 | 11.8 | 11.3 | 10.9 | 10.5 | 10.1 | 9.7
49 | 54 | 14.7 | 14.3 | 13.8 | 13.4 | 13.0 | 12.5 | 12.1 | 11.7 | 11.3 | 10.8 | 10.4 | 10.0 | 9.6
50 | 55 | 14.5 | 14.1 | 13.7 | 13.3 | 12.8 | 12.4 | 12.0 | 11.6 | 11.2 | 10.7 | 10.3 | 9.9 | 9.5
51 | 56 | 14.3 | 13.9 | 13.5 | 13.1 | 12.7 | 12.3 | 11.9 | 11.5 | 11.1 | 10.7 | 10.3 | 9.9 | 9.5
52 | 57 | 14.1 | 13.7 | 13.3 | 12.9 | 12.5 | 12.1 | 11.7 | 11.3 | 10.9 | 10.6 | 10.2 | 9.8 | 9.4
53 | 58 | 13.9 | 13.6 | 13.2 | 12.8 | 12.4 | 12.0 | 11.6 | 11.2 | 10.8 | 10.5 | 10.1 | 9.7 | 9.3
54 | 59 | 13.7 | 13.4 | 13.0 | 12.6 | 12.2 | 11.9 | 11.5 | 11.1 | 10.7 | 10.3 | 10.0 | 9.6 | 9.2
55 | 60 | 13.5 | 13.2 | 12.8 | 12.4 | 12.1 | 11.7 | 11.3 | 11.0 | 10.6 | 10.2 | 9.9 | 9.5 | 9.1
56 | 61 | 13.3 | 12.9 | 12.6 | 12.2 | 11.9 | 11.5 | 11.2 | 10.8 | 10.5 | 10.1 | 9.8 | 9.4 | 9.0
57 | 62 | 13.0 | 12.7 | 12.4 | 12.1 | 11.7 | 11.4 | 11.0 | 10.7 | 10.3 | 10.0 | 9.6 | 9.3 | 8.9
58 | 63 | 12.8 | 12.5 | 12.2 | 11.8 | 11.5 | 11.2 | 10.9 | 10.5 | 10.2 | 9.8 | 9.5 | 9.2 | 8.8
59 | 64 | 12.6 | 12.3 | 11.9 | 11.6 | 11.3 | 11.0 | 10.7 | 10.4 | 10.0 | 9.7 | 9.4 | 9.1 | 8.7
60 | 65 | 12.3 | 12.0 | 11.7 | 11.4 | 11.1 | 10.8 | 10.5 | 10.2 | 9.9 | 9.6 | 9.3 | 8.9 | 8.6
61 | 66 | 12.0 | 11.8 | 11.5 | 11.2 | 10.9 | 10.6 | 10.3 | 10.0 | 9.7 | 9.4 | 9.1 | 8.8 | 8.5
62 | 67 | 11.8 | 11.5 | 11.2 | 11.0 | 10.7 | 10.4 | 10.1 | 9.8 | 9.6 | 9.3 | 9.0 | 8.7 | 8.4
63 | 68 | 11.5 | 11.2 | 11.0 | 10.7 | 10.5 | 10.2 | 9.9 | 9.7 | 9.4 | 9.1 | 8.8 | 8.5 | 8.2
64 | 69 | 11.2 | 11.0 | 10.7 | 10.5 | 10.2 | 10.0 | 9.7 | 9.5 | 9.2 | 8.9 | 8.7 | 8.4 | 8.1
65 | 70 | 10.9 | 10.7 | 10.5 | 10.2 | 10.0 | 9.8 | 9.5 | 9.3 | 9.0 | 8.8 | 8.5 | 8.2 | 8.0
66 | 71 | 10.6 | 10.4 | 10.2 | 10.0 | 9.8 | 9.5 | 9.3 | 9.1 | 8.8 | 8.6 | 8.3 | 8.1 | 7.8
67 | 72 | 10.3 | 10.1 | 9.9 | 9.7 | 9.5 | 9.3 | 9.1 | 8.9 | 8.6 | 8.4 | 8.1 | 7.9 | 7.7
68 | 73 | 10.0 | 9.8 | 9.7 | 9.5 | 9.3 | 9.1 | 8.9 | 8.6 | 8.4 | 8.2 | 8.0 | 7.7 | 7.5
69 | 74 | 9.7 | 9.6 | 9.4 | 9.2 | 9.0 | 8.8 | 8.6 | 8.4 | 8.2 | 8.0 | 7.8 | 7.6 | 7.3
70 | 75 | 9.4 | 9.3 | 9.1 | 8.9 | 8.8 | 8.6 | 8.4 | 8.2 | 8.0 | 7.8 | 7.6 | 7.4 | 7.2
71 | 76 | 9.1 | 9.0 | 8.8 | 8.7 | 8.5 | 8.3 | 8.1 | 8.0 | 7.8 | 7.6 | 7.4 | 7.2 | 7.0
72 | 77 | 8.8 | 8.7 | 8.5 | 8.4 | 8.2 | 8.1 | 7.9 | 7.7 | 7.6 | 7.4 | 7.2 | 7.0 | 6.8
73 | 78 | 8.5 | 8.4 | 8.2 | 8.1 | 8.0 | 7.8 | 7.7 | 7.5 | 7.3 | 7.2 | 7.0 | 6.8 | 6.7
Male | Female | Ages
Male 74 | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86
Female 79 | 80 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 89 | 90 | 91
35 | 40 | 9.7 | 9.3 | 8.9 | 8.5 | 8.1 | 7.7 | 7.3 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.3
36 | 41 | 9.7 | 9.3 | 8.9 | 8.4 | 8.0 | 7.7 | 7.3 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.3
37 | 42 | 9.7 | 9.3 | 8.8 | 8.4 | 8.0 | 7.6 | 7.3 | 6.9 | 6.5 | 6.2 | 5.9 | 5.6 | 5.3
38 | 43 | 9.7 | 9.2 | 8.8 | 8.4 | 8.0 | 7.6 | 7.2 | 6.9 | 6.5 | 6.2 | 5.9 | 5.6 | 5.3
39 | 44 | 9.6 | 9.2 | 8.8 | 8.4 | 8.0 | 7.6 | 7.2 | 6.9 | 6.5 | 6.2 | 5.9 | 5.6 | 5.3
40 | 45 | 9.6 | 9.2 | 8.8 | 8.4 | 8.0 | 7.6 | 7.2 | 6.9 | 6.5 | 6.2 | 5.9 | 5.5 | 5.2
41 | 46 | 9.6 | 9.2 | 8.7 | 8.3 | 7.9 | 7.6 | 7.2 | 6.8 | 6.5 | 6.2 | 5.8 | 5.5 | 5.2
42 | 47 | 9.5 | 9.1 | 8.7 | 8.3 | 7.9 | 7.5 | 7.2 | 6.8 | 6.5 | 6.2 | 5.8 | 5.5 | 5.2
43 | 48 | 9.5 | 9.1 | 8.7 | 8.3 | 7.9 | 7.5 | 7.2 | 6.8 | 6.5 | 6.1 | 5.8 | 5.5 | 5.2
44 | 49 | 9.5 | 9.0 | 8.6 | 8.2 | 7.9 | 7.5 | 7.1 | 6.8 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2
45 | 50 | 9.4 | 9.0 | 8.6 | 8.2 | 7.8 | 7.5 | 7.1 | 6.8 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2
46 | 51 | 9.4 | 9.0 | 8.6 | 8.2 | 7.8 | 7.4 | 7.1 | 6.7 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2
47 | 52 | 9.3 | 8.9 | 8.5 | 8.1 | 7.8 | 7.4 | 7.1 | 6.7 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2
48 | 53 | 9.3 | 8.9 | 8.5 | 8.1 | 7.7 | 7.4 | 7.0 | 6.7 | 6.4 | 6.0 | 5.7 | 5.4 | 5.1
49 | 54 | 9.2 | 8.8 | 8.4 | 8.1 | 7.7 | 7.3 | 7.0 | 6.7 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1
50 | 55 | 9.1 | 8.8 | 8.4 | 8.0 | 7.7 | 7.3 | 7.0 | 6.6 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1
51 | 56 | 9.1 | 8.7 | 8.3 | 8.0 | 7.6 | 7.3 | 6.9 | 6.6 | 6.3 | 6.0 | 5.7 | 5.4 | 5.1
52 | 57 | 9.0 | 8.6 | 8.3 | 7.9 | 7.6 | 7.2 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.4 | 5.1
53 | 58 | 8.9 | 8.6 | 8.2 | 7.9 | 7.5 | 7.2 | 6.9 | 6.5 | 6.2 | 5.9 | 5.6 | 5.3 | 5.1
54 | 59 | 8.9 | 8.5 | 8.2 | 7.8 | 7.5 | 7.1 | 6.8 | 6.5 | 6.2 | 5.9 | 5.6 | 5.3 | 5.0
55 | 60 | 8.8 | 8.4 | 8.1 | 7.7 | 7.4 | 7.1 | 6.8 | 6.4 | 6.1 | 5.8 | 5.6 | 5.3 | 5.0
56 | 61 | 8.7 | 8.4 | 8.0 | 7.7 | 7.3 | 7.0 | 6.7 | 6.4 | 6.1 | 5.8 | 5.5 | 5.3 | 5.0
57 | 62 | 8.6 | 8.3 | 7.9 | 7.6 | 7.3 | 7.0 | 6.7 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2 | 5.0
58 | 63 | 8.5 | 8.2 | 7.9 | 7.5 | 7.2 | 6.9 | 6.6 | 6.3 | 6.0 | 5.7 | 5.5 | 5.2 | 4.9
59 | 64 | 8.4 | 8.1 | 7.8 | 7.5 | 7.1 | 6.8 | 6.5 | 6.3 | 6.0 | 5.7 | 5.4 | 5.2 | 4.9
60 | 65 | 8.3 | 8.0 | 7.7 | 7.4 | 7.1 | 6.8 | 6.5 | 6.2 | 5.9 | 5.6 | 5.4 | 5.1 | 4.9
61 | 66 | 8.2 | 7.9 | 7.6 | 7.3 | 7.0 | 6.7 | 6.4 | 6.1 | 5.9 | 5.6 | 5.3 | 5.1 | 4.8
62 | 67 | 8.1 | 7.8 | 7.5 | 7.2 | 6.9 | 6.6 | 6.4 | 6.1 | 5.8 | 5.5 | 5.3 | 5.0 | 4.8
63 | 68 | 8.0 | 7.7 | 7.4 | 7.1 | 6.8 | 6.6 | 6.3 | 6.0 | 5.7 | 5.5 | 5.2 | 5.0 | 4.7
64 | 69 | 7.8 | 7.6 | 7.3 | 7.0 | 6.7 | 6.5 | 6.2 | 5.9 | 5.7 | 5.4 | 5.2 | 4.9 | 4.7
65 | 70 | 7.7 | 7.4 | 7.2 | 6.9 | 6.6 | 6.4 | 6.1 | 5.9 | 5.6 | 5.4 | 5.1 | 4.9 | 4.7
66 | 71 | 7.6 | 7.3 | 7.1 | 6.8 | 6.5 | 6.3 | 6.0 | 5.8 | 5.5 | 5.3 | 5.1 | 4.8 | 4.6
67 | 72 | 7.4 | 7.2 | 6.9 | 6.7 | 6.4 | 6.2 | 6.0 | 5.7 | 5.5 | 5.2 | 5.0 | 4.8 | 4.6
68 | 73 | 7.3 | 7.0 | 6.8 | 6.6 | 6.3 | 6.1 | 5.9 | 5.6 | 5.4 | 5.2 | 4.9 | 4.7 | 4.5
69 | 74 | 7.1 | 6.9 | 6.7 | 6.4 | 6.2 | 6.0 | 5.8 | 5.5 | 5.3 | 5.1 | 4.9 | 4.7 | 4.5
70 | 75 | 7.0 | 6.8 | 6.5 | 6.3 | 6.1 | 5.9 | 5.7 | 5.4 | 5.2 | 5.0 | 4.8 | 4.6 | 4.4
71 | 76 | 6.8 | 6.6 | 6.4 | 6.2 | 6.0 | 5.8 | 5.6 | 5.3 | 5.1 | 4.9 | 4.7 | 4.5 | 4.3
72 | 77 | 6.6 | 6.4 | 6.3 | 6.1 | 5.9 | 5.7 | 5.5 | 5.3 | 5.0 | 4.9 | 4.7 | 4.5 | 4.3
73 | 78 | 6.5 | 6.3 | 6.1 | 5.9 | 5.7 | 5.5 | 5.3 | 5.1 | 5.0 | 4.8 | 4.6 | 4.4 | 4.2
74 | 79 | 6.3 | 6.1 | 6.0 | 5.8 | 5.6 | 5.4 | 5.2 | 5.0 | 4.9 | 4.7 | 4.5 | 4.3 | 4.1
75 | 80 | 6.1 | 6.0 | 5.8 | 5.6 | 5.5 | 5.3 | 5.1 | 4.9 | 4.8 | 4.6 | 4.4 | 4.2 | 4.1
76 | 81 | 6.0 | 5.8 | 5.6 | 5.5 | 5.3 | 5.2 | 5.0 | 4.8 | 4.7 | 4.5 | 4.3 | 4.1 | 4.0
77 | 82 | 5.8 | 5.6 | 5.5 | 5.3 | 5.2 | 5.0 | 4.9 | 4.7 | 4.5 | 4.4 | 4.2 | 4.1 | 3.9
78 | 83 | 5.6 | 5.5 | 5.3 | 5.2 | 5.0 | 4.9 | 4.7 | 4.6 | 4.4 | 4.3 | 4.1 | 4.0 | 3.8
79 | 84 | 5.4 | 5.3 | 5.2 | 5.0 | 4.9 | 4.7 | 4.6 | 4.5 | 4.3 | 4.2 | 4.0 | 3.9 | 3.7
80 | 85 | 5.2 | 5.1 | 5.0 | 4.9 | 4.7 | 4.6 | 4.5 | 4.3 | 4.2 | 4.1 | 3.9 | 3.8 | 3.6
81 | 86 | 5.0 | 4.9 | 4.8 | 4.7 | 4.6 | 4.5 | 4.3 | 4.2 | 4.1 | 3.9 | 3.8 | 3.7 | 3.6
82 | 87 | 4.9 | 4.8 | 4.7 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0 | 3.8 | 3.7 | 3.6 | 3.5
83 | 88 | 4.7 | 4.6 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 3.9 | 3.8 | 3.7 | 3.6 | 3.5 | 3.4
84 | 89 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0 | 3.9 | 3.8 | 3.7 | 3.6 | 3.5 | 3.4 | 3.3
85 | 90 | 4.3 | 4.2 | 4.1 | 4.1 | 4.0 | 3.9 | 3.8 | 3.7 | 3.6 | 3.5 | 3.4 | 3.3 | 3.2
86 | 91 | 4.1 | 4.1 | 4.0 | 3.9 | 3.8 | 3.7 | 3.6 | 3.6 | 3.5 | 3.4 | 3.3 | 3.2 | 3.1
Male | Female | Ages
Male 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97
Female 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102
35 | 40 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7
36 | 41 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7
37 | 42 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7
38 | 43 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.8 | 2.6
39 | 44 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.0 | 2.8 | 2.6
40 | 45 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.0 | 2.8 | 2.6
41 | 46 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.2 | 3.0 | 2.8 | 2.6
42 | 47 | 4.9 | 4.7 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.2 | 3.0 | 2.8 | 2.6
43 | 48 | 4.9 | 4.7 | 4.4 | 4.1 | 3.9 | 3.7 | 3.5 | 3.2 | 3.0 | 2.8 | 2.6
44 | 49 | 4.9 | 4.7 | 4.4 | 4.1 | 3.9 | 3.7 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
45 | 50 | 4.9 | 4.6 | 4.4 | 4.1 | 3.9 | 3.7 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
46 | 51 | 4.9 | 4.6 | 4.4 | 4.1 | 3.9 | 3.7 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
47 | 52 | 4.9 | 4.6 | 4.4 | 4.1 | 3.9 | 3.7 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
48 | 53 | 4.9 | 4.6 | 4.4 | 4.1 | 3.9 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
49 | 54 | 4.9 | 4.6 | 4.3 | 4.1 | 3.9 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
50 | 55 | 4.8 | 4.6 | 4.3 | 4.1 | 3.9 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
51 | 56 | 4.8 | 4.6 | 4.3 | 4.1 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
52 | 57 | 4.8 | 4.5 | 4.3 | 4.1 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
53 | 58 | 4.8 | 4.5 | 4.3 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
54 | 59 | 4.8 | 4.5 | 4.3 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
55 | 60 | 4.7 | 4.5 | 4.3 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6
56 | 61 | 4.7 | 4.5 | 4.2 | 4.0 | 3.8 | 3.6 | 3.3 | 3.1 | 2.9 | 2.8 | 2.6
57 | 62 | 4.7 | 4.5 | 4.2 | 4.0 | 3.8 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.6
58 | 63 | 4.7 | 4.4 | 4.2 | 4.0 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5
59 | 64 | 4.6 | 4.4 | 4.2 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5
Male | Female | Ages
Male 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
35 | 40 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
36 | 41 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.8 | 0.7
37 | 42 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
38 | 43 | 2.5 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
39 | 44 | 2.4 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
40 | 45 | 2.4 | 2.2 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
41 | 46 | 2.4 | 2.2 | 2.1 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
42 | 47 | 2.4 | 2.2 | 2.0 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
43 | 48 | 2.4 | 2.2 | 2.0 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
44 | 49 | 2.4 | 2.2 | 2.0 | 1.9 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
45 | 50 | 2.4 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
46 | 51 | 2.4 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
47 | 52 | 2.4 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
48 | 53 | 2.4 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
49 | 54 | 2.4 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
50 | 55 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
51 | 56 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
52 | 57 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
53 | 58 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
54 | 59 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
55 | 60 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
56 | 61 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
57 | 62 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 0.9 | 0.8 | 0.7
58 | 63 | 2.4 | 2.2 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 0.9 | 0.8 | 0.7
59 | 64 | 2.3 | 2.2 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 0.9 | 0.8 | 0.7
Male | Female | Ages
Male 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96 | 97
Female 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102
60 | 65 | 4.6 | 4.4 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5
61 | 66 | 4.6 | 4.3 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5
62 | 67 | 4.5 | 4.3 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5
63 | 68 | 4.5 | 4.3 | 4.1 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.9 | 2.7 | 2.5
64 | 69 | 4.5 | 4.2 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.7 | 2.5
65 | 70 | 4.4 | 4.2 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6 | 2.5
66 | 71 | 4.4 | 4.2 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.6 | 2.4
67 | 72 | 4.3 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 3.0 | 2.8 | 2.6 | 2.4
68 | 73 | 4.3 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.8 | 2.6 | 2.4
69 | 74 | 4.2 | 4.0 | 3.8 | 3.6 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.6 | 2.4
70 | 75 | 4.2 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.1 | 2.9 | 2.7 | 2.5 | 2.4
71 | 76 | 4.1 | 3.9 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.9 | 2.7 | 2.5 | 2.3
72 | 77 | 4.1 | 3.9 | 3.7 | 3.5 | 3.3 | 3.2 | 3.0 | 2.8 | 2.7 | 2.5 | 2.3
73 | 78 | 4.0 | 3.8 | 3.7 | 3.5 | 3.3 | 3.1 | 3.0 | 2.8 | 2.6 | 2.5 | 2.3
74 | 79 | 3.9 | 3.8 | 3.6 | 3.4 | 3.3 | 3.1 | 2.9 | 2.8 | 2.6 | 2.4 | 2.3
75 | 80 | 3.9 | 3.7 | 3.5 | 3.4 | 3.2 | 3.0 | 2.9 | 2.7 | 2.6 | 2.4 | 2.2
76 | 81 | 3.8 | 3.6 | 3.5 | 3.3 | 3.2 | 3.0 | 2.8 | 2.7 | 2.5 | 2.4 | 2.2
77 | 82 | 3.7 | 3.6 | 3.4 | 3.3 | 3.1 | 3.0 | 2.8 | 2.6 | 2.5 | 2.3 | 2.2
78 | 83 | 3.7 | 3.5 | 3.4 | 3.2 | 3.1 | 2.9 | 2.7 | 2.6 | 2.4 | 2.3 | 2.1
79 | 84 | 3.6 | 3.4 | 3.3 | 3.1 | 3.0 | 2.8 | 2.7 | 2.5 | 2.4 | 2.2 | 2.1
80 | 85 | 3.5 | 3.4 | 3.2 | 3.1 | 2.9 | 2.8 | 2.6 | 2.5 | 2.3 | 2.2 | 2.0
81 | 86 | 3.4 | 3.3 | 3.1 | 3.0 | 2.9 | 2.7 | 2.6 | 2.4 | 2.3 | 2.1 | 2.0
82 | 87 | 3.3 | 3.2 | 3.1 | 2.9 | 2.8 | 2.7 | 2.5 | 2.4 | 2.2 | 2.1 | 2.0
83 | 88 | 3.2 | 3.1 | 3.0 | 2.9 | 2.7 | 2.6 | 2.5 | 2.3 | 2.2 | 2.0 | 1.9
84 | 89 | 3.1 | 3.0 | 2.9 | 2.8 | 2.7 | 2.5 | 2.4 | 2.3 | 2.1 | 2.0 | 1.9
Male | Female | Ages
Male 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106 | 107 | 108
Female 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113
60 | 65 | 2.3 | 2.1 | 2.0 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 0.9 | 0.8 | 0.7
61 | 66 | 2.3 | 2.1 | 2.0 | 1.8 | 1.6 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
62 | 67 | 2.3 | 2.1 | 1.9 | 1.8 | 1.6 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
63 | 68 | 2.3 | 2.1 | 1.9 | 1.7 | 1.6 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
64 | 69 | 2.3 | 2.1 | 1.9 | 1.7 | 1.6 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
65 | 70 | 2.3 | 2.1 | 1.9 | 1.7 | 1.6 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
66 | 71 | 2.3 | 2.1 | 1.9 | 1.7 | 1.5 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
67 | 72 | 2.2 | 2.1 | 1.9 | 1.7 | 1.5 | 1.4 | 1.2 | 1.0 | 0.9 | 0.7 | 0.7
68 | 73 | 2.2 | 2.0 | 1.9 | 1.7 | 1.5 | 1.4 | 1.2 | 1.0 | 0.9 | 0.7 | 0.7
69 | 74 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.9 | 0.7 | 0.6
70 | 75 | 2.2 | 2.0 | 1.8 | 1.7 | 1.5 | 1.3 | 1.2 | 1.0 | 0.9 | 0.7 | 0.6
71 | 76 | 2.2 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.2 | 1.0 | 0.9 | 0.7 | 0.6
72 | 77 | 2.1 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7 | 0.6
73 | 78 | 2.1 | 1.9 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7 | 0.6
74 | 79 | 2.1 | 1.9 | 1.7 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7 | 0.6
75 | 80 | 2.1 | 1.9 | 1.7 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7
76 | 81 | 2.0 | 1.9 | 1.7 | 1.5 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
77 | 82 | 2.0 | 1.8 | 1.7 | 1.5 | 1.4 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7
78 | 83 | 2.0 | 1.8 | 1.6 | 1.5 | 1.3 | 1.2 | 1.0 | 0.9 | 0.8 | 0.7
79 | 84 | 1.9 | 1.8 | 1.6 | 1.5 | 1.3 | 1.2 | 1.0 | 0.9 | 0.8 | 0.7
80 | 85 | 1.9 | 1.7 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | 0.9 | 0.7 | 0.7
81 | 86 | 1.8 | 1.7 | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 | 0.8 | 0.7 | 0.6
82 | 87 | 1.8 | 1.7 | 1.5 | 1.4 | 1.2 | 1.1 | 1.0 | 0.8 | 0.7 | 0.6
83 | 88 | 1.8 | 1.6 | 1.5 | 1.3 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7 | 0.6
84 | 89 | 1.7 | 1.6 | 1.4 | 1.3 | 1.2 | 1.0 | 0.9 | 0.8 | 0.7
Male | Female | Ages
Male 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94 | 95 | 96
Female 92 | 93 | 94 | 95 | 96 | 97 | 98 | 99 | 100 | 101
85 | 90 | 3.1 | 2.9 | 2.8 | 2.7 | 2.6 | 2.5 | 2.3 | 2.2 | 2.1 | 1.9
86 | 91 | 3.0 | 2.8 | 2.7 | 2.6 | 2.5 | 2.4 | 2.3 | 2.1 | 2.0 | 1.9
87 | 92 | 2.9 | 2.8 | 2.6 | 2.5 | 2.4 | 2.3 | 2.2 | 2.1 | 1.9 | 1.8
88 | 93 | 2.8 | 2.7 | 2.6 | 2.4 | 2.3 | 2.2 | 2.1 | 2.0 | 1.9 | 1.7
89 | 94 | 2.6 | 2.6 | 2.5 | 2.4 | 2.2 | 2.1 | 2.0 | 1.9 | 1.8 | 1.7
90 | 95 | 2.5 | 2.4 | 2.4 | 2.3 | 2.2 | 2.0 | 1.9 | 1.8 | 1.7 | 1.6
91 | 96 | 2.4 | 2.3 | 2.2 | 2.2 | 2.1 | 2.0 | 1.9 | 1.7 | 1.6 | 1.5
92 | 97 | 2.3 | 2.2 | 2.1 | 2.0 | 2.0 | 1.9 | 1.8 | 1.7 | 1.6 | 1.5
93 | 98 | 2.2 | 2.1 | 2.0 | 1.9 | 1.9 | 1.8 | 1.7 | 1.6 | 1.5 | 1.4
94 | 99 | 2.1 | 2.0 | 1.9 | 1.8 | 1.7 | 1.7 | 1.6 | 1.5 | 1.4 | 1.3
95 | 100 | 1.9 | 1.9 | 1.8 | 1.7 | 1.6 | 1.6 | 1.5 | 1.4 | 1.3 | 1.2
96 | 101 | 1.8 | 1.7 | 1.7 | 1.6 | 1.5 | 1.5 | 1.4 | 1.3 | 1.2 | 1.1
97 | 102 | 1.7 | 1.6 | 1.6 | 1.5 | 1.4 | 1.4 | 1.3 | 1.2 | 1.1 | 1.1
98 | 103 | 1.6 | 1.5 | 1.4 | 1.4 | 1.3 | 1.3 | 1.2 | 1.1 | 1.0 | 1.0
99 | 104 | 1.4 | 1.4 | 1.3 | 1.3 | 1.2 | 1.1 | 1.1 | 1.0 | 1.0 | 0.9
Male | Female | Ages
Male 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104 | 105 | 106
Female 102 | 103 | 104 | 105 | 106 | 107 | 108 | 109 | 110 | 111
85 | 90 | 1.8 | 1.7 | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7
86 | 91 | 1.7 | 1.6 | 1.5 | 1.3 | 1.2 | 1.1 | 1.0 | 0.8 | 0.7 | 0.7
87 | 92 | 1.7 | 1.6 | 1.4 | 1.3 | 1.2 | 1.1 | 0.9 | 0.8 | 0.7 | 0.6
88 | 93 | 1.6 | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.6
89 | 94 | 1.6 | 1.4 | 1.3 | 1.2 | 1.1 | 1.0 | 0.9 | 0.7 | 0.7
90 | 95 | 1.5 | 1.4 | 1.3 | 1.2 | 1.0 | 0.9 | 0.8 | 0.7 | 0.6
91 | 96 | 1.4 | 1.3 | 1.2 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.6
92 | 97 | 1.4 | 1.3 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.7
93 | 98 | 1.3 | 1.2 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.6
94 | 99 | 1.2 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.7
95 | 100 | 1.1 | 1.0 | 1.0 | 0.9 | 0.8 | 0.7 | 0.6
96 | 101 | 1.1 | 1.0 | 0.9 | 0.8 | 0.7 | 0.7
97 | 102 | 1.0 | 0.9 | 0.8 | 0.7 | 0.7 | 0.6
98 | 103 | 0.9 | 0.8 | 0.7 | 0.7 | 0.6
99 | 104 | 0.8 | 0.7 | 0.7 | 0.6
Table III—Percent Value of Refund Feature
Ages | Duration of guaranteed amount—[Years]
Male | Female | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13
6 | 11 | 1 | 1 | 1 | 1 | 1
7 | 12 | 1 | 1 | 1 | 1 | 1
8 | 13 | 1 | 1 | 1 | 1 | 1 | 1
9 | 14 | 1 | 1 | 1 | 1 | 1 | 1
10 | 15 | 1 | 1 | 1 | 1 | 1 | 1
11 | 16 | 1 | 1 | 1 | 1 | 1 | 1
12 | 17 | 1 | 1 | 1 | 1 | 1 | 1
13 | 18 | 1 | 1 | 1 | 1 | 1 | 1
14 | 19 | 1 | 1 | 1 | 1 | 1 | 1
15 | 20 | 1 | 1 | 1 | 1 | 1 | 1
16 | 21 | 1 | 1 | 1 | 1 | 1 | 1
17 | 22 | 1 | 1 | 1 | 1 | 1 | 1
18 | 23 | 1 | 1 | 1 | 1 | 1 | 1
19 | 24 | 1 | 1 | 1 | 1 | 1 | 1
20 | 25 | 1 | 1 | 1 | 1 | 1 | 1
21 | 26 | 1 | 1 | 1 | 1 | 1 | 1
22 | 27 | 1 | 1 | 1 | 1 | 1 | 1 | 1
23 | 28 | 1 | 1 | 1 | 1 | 1 | 1 | 1
24 | 29 | 1 | 1 | 1 | 1 | 1 | 1 | 1
25 | 30 | 1 | 1 | 1 | 1 | 1 | 1 | 1
26 | 31 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
27 | 32 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
28 | 33 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
29 | 34 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2
30 | 35 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2
31 | 36 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2
32 | 37 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
33 | 38 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
34 | 39 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
35 | 40 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
36 | 41 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 3
37 | 42 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 3 | 3
38 | 43 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 3 | 3
39 | 44 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 3 | 3 | 3
40 | 45 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 3 | 4
41 | 46 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 3 | 4
42 | 47 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 3 | 4 | 4
43 | 48 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 4 | 4 | 4
44 | 49 | 1 | 1 | 1 | 1 | 2 | 2 | 3 | 3 | 3 | 4 | 4 | 5
45 | 50 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 4 | 4 | 5 | 5
46 | 51 | 1 | 1 | 1 | 2 | 2 | 3 | 3 | 3 | 4 | 4 | 5 | 5
47 | 52 | 1 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 4 | 5 | 5 | 6
48 | 53 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 4 | 5 | 5 | 6 | 6
49 | 54 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 4 | 5 | 5 | 6 | 7
50 | 55 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 5 | 5 | 6 | 7 | 7
51 | 56 | 1 | 1 | 2 | 3 | 3 | 4 | 4 | 5 | 6 | 6 | 7 | 8
52 | 57 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 5 | 5 | 6 | 7 | 8 | 8
53 | 58 | 1 | 1 | 2 | 2 | 3 | 4 | 4 | 5 | 6 | 7 | 7 | 8 | 9
54 | 59 | 1 | 1 | 2 | 2 | 3 | 4 | 5 | 5 | 6 | 7 | 8 | 9 | 10
55 | 60 | 1 | 1 | 2 | 3 | 3 | 4 | 5 | 6 | 7 | 8 | 8 | 9 | 10
56 | 61 | 1 | 1 | 2 | 3 | 4 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11
57 | 62 | 1 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12
58 | 63 | 1 | 2 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 12 | 13
59 | 64 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 14
60 | 65 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 10 | 11 | 12 | 13 | 15
61 | 66 | 1 | 2 | 3 | 4 | 5 | 6 | 8 | 9 | 10 | 12 | 13 | 14 | 16
62 | 67 | 1 | 2 | 3 | 4 | 6 | 7 | 8 | 10 | 11 | 12 | 14 | 15 | 17
63 | 68 | 1 | 2 | 4 | 5 | 6 | 7 | 9 | 10 | 12 | 13 | 15 | 16 | 18
64 | 69 | 1 | 3 | 4 | 5 | 7 | 8 | 9 | 11 | 13 | 14 | 16 | 17 | 19
65 | 70 | 1 | 3 | 4 | 6 | 7 | 9 | 10 | 12 | 13 | 15 | 17 | 19 | 20
66 | 71 | 1 | 3 | 4 | 6 | 8 | 9 | 11 | 13 | 14 | 16 | 18 | 20 | 22
67 | 72 | 2 | 3 | 5 | 6 | 8 | 10 | 12 | 14 | 15 | 17 | 19 | 21 | 23
68 | 73 | 2 | 3 | 5 | 7 | 9 | 11 | 13 | 14 | 16 | 18 | 21 | 23 | 25
69 | 74 | 2 | 4 | 6 | 7 | 9 | 11 | 13 | 16 | 18 | 20 | 22 | 24 | 26
70 | 75 | 2 | 4 | 6 | 8 | 10 | 12 | 14 | 17 | 19 | 21 | 23 | 26 | 28
71 | 76 | 2 | 4 | 6 | 9 | 11 | 13 | 15 | 18 | 20 | 22 | 25 | 27 | 29
72 | 77 | 2 | 5 | 7 | 9 | 12 | 14 | 16 | 19 | 21 | 24 | 26 | 29 | 31
73 | 78 | 2 | 5 | 7 | 10 | 12 | 15 | 18 | 20 | 23 | 25 | 28 | 30 | 33
74 | 79 | 3 | 5 | 8 | 11 | 13 | 16 | 19 | 22 | 24 | 27 | 30 | 32 | 35
75 | 80 | 3 | 6 | 8 | 11 | 14 | 17 | 20 | 23 | 26 | 29 | 31 | 34 | 37
76 | 81 | 3 | 6 | 9 | 12 | 15 | 18 | 21 | 24 | 27 | 30 | 33 | 36 | 39
77 | 82 | 3 | 7 | 10 | 13 | 16 | 20 | 23 | 26 | 29 | 32 | 35 | 38 | 41
78 | 83 | 4 | 7 | 11 | 14 | 17 | 21 | 24 | 28 | 31 | 34 | 37 | 40 | 43
79 | 84 | 4 | 8 | 11 | 15 | 19 | 22 | 26 | 29 | 33 | 36 | 39 | 42 | 45
80 | 85 | 4 | 8 | 12 | 16 | 20 | 24 | 27 | 31 | 34 | 38 | 41 | 44 | 47
81 | 86 | 4 | 9 | 13 | 17 | 21 | 25 | 29 | 33 | 36 | 40 | 43 | 46 | 49
82 | 87 | 5 | 9 | 14 | 18 | 23 | 27 | 31 | 35 | 38 | 42 | 45 | 48 | 51
83 | 88 | 5 | 10 | 15 | 19 | 24 | 28 | 33 | 37 | 40 | 44 | 47 | 50 | 53
84 | 89 | 5 | 11 | 16 | 21 | 26 | 30 | 34 | 38 | 42 | 46 | 49 | 52 | 55
85 | 90 | 6 | 11 | 17 | 22 | 27 | 32 | 36 | 41 | 44 | 48 | 51 | 55 | 57
Ages | Duration of guaranteed amount—[Years]
Male | Female | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26
6 | 11 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
7 | 12 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
8 | 13 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
9 | 14 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
10 | 15 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
11 | 16 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
12 | 17 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
13 | 18 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
14 | 19 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
15 | 20 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
16 | 21 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2
17 | 22 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2
18 | 23 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2
19 | 24 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2
20 | 25 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3
21 | 26 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3
22 | 27 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
23 | 28 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
24 | 29 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
25 | 30 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3
26 | 31 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4
27 | 32 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4
28 | 33 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4
29 | 34 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5
30 | 35 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5
31 | 36 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5
32 | 37 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6
33 | 38 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6
34 | 39 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7
35 | 40 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7
36 | 41 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8
37 | 42 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8
38 | 43 | 3 | 4 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8 | 9
39 | 44 | 4 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8 | 9 | 9
40 | 45 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8 | 9 | 9 | 10
41 | 46 | 4 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8 | 9 | 9 | 10 | 11
42 | 47 | 5 | 5 | 5 | 6 | 6 | 7 | 8 | 8 | 9 | 9 | 10 | 11 | 12
43 | 48 | 5 | 6 | 6 | 7 | 8 | 8 | 9 | 9 | 10 | 11 | 12 | 12
44 | 49 | 5 | 6 | 6 | 7 | 7 | 8 | 9 | 9 | 10 | 11 | 12 | 12 | 13
45 | 50 | 6 | 6 | 7 | 7 | 8 | 9 | 9 | 10 | 11 | 12 | 12 | 13 | 14
46 | 51 | 6 | 7 | 7 | 8 | 9 | 9 | 10 | 11 | 12 | 12 | 13 | 14 | 15
47 | 52 | 7 | 7 | 8 | 9 | 9 | 10 | 11 | 12 | 12 | 13 | 14 | 15 | 16
48 | 53 | 7 | 8 | 8 | 9 | 10 | 11 | 12 | 12 | 13 | 14 | 15 | 16 | 17
49 | 54 | 8 | 8 | 9 | 10 | 11 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18
50 | 55 | 8 | 9 | 10 | 11 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 20
51 | 56 | 9 | 10 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 20 | 21
52 | 57 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 20 | 21 | 22
53 | 58 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 19 | 20 | 21 | 22 | 24
54 | 59 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 20 | 21 | 22 | 24 | 25
55 | 60 | 11 | 13 | 14 | 15 | 16 | 17 | 18 | 20 | 21 | 22 | 24 | 25 | 26
56 | 61 | 12 | 13 | 15 | 16 | 17 | 18 | 20 | 21 | 22 | 24 | 25 | 27 | 28
57 | 62 | 13 | 14 | 16 | 17 | 18 | 20 | 21 | 22 | 24 | 25 | 27 | 28 | 30
58 | 63 | 14 | 15 | 17 | 18 | 19 | 21 | 22 | 24 | 25 | 27 | 28 | 30 | 31
59 | 64 | 15 | 16 | 18 | 19 | 21 | 22 | 24 | 25 | 27 | 28 | 30 | 31 | 33
60 | 65 | 16 | 18 | 19 | 20 | 22 | 24 | 25 | 27 | 28 | 30 | 32 | 33 | 35
61 | 66 | 17 | 19 | 20 | 22 | 23 | 25 | 27 | 28 | 30 | 32 | 33 | 35 | 37
62 | 67 | 18 | 20 | 22 | 23 | 25 | 27 | 28 | 30 | 32 | 33 | 35 | 37 | 38
63 | 68 | 20 | 21 | 23 | 25 | 26 | 28 | 30 | 32 | 33 | 35 | 37 | 39 | 40
64 | 69 | 21 | 23 | 24 | 26 | 28 | 30 | 32 | 33 | 35 | 37 | 39 | 41 | 42
65 | 70 | 22 | 24 | 26 | 28 | 30 | 32 | 33 | 35 | 37 | 39 | 41 | 42 | 44
66 | 71 | 24 | 26 | 28 | 29 | 31 | 33 | 35 | 37 | 39 | 41 | 43 | 44 | 46
67 | 72 | 25 | 27 | 29 | 31 | 33 | 35 | 37 | 39 | 41 | 43 | 45 | 46 | 48
68 | 73 | 27 | 29 | 31 | 33 | 35 | 37 | 39 | 41 | 43 | 45 | 47 | 48 | 50
69 | 74 | 28 | 30 | 33 | 35 | 37 | 39 | 41 | 43 | 45 | 47 | 48 | 50 | 52
70 | 75 | 30 | 32 | 34 | 37 | 39 | 41 | 43 | 45 | 47 | 49 | 50 | 52 | 54
71 | 76 | 32 | 34 | 36 | 39 | 41 | 43 | 45 | 47 | 49 | 51 | 52 | 54 | 56
72 | 77 | 34 | 36 | 38 | 41 | 43 | 45 | 47 | 49 | 51 | 53 | 54 | 56 | 58
73 | 78 | 35 | 38 | 40 | 43 | 45 | 47 | 49 | 51 | 53 | 55 | 56 | 58 | 59
74 | 79 | 37 | 40 | 42 | 45 | 47 | 49 | 51 | 53 | 55 | 57 | 58 | 60 | 61
75 | 80 | 39 | 42 | 44 | 47 | 49 | 51 | 53 | 55 | 57 | 58 | 60 | 62 | 63
76 | 81 | 41 | 44 | 46 | 49 | 51 | 53 | 55 | 57 | 59 | 60 | 62 | 63 | 65
77 | 82 | 43 | 46 | 48 | 51 | 53 | 55 | 57 | 59 | 61 | 62 | 64 | 65 | 66
78 | 83 | 45 | 48 | 50 | 53 | 55 | 57 | 59 | 61 | 62 | 64 | 65 | 67 | 68
79 | 84 | 48 | 50 | 53 | 55 | 57 | 59 | 61 | 63 | 64 | 66 | 67 | 68 | 70
80 | 85 | 50 | 52 | 55 | 57 | 59 | 61 | 63 | 64 | 66 | 67 | 69 | 70 | 71
81 | 86 | 52 | 54 | 57 | 59 | 61 | 63 | 65 | 66 | 68 | 69 | 70 | 72 | 73
82 | 87 | 54 | 56 | 59 | 61 | 63 | 65 | 66 | 68 | 69 | 71 | 72 | 73 | 74
83 | 88 | 56 | 58 | 61 | 63 | 65 | 66 | 68 | 70 | 71 | 72 | 73 | 74 | 75
84 | 89 | 58 | 60 | 63 | 65 | 67 | 68 | 70 | 71 | 73 | 74 | 75 | 76 | 77
85 | 90 | 60 | 62 | 65 | 67 | 68 | 70 | 71 | 73 | 74 | 75 | 76 | 77
Ages | Duration of guaranteed amount—[Years]
Male | Female | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34 | 35
6 | 11 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2
7 | 12 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3
8 | 13 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3
9 | 14 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3
10 | 15 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
11 | 16 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
12 | 17 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
13 | 18 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
14 | 19 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3
15 | 20 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 3
16 | 21 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 3 | 4
17 | 22 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4
18 | 23 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4
19 | 24 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 4
20 | 25 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 4 | 5
21 | 26 | 3 | 3 | 3 | 4 | 4 | 4 | 4 | 5 | 5
22 | 27 | 3 | 3 | 4 | 4 | 4 | 4 | 5 | 5 | 5
23 | 28 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 5
24 | 29 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 5 | 6
25 | 30 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 6
26 | 31 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 6 | 7
27 | 32 | 4 | 5 | 5 | 5 | 6 | 6 | 6 | 7 | 7
28 | 33 | 5 | 5 | 5 | 6 | 6 | 6 | 7 | 7 | 8
29 | 34 | 5 | 5 | 6 | 6 | 6 | 7 | 7 | 8 | 8
30 | 35 | 5 | 6 | 6 | 6 | 7 | 7 | 8 | 8 | 9
31 | 36 | 6 | 6 | 6 | 7 | 7 | 8 | 8 | 9 | 9
32 | 37 | 6 | 7 | 7 | 7 | 8 | 8 | 9 | 10 | 10
33 | 38 | 7 | 7 | 7 | 8 | 8 | 9 | 10 | 10 | 11
34 | 39 | 7 | 8 | 8 | 9 | 9 | 10 | 10 | 11 | 12
35 | 40 | 8 | 8 | 9 | 9 | 10 | 10 | 11 | 12 | 12
36 | 41 | 8 | 9 | 9 | 10 | 10 | 11 | 12 | 13 | 13
37 | 42 | 9 | 9 | 10 | 11 | 11 | 12 | 13 | 13 | 14
38 | 43 | 9 | 10 | 11 | 11 | 12 | 13 | 13 | 14 | 15
39 | 44 | 10 | 11 | 11 | 12 | 13 | 14 | 14 | 15 | 16
40 | 45 | 11 | 11 | 12 | 13 | 14 | 15 | 15 | 16 | 17
41 | 46 | 11 | 12 | 13 | 14 | 15 | 16 | 16 | 17 | 18
42 | 47 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 18 | 19
43 | 48 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21
44 | 49 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22
45 | 50 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23
46 | 51 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 24 | 25
47 | 52 | 17 | 18 | 19 | 20 | 21 | 23 | 24 | 25 | 26
48 | 53 | 18 | 19 | 20 | 22 | 23 | 24 | 25 | 26 | 28
49 | 54 | 19 | 21 | 22 | 23 | 24 | 25 | 27 | 28 | 29
50 | 55 | 21 | 22 | 23 | 24 | 26 | 27 | 28 | 29 | 31
51 | 56 | 22 | 23 | 25 | 26 | 27 | 28 | 30 | 31 | 32
52 | 57 | 23 | 25 | 26 | 27 | 29 | 30 | 31 | 33 | 34
53 | 58 | 25 | 26 | 28 | 29 | 30 | 32 | 33 | 34 | 36
54 | 59 | 26 | 28 | 29 | 31 | 32 | 33 | 35 | 36 | 38
55 | 60 | 28 | 29 | 31 | 32 | 34 | 35 | 36 | 38 | 39
56 | 61 | 29 | 31 | 32 | 34 | 35 | 37 | 38 | 40 | 41
57 | 62 | 31 | 33 | 34 | 36 | 37 | 39 | 40 | 41 | 43
58 | 63 | 33 | 34 | 36 | 37 | 39 | 40 | 42 | 43 | 45
59 | 64 | 35 | 36 | 38 | 39 | 41 | 42 | 44 | 45 | 47
60 | 65 | 36 | 38 | 40 | 41 | 43 | 44 | 46 | 47 | 48
61 | 66 | 38 | 40 | 41 | 43 | 44 | 46 | 47 | 49 | 50
62 | 67 | 40 | 42 | 43 | 45 | 46 | 48 | 49 | 51 | 52
63 | 68 | 42 | 44 | 45 | 47 | 48 | 50 | 51 | 52 | 54
64 | 69 | 44 | 46 | 47 | 49 | 50 | 52 | 53 | 54 | 55
65 | 70 | 46 | 47 | 49 | 50 | 52 | 53 | 55 | 56 | 57
66 | 71 | 48 | 49 | 51 | 52 | 54 | 55 | 56 | 58 | 59
67 | 72 | 50 | 51 | 53 | 54 | 56 | 57 | 58 | 59 | 61
68 | 73 | 52 | 53 | 55 | 56 | 57 | 59 | 60 | 61 | 62
69 | 74 | 53 | 55 | 56 | 58 | 59 | 60 | 62 | 63 | 64
70 | 75 | 55 | 57 | 58 | 60 | 61 | 62 | 62 | 64 | 65
71 | 76 | 57 | 59 | 60 | 61 | 63 | 64 | 65 | 66 | 67
72 | 77 | 59 | 60 | 62 | 63 | 64 | 65 | 66 | 67 | 68
73 | 78 | 61 | 62 | 64 | 65 | 66 | 67 | 68 | 69 | 70
74 | 79 | 63 | 64 | 65 | 66 | 67 | 68 | 69 | 70 | 71
75 | 80 | 64 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 72
76 | 81 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73
77 | 82 | 68 | 69 | 70 | 71 | 72 | 73 | 74
78 | 83 | 69 | 70 | 71 | 72 | 73 | 74
79 | 84 | 71 | 72 | 73 | 74 | 75
80 | 85 | 72 | 73 | 74 | 75
81 | 86 | 74 | 75 | 75
82 | 87 | 75 | 76
83 | 88 | 76
84 | 89
85 | 90
Ages | Duration of guaranteed amount—[Years]
Male | Female | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
86 | 91 | 6 | 12 | 18 | 24 | 29 | 34 | 38 | 43 | 47 | 50 | 54 | 57 | 59 | 62
87 | 92 | 7 | 13 | 19 | 25 | 31 | 36 | 40 | 45 | 49 | 52 | 56 | 59 | 61 | 64
88 | 93 | 7 | 14 | 21 | 27 | 32 | 38 | 42 | 47 | 51 | 55 | 58 | 61 | 63 | 66
89 | 94 | 8 | 15 | 22 | 28 | 34 | 40 | 45 | 49 | 53 | 57 | 60 | 63 | 65 | 68
90 | 95 | 8 | 16 | 23 | 30 | 36 | 42 | 47 | 51 | 55 | 59 | 62 | 65 | 67 | 70
91 | 96 | 9 | 17 | 25 | 32 | 38 | 44 | 49 | 53 | 57 | 61 | 64 | 67 | 69 | 71
92 | 97 | 9 | 18 | 26 | 34 | 40 | 46 | 51 | 55 | 59 | 63 | 66 | 69 | 71 | 73
93 | 98 | 10 | 20 | 28 | 36 | 42 | 48 | 53 | 58 | 62 | 65 | 68 | 70 | 73 | 75
94 | 99 | 11 | 21 | 30 | 37 | 44 | 50 | 55 | 60 | 64 | 67 | 70 | 72 | 74 | 76
95 | 100 | 12 | 22 | 31 | 39 | 46 | 52 | 58 | 62 | 66 | 69 | 72 | 74 | 76 | 78
96 | 101 | 12 | 24 | 33 | 42 | 49 | 55 | 60 | 64 | 68 | 71 | 73 | 76 | 78 | 79
97 | 102 | 13 | 25 | 35 | 44 | 51 | 57 | 62 | 66 | 70 | 73 | 75 | 77 | 79
98 | 103 | 14 | 27 | 37 | 46 | 54 | 60 | 65 | 69 | 72 | 75 | 77 | 79
99 | 104 | 15 | 29 | 40 | 49 | 56 | 62 | 67 | 71 | 74 | 77 | 79
100 | 105 | 17 | 31 | 43 | 52 | 59 | 65 | 70 | 74 | 76 | 79
101 | 106 | 18 | 33 | 46 | 55 | 63 | 68 | 73 | 76 | 79
102 | 107 | 20 | 36 | 49 | 59 | 66 | 71 | 75 | 78
103 | 108 | 22 | 40 | 53 | 62 | 69 | 74 | 78
104 | 109 | 24 | 43 | 57 | 66 | 73 | 77
105 | 110 | 27 | 48 | 61 | 70 | 76
106 | 111 | 53 | 66 | 74
107 | 112 | 35 | 53 | 71
108 | 113 | 40 | 64
Ages | Duration of guaranteed amount—[Years]
Male | Female | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25
86 | 91 | 64 | 66 | 68 | 70 | 72 | 73 | 74 | 75 | 76 | 77
87 | 92 | 66 | 68 | 70 | 72 | 73 | 74 | 76 | 77 | 78
88 | 93 | 68 | 70 | 72 | 73 | 75 | 76 | 77 | 78
89 | 94 | 70 | 72 | 73 | 75 | 76 | 77 | 78
90 | 95 | 72 | 73 | 75 | 76 | 77 | 79
91 | 96 | 73 | 75 | 76 | 78 | 79
92 | 97 | 75 | 76 | 78 | 79
93 | 98 | 76 | 78 | 79
94 | 99 | 78 | 79
95 | 100 | 79
Table IV—Temporary Life Annuities 1—One Life—Expected Return Multiples
[See footnote at end of table]
Ages | Temporary period—maximum duration of annuity—[Years]
Male | Female | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10
0 to 8 | 0 to 13 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
9 | 14 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
10 | 15 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
11 | 16 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
12 | 17 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
13 | 18 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
14 | 19 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
15 | 20 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
16 | 21 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
17 | 22 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
18 | 23 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
19 | 24 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
20 | 25 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
21 | 26 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
22 | 27 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
23 | 28 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
24 | 29 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
25 | 30 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
26 | 31 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
27 | 32 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
28 | 33 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
29 | 34 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
30 | 35 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
31 | 36 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
32 | 37 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
33 | 38 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
34 | 39 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.9 | 9.8
35 | 40 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.9 | 9.8
36 | 41 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.9 | 9.8
37 | 42 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
38 | 43 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
39 | 44 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
40 | 45 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
41 | 46 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
42 | 47 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
43 | 48 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
44 | 49 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.8 | 7.8 | 8.7 | 9.7
45 | 50 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.8 | 8.7 | 9.6
46 | 51 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.8 | 8.7 | 9.6
47 | 52 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.7 | 8.7 | 9.6
48 | 53 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.7 | 8.6 | 9.5
49 | 54 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.8 | 7.7 | 8.6 | 9.5
50 | 55 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.8 | 7.7 | 8.6 | 9.5
51 | 56 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.7 | 7.7 | 8.6 | 9.4
52 | 57 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.7 | 7.6 | 8.5 | 9.4
53 | 58 | 1.0 | 2.0 | 2.9 | 3.9 | 4.9 | 5.8 | 6.7 | 7.6 | 8.5 | 9.3
54 | 59 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.8 | 6.7 | 7.6 | 8.4 | 9.3
55 | 60 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.8 | 6.7 | 7.5 | 8.4 | 9.2
56 | 61 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.5 | 8.4 | 9.2
57 | 62 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.5 | 8.3 | 9.1
58 | 63 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.4 | 8.3 | 9.1
59 | 64 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.5 | 7.4 | 8.2 | 9.0
60 | 65 | 1.0 | 2.0 | 2.9 | 3.8 | 4.8 | 5.6 | 6.5 | 7.3 | 8.1 | 8.9
61 | 66 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.6 | 6.5 | 7.3 | 8.1 | 8.8
62 | 67 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.6 | 6.4 | 7.2 | 8.0 | 8.8
63 | 68 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.6 | 6.4 | 7.2 | 7.9 | 8.7
64 | 69 | 1.0 | 1.9 | 2.9 | 3.8 | 4.7 | 5.5 | 6.3 | 7.1 | 7.9 | 8.6
65 | 70 | 1.0 | 1.9 | 2.9 | 3.8 | 4.6 | 5.5 | 6.3 | 7.1 | 7.8 | 8.5
66 | 71 | 1.0 | 1.9 | 2.9 | 3.8 | 4.6 | 5.4 | 6.2 | 7.0 | 7.7 | 8.4
67 | 72 | 1.0 | 1.9 | 2.9 | 3.7 | 4.6 | 5.4 | 6.2 | 6.9 | 7.6 | 8.3
68 | 73 | 1.0 | 1.9 | 2.8 | 3.7 | 4.6 | 5.4 | 6.1 | 6.8 | 7.5 | 8.2
69 | 74 | 1.0 | 1.9 | 2.8 | 3.7 | 4.5 | 5.3 | 6.1 | 6.8 | 7.4 | 8.0
70 | 75 | 1.0 | 1.9 | 2.8 | 3.7 | 4.5 | 5.3 | 6.0 | 6.7 | 7.3 | 7.9
71 | 76 | 1.0 | 1.9 | 2.8 | 3.7 | 4.5 | 5.2 | 5.9 | 6.6 | 7.2 | 7.8
72 | 77 | 1.0 | 1.9 | 2.8 | 3.6 | 4.4 | 5.2 | 5.8 | 6.5 | 7.1 | 7.6
73 | 78 | 1.0 | 1.9 | 2.8 | 3.6 | 4.4 | 5.1 | 5.8 | 6.4 | 7.0 | 7.5
74 | 79 | 1.0 | 1.9 | 2.8 | 3.6 | 4.3 | 5.0 | 5.7 | 6.3 | 6.8 | 7.3
75 | 80 | 1.0 | 1.9 | 2.7 | 3.5 | 4.3 | 5.0 | 5.6 | 6.2 | 6.7 | 7.1
76 | 81 | 1.0 | 1.9 | 2.7 | 3.5 | 4.2 | 4.9 | 5.5 | 6.1 | 6.5 | 7.0
77 | 82 | 1.0 | 1.9 | 2.7 | 3.5 | 4.2 | 4.8 | 5.4 | 5.9 | 6.4 | 6.8
78 | 83 | 1.0 | 1.9 | 2.7 | 3.4 | 4.1 | 4.7 | 5.3 | 5.8 | 6.2 | 6.6
79 | 84 | 1.0 | 1.8 | 2.7 | 3.4 | 4.1 | 4.7 | 5.2 | 5.7 | 6.1 | 6.4
80 | 85 | 1.0 | 1.8 | 2.6 | 3.4 | 4.0 | 4.6 | 5.1 | 5.5 | 5.9 | 6.2
81 | 86 | 1.0 | 1.8 | 2.6 | 3.3 | 3.9 | 4.5 | 5.0 | 5.4 | 5.7 | 6.0
82 | 87 | 1.0 | 1.8 | 2.6 | 3.3 | 3.9 | 4.4 | 4.8 | 5.2 | 5.6 | 5.8
83 | 88 | .9 | 1.8 | 2.6 | 3.2 | 3.8 | 4.3 | 4.7 | 5.1 | 5.4 | 5.6
84 | 89 | .9 | 1.8 | 2.5 | 3.2 | 3.7 | 4.2 | 4.6 | 4.9 | 5.2 | 5.4
85 | 90 | .9 | 1.8 | 2.5 | 3.1 | 3.6 | 4.1 | 4.5 | 4.8 | 5.0 | 5.2
86 | 91 | .9 | 1.8 | 2.5 | 3.1 | 3.6 | 4.0 | 4.3 | 4.6 | 4.8 | 5.0
Ages | Temporary period—maximum duration of annuity—[Years]
Male | Female | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20
0 to 8 | 0 to 13 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
9 | 14 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
10 | 15 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
11 | 16 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
12 | 17 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
13 | 18 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
14 | 19 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
15 | 20 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
16 | 21 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
17 | 22 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
18 | 23 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
19 | 24 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.7 | 18.7 | 19.7
20 | 25 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.7 | 18.7 | 19.7
21 | 26 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.8 | 17.7 | 18.7 | 19.6
22 | 27 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.7 | 17.7 | 18.7 | 19.6
23 | 28 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.7 | 17.7 | 18.7 | 19.6
24 | 29 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.7 | 17.7 | 18.6 | 19.6
25 | 30 | 10.9 | 11.9 | 12.8 | 13.8 | 14.8 | 15.7 | 16.7 | 17.7 | 18.6 | 19.6
26 | 31 | 10.9 | 11.9 | 12.8 | 13.8 | 14.8 | 15.7 | 16.7 | 17.6 | 18.6 | 19.5
27 | 32 | 10.9 | 11.9 | 12.8 | 13.8 | 14.8 | 15.7 | 16.7 | 17.6 | 18.6 | 19.5
28 | 33 | 10.9 | 11.8 | 12.8 | 13.8 | 14.7 | 15.7 | 16.6 | 17.6 | 18.5 | 19.5
29 | 34 | 10.9 | 11.8 | 12.8 | 13.8 | 14.7 | 15.7 | 16.6 | 17.6 | 18.5 | 19.4
30 | 35 | 10.9 | 11.8 | 12.8 | 13.7 | 14.7 | 15.6 | 16.6 | 17.5 | 18.4 | 19.4
31 | 36 | 10.8 | 11.8 | 12.8 | 13.7 | 14.7 | 15.6 | 16.5 | 17.5 | 18.4 | 19.3
32 | 37 | 10.8 | 11.8 | 12.7 | 13.7 | 14.6 | 15.6 | 16.5 | 17.4 | 18.4 | 19.3
33 | 38 | 10.8 | 11.8 | 12.7 | 13.7 | 14.6 | 15.6 | 16.5 | 17.4 | 18.3 | 19.2
34 | 39 | 10.8 | 11.8 | 12.7 | 13.6 | 14.6 | 15.5 | 16.4 | 17.4 | 18.3 | 19.2
35 | 40 | 10.8 | 11.7 | 12.7 | 13.6 | 14.6 | 15.5 | 16.4 | 17.3 | 18.2 | 19.1
36 | 41 | 10.8 | 11.7 | 12.7 | 13.6 | 14.5 | 15.4 | 16.3 | 17.2 | 18.1 | 19.0
37 | 42 | 10.8 | 11.7 | 12.6 | 13.6 | 14.5 | 15.4 | 16.3 | 17.2 | 18.1 | 18.9
38 | 43 | 10.7 | 11.7 | 12.6 | 13.5 | 14.4 | 15.3 | 16.2 | 17.1 | 18.0 | 18.9
39 | 44 | 10.7 | 11.6 | 12.6 | 13.5 | 14.4 | 15.3 | 16.2 | 17.1 | 17.9 | 18.8
40 | 45 | 10.7 | 11.6 | 12.5 | 13.5 | 14.4 | 15.2 | 16.1 | 17.0 | 17.8 | 18.7
41 | 46 | 10.7 | 11.6 | 12.5 | 13.4 | 14.3 | 15.2 | 16.1 | 16.9 | 17.8 | 18.6
42 | 47 | 10.6 | 11.6 | 12.5 | 13.4 | 14.3 | 15.1 | 16.0 | 16.8 | 17.7 | 18.5
43 | 48 | 10.6 | 11.5 | 12.4 | 13.3 | 14.2 | 15.1 | 15.9 | 16.7 | 17.6 | 18.4
44 | 49 | 10.6 | 11.5 | 12.4 | 13.3 | 14.1 | 15.0 | 15.8 | 16.7 | 17.5 | 18.3
45 | 50 | 10.5 | 11.4 | 12.3 | 13.2 | 14.1 | 14.9 | 15.7 | 16.6 | 17.4 | 18.1
46 | 51 | 10.5 | 11.4 | 12.3 | 13.2 | 14.0 | 14.8 | 15.7 | 16.5 | 17.2 | 18.0
47 | 52 | 10.5 | 11.4 | 12.2 | 13.1 | 13.9 | 14.7 | 15.6 | 16.3 | 17.1 | 17.8
48 | 53 | 10.4 | 11.3 | 12.2 | 13.0 | 13.8 | 14.7 | 15.4 | 16.2 | 17.0 | 17.7
49 | 54 | 10.4 | 11.3 | 12.1 | 12.9 | 13.8 | 14.6 | 15.3 | 16.1 | 16.8 | 17.5
50 | 55 | 10.3 | 11.2 | 12.0 | 12.9 | 13.7 | 14.5 | 15.2 | 16.0 | 16.7 | 17.4
51 | 56 | 10.3 | 11.1 | 12.0 | 12.8 | 13.6 | 14.3 | 15.1 | 15.8 | 16.5 | 17.2
52 | 57 | 10.2 | 11.1 | 11.9 | 12.7 | 13.5 | 14.2 | 14.9 | 15.6 | 16.3 | 17.0
53 | 58 | 10.2 | 11.0 | 11.8 | 12.6 | 13.4 | 14.1 | 14.8 | 15.5 | 16.1 | 16.8
54 | 59 | 10.1 | 10.9 | 11.7 | 12.5 | 13.2 | 14.0 | 14.6 | 15.3 | 15.9 | 16.5
55 | 60 | 10.1 | 10.9 | 11.6 | 12.4 | 13.1 | 13.8 | 14.5 | 15.1 | 15.7 | 16.3
56 | 61 | 10.0 | 10.8 | 11.5 | 12.3 | 13.0 | 13.7 | 14.3 | 14.9 | 15.5 | 16.1
57 | 62 | 9.9 | 10.7 | 11.4 | 12.2 | 12.8 | 13.5 | 14.1 | 14.7 | 15.3 | 15.8
58 | 63 | 9.8 | 10.6 | 11.3 | 12.0 | 12.7 | 13.3 | 13.9 | 14.5 | 15.0 | 15.5
59 | 64 | 9.8 | 10.5 | 11.2 | 11.9 | 12.5 | 13.2 | 13.7 | 14.3 | 14.8 | 15.3
60 | 65 | 9.7 | 10.4 | 11.1 | 11.7 | 12.4 | 13.0 | 13.5 | 14.0 | 14.5 | 15.0
61 | 66 | 9.6 | 10.3 | 11.0 | 11.6 | 12.2 | 12.8 | 13.3 | 13.8 | 14.2 | 14.7
62 | 67 | 9.5 | 10.2 | 10.8 | 11.4 | 12.0 | 12.5 | 13.1 | 13.5 | 14.0 | 14.3
63 | 68 | 9.4 | 10.0 | 10.7 | 11.3 | 11.8 | 12.3 | 12.8 | 13.2 | 13.7 | 14.0
64 | 69 | 9.3 | 9.9 | 10.5 | 11.1 | 11.6 | 12.1 | 12.5 | 13.0 | 13.3 | 13.7
65 | 70 | 9.1 | 9.8 | 10.3 | 10.9 | 11.4 | 11.9 | 12.3 | 12.7 | 13.0 | 13.3
66 | 71 | 9.0 | 9.6 | 10.2 | 10.7 | 11.2 | 11.6 | 12.0 | 12.4 | 12.7 | 13.0
67 | 72 | 8.9 | 9.5 | 10.0 | 10.5 | 10.9 | 11.3 | 11.7 | 12.0 | 12.3 | 12.6
68 | 73 | 8.7 | 9.3 | 9.8 | 10.3 | 10.7 | 11.1 | 11.4 | 11.7 | 12.0 | 12.2
69 | 74 | 8.6 | 9.1 | 9.6 | 10.0 | 10.4 | 10.8 | 11.1 | 11.4 | 11.6 | 11.8
70 | 75 | 8.4 | 8.9 | 9.4 | 9.8 | 10.2 | 10.5 | 10.8 | 11.0 | 11.2 | 11.4
71 | 76 | 8.3 | 8.7 | 9.2 | 9.6 | 9.9 | 10.2 | 10.4 | 10.7 | 10.9 | 11.0
72 | 77 | 8.1 | 8.6 | 8.9 | 9.3 | 9.6 | 9.9 | 10.1 | 10.3 | 10.5 | 10.6
73 | 78 | 7.9 | 8.3 | 8.7 | 9.0 | 9.3 | 9.6 | 9.8 | 9.9 | 10.1 | 10.2
74 | 79 | 7.7 | 8.1 | 8.5 | 8.8 | 9.0 | 9.2 | 9.4 | 9.6 | 9.7 | 9.8
75 | 80 | 7.6 | 7.9 | 8.2 | 8.5 | 8.7 | 8.9 | 9.1 | 9.2 | 9.3 | 9.4
76 | 81 | 7.4 | 7.7 | 8.0 | 8.2 | 8.4 | 8.6 | 8.7 | 8.8 | 8.9 | 9.0
77 | 82 | 7.1 | 7.5 | 7.7 | 7.9 | 8.1 | 8.3 | 8.4 | 8.5 | 8.5 | 8.6
78 | 83 | 6.9 | 7.2 | 7.4 | 7.6 | 7.8 | 7.9 | 8.0 | 8.1 | 8.2 | 8.2
79 | 84 | 6.7 | 7.0 | 7.2 | 7.3 | 7.5 | 7.6 | 7.7 | 7.7 | 7.8 | 7.8
80 | 85 | 6.5 | 6.7 | 6.9 | 7.1 | 7.2 | 7.3 | 7.3 | 7.4 | 7.4 | 7.4
81 | 86 | 6.3 | 6.5 | 6.6 | 6.8 | 6.9 | 6.9 | 7.0 | 7.0 | 7.1
82 | 87 | 6.0 | 6.2 | 6.4 | 6.5 | 6.5 | 6.6 | 6.7 | 6.7
83 | 88 | 5.8 | 6.0 | 6.1 | 6.2 | 6.2 | 6.3 | 6.3
84 | 89 | 5.6 | 5.7 | 5.8 | 5.9 | 5.9 | 6.0
85 | 90 | 5.3 | 5.5 | 5.5 | 5.6 | 5.6
86 | 91 | 5.1 | 5.2 | 5.3 | 5.3
Ages | Temporary period—maximum duration of annuity—[Years]
Male | Female | 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30
0 to 8 | 0 to 13 | 20.7 | 21.7 | 22.7 | 23.6 | 24.6 | 25.6 | 26.5 | 27.5 | 28.4 | 29.4
9 | 14 | 20.7 | 21.7 | 22.7 | 23.6 | 24.6 | 25.5 | 26.5 | 27.5 | 28.4 | 29.4
10 | 15 | 20.7 | 21.7 | 22.7 | 23.6 | 24.6 | 25.5 | 26.5 | 27.5 | 28.4 | 29.4
11 | 16 | 20.7 | 21.7 | 22.6 | 23.6 | 24.6 | 25.5 | 26.5 | 27.4 | 28.4 | 29.3
12 | 17 | 20.7 | 21.7 | 22.6 | 23.6 | 24.6 | 25.5 | 26.5 | 27.4 | 28.4 | 29.3
13 | 18 | 20.7 | 21.7 | 22.6 | 23.6 | 24.6 | 25.5 | 26.5 | 27.4 | 28.4 | 29.3
14 | 19 | 20.7 | 21.7 | 22.6 | 23.6 | 24.5 | 25.5 | 26.4 | 27.4 | 28.3 | 29.3
15 | 20 | 20.7 | 21.6 | 22.6 | 23.6 | 24.5 | 25.5 | 26.4 | 27.4 | 28.3 | 29.2
16 | 21 | 20.7 | 21.6 | 22.6 | 23.6 | 24.5 | 25.5 | 26.4 | 27.3 | 28.3 | 29.2
17 | 22 | 20.7 | 21.6 | 22.6 | 23.5 | 24.5 | 25.4 | 26.4 | 27.3 | 28.2 | 29.2
18 | 23 | 20.7 | 21.6 | 22.6 | 23.5 | 24.5 | 25.4 | 26.3 | 27.3 | 28.2 | 29.1
19 | 24 | 20.6 | 21.6 | 22.5 | 23.5 | 24.4 | 25.4 | 26.3 | 27.2 | 28.1 | 29.1
20 | 25 | 20.6 | 21.6 | 22.5 | 23.5 | 24.4 | 25.3 | 26.3 | 27.2 | 28.1 | 29.0
21 | 26 | 20.6 | 21.5 | 22.5 | 23.4 | 24.4 | 25.3 | 26.2 | 27.1 | 28.0 | 28.9
22 | 27 | 20.6 | 21.5 | 22.5 | 23.4 | 24.3 | 25.3 | 26.2 | 27.1 | 28.0 | 28.9
23 | 28 | 20.6 | 21.5 | 22.4 | 23.4 | 24.3 | 25.2 | 26.1 | 27.0 | 27.9 | 28.8
24 | 29 | 20.5 | 21.5 | 22.4 | 23.3 | 24.2 | 25.2 | 26.1 | 27.0 | 27.8 | 28.7
25 | 30 | 20.5 | 21.4 | 22.4 | 23.3 | 24.2 | 25.1 | 26.0 | 26.9 | 27.8 | 28.6
26 | 31 | 20.5 | 21.4 | 22.3 | 23.2 | 24.1 | 25.0 | 25.9 | 26.8 | 27.7 | 28.5
27 | 32 | 20.4 | 21.3 | 22.3 | 23.2 | 24.1 | 25.0 | 25.8 | 26.7 | 27.6 | 28.4
28 | 33 | 20.4 | 21.3 | 22.2 | 23.1 | 24.0 | 24.9 | 25.8 | 26.6 | 27.5 | 28.3
29 | 34 | 20.3 | 21.2 | 22.1 | 23.0 | 23.9 | 24.8 | 25.7 | 26.5 | 27.4 | 28.2
30 | 35 | 20.3 | 21.2 | 22.1 | 23.0 | 23.8 | 24.7 | 25.6 | 26.4 | 27.2 | 28.1
31 | 36 | 20.2 | 21.1 | 22.0 | 22.9 | 23.8 | 24.6 | 25.5 | 26.3 | 27.1 | 27.9
32 | 37 | 20.2 | 21.1 | 21.9 | 22.8 | 23.7 | 24.5 | 25.4 | 26.2 | 27.0 | 27.8
33 | 38 | 20.1 | 21.0 | 21.9 | 22.7 | 23.6 | 24.4 | 25.2 | 26.0 | 26.8 | 27.6
34 | 39 | 20.0 | 20.9 | 21.8 | 22.6 | 23.5 | 24.3 | 25.1 | 25.9 | 26.7 | 27.4
35 | 40 | 20.0 | 20.8 | 21.7 | 22.5 | 23.3 | 24.2 | 25.0 | 25.7 | 26.5 | 27.2
36 | 41 | 19.9 | 20.7 | 21.6 | 22.4 | 23.2 | 24.0 | 24.8 | 25.6 | 26.3 | 27.0
37 | 42 | 19.8 | 20.6 | 21.5 | 22.3 | 23.1 | 23.9 | 24.6 | 25.4 | 26.1 | 26.8
38 | 43 | 19.7 | 20.5 | 21.4 | 22.2 | 23.0 | 23.7 | 24.5 | 25.2 | 25.9 | 26.6
39 | 44 | 19.6 | 20.4 | 21.2 | 22.0 | 22.8 | 23.6 | 24.3 | 25.0 | 25.7 | 26.4
40 | 45 | 19.5 | 20.3 | 21.1 | 21.9 | 22.6 | 23.4 | 24.1 | 24.8 | 25.5 | 26.1
41 | 46 | 19.4 | 20.2 | 21.0 | 21.7 | 22.5 | 23.2 | 23.9 | 24.6 | 25.2 | 25.9
42 | 47 | 19.3 | 20.1 | 20.8 | 21.6 | 22.3 | 23.0 | 23.7 | 24.3 | 25.0 | 25.6
43 | 48 | 19.2 | 19.9 | 20.7 | 21.4 | 22.1 | 22.8 | 23.4 | 24.1 | 24.7 | 25.3
44 | 49 | 19.0 | 19.8 | 20.5 | 21.2 | 21.9 | 22.6 | 23.2 | 23.8 | 24.4 | 25.0
45 | 50 | 18.9 | 19.6 | 20.3 | 21.0 | 21.7 | 22.3 | 22.9 | 23.5 | 24.1 | 24.6
46 | 51 | 18.7 | 19.4 | 20.1 | 20.8 | 21.5 | 22.1 | 22.7 | 23.2 | 23.8 | 24.3
47 | 52 | 18.6 | 19.3 | 19.9 | 20.6 | 21.2 | 21.8 | 22.4 | 22.9 | 23.4 | 23.9
48 | 53 | 18.4 | 19.1 | 19.7 | 20.4 | 21.0 | 21.5 | 22.1 | 22.6 | 23.1 | 23.5
49 | 54 | 18.2 | 18.9 | 19.5 | 20.1 | 20.7 | 21.2 | 21.7 | 22.2 | 22.7 | 23.1
50 | 55 | 18.0 | 18.7 | 19.3 | 19.8 | 20.4 | 20.9 | 21.4 | 21.9 | 22.3 | 22.7
51 | 56 | 17.8 | 18.4 | 19.0 | 19.6 | 20.1 | 20.6 | 21.1 | 21.5 | 21.9 | 22.3
52 | 57 | 17.6 | 18.2 | 18.7 | 19.3 | 19.8 | 20.2 | 20.7 | 21.1 | 21.5 | 21.8
53 | 58 | 17.4 | 17.9 | 18.5 | 19.0 | 19.4 | 19.9 | 20.3 | 20.7 | 21.0 | 21.3
54 | 59 | 17.1 | 17.7 | 18.2 | 18.7 | 19.1 | 19.5 | 19.9 | 20.2 | 20.6 | 20.8
55 | 60 | 16.9 | 17.4 | 17.9 | 18.3 | 18.7 | 19.1 | 19.5 | 19.8 | 20.1 | 20.3
56 | 61 | 16.6 | 17.1 | 17.5 | 18.0 | 18.4 | 18.7 | 19.0 | 19.3 | 19.6 | 19.8
57 | 62 | 16.3 | 16.8 | 17.2 | 17.6 | 18.0 | 18.3 | 18.6 | 18.9 | 19.1 | 19.3
58 | 63 | 16.0 | 16.5 | 16.9 | 17.2 | 17.6 | 17.9 | 18.1 | 18.4 | 18.6 | 18.8
59 | 64 | 15.7 | 16.1 | 16.5 | 16.8 | 17.1 | 17.4 | 17.7 | 17.9 | 18.1 | 18.2
60 | 65 | 15.4 | 15.8 | 16.1 | 16.4 | 16.7 | 17.0 | 17.2 | 17.4 | 17.5 | 17.7
61 | 66 | 15.1 | 15.4 | 15.7 | 16.0 | 16.3 | 16.5 | 16.7 | 16.9 | 17.0 | 17.1
62 | 67 | 14.7 | 15.0 | 15.3 | 15.6 | 15.8 | 16.0 | 16.2 | 16.3 | 16.4 | 16.5
63 | 68 | 14.4 | 14.6 | 14.9 | 15.1 | 15.3 | 15.5 | 15.7 | 15.8 | 15.9 | 16.0
64 | 69 | 14.0 | 14.3 | 14.5 | 14.7 | 14.9 | 15.0 | 15.2 | 15.3 | 15.3 | 15.4
65 | 70 | 13.6 | 13.8 | 14.1 | 14.2 | 14.4 | 14.5 | 14.6 | 14.7 | 14.8 | 14.9
66 | 71 | 13.2 | 13.4 | 13.6 | 13.8 | 13.9 | 14.0 | 14.1 | 14.2 | 14.2 | 14.3
67 | 72 | 12.8 | 13.0 | 13.2 | 13.3 | 13.4 | 13.5 | 13.6 | 13.7 | 13.7 | 13.7
68 | 73 | 12.4 | 12.6 | 12.7 | 12.8 | 12.9 | 13.0 | 13.1 | 13.1 | 13.2 | 13.2
69 | 74 | 12.0 | 12.1 | 12.3 | 12.4 | 12.4 | 12.5 | 12.6 | 12.6 | 12.6 | 12.6
70 | 75 | 11.6 | 11.7 | 11.8 | 11.9 | 12.0 | 12.0 | 12.0 | 12.1 | 12.1 | 12.1
71 | 76 | 11.2 | 11.3 | 11.3 | 11.4 | 11.5 | 11.5 | 11.5 | 11.6 | 11.6
72 | 77 | 10.7 | 10.8 | 10.9 | 10.9 | 11.0 | 11.0 | 11.0 | 11.0
73 | 78 | 10.3 | 10.4 | 10.4 | 10.5 | 10.5 | 10.5 | 10.5
74 | 79 | 9.9 | 9.9 | 10.0 | 10.0 | 10.1 | 10.1
75 | 80 | 9.5 | 9.5 | 9.6 | 9.6 | 9.6
76 | 81 | 9.1 | 9.1 | 9.1 | 9.1
77 | 82 | 8.6 | 8.7 | 8.7
78 | 83 | 8.2 | 8.3
79 | 84 | 7.8
Footnote to Table IV:
1 The multiples in this table are not applicable to annuities for a term certain; for such cases see paragraph (c) of § 1.72-5.
Table V—Ordinary Life Annuities One Life—Expected Return Multiples
Age | Multiple
5 | 76.6
6 | 75.6
7 | 74.7
8 | 73.7
9 | 72.7
10 | 71.7
11 | 70.7
12 | 69.7
13 | 68.8
14 | 67.8
15 | 66.8
16 | 65.8
17 | 64.8
18 | 63.9
19 | 62.9
20 | 61.9
21 | 60.9
22 | 59.9
23 | 59.0
24 | 58.0
25 | 57.0
26 | 56.0
27 | 55.1
28 | 54.1
29 | 53.1
30 | 52.2
31 | 51.2
32 | 50.2
33 | 49.3
34 | 48.3
35 | 47.3
36 | 46.4
37 | 45.4
38 | 44.4
39 | 43.5
40 | 42.5
41 | 41.5
42 | 40.6
43 | 39.6
44 | 38.7
45 | 37.7
46 | 36.8
47 | 35.9
48 | 34.9
49 | 34.0
50 | 33.1
51 | 32.2
52 | 31.3
53 | 30.4
54 | 29.5
55 | 28.6
56 | 27.7
57 | 26.8
58 | 25.9
59 | 25.0
60 | 24.2
61 | 23.3
62 | 22.5
63 | 21.6
64 | 20.8
65 | 20.0
66 | 19.2
67 | 18.4
68 | 17.6
69 | 16.8
70 | 16.0
71 | 15.3
72 | 14.6
73 | 13.9
74 | 13.2
75 | 12.5
76 | 11.9
77 | 11.2
78 | 10.6
79 | 10.0
80 | 9.5
81 | 8.9
82 | 8.4
83 | 7.9
84 | 7.4
85 | 6.9
86 | 6.5
87 | 6.1
88 | 5.7
89 | 5.3
90 | 5.0
91 | 4.7
92 | 4.4
93 | 4.1
94 | 3.9
95 | 3.7
96 | 3.4
97 | 3.2
98 | 3.0
99 | 2.8
100 | 2.7
101 | 2.5
102 | 2.3
103 | 2.1
104 | 1.9
105 | 1.8
106 | 1.6
107 | 1.4
108 | 1.3
109 | 1.1
110 | 1.0
111 | .9
112 | .8
113 | .7
114 | .6
115 | .5
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
5 | 83.8 | 83.3 | 82.8 | 82.4 | 82.0 | 81.6 | 81.2 | 80.9 | 80.6 | 80.3
6 | 83.3 | 82.8 | 82.3 | 81.8 | 81.4 | 81.0 | 80.6 | 80.3 | 79.9 | 79.6
7 | 82.8 | 82.3 | 81.8 | 81.3 | 80.9 | 80.4 | 80.0 | 79.6 | 79.3 | 78.9
8 | 82.4 | 81.8 | 81.3 | 80.8 | 80.3 | 79.9 | 79.4 | 79.0 | 78.6 | 78.3
9 | 82.0 | 81.4 | 80.9 | 80.3 | 79.8 | 79.3 | 78.9 | 78.4 | 78.0 | 77.6
10 | 81.6 | 81.0 | 80.4 | 79.9 | 79.3 | 78.8 | 78.3 | 77.9 | 77.4 | 77.0
11 | 81.2 | 80.6 | 80.0 | 79.4 | 78.9 | 78.3 | 77.8 | 77.3 | 76.9 | 76.4
12 | 80.9 | 80.3 | 79.6 | 79.0 | 78.4 | 77.9 | 77.3 | 76.8 | 76.3 | 75.9
13 | 80.6 | 79.9 | 79.3 | 78.6 | 78.0 | 77.4 | 76.9 | 76.3 | 75.8 | 75.3
14 | 80.3 | 79.6 | 78.9 | 78.3 | 77.6 | 77.0 | 76.4 | 75.9 | 75.3 | 74.8
15 | 80.0 | 79.3 | 78.6 | 77.9 | 77.3 | 76.6 | 76.0 | 75.4 | 74.9 | 74.3
16 | 79.8 | 79.0 | 78.3 | 77.6 | 76.9 | 76.3 | 75.6 | 75.0 | 74.4 | 73.9
17 | 79.5 | 78.8 | 78.0 | 77.3 | 76.6 | 75.9 | 75.3 | 74.6 | 74.0 | 73.4
18 | 79.3 | 78.5 | 77.8 | 77.0 | 76.3 | 75.6 | 74.9 | 74.3 | 73.6 | 73.0
19 | 79.1 | 78.3 | 77.5 | 76.8 | 76.0 | 75.3 | 74.6 | 73.9 | 73.3 | 72.6
20 | 78.9 | 78.1 | 77.3 | 76.5 | 75.8 | 75.0 | 74.3 | 73.6 | 72.9 | 72.3
21 | 78.7 | 77.9 | 77.1 | 76.3 | 75.5 | 74.8 | 74.0 | 73.3 | 72.6 | 71.9
22 | 78.6 | 77.7 | 76.9 | 76.1 | 75.3 | 74.5 | 73.8 | 73.0 | 72.3 | 71.6
23 | 78.4 | 77.6 | 76.7 | 75.9 | 75.1 | 74.3 | 73.5 | 72.8 | 72.0 | 71.3
24 | 78.3 | 77.4 | 76.6 | 75.7 | 74.9 | 74.1 | 73.3 | 72.6 | 71.8 | 71.1
25 | 78.2 | 77.3 | 76.4 | 75.6 | 74.8 | 73.9 | 73.1 | 72.3 | 71.6 | 70.8
26 | 78.0 | 77.2 | 76.3 | 75.4 | 74.6 | 73.8 | 72.9 | 72.1 | 71.3 | 70.6
27 | 77.9 | 77.1 | 76.2 | 75.3 | 74.4 | 73.6 | 72.8 | 71.9 | 71.1 | 70.3
28 | 77.8 | 76.9 | 76.1 | 75.2 | 74.3 | 73.4 | 72.6 | 71.8 | 70.9 | 70.1
29 | 77.7 | 76.8 | 76.0 | 75.1 | 74.2 | 73.3 | 72.5 | 71.6 | 70.8 | 70.0
30 | 77.7 | 76.8 | 75.9 | 75.0 | 74.1 | 73.2 | 72.3 | 71.5 | 70.6 | 69.8
31 | 77.6 | 76.7 | 75.8 | 74.9 | 74.0 | 73.1 | 72.2 | 71.3 | 70.5 | 69.6
32 | 77.5 | 76.6 | 75.7 | 74.8 | 73.9 | 73.0 | 72.1 | 71.2 | 70.3 | 69.5
33 | 77.5 | 76.5 | 75.6 | 74.7 | 73.8 | 72.9 | 72.0 | 71.1 | 70.2 | 69.3
34 | 77.4 | 76.5 | 75.5 | 74.6 | 73.7 | 72.8 | 71.9 | 71.0 | 70.1 | 69.2
35 | 77.3 | 76.4 | 75.5 | 74.5 | 73.6 | 72.7 | 71.8 | 70.9 | 70.0 | 69.1
36 | 77.3 | 76.3 | 75.4 | 74.5 | 73.5 | 72.6 | 71.7 | 70.8 | 69.9 | 69.0
37 | 77.2 | 76.3 | 75.4 | 74.4 | 73.5 | 72.6 | 71.6 | 70.7 | 69.8 | 68.9
38 | 77.2 | 76.2 | 75.3 | 74.4 | 73.4 | 72.5 | 71.6 | 70.6 | 69.7 | 68.8
39 | 77.2 | 76.2 | 75.3 | 74.3 | 73.4 | 72.4 | 71.5 | 70.6 | 69.6 | 68.7
40 | 77.1 | 76.2 | 75.2 | 74.3 | 73.3 | 72.4 | 71.4 | 70.5 | 69.6 | 68.6
41 | 77.1 | 76.1 | 75.2 | 74.2 | 73.3 | 72.3 | 71.4 | 70.4 | 69.5 | 68.6
42 | 77.0 | 76.1 | 75.1 | 74.2 | 73.2 | 72.3 | 71.3 | 70.4 | 69.4 | 68.5
43 | 77.0 | 76.1 | 75.1 | 74.1 | 73.2 | 72.2 | 71.3 | 70.3 | 69.4 | 68.5
44 | 77.0 | 76.0 | 75.1 | 74.1 | 73.1 | 72.2 | 71.2 | 70.3 | 69.3 | 68.4
45 | 77.0 | 76.0 | 75.0 | 74.1 | 73.1 | 72.2 | 71.2 | 70.2 | 69.3 | 68.4
46 | 76.9 | 76.0 | 75.0 | 74.0 | 73.1 | 72.1 | 71.2 | 70.2 | 69.3 | 68.3
47 | 76.9 | 75.9 | 75.0 | 74.0 | 73.1 | 72.1 | 71.1 | 70.2 | 69.2 | 68.3
48 | 76.9 | 75.9 | 75.0 | 74.0 | 73.0 | 72.1 | 71.1 | 70.1 | 69.2 | 68.2
49 | 76.9 | 75.9 | 74.9 | 74.0 | 73.0 | 72.0 | 71.1 | 70.1 | 69.1 | 68.2
50 | 76.9 | 75.9 | 74.9 | 73.9 | 73.0 | 72.0 | 71.0 | 70.1 | 69.1 | 68.2
51 | 76.8 | 75.9 | 74.9 | 73.9 | 73.0 | 72.0 | 71.0 | 70.1 | 69.1 | 68.1
52 | 76.8 | 75.9 | 74.9 | 73.9 | 72.9 | 72.0 | 71.0 | 70.0 | 69.1 | 68.1
53 | 76.8 | 75.8 | 74.9 | 73.9 | 72.9 | 71.9 | 71.0 | 70.0 | 69.0 | 68.1
54 | 76.8 | 75.8 | 74.8 | 73.9 | 72.9 | 71.9 | 71.0 | 70.0 | 69.0 | 68.1
55 | 76.8 | 75.8 | 74.8 | 73.9 | 72.9 | 71.9 | 70.9 | 70.0 | 69.0 | 68.0
56 | 76.8 | 75.8 | 74.8 | 73.8 | 72.9 | 71.9 | 70.9 | 69.9 | 69.0 | 68.0
57 | 76.8 | 75.8 | 74.8 | 73.8 | 72.9 | 71.9 | 70.9 | 69.9 | 69.0 | 68.0
58 | 76.8 | 75.8 | 74.8 | 73.8 | 72.8 | 71.9 | 70.9 | 69.9 | 68.9 | 68.0
59 | 76.7 | 75.8 | 74.8 | 73.8 | 72.8 | 71.9 | 70.9 | 69.9 | 68.9 | 68.0
60 | 76.7 | 75.8 | 74.8 | 73.8 | 72.8 | 71.8 | 70.9 | 69.9 | 68.9 | 67.9
61 | 76.7 | 75.7 | 74.8 | 73.8 | 72.8 | 71.8 | 70.9 | 69.9 | 68.9 | 67.9
62 | 76.7 | 75.7 | 74.8 | 73.8 | 72.8 | 71.8 | 70.8 | 69.9 | 68.9 | 67.9
63 | 76.7 | 75.7 | 74.8 | 73.8 | 72.8 | 71.8 | 70.8 | 69.9 | 68.9 | 67.9
64 | 76.7 | 75.7 | 74.7 | 73.8 | 72.8 | 71.8 | 70.8 | 69.8 | 68.9 | 67.9
65 | 76.7 | 75.7 | 74.7 | 73.8 | 72.8 | 71.8 | 70.8 | 69.8 | 68.9 | 67.9
66 | 76.7 | 75.7 | 74.7 | 73.7 | 72.8 | 71.8 | 70.8 | 69.8 | 68.9 | 67.9
67 | 76.7 | 75.7 | 74.7 | 73.7 | 72.8 | 71.8 | 70.8 | 69.8 | 68.8 | 67.9
68 | 76.7 | 75.7 | 74.7 | 73.7 | 72.8 | 71.8 | 70.8 | 69.8 | 68.8 | 67.9
69 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.8 | 70.8 | 69.8 | 68.8 | 67.8
70 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.8 | 70.8 | 69.8 | 68.8 | 67.8
71 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.8 | 70.8 | 69.8 | 68.8 | 67.8
72 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.8 | 70.8 | 69.8 | 68.8 | 67.8
73 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.8 | 69.8 | 68.8 | 67.8
74 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.8 | 69.8 | 68.8 | 67.8
75 | 76.7 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.8 | 69.8 | 68.8 | 67.8
76 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.8 | 69.8 | 68.8 | 67.8
77 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.8 | 69.8 | 68.8 | 67.8
78 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
79 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
80 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
81 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
82 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
83 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
84 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
85 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
86 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
87 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
88 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.8 | 68.8 | 67.8
89 | 76.6 | 75.7 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
90 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
91 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
92 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
93 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
94 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
95 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
96 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
97 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
98 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
99 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
100 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
101 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
102 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
103 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
104 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
105 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
106 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
107 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
108 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
109 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
110 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
111 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
112 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
113 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
114 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
115 | 76.6 | 75.6 | 74.7 | 73.7 | 72.7 | 71.7 | 70.7 | 69.7 | 68.8 | 67.8
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24
15 | 73.8 | 73.3 | 72.9 | 72.4 | 72.0 | 71.6 | 71.3 | 70.9 | 70.6 | 70.3
16 | 73.3 | 72.8 | 72.3 | 71.9 | 71.4 | 71.0 | 70.7 | 70.3 | 70.0 | 69.6
17 | 72.9 | 72.3 | 71.8 | 71.3 | 70.9 | 70.5 | 70.0 | 69.7 | 69.3 | 69.0
18 | 72.4 | 71.9 | 71.3 | 70.8 | 70.4 | 69.0 | 69.5 | 69.9 | 68.7 | 68.3
19 | 72.0 | 71.4 | 70.9 | 70.4 | 69.8 | 69.4 | 68.9 | 68.5 | 68.1 | 67.7
20 | 71.6 | 71.0 | 70.5 | 69.9 | 69.4 | 68.8 | 68.4 | 67.9 | 67.5 | 67.1
21 | 71.3 | 70.7 | 70.0 | 69.5 | 68.9 | 68.4 | 67.9 | 67.4 | 66.9 | 66.5
22 | 70.9 | 70.3 | 69.7 | 69.0 | 68.5 | 67.9 | 67.4 | 66.9 | 66.4 | 65.9
23 | 70.6 | 70.0 | 69.3 | 68.7 | 68.1 | 67.5 | 66.9 | 66.4 | 65.9 | 65.4
24 | 70.3 | 69.6 | 69.0 | 68.3 | 67.7 | 67.1 | 66.5 | 65.9 | 65.4 | 64.9
25 | 70.1 | 69.3 | 68.6 | 68.0 | 67.3 | 66.7 | 66.1 | 65.5 | 64.9 | 64.4
26 | 69.8 | 69.1 | 68.3 | 67.6 | 67.0 | 66.3 | 65.7 | 65.1 | 64.5 | 63.9
27 | 69.6 | 68.8 | 68.1 | 67.3 | 66.7 | 66.0 | 65.3 | 64.7 | 64.1 | 63.5
28 | 69.3 | 68.6 | 67.8 | 67.1 | 66.4 | 65.7 | 65.0 | 64.3 | 63.7 | 63.1
29 | 69.1 | 68.4 | 67.6 | 66.8 | 66.1 | 65.4 | 64.7 | 64.0 | 63.3 | 62.7
30 | 69.0 | 68.2 | 67.4 | 66.6 | 65.8 | 65.1 | 64.4 | 63.7 | 63.0 | 62.3
31 | 68.8 | 68.0 | 67.2 | 66.4 | 65.6 | 64.8 | 64.1 | 63.4 | 62.7 | 62.0
32 | 68.6 | 67.8 | 67.0 | 66.2 | 65.4 | 64.6 | 63.8 | 63.1 | 62.4 | 61.7
33 | 68.5 | 67.6 | 66.8 | 66.0 | 65.2 | 64.4 | 63.6 | 62.8 | 62.1 | 61.4
34 | 68.3 | 67.5 | 66.6 | 65.8 | 65.0 | 64.2 | 63.4 | 62.6 | 61.9 | 61.1
35 | 68.2 | 67.4 | 66.5 | 65.6 | 64.8 | 64.0 | 63.2 | 62.4 | 61.6 | 60.9
36 | 68.1 | 67.2 | 66.4 | 65.5 | 64.7 | 63.8 | 63.0 | 62.2 | 61.4 | 60.6
37 | 68.0 | 67.1 | 66.2 | 65.4 | 64.5 | 63.7 | 62.8 | 62.0 | 61.2 | 60.4
38 | 67.9 | 67.0 | 66.1 | 65.2 | 64.4 | 63.5 | 62.7 | 61.8 | 61.0 | 60.2
39 | 67.8 | 66.9 | 66.0 | 65.1 | 64.2 | 63.4 | 62.5 | 61.7 | 60.8 | 60.0
40 | 67.7 | 66.8 | 65.9 | 65.0 | 64.1 | 63.3 | 62.4 | 61.5 | 60.7 | 59.9
41 | 67.7 | 66.7 | 65.8 | 64.9 | 64.0 | 63.1 | 62.3 | 61.4 | 60.5 | 59.7
42 | 67.6 | 66.7 | 65.7 | 64.8 | 63.9 | 63.0 | 62.2 | 61.3 | 60.4 | 59.6
43 | 67.5 | 66.6 | 65.7 | 64.8 | 63.8 | 62.9 | 62.1 | 61.2 | 60.3 | 59.4
44 | 67.5 | 66.5 | 65.6 | 64.7 | 63.8 | 62.9 | 62.0 | 61.1 | 60.2 | 59.3
45 | 67.4 | 66.5 | 65.5 | 64.6 | 63.7 | 62.8 | 61.9 | 61.0 | 60.1 | 59.2
46 | 67.4 | 66.4 | 65.4 | 64.6 | 63.6 | 62.7 | 61.8 | 60.9 | 60.0 | 59.1
47 | 67.3 | 66.4 | 65.4 | 64.5 | 63.6 | 62.6 | 61.7 | 60.8 | 59.9 | 59.0
48 | 67.3 | 66.3 | 65.4 | 64.4 | 63.5 | 62.6 | 61.6 | 60.7 | 59.8 | 58.9
49 | 67.2 | 66.3 | 65.3 | 64.4 | 63.5 | 62.5 | 61.6 | 60.7 | 59.7 | 58.8
50 | 67.2 | 66.2 | 65.3 | 64.3 | 63.4 | 62.5 | 61.5 | 60.6 | 59.7 | 58.8
51 | 67.2 | 66.2 | 65.3 | 64.3 | 63.4 | 62.4 | 61.5 | 60.5 | 59.6 | 58.7
52 | 67.1 | 66.2 | 65.2 | 64.3 | 63.3 | 62.4 | 61.4 | 60.5 | 59.6 | 58.6
53 | 67.1 | 66.2 | 65.2 | 64.2 | 63.3 | 62.3 | 61.4 | 60.4 | 59.5 | 58.6
54 | 67.1 | 66.1 | 65.2 | 64.2 | 63.2 | 62.3 | 61.3 | 60.4 | 59.5 | 58.5
55 | 67.1 | 66.1 | 65.1 | 64.2 | 63.2 | 62.3 | 61.3 | 60.4 | 59.4 | 58.5
56 | 67.0 | 66.1 | 65.1 | 64.1 | 63.2 | 62.2 | 61.3 | 60.3 | 59.4 | 58.4
57 | 67.0 | 66.1 | 65.1 | 64.1 | 63.2 | 62.2 | 61.2 | 60.3 | 59.3 | 58.4
58 | 67.0 | 66.0 | 65.1 | 64.1 | 63.1 | 62.2 | 61.2 | 60.3 | 59.3 | 58.4
59 | 67.0 | 66.0 | 65.0 | 64.1 | 63.1 | 62.1 | 61.2 | 60.2 | 59.3 | 58.3
60 | 67.0 | 66.0 | 65.0 | 64.1 | 63.1 | 62.1 | 61.2 | 60.2 | 59.2 | 58.3
61 | 67.0 | 66.0 | 65.0 | 64.0 | 63.1 | 62.1 | 61.1 | 60.2 | 59.2 | 58.3
62 | 66.9 | 66.0 | 65.0 | 64.0 | 63.1 | 62.1 | 61.1 | 60.2 | 59.2 | 58.2
63 | 66.9 | 66.0 | 65.0 | 64.0 | 63.0 | 62.1 | 61.1 | 60.1 | 59.2 | 58.2
64 | 66.9 | 65.9 | 65.0 | 64.0 | 63.0 | 62.1 | 61.1 | 60.1 | 59.2 | 58.2
65 | 66.9 | 65.9 | 65.0 | 64.0 | 63.0 | 62.0 | 61.1 | 60.1 | 59.1 | 58.2
66 | 66.9 | 65.9 | 64.9 | 64.0 | 63.0 | 62.0 | 61.1 | 60.1 | 59.1 | 58.2
67 | 66.9 | 65.9 | 64.9 | 64.0 | 63.0 | 62.0 | 61.1 | 60.1 | 59.1 | 58.1
68 | 66.9 | 65.9 | 64.9 | 64.0 | 63.0 | 62.0 | 61.0 | 60.1 | 59.1 | 58.1
69 | 66.9 | 65.9 | 64.9 | 63.9 | 63.0 | 62.0 | 61.0 | 60.0 | 59.1 | 58.1
70 | 66.9 | 65.9 | 64.9 | 63.9 | 63.0 | 62.0 | 61.0 | 60.0 | 59.1 | 58.1
71 | 66.9 | 65.9 | 64.9 | 63.9 | 62.9 | 62.0 | 61.0 | 60.0 | 59.1 | 58.1
72 | 66.9 | 65.9 | 64.9 | 63.9 | 62.9 | 62.0 | 61.0 | 60.0 | 59.0 | 58.1
73 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 62.0 | 61.0 | 60.0 | 59.0 | 58.1
74 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 62.0 | 61.0 | 60.0 | 59.0 | 58.1
75 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 61.9 | 61.0 | 60.0 | 59.0 | 58.1
76 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 61.9 | 61.0 | 60.0 | 59.0 | 58.0
76 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 61.9 | 61.0 | 60.0 | 59.0 | 58.0
77 | 66.8 | 65.9 | 64.9 | 63.9 | 63.9 | 62.9 | 61.0 | 60.0 | 59.0 | 58.0
78 | 66.8 | 65.8 | 64.9 | 63.9 | 62.9 | 61.9 | 61.0 | 60.0 | 59.0 | 58.0
79 | 66.8 | 65.8 | 64.9 | 63.9 | 62.9 | 61.9 | 61.0 | 60.0 | 59.0 | 58.0
80 | 66.8 | 65.9 | 64.9 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
81 | 66.8 | 65.8 | 64.9 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
82 | 66.8 | 65.8 | 64.9 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
83 | 66.8 | 65.8 | 64.9 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
84 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
85 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
86 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
87 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
88 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
89 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
90 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
91 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 60.0 | 59.0 | 58.0
92 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
93 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
94 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
95 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
96 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
97 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
98 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
99 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
100 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
101 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
102 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
103 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
104 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
105 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
106 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
107 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
108 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
109 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
110 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
111 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
112 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
113 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
114 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
115 | 66.8 | 65.8 | 64.8 | 63.9 | 62.9 | 61.9 | 60.9 | 59.9 | 59.0 | 58.0
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34
25 | 63.9 | 63.4 | 62.9 | 62.5 | 62.1 | 61.7 | 61.3 | 61.0 | 60.7 | 60.4
26 | 63.4 | 62.9 | 62.4 | 61.9 | 61.5 | 61.1 | 60.7 | 60.4 | 60.0 | 59.7
27 | 62.9 | 62.4 | 61.9 | 61.4 | 60.9 | 60.5 | 60.1 | 59.7 | 59.4 | 59.0
28 | 62.5 | 61.9 | 61.4 | 60.9 | 60.4 | 60.0 | 59.5 | 59.1 | 58.7 | 58.4
29 | 62.1 | 61.5 | 60.9 | 60.4 | 59.9 | 59.4 | 59.0 | 58.5 | 58.1 | 57.7
30 | 61.7 | 61.1 | 60.5 | 60.0 | 59.4 | 58.9 | 58.4 | 58.0 | 57.5 | 57.1
31 | 61.3 | 60.7 | 60.1 | 59.5 | 59.0 | 58.4 | 57.9 | 57.4 | 57.0 | 56.5
32 | 61.0 | 60.4 | 59.7 | 59.1 | 58.5 | 58.0 | 57.4 | 56.9 | 56.4 | 56.0
33 | 60.7 | 60.0 | 59.4 | 58.7 | 58.1 | 57.5 | 57.0 | 56.4 | 55.9 | 55.5
34 | 60.4 | 59.7 | 59.0 | 58.4 | 57.7 | 57.1 | 56.5 | 56.0 | 55.5 | 54.9
35 | 60.1 | 59.4 | 58.7 | 58.0 | 57.4 | 56.7 | 56.1 | 55.6 | 55.0 | 54.5
36 | 59.9 | 59.1 | 58.4 | 57.7 | 57.0 | 56.4 | 55.8 | 55.1 | 54.6 | 54.0
37 | 59.6 | 58.9 | 58.1 | 57.4 | 56.7 | 56.0 | 55.4 | 54.8 | 54.2 | 53.6
38 | 59.4 | 58.6 | 57.9 | 57.9 | 56.4 | 55.7 | 55.1 | 54.4 | 53.8 | 53.2
39 | 59.2 | 58.4 | 57.7 | 56.9 | 56.2 | 55.4 | 54.7 | 54.1 | 53.4 | 52.8
40 | 59.0 | 58.2 | 57.4 | 56.7 | 55.9 | 55.2 | 54.5 | 53.8 | 53.1 | 52.4
41 | 58.9 | 58.0 | 57.2 | 56.4 | 55.7 | 54.9 | 54.2 | 53.5 | 52.8 | 52.1
42 | 58.7 | 57.9 | 57.1 | 56.2 | 55.5 | 54.7 | 53.9 | 53.2 | 52.5 | 51.8
43 | 58.6 | 57.7 | 56.9 | 56.1 | 55.3 | 54.5 | 53.7 | 52.9 | 52.2 | 51.5
44 | 58.4 | 57.6 | 56.7 | 55.9 | 55.1 | 54.3 | 53.5 | 52.7 | 52.0 | 51.2
45 | 58.3 | 57.4 | 56.6 | 55.7 | 54.9 | 54.1 | 53.3 | 52.5 | 51.7 | 51.0
46 | 58.2 | 57.3 | 56.5 | 55.6 | 54.8 | 53.9 | 53.1 | 52.3 | 51.5 | 50.7
47 | 58.1 | 57.2 | 56.3 | 55.5 | 54.6 | 53.8 | 52.9 | 52.1 | 51.3 | 50.5
48 | 58.0 | 57.1 | 56.2 | 55.3 | 54.5 | 53.6 | 52.8 | 51.9 | 51.1 | 50.3
49 | 57.9 | 57.0 | 56.1 | 55.2 | 54.4 | 53.5 | 52.6 | 51.8 | 51.0 | 50.1
50 | 57.8 | 56.9 | 56.0 | 55.1 | 54.2 | 53.4 | 52.5 | 51.7 | 50.8 | 50.0
51 | 57.8 | 56.9 | 55.9 | 55.0 | 54.1 | 53.3 | 52.4 | 51.5 | 50.7 | 49.8
52 | 57.7 | 56.8 | 55.9 | 55.0 | 54.1 | 53.2 | 52.3 | 51.4 | 50.5 | 49.7
53 | 57.6 | 56.7 | 55.8 | 54.9 | 54.0 | 53.1 | 52.2 | 51.3 | 50.4 | 49.6
54 | 57.6 | 56.7 | 55.7 | 54.8 | 53.9 | 53.0 | 52.1 | 51.2 | 50.3 | 49.4
55 | 57.5 | 56.6 | 55.7 | 54.7 | 53.8 | 52.9 | 52.0 | 51.1 | 40.2 | 49.3
56 | 57.5 | 56.5 | 55.6 | 54.7 | 53.8 | 52.8 | 51.9 | 51.0 | 50.1 | 49.2
57 | 57.4 | 56.5 | 55.6 | 54.6 | 53.7 | 52.8 | 51.9 | 50.9 | 50.0 | 49.1
58 | 57.4 | 56.5 | 55.5 | 54.6 | 53.6 | 52.7 | 51.8 | 50.9 | 50.0 | 49.1
59 | 57.4 | 56.4 | 55.5 | 54.5 | 53.6 | 52.7 | 51.7 | 50.8 | 49.9 | 49.0
60 | 57.3 | 56.4 | 55.4 | 54.5 | 53.6 | 52.6 | 51.7 | 50.8 | 49.8 | 48.9
61 | 57.3 | 56.4 | 55.4 | 54.5 | 53.5 | 52.6 | 51.6 | 50.7 | 49.8 | 48.9
62 | 57.3 | 56.3 | 55.4 | 54.4 | 53.5 | 52.5 | 51.6 | 50.7 | 49.7 | 48.8
63 | 57.3 | 56.3 | 55.3 | 54.4 | 53.4 | 52.5 | 51.6 | 50.6 | 49.7 | 48.7
64 | 57.2 | 56.3 | 55.3 | 54.4 | 53.4 | 52.5 | 51.5 | 50.6 | 49.6 | 48.7
65 | 57.2 | 56.3 | 55.3 | 54.3 | 53.4 | 52.4 | 51.5 | 50.5 | 49.6 | 48.7
66 | 57.2 | 56.2 | 55.3 | 54.3 | 53.4 | 52.4 | 51.5 | 50.5 | 49.6 | 48.6
67 | 57.2 | 56.2 | 55.3 | 54.3 | 53.3 | 52.4 | 51.4 | 50.5 | 49.5 | 48.6
68 | 57.2 | 56.2 | 55.2 | 54.3 | 53.3 | 52.4 | 51.4 | 50.4 | 49.5 | 48.6
69 | 57.1 | 56.2 | 55.2 | 54.3 | 53.3 | 52.3 | 51.4 | 50.4 | 49.5 | 48.5
70 | 57.1 | 56.2 | 55.2 | 54.2 | 53.3 | 52.3 | 51.4 | 50.4 | 49.4 | 48.5
71 | 57.1 | 56.2 | 55.2 | 54.2 | 53.3 | 52.3 | 51.3 | 50.4 | 49.4 | 48.5
72 | 57.1 | 56.1 | 55.2 | 54.2 | 53.2 | 52.3 | 51.3 | 50.4 | 49.4 | 48.5
73 | 57.1 | 56.1 | 55.2 | 54.2 | 53.2 | 52.3 | 51.3 | 50.3 | 49.4 | 48.4
74 | 57.1 | 56.1 | 55.2 | 54.2 | 53.2 | 52.3 | 51.3 | 50.3 | 49.4 | 48.4
75 | 57.1 | 56.1 | 55.1 | 54.2 | 53.2 | 52.2 | 51.3 | 50.3 | 49.4 | 48.4
76 | 57.1 | 56.1 | 55.1 | 54.2 | 53.2 | 52.2 | 51.3 | 50.3 | 49.3 | 48.4
77 | 57.1 | 56.1 | 55.1 | 54.2 | 53.2 | 52.2 | 51.3 | 50.3 | 49.3 | 48.4
78 | 57.1 | 56.1 | 55.1 | 54.2 | 53.2 | 52.2 | 51.3 | 50.3 | 49.3 | 48.4
79 | 57.1 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.4
80 | 57.1 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.3
81 | 57.0 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.3
82 | 57.0 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.3
83 | 57.0 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.3
84 | 57.0 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.3 | 49.3 | 48.3
85 | 57.0 | 56.1 | 55.1 | 54.1 | 53.2 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
86 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
87 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
88 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
89 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
90 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
91 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
92 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
93 | 57.0 | 56.1 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
94 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
95 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
96 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
97 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
98 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
99 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
100 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
101 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
102 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
103 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
104 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
105 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
106 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
107 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
108 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
109 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
110 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
111 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
112 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
113 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
114 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
115 | 57.0 | 56.0 | 55.1 | 54.1 | 53.1 | 52.2 | 51.2 | 50.2 | 49.3 | 48.3
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44
35 | 54.0 | 53.5 | 53.0 | 52.6 | 52.2 | 51.8 | 51.4 | 51.1 | 50.8 | 50.5
36 | 53.5 | 53.0 | 52.5 | 52.0 | 51.6 | 51.2 | 50.8 | 50.4 | 50.1 | 49.8
37 | 53.0 | 52.5 | 52.0 | 51.5 | 51.0 | 50.6 | 50.2 | 49.8 | 49.5 | 49.1
38 | 52.6 | 52.0 | 51.5 | 51.0 | 50.5 | 50.0 | 49.6 | 49.2 | 48.8 | 48.5
39 | 52.2 | 51.6 | 51.0 | 50.5 | 50.0 | 49.5 | 49.1 | 48.6 | 48.2 | 47.8
40 | 51.8 | 51.2 | 50.6 | 50.0 | 49.5 | 49.0 | 48.5 | 48.1 | 47.6 | 47.2
41 | 51.4 | 50.8 | 50.2 | 49.6 | 49.1 | 48.5 | 48.0 | 47.5 | 47.1 | 46.7
42 | 51.1 | 50.4 | 49.8 | 49.2 | 48.6 | 48.1 | 47.5 | 47.0 | 46.6 | 46.1
43 | 50.8 | 50.1 | 49.5 | 48.8 | 48.2 | 47.6 | 47.1 | 46.6 | 46.0 | 45.6
44 | 50.5 | 49.8 | 49.1 | 48.5 | 47.8 | 47.2 | 46.7 | 46.1 | 45.6 | 45.1
45 | 50.2 | 49.5 | 48.8 | 48.1 | 47.5 | 46.9 | 46.3 | 45.7 | 45.1 | 44.6
46 | 50.0 | 49.2 | 48.5 | 47.8 | 47.2 | 46.5 | 45.9 | 45.3 | 44.7 | 44.1
47 | 49.7 | 49.0 | 48.3 | 47.5 | 46.8 | 46.2 | 45.5 | 44.9 | 44.3 | 43.7
48 | 49.5 | 48.8 | 48.0 | 47.3 | 46.6 | 45.9 | 45.2 | 44.5 | 43.9 | 43.3
49 | 49.3 | 48.5 | 47.8 | 47.0 | 46.3 | 45.6 | 44.9 | 44.2 | 43.6 | 42.9
50 | 49.2 | 48.4 | 47.6 | 46.8 | 46.0 | 45.3 | 44.6 | 43.9 | 43.2 | 42.6
51 | 49.0 | 48.2 | 47.4 | 46.6 | 45.8 | 45.1 | 44.3 | 43.6 | 42.9 | 44.2
52 | 48.8 | 48.0 | 47.2 | 46.4 | 45.6 | 44.8 | 44.1 | 43.3 | 42.6 | 41.9
53 | 48.7 | 47.9 | 47.0 | 46.2 | 45.4 | 44.6 | 43.9 | 43.1 | 42.4 | 41.7
54 | 48.6 | 47.7 | 46.9 | 46.0 | 45.2 | 44.4 | 43.6 | 42.9 | 42.1 | 41.4
55 | 48.5 | 47.6 | 46.7 | 45.9 | 45.1 | 44.2 | 43.4 | 42.7 | 41.9 | 41.2
56 | 48.3 | 47.5 | 46.6 | 45.8 | 44.9 | 44.1 | 43.3 | 42.5 | 41.7 | 40.9
57 | 48.3 | 47.4 | 46.5 | 45.6 | 44.8 | 43.9 | 43.1 | 42.3 | 41.5 | 40.7
58 | 48.2 | 47.3 | 46.4 | 45.5 | 44.7 | 43.8 | 43.0 | 42.1 | 41.3 | 40.5
59 | 48.1 | 47.2 | 46.3 | 45.4 | 44.5 | 43.7 | 42.8 | 42.0 | 41.2 | 40.4
60 | 48.0 | 47.1 | 46.2 | 45.3 | 44.4 | 43.6 | 42.7 | 41.9 | 41.0 | 40.2
61 | 47.9 | 47.0 | 46.1 | 45.2 | 44.3 | 43.5 | 42.6 | 41.7 | 40.9 | 40.0
62 | 47.9 | 47.0 | 46.0 | 45.1 | 44.2 | 43.4 | 42.5 | 41.6 | 40.8 | 39.9
63 | 47.8 | 46.9 | 46.0 | 45.1 | 44.2 | 43.3 | 42.4 | 41.5 | 40.6 | 39.8
64 | 47.8 | 46.8 | 45.9 | 45.0 | 44.1 | 43.2 | 42.3 | 41.4 | 40.5 | 39.7
65 | 47.7 | 46.8 | 45.9 | 44.9 | 44.0 | 43.1 | 42.2 | 41.3 | 40.4 | 39.6
66 | 47.7 | 46.7 | 45.8 | 44.9 | 44.0 | 43.1 | 42.2 | 41.3 | 40.4 | 39.5
67 | 47.6 | 46.7 | 45.8 | 44.8 | 43.9 | 43.0 | 42.1 | 41.2 | 40.3 | 39.4
68 | 47.6 | 46.7 | 45.7 | 44.8 | 43.9 | 42.9 | 42.0 | 41.1 | 40.2 | 39.3
69 | 47.6 | 46.6 | 45.7 | 44.8 | 43.8 | 42.9 | 42.0 | 41.1 | 40.2 | 39.3
70 | 47.5 | 46.6 | 45.7 | 44.7 | 43.8 | 42.9 | 41.9 | 41.0 | 40.1 | 39.2
71 | 47.5 | 46.6 | 45.6 | 44.7 | 43.8 | 42.8 | 41.9 | 41.0 | 40.1 | 39.1
72 | 47.5 | 46.6 | 45.6 | 44.7 | 43.7 | 42.8 | 41.9 | 40.9 | 40.0 | 39.1
73 | 47.5 | 46.5 | 45.6 | 44.6 | 43.7 | 42.8 | 41.8 | 40.9 | 40.0 | 39.0
74 | 47.5 | 46.5 | 45.6 | 44.6 | 43.7 | 42.7 | 41.8 | 40.9 | 39.9 | 39.0
75 | 47.4 | 46.5 | 45.5 | 44.6 | 43.6 | 42.7 | 41.8 | 40.8 | 39.9 | 39.0
76 | 47.4 | 46.5 | 45.5 | 44.6 | 43.6 | 42.7 | 41.7 | 40.8 | 39.9 | 38.9
77 | 47.4 | 46.5 | 45.5 | 44.6 | 43.6 | 42.7 | 41.7 | 40.8 | 39.8 | 38.9
78 | 47.4 | 46.4 | 45.5 | 44.5 | 43.6 | 42.6 | 41.7 | 40.7 | 39.8 | 38.9
79 | 47.4 | 46.4 | 45.5 | 44.5 | 43.6 | 42.6 | 41.7 | 40.7 | 39.8 | 38.9
80 | 47.4 | 46.4 | 45.5 | 44.5 | 43.6 | 42.6 | 41.7 | 40.7 | 39.8 | 38.8
81 | 47.4 | 46.4 | 45.5 | 44.5 | 43.5 | 42.6 | 41.6 | 40.7 | 39.8 | 38.8
82 | 47.4 | 46.4 | 45.4 | 44.5 | 43.5 | 42.6 | 41.6 | 40.7 | 39.7 | 38.8
83 | 47.4 | 46.4 | 45.4 | 44.5 | 43.5 | 42.6 | 41.6 | 40.7 | 39.7 | 38.8
84 | 47.4 | 46.4 | 45.4 | 44.5 | 43.5 | 42.6 | 41.6 | 40.7 | 39.7 | 38.8
85 | 47.4 | 46.4 | 45.4 | 44.5 | 43.5 | 42.6 | 41.6 | 40.7 | 39.7 | 38.8
86 | 47.3 | 46.4 | 45.4 | 44.5 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.8
87 | 47.3 | 46.4 | 45.4 | 44.5 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
88 | 47.3 | 46.4 | 45.4 | 44.5 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
89 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
90 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
91 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 39.7
92 | 47.3 | 46.4 | 45.4 | 44.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 38.7
93 | 47.3 | 46.4 | 45.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 39.7 | 38.7
94 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
95 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
96 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.7 | 38.7
97 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.6 | 38.7
98 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.6 | 40.6 | 39.6 | 38.7
99 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
100 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
101 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
102 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
103 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
104 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
105 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
106 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
107 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
108 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
109 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
110 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
111 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
112 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
113 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
114 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
114 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
115 | 47.3 | 46.4 | 45.4 | 44.4 | 43.5 | 42.5 | 41.5 | 40.6 | 39.6 | 38.7
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52 | 53 | 54
45 | 44.1 | 43.6 | 43.2 | 42.7 | 42.3 | 42.0 | 41.6 | 41.3 | 41.0 | 40.7
46 | 43.6 | 43.1 | 42.6 | 42.2 | 41.8 | 41.4 | 41.0 | 40.6 | 40.3 | 40.0
47 | 43.2 | 42.6 | 42.1 | 41.7 | 41.2 | 40.8 | 40.4 | 40.0 | 39.7 | 39.3
48 | 42.7 | 42.2 | 41.7 | 41.2 | 40.7 | 40.2 | 39.8 | 39.4 | 39.0 | 38.7
49 | 42.3 | 41.8 | 41.2 | 40.7 | 40.2 | 39.7 | 39.3 | 38.8 | 38.4 | 38.1
50 | 42.0 | 41.4 | 40.8 | 40.2 | 39.7 | 39.2 | 38.7 | 38.3 | 37.9 | 37.5
51 | 41.6 | 41.0 | 40.4 | 39.8 | 39.3 | 38.7 | 38.2 | 37.8 | 37.3 | 36.9
52 | 41.3 | 40.6 | 40.0 | 39.4 | 38.8 | 38.3 | 37.8 | 37.3 | 36.8 | 36.4
53 | 41.0 | 40.3 | 39.7 | 39.0 | 38.4 | 37.9 | 37.3 | 36.8 | 36.3 | 35.8
54 | 40.7 | 40.0 | 39.3 | 38.7 | 38.1 | 37.5 | 36.9 | 36.4 | 35.8 | 35.3
55 | 40.4 | 39.7 | 39.0 | 38.4 | 37.7 | 37.1 | 36.5 | 35.9 | 35.4 | 34.9
56 | 40.2 | 39.5 | 38.7 | 38.1 | 37.4 | 36.8 | 36.1 | 35.6 | 35.0 | 34.4
57 | 40.0 | 39.2 | 38.5 | 37.8 | 37.1 | 36.4 | 35.8 | 35.2 | 34.6 | 34.0
58 | 39.7 | 39.0 | 38.2 | 37.5 | 36.8 | 36.1 | 35.5 | 34.8 | 34.2 | 33.6
59 | 39.6 | 38.8 | 38.0 | 37.3 | 36.6 | 35.9 | 35.2 | 34.5 | 33.9 | 33.3
60 | 39.4 | 38.6 | 37.8 | 37.1 | 36.3 | 35.6 | 34.9 | 34.2 | 33.6 | 32.9
61 | 39.2 | 38.4 | 37.6 | 36.9 | 36.1 | 35.4 | 34.6 | 33.9 | 33.3 | 32.6
62 | 39.1 | 38.3 | 37.5 | 36.7 | 35.9 | 35.1 | 34.4 | 33.7 | 33.0 | 32.3
63 | 38.9 | 38.1 | 37.3 | 36.5 | 35.7 | 34.9 | 34.2 | 33.5 | 32.7 | 32.0
64 | 38.8 | 38.0 | 37.2 | 36.3 | 35.5 | 34.8 | 34.0 | 33.2 | 32.5 | 31.8
65 | 38.7 | 37.9 | 37.0 | 36.2 | 35.4 | 34.6 | 33.8 | 33.0 | 32.3 | 31.6
66 | 38.6 | 37.8 | 36.9 | 36.1 | 35.2 | 34.4 | 33.6 | 32.9 | 32.1 | 31.4
67 | 38.5 | 37.7 | 36.8 | 36.0 | 35.1 | 34.3 | 33.5 | 32.7 | 31.9 | 31.2
68 | 38.4 | 37.6 | 36.7 | 35.8 | 35.0 | 34.2 | 33.4 | 32.5 | 31.8 | 31.0
69 | 38.4 | 37.5 | 36.6 | 35.7 | 34.9 | 34.1 | 33.2 | 32.4 | 31.6 | 30.8
70 | 38.3 | 37.4 | 36.5 | 35.7 | 34.8 | 34.0 | 33.1 | 32.3 | 31.5 | 30.7
71 | 38.2 | 37.3 | 36.5 | 35.6 | 34.7 | 33.9 | 33.0 | 32.2 | 31.4 | 30.5
72 | 38.2 | 37.3 | 36.4 | 35.5 | 34.6 | 33.8 | 32.9 | 32.1 | 31.2 | 30.4
73 | 38.1 | 37.2 | 36.3 | 35.4 | 34.6 | 33.7 | 32.8 | 32.0 | 31.1 | 30.3
74 | 38.1 | 37.2 | 36.3 | 35.4 | 34.5 | 33.6 | 32.8 | 31.9 | 31.1 | 30.2
75 | 38.1 | 37.1 | 36.2 | 35.3 | 34.5 | 33.6 | 32.7 | 31.8 | 31.0 | 30.1
76 | 38.0 | 37.1 | 36.2 | 35.3 | 34.4 | 33.5 | 32.6 | 31.8 | 30.9 | 30.1
77 | 38.0 | 37.1 | 36.2 | 35.3 | 34.4 | 33.5 | 32.6 | 31.7 | 30.8 | 30.0
78 | 38.0 | 37.0 | 36.1 | 35.2 | 34.3 | 33.4 | 32.5 | 31.7 | 30.8 | 29.9
79 | 37.9 | 37.0 | 36.1 | 35.2 | 34.3 | 33.4 | 32.5 | 31.6 | 30.7 | 29.9
80 | 37.9 | 37.0 | 36.1 | 35.2 | 34.2 | 33.4 | 32.5 | 31.6 | 30.7 | 29.8
81 | 37.9 | 37.0 | 36.0 | 35.1 | 34.2 | 33.3 | 32.4 | 31.5 | 30.7 | 29.8
82 | 37.9 | 36.9 | 36.0 | 35.1 | 34.2 | 33.3 | 32.4 | 31.5 | 30.6 | 29.7
83 | 37.9 | 36.9 | 36.0 | 35.1 | 34.2 | 33.3 | 32.4 | 31.5 | 30.6 | 29.7
84 | 37.8 | 36.9 | 36.9 | 35.0 | 34.2 | 33.2 | 32.3 | 31.4 | 30.6 | 29.7
85 | 37.8 | 36.9 | 36.0 | 35.1 | 34.1 | 33.2 | 32.3 | 31.4 | 30.5 | 29.6
86 | 38.8 | 36.9 | 36.0 | 35.0 | 34.1 | 33.2 | 32.3 | 31.4 | 30.5 | 29.6
87 | 37.8 | 36.9 | 35.9 | 35.0 | 34.1 | 33.2 | 32.3 | 31.4 | 30.5 | 29.6
88 | 37.8 | 36.9 | 35.9 | 35.0 | 34.1 | 33.2 | 32.3 | 31.4 | 30.5 | 29.6
89 | 37.8 | 36.9 | 35.9 | 35.0 | 34.1 | 33.2 | 32.3 | 31.4 | 30.5 | 29.6
90 | 37.8 | 36.9 | 35.9 | 35.0 | 34.1 | 33.2 | 32.3 | 31.3 | 30.5 | 29.6
91 | 37.8 | 36.8 | 35.9 | 35.0 | 34.1 | 33.2 | 32.2 | 31.3 | 30.4 | 29.5
92 | 37.8 | 36.8 | 35.9 | 35.0 | 34.1 | 33.2 | 32.2 | 31.3 | 30.4 | 29.5
93 | 37.8 | 36.8 | 35.9 | 35.0 | 34.1 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
94 | 37.8 | 36.8 | 35.9 | 35.0 | 34.1 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
95 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
96 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
97 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
98 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
99 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
101 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
102 | 37.8 | 36.8 | 35.9 | 35.0 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
103 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
104 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
105 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
106 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
107 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
108 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
109 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
110 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
111 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
112 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
113 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
114 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
115 | 37.7 | 36.8 | 35.9 | 34.9 | 34.0 | 33.1 | 32.2 | 31.3 | 30.4 | 29.5
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64
55 | 34.4 | 33.9 | 33.5 | 33.1 | 32.7 | 32.3 | 32.0 | 31.7 | 31.4 | 31.1
56 | 33.9 | 33.4 | 33.0 | 32.5 | 32.1 | 31.7 | 31.4 | 31.0 | 30.7 | 30.4
57 | 33.5 | 33.0 | 32.5 | 32.0 | 31.6 | 31.2 | 30.8 | 30.4 | 30.1 | 29.8
58 | 33.1 | 32.5 | 32.0 | 31.5 | 31.1 | 30.6 | 30.2 | 29.9 | 29.5 | 29.2
59 | 32.7 | 32.1 | 31.6 | 31.1 | 30.6 | 30.1 | 29.7 | 29.3 | 28.9 | 28.6
60 | 32.3 | 31.7 | 31.2 | 30.6 | 30.1 | 29.7 | 29.2 | 28.8 | 28.4 | 28.0
61 | 32.0 | 31.4 | 30.8 | 30.2 | 29.7 | 29.2 | 28.7 | 28.3 | 27.8 | 27.4
62 | 31.7 | 31.0 | 30.4 | 29.9 | 29.3 | 28.8 | 28.3 | 27.8 | 27.3 | 26.9
63 | 31.4 | 30.7 | 30.1 | 29.5 | 28.9 | 28.4 | 27.8 | 27.3 | 26.9 | 26.4
64 | 31.1 | 30.4 | 29.8 | 29.2 | 28.6 | 28.0 | 27.4 | 26.9 | 26.4 | 25.9
65 | 30.9 | 30.2 | 29.5 | 28.9 | 28.2 | 27.6 | 27.1 | 26.5 | 26.0 | 25.5
66 | 30.6 | 29.9 | 29.2 | 28.6 | 27.9 | 27.3 | 26.7 | 26.1 | 25.6 | 25.1
67 | 30.4 | 29.7 | 29.0 | 28.3 | 27.6 | 27.0 | 26.4 | 25.8 | 25.2 | 24.7
68 | 30.2 | 29.5 | 28.8 | 28.1 | 27.4 | 26.7 | 26.1 | 25.5 | 24.9 | 24.3
69 | 30.1 | 29.3 | 28.6 | 27.8 | 27.1 | 26.5 | 25.8 | 25.2 | 24.6 | 24.0
70 | 29.9 | 29.1 | 28.4 | 27.6 | 26.9 | 26.2 | 25.6 | 24.9 | 24.3 | 23.7
71 | 29.7 | 29.0 | 28.2 | 27.5 | 26.7 | 26.0 | 25.3 | 24.7 | 24.0 | 23.4
72 | 29.6 | 28.8 | 28.1 | 27.3 | 26.5 | 25.8 | 25.1 | 24.4 | 23.8 | 23.1
73 | 29.5 | 28.7 | 27.9 | 27.1 | 26.4 | 25.6 | 24.9 | 24.2 | 23.5 | 22.9
74 | 29.4 | 28.6 | 27.8 | 27.0 | 26.2 | 25.5 | 24.7 | 24.0 | 23.3 | 22.7
75 | 29.3 | 28.5 | 27.7 | 26.9 | 26.1 | 25.3 | 24.6 | 23.8 | 23.1 | 22.4
76 | 29.2 | 28.4 | 27.6 | 26.8 | 26.0 | 25.2 | 24.4 | 23.7 | 23.0 | 22.3
77 | 29.1 | 28.3 | 27.5 | 26.7 | 25.9 | 25.1 | 24.3 | 23.6 | 22.8 | 22.1
78 | 29.1 | 28.2 | 27.4 | 26.6 | 25.8 | 25.0 | 24.2 | 23.4 | 22.7 | 21.9
79 | 29.0 | 28.2 | 27.3 | 26.5 | 25.7 | 24.9 | 24.1 | 23.3 | 22.6 | 21.8
80 | 29.0 | 28.1 | 27.3 | 26.4 | 25.6 | 24.8 | 24.0 | 23.2 | 22.4 | 21.7
81 | 28.9 | 28.1 | 27.2 | 26.4 | 25.5 | 24.7 | 23.9 | 23.1 | 22.3 | 21.6
82 | 28.9 | 28.0 | 27.2 | 26.3 | 25.5 | 24.6 | 23.8 | 23.0 | 22.3 | 21.5
83 | 28.8 | 28.0 | 27.1 | 26.3 | 25.4 | 24.6 | 23.8 | 23.0 | 22.2 | 21.4
84 | 28.8 | 27.9 | 27.1 | 26.2 | 25.4 | 24.5 | 23.7 | 22.9 | 22.1 | 21.3
85 | 28.8 | 27.9 | 27.0 | 26.2 | 25.3 | 24.5 | 23.7 | 22.8 | 22.0 | 21.3
86 | 28.7 | 27.9 | 27.0 | 26.1 | 25.3 | 24.5 | 23.6 | 22.8 | 22.0 | 21.2
87 | 28.7 | 27.8 | 27.0 | 26.1 | 25.3 | 24.4 | 23.6 | 22.8 | 21.9 | 21.1
88 | 28.7 | 27.8 | 27.0 | 26.1 | 25.2 | 24.4 | 23.5 | 22.7 | 21.9 | 21.1
89 | 28.7 | 27.8 | 26.9 | 26.1 | 25.2 | 24.4 | 23.5 | 22.7 | 21.9 | 21.1
90 | 28.7 | 27.8 | 26.9 | 26.1 | 25.2 | 24.3 | 23.5 | 22.7 | 21.8 | 21.0
91 | 28.7 | 27.8 | 26.9 | 26.0 | 25.2 | 24.3 | 23.5 | 22.6 | 21.8 | 21.0
92 | 28.6 | 27.8 | 26.9 | 26.0 | 25.2 | 24.3 | 23.5 | 22.6 | 21.8 | 21.0
93 | 28.6 | 27.8 | 26.9 | 26.0 | 25.1 | 24.3 | 23.4 | 22.6 | 21.8 | 20.9
94 | 28.6 | 27.7 | 26.9 | 26.0 | 25.1 | 24.3 | 23.4 | 22.6 | 21.7 | 20.9
95 | 28.6 | 27.7 | 26.9 | 26.0 | 25.1 | 24.3 | 23.4 | 22.6 | 21.7 | 20.9
96 | 28.6 | 27.7 | 26.9 | 26.0 | 25.1 | 24.2 | 23.4 | 22.6 | 21.7 | 20.9
97 | 28.6 | 27.7 | 26.8 | 26.0 | 25.1 | 24.2 | 23.4 | 22.5 | 21.7 | 20.9
98 | 28.6 | 27.7 | 26.8 | 26.0 | 25.1 | 24.2 | 23.4 | 22.5 | 21.7 | 20.9
99 | 28.6 | 27.7 | 26.8 | 26.0 | 25.1 | 24.2 | 23.4 | 22.5 | 21.7 | 20.9
100 | 28.6 | 27.7 | 26.8 | 26.0 | 25.1 | 24.2 | 23.4 | 22.5 | 21.7 | 20.8
101 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.4 | 22.5 | 21.7 | 20.8
102 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.7 | 20.8
103 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.7 | 20.8
104 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
105 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
106 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
107 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
108 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
109 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
110 | 28.6 | 27.7 | 26.8 | 25.9 | 25.1 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
111 | 28.6 | 27.7 | 26.8 | 25.9 | 25.0 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
112 | 28.6 | 27.7 | 26.8 | 25.9 | 25.0 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
113 | 28.6 | 27.7 | 26.8 | 25.9 | 25.0 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
114 | 28.6 | 27.7 | 26.8 | 25.9 | 25.0 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
115 | 28.6 | 27.7 | 26.8 | 25.9 | 25.0 | 24.2 | 23.3 | 22.5 | 21.6 | 20.8
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74
65 | 25.0 | 24.6 | 24.2 | 23.8 | 23.4 | 23.1 | 22.8 | 22.5 | 22.2 | 22.0
66 | 24.6 | 24.1 | 23.7 | 23.3 | 22.9 | 22.5 | 22.2 | 21.9 | 21.6 | 21.4
67 | 24.2 | 23.7 | 23.2 | 22.8 | 22.4 | 22.0 | 21.7 | 21.3 | 21.0 | 20.8
68 | 23.8 | 23.3 | 22.8 | 22.3 | 21.9 | 21.5 | 21.2 | 20.8 | 20.5 | 20.2
69 | 23.4 | 22.9 | 22.4 | 21.9 | 21.5 | 21.1 | 20.7 | 20.3 | 20.0 | 19.6
70 | 23.1 | 22.5 | 22.0 | 21.5 | 21.1 | 20.6 | 20.2 | 19.8 | 19.4 | 19.1
71 | 22.8 | 22.2 | 21.7 | 21.2 | 20.7 | 20.2 | 19.8 | 19.4 | 19.0 | 18.6
72 | 22.5 | 21.9 | 21.3 | 20.8 | 20.3 | 19.8 | 19.4 | 18.9 | 18.5 | 18.2
73 | 22.2 | 21.6 | 21.0 | 20.5 | 20.0 | 19.4 | 19.0 | 18.5 | 18.1 | 17.7
74 | 22.0 | 21.4 | 20.8 | 20.2 | 19.6 | 19.1 | 18.6 | 18.2 | 17.7 | 17.3
75 | 21.8 | 21.1 | 20.5 | 19.9 | 19.3 | 18.8 | 18.3 | 17.8 | 17.3 | 16.9
76 | 21.6 | 20.9 | 20.3 | 19.7 | 19.1 | 18.5 | 18.0 | 17.5 | 17.0 | 16.5
77 | 21.4 | 20.7 | 20.1 | 19.4 | 18.8 | 18.3 | 17.7 | 17.2 | 16.7 | 16.2
78 | 21.2 | 20.5 | 19.9 | 19.2 | 18.6 | 18.0 | 17.5 | 16.9 | 16.4 | 15.9
79 | 21.1 | 20.4 | 19.7 | 19.0 | 18.4 | 17.8 | 17.2 | 16.7 | 16.1 | 15.6
80 | 21.0 | 20.2 | 19.5 | 18.9 | 18.2 | 17.6 | 17.0 | 16.4 | 15.9 | 15.4
81 | 20.8 | 20.1 | 19.4 | 18.7 | 18.1 | 17.4 | 16.8 | 16.2 | 15.7 | 15.1
82 | 20.7 | 20.0 | 19.3 | 18.6 | 17.9 | 17.3 | 16.6 | 16.0 | 15.5 | 14.9
83 | 20.6 | 19.9 | 19.2 | 18.5 | 17.8 | 17.1 | 16.5 | 15.9 | 15.3 | 14.7
84 | 20.5 | 19.8 | 19.1 | 18.4 | 17.7 | 17.0 | 16.3 | 15.7 | 15.1 | 14.5
85 | 20.5 | 19.7 | 19.0 | 18.3 | 17.6 | 16.9 | 16.2 | 15.6 | 15.0 | 14.4
86 | 20.4 | 19.6 | 18.9 | 18.2 | 17.5 | 16.8 | 16.1 | 15.5 | 14.8 | 14.2
87 | 20.4 | 19.6 | 18.8 | 18.1 | 17.4 | 16.7 | 16.0 | 15.4 | 14.7 | 14.1
88 | 20.3 | 19.5 | 18.8 | 18.0 | 17.3 | 16.6 | 15.9 | 15.3 | 14.6 | 14.0
89 | 20.3 | 19.5 | 18.7 | 18.0 | 17.2 | 16.5 | 15.8 | 15.2 | 14.5 | 13.9
90 | 20.2 | 19.4 | 18.7 | 17.9 | 17.2 | 16.5 | 15.8 | 15.1 | 14.5 | 13.8
91 | 20.2 | 19.4 | 18.6 | 17.9 | 17.1 | 16.4 | 15.7 | 15.0 | 14.4 | 13.7
92 | 20.2 | 19.4 | 18.6 | 17.8 | 17.1 | 16.4 | 15.7 | 15.0 | 14.3 | 13.7
93 | 20.1 | 19.3 | 18.6 | 17.8 | 17.1 | 16.3 | 15.6 | 14.9 | 14.3 | 13.6
94 | 20.1 | 19.3 | 18.5 | 17.8 | 17.0 | 16.3 | 15.6 | 14.9 | 14.2 | 13.6
95 | 20.1 | 19.3 | 18.5 | 17.8 | 17.0 | 16.3 | 15.6 | 14.9 | 14.2 | 13.5
96 | 20.1 | 19.3 | 18.5 | 17.7 | 17.0 | 16.2 | 15.5 | 14.8 | 14.2 | 13.5
97 | 20.1 | 19.3 | 18.5 | 17.7 | 17.0 | 16.2 | 15.5 | 14.8 | 14.1 | 13.5
98 | 20.1 | 19.3 | 18.5 | 17.7 | 16.9 | 16.2 | 15.5 | 14.8 | 14.1 | 13.4
99 | 20.0 | 19.2 | 18.5 | 17.7 | 16.9 | 16.2 | 15.5 | 14.7 | 14.1 | 13.4
100 | 20.0 | 19.2 | 18.4 | 17.7 | 16.9 | 16.2 | 15.4 | 14.7 | 14.0 | 13.4
101 | 20.0 | 19.2 | 18.4 | 17.7 | 16.9 | 16.1 | 15.4 | 14.7 | 14.0 | 13.3
102 | 20.0 | 19.2 | 18.4 | 17.6 | 16.9 | 16.1 | 15.4 | 14.7 | 14.0 | 13.3
103 | 20.0 | 19.2 | 18.4 | 17.6 | 16.9 | 16.1 | 15.4 | 14.7 | 14.0 | 13.3
104 | 20.0 | 19.2 | 18.4 | 17.6 | 16.9 | 16.1 | 15.4 | 14.7 | 14.0 | 13.3
105 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.4 | 14.6 | 13.9 | 13.3
106 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.3 | 14.6 | 13.9 | 13.3
107 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.3 | 14.6 | 13.9 | 13.2
108 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.3 | 14.6 | 13.9 | 13.2
109 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.3 | 14.6 | 13.9 | 13.2
110 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.1 | 15.3 | 14.6 | 13.9 | 13.2
111 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.0 | 15.3 | 14.6 | 13.9 | 13.2
112 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.0 | 15.3 | 14.6 | 13.9 | 13.2
113 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.0 | 15.3 | 14.6 | 13.9 | 13.2
114 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.0 | 15.3 | 14.6 | 13.9 | 13.2
115 | 20.0 | 19.2 | 18.4 | 17.6 | 16.8 | 16.0 | 15.3 | 14.6 | 13.9 | 13.2
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83 | 84
75 | 16.5 | 16.1 | 15.8 | 15.4 | 15.1 | 14.9 | 14.6 | 14.4 | 14.2 | 14.0
76 | 16.1 | 15.7 | 15.4 | 15.0 | 14.7 | 14.4 | 14.1 | 13.9 | 13.7 | 13.5
77 | 15.8 | 15.4 | 15.0 | 14.6 | 14.3 | 14.0 | 13.7 | 13.4 | 13.2 | 13.0
78 | 15.4 | 15.0 | 14.6 | 14.2 | 13.9 | 13.5 | 13.2 | 13.0 | 12.7 | 12.5
79 | 15.1 | 14.7 | 14.3 | 13.9 | 13.5 | 13.2 | 12.8 | 12.5 | 12.3 | 12.0
80 | 14.9 | 14.4 | 14.0 | 13.5 | 13.2 | 12.8 | 12.5 | 12.2 | 11.9 | 11.6
81 | 14.6 | 14.1 | 13.7 | 13.2 | 12.8 | 12.5 | 12.1 | 11.8 | 11.5 | 11.2
82 | 14.4 | 13.9 | 13.4 | 13.0 | 12.5 | 12.2 | 11.8 | 11.5 | 11.1 | 10.9
83 | 14.2 | 13.7 | 13.2 | 12.7 | 12.3 | 11.9 | 11.5 | 11.1 | 10.8 | 10.5
84 | 14.0 | 13.5 | 13.0 | 12.5 | 12.0 | 11.6 | 11.2 | 10.9 | 10.5 | 10.2
85 | 13.8 | 13.3 | 12.8 | 12.3 | 11.8 | 11.4 | 11.0 | 10.6 | 10.2 | 9.9
86 | 13.7 | 13.1 | 12.6 | 12.1 | 11.6 | 11.2 | 10.8 | 10.4 | 10.0 | 9.7
87 | 13.5 | 13.0 | 12.4 | 11.9 | 11.4 | 11.0 | 10.6 | 10.1 | 9.8 | 9.4
88 | 13.4 | 12.8 | 12.3 | 11.8 | 11.3 | 10.8 | 10.4 | 10.0 | 9.6 | 9.2
89 | 13.3 | 12.7 | 12.2 | 11.6 | 11.1 | 10.7 | 10.2 | 9.8 | 9.4 | 9.0
90 | 13.2 | 12.6 | 12.1 | 11.5 | 11.0 | 10.5 | 10.1 | 9.6 | 9.2 | 8.8
91 | 13.1 | 12.5 | 12.0 | 11.4 | 10.9 | 10.4 | 9.9 | 9.5 | 9.1 | 8.7
92 | 13.1 | 12.5 | 11.9 | 11.3 | 10.8 | 10.3 | 9.8 | 9.4 | 8.9 | 8.5
93 | 13.0 | 12.4 | 11.8 | 11.3 | 10.7 | 10.2 | 9.7 | 9.3 | 8.8 | 8.4
94 | 12.9 | 12.3 | 11.7 | 11.2 | 10.6 | 10.1 | 9.6 | 9.2 | 8.7 | 8.3
95 | 12.9 | 12.3 | 11.7 | 11.1 | 10.6 | 10.1 | 9.6 | 9.1 | 8.6 | 8.2
96 | 12.9 | 12.2 | 11.6 | 11.1 | 10.5 | 10.0 | 9.5 | 9.0 | 8.5 | 8.1
97 | 12.8 | 12.2 | 11.6 | 11.0 | 10.5 | 9.9 | 9.4 | 8.9 | 8.5 | 8.0
98 | 12.8 | 12.2 | 11.5 | 11.0 | 10.4 | 9.9 | 9.4 | 8.9 | 8.4 | 8.0
99 | 12.7 | 12.1 | 11.5 | 10.9 | 10.4 | 9.8 | 9.3 | 8.8 | 8.3 | 7.9
100 | 12.7 | 12.1 | 11.5 | 10.9 | 10.3 | 9.8 | 9.2 | 8.7 | 8.3 | 7.8
101 | 12.7 | 12.1 | 11.4 | 10.8 | 10.3 | 9.7 | 9.2 | 8.7 | 8.2 | 7.8
102 | 12.7 | 12.0 | 11.4 | 10.8 | 10.2 | 9.7 | 9.2 | 8.7 | 8.2 | 7.7
103 | 12.6 | 12.0 | 11.4 | 10.8 | 10.2 | 9.7 | 9.1 | 8.6 | 8.1 | 7.7
104 | 12.6 | 12.0 | 11.4 | 10.8 | 10.2 | 9.6 | 9.1 | 8.6 | 8.1 | 7.6
105 | 12.6 | 12.0 | 11.3 | 10.7 | 10.2 | 9.6 | 9.1 | 8.5 | 8.0 | 7.6
106 | 12.6 | 11.9 | 11.3 | 10.7 | 10.1 | 9.6 | 9.0 | 8.5 | 8.0 | 7.5
107 | 12.6 | 11.9 | 11.3 | 10.7 | 10.1 | 9.6 | 9.0 | 8.5 | 8.0 | 7.5
108 | 12.6 | 11.9 | 11.3 | 10.7 | 10.1 | 9.5 | 9.0 | 8.5 | 8.0 | 7.5
109 | 12.6 | 11.9 | 11.3 | 10.7 | 10.1 | 9.5 | 9.0 | 8.4 | 7.9 | 7.5
110 | 12.6 | 11.9 | 11.3 | 10.7 | 10.1 | 9.5 | 9.0 | 8.4 | 7.9 | 7.4
111 | 12.5 | 11.9 | 11.3 | 10.7 | 10.1 | 9.5 | 8.9 | 8.4 | 7.9 | 7.4
112 | 12.5 | 11.9 | 11.3 | 10.6 | 10.1 | 9.5 | 8.9 | 8.4 | 7.9 | 7.4
113 | 12.5 | 11.9 | 11.2 | 10.6 | 10.0 | 9.5 | 8.9 | 8.4 | 7.9 | 7.4
114 | 12.5 | 11.9 | 11.2 | 10.6 | 10.0 | 9.5 | 8.9 | 8.4 | 7.9 | 7.4
115 | 12.5 | 11.9 | 11.2 | 10.6 | 10.0 | 9.5 | 8.9 | 8.4 | 7.9 | 7.4
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94
85 | 9.6 | 9.3 | 9.1 | 8.9 | 8.7 | 8.5 | 8.3 | 8.2 | 8.0 | 7.9
86 | 9.3 | 9.1 | 8.8 | 8.6 | 8.3 | 8.2 | 8.0 | 7.8 | 7.7 | 7.6
87 | 9.1 | 8.8 | 8.5 | 8.3 | 8.1 | 7.9 | 7.7 | 7.5 | 7.4 | 7.2
88 | 8.9 | 8.6 | 8.3 | 8.0 | 7.8 | 7.6 | 7.4 | 7.2 | 7.1 | 6.9
89 | 8.7 | 8.3 | 8.1 | 7.8 | 7.5 | 7.3 | 7.1 | 6.9 | 6.8 | 6.6
90 | 8.5 | 8.2 | 7.9 | 7.6 | 7.3 | 7.1 | 6.9 | 6.7 | 6.5 | 6.4
91 | 8.3 | 8.0 | 7.7 | 7.4 | 7.1 | 6.9 | 6.7 | 6.5 | 6.3 | 6.2
92 | 8.2 | 7.8 | 7.5 | 7.2 | 6.9 | 6.7 | 6.5 | 6.3 | 6.1 | 5.9
93 | 8.0 | 7.7 | 7.4 | 7.1 | 6.8 | 6.5 | 6.3 | 6.1 | 5.9 | 5.8
94 | 7.9 | 7.6 | 7.2 | 6.9 | 6.6 | 6.4 | 6.2 | 5.9 | 5.8 | 5.6
95 | 7.8 | 7.5 | 7.1 | 6.8 | 6.5 | 6.3 | 6.0 | 5.8 | 5.6 | 5.4
96 | 7.7 | 7.3 | 7.0 | 6.7 | 6.4 | 6.1 | 5.9 | 5.7 | 5.5 | 5.3
97 | 7.6 | 7.3 | 6.9 | 6.6 | 6.3 | 6.0 | 5.8 | 5.5 | 5.3 | 5.1
98 | 7.6 | 7.2 | 6.8 | 6.5 | 6.2 | 5.9 | 5.6 | 5.4 | 5.2 | 5.0
99 | 7.5 | 7.1 | 6.7 | 6.4 | 6.1 | 5.8 | 5.5 | 5.3 | 5.1 | 4.9
100 | 7.4 | 7.0 | 6.6 | 6.3 | 6.0 | 5.7 | 5.4 | 5.2 | 5.0 | 4.8
101 | 7.3 | 6.9 | 6.6 | 6.2 | 5.9 | 5.6 | 5.3 | 5.1 | 4.9 | 4.7
102 | 7.3 | 6.9 | 6.5 | 6.2 | 5.8 | 5.5 | 5.3 | 5.0 | 4.8 | 4.6
103 | 7.2 | 6.8 | 6.4 | 6.1 | 5.8 | 5.5 | 5.2 | 4.9 | 4.7 | 4.5
104 | 7.2 | 6.8 | 6.4 | 6.0 | 5.7 | 5.4 | 5.1 | 4.8 | 4.6 | 4.4
105 | 7.1 | 6.7 | 6.3 | 6.0 | 5.6 | 5.3 | 5.0 | 4.8 | 4.5 | 4.3
106 | 7.1 | 6.7 | 6.3 | 5.9 | 5.6 | 5.3 | 5.0 | 4.7 | 4.5 | 4.2
107 | 7.1 | 6.6 | 6.2 | 5.9 | 5.5 | 5.2 | 4.9 | 4.6 | 4.4 | 4.2
108 | 7.0 | 6.6 | 6.2 | 5.8 | 5.5 | 5.2 | 4.9 | 4.6 | 4.3 | 4.1
109 | 7.0 | 6.6 | 6.2 | 5.8 | 5.5 | 5.1 | 4.8 | 4.5 | 4.3 | 4.1
110 | 7.0 | 6.6 | 6.2 | 5.8 | 5.4 | 5.1 | 4.8 | 4.5 | 4.3 | 4.0
111 | 7.0 | 6.5 | 6.1 | 5.7 | 5.4 | 5.1 | 4.8 | 4.5 | 4.2 | 4.0
112 | 7.0 | 6.5 | 6.1 | 5.7 | 5.4 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9
113 | 6.9 | 6.5 | 6.1 | 5.7 | 5.4 | 5.0 | 4.7 | 4.4 | 4.2 | 3.9
114 | 6.9 | 6.5 | 6.1 | 5.7 | 5.3 | 5.0 | 4.7 | 4.4 | 4.1 | 3.9
115 | 6.9 | 6.5 | 6.1 | 5.7 | 5.3 | 5.0 | 4.7 | 4.4 | 4.1 | 3.9
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104
95 | 5.3 | 5.1 | 5.0 | 4.8 | 4.7 | 4.6 | 4.5 | 4.4 | 4.3 | 4.2
96 | 5.1 | 5.0 | 4.8 | 4.7 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0
97 | 5.0 | 4.8 | 4.7 | 4.5 | 4.4 | 4.3 | 4.1 | 4.0 | 3.9 | 3.8
98 | 4.8 | 4.7 | 4.5 | 4.4 | 4.2 | 4.1 | 4.0 | 3.9 | 3.8 | 3.7
99 | 4.7 | 4.5 | 4.4 | 4.2 | 4.1 | 4.0 | 3.8 | 3.7 | 3.6 | 3.5
100 | 4.6 | 4.4 | 4.3 | 4.1 | 4.0 | 3.8 | 3.7 | 3.6 | 3.5 | 3.3
101 | 4.5 | 4.3 | 4.1 | 4.0 | 3.8 | 3.7 | 3.6 | 3.4 | 3.3 | 3.2
102 | 4.4 | 4.2 | 4.0 | 3.9 | 3.7 | 3.6 | 3.4 | 3.3 | 3.2 | 3.1
103 | 4.3 | 4.1 | 3.9 | 3.8 | 3.6 | 3.5 | 3.3 | 3.2 | 3.0 | 2.9
104 | 4.2 | 4.0 | 3.8 | 3.7 | 3.5 | 3.3 | 3.2 | 3.1 | 2.9 | 2.8
105 | 4.1 | 3.9 | 3.7 | 3.6 | 3.4 | 3.2 | 3.1 | 2.9 | 2.8 | 2.7
106 | 4.0 | 3.8 | 3.6 | 3.5 | 3.3 | 3.1 | 3.0 | 2.8 | 2.7 | 2.5
107 | 4.0 | 3.8 | 3.6 | 3.4 | 3.2 | 3.1 | 2.9 | 2.7 | 2.6 | 2.4
108 | 3.9 | 3.7 | 3.5 | 3.3 | 3.1 | 3.0 | 2.8 | 2.7 | 2.5 | 2.3
109 | 3.8 | 3.6 | 3.4 | 3.3 | 3.1 | 2.9 | 2.7 | 2.6 | 2.4 | 2.3
110 | 3.8 | 3.6 | 3.4 | 3.2 | 3.0 | 2.8 | 2.7 | 2.5 | 2.3 | 2.2
111 | 3.8 | 3.5 | 3.3 | 3.2 | 3.0 | 2.8 | 2.6 | 2.4 | 2.3 | 2.1
112 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.8 | 2.6 | 2.4 | 2.2 | 2.1
113 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.4 | 2.2 | 2.0
114 | 3.7 | 3.5 | 3.3 | 3.1 | 2.9 | 2.7 | 2.5 | 2.3 | 2.1 | 2.0
115 | 3.7 | 3.4 | 3.2 | 3.0 | 2.8 | 2.7 | 2.5 | 2.3 | 2.1 | 1.9
Table VI—Ordinary Joint Life and Last Survivor Annuities; Two Lives—Expected Return Multiples
Ages | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113 | 114 | 115
105 | 2.5 | 2.4 | 2.3 | 2.2 | 2.1 | 2.0 | 2.0 | 1.9 | 1.8 | 1.8 | 1.8
106 | 2.4 | 2.3 | 2.2 | 2.1 | 2.0 | 1.9 | 1.8 | 1.7 | 1.7 | 1.6 | 1.6
107 | 2.3 | 2.2 | 2.1 | 1.9 | 1.8 | 1.7 | 1.7 | 1.6 | 1.5 | 1.5 | 1.4
108 | 2.2 | 2.1 | 1.9 | 1.8 | 1.7 | 1.6 | 1.5 | 1.5 | 1.4 | 1.3 | 1.3
109 | 2.1 | 2.0 | 1.8 | 1.7 | 1.6 | 1.5 | 1.4 | 1.3 | 1.3 | 1.2 | 1.1
110 | 2.0 | 1.9 | 1.7 | 1.6 | 1.5 | 1.4 | 1.3 | 1.2 | 1.1 | 1.1 | 1.0
111 | 2.0 | 1.8 | 1.7 | 1.5 | 1.4 | 1.3 | 1.2 | 1.1 | 1.0 | .9 | .9
112 | 1.9 | 1.7 | 1.6 | 1.5 | 1.3 | 1.2 | 1.1 | 1.0 | .9 | .8 | .8
113 | 1.8 | 1.7 | 1.5 | 1.4 | 1.3 | 1.1 | 1.0 | .9 | .8 | .7 | .7
114 | 1.8 | 1.6 | 1.5 | 1.3 | 1.2 | 1.1 | .9 | .8 | .7 | .6 | .6
115 | 1.8 | 1.6 | 1.4 | 1.3 | 1.1 | 1.0 | .9 | .8 | .7 | .6 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
5 | 69.5 | 69.0 | 68.4 | 67.9 | 67.3 | 66.7 | 66.1 | 65.5 | 64.8 | 64.1
6 | 69.0 | 68.5 | 68.0 | 67.5 | 66.9 | 66.4 | 65.8 | 65.1 | 64.5 | 63.8
7 | 68.4 | 68.0 | 67.5 | 67.0 | 66.5 | 66.0 | 65.4 | 64.8 | 64.2 | 63.5
8 | 67.9 | 67.5 | 67.0 | 66.6 | 66.1 | 65.5 | 65.0 | 64.4 | 63.8 | 63.2
9 | 67.3 | 66.9 | 66.5 | 66.1 | 65.6 | 65.1 | 64.6 | 64.0 | 63.4 | 62.8
10 | 66.7 | 66.4 | 66.0 | 65.5 | 65.1 | 64.6 | 64.1 | 63.6 | 63.0 | 62.5
11 | 66.1 | 65.8 | 65.4 | 65.0 | 64.6 | 64.1 | 63.6 | 63.1 | 62.6 | 62.1
12 | 65.5 | 65.1 | 64.8 | 64.4 | 64.0 | 63.6 | 63.1 | 62.7 | 62.2 | 61.7
13 | 64.8 | 64.5 | 64.2 | 63.8 | 63.4 | 63.0 | 62.6 | 62.2 | 61.7 | 61.2
14 | 64.1 | 63.8 | 63.5 | 63.2 | 62.8 | 62.5 | 62.1 | 61.7 | 61.2 | 60.7
15 | 63.4 | 63.1 | 62.9 | 62.6 | 62.2 | 61.9 | 61.5 | 61.1 | 60.7 | 60.2
16 | 62.7 | 62.4 | 62.2 | 61.9 | 61.6 | 61.3 | 60.9 | 60.5 | 60.1 | 59.7
17 | 61.9 | 61.7 | 61.5 | 61.2 | 60.9 | 60.6 | 60.3 | 59.9 | 59.6 | 59.2
18 | 61.2 | 61.0 | 60.7 | 60.5 | 60.2 | 60.0 | 59.7 | 59.3 | 59.0 | 58.6
19 | 60.4 | 60.2 | 60.0 | 59.8 | 59.5 | 59.3 | 59.0 | 58.7 | 58.4 | 58.0
20 | 59.6 | 59.4 | 59.2 | 59.0 | 58.8 | 58.6 | 58.3 | 58.0 | 57.7 | 57.4
21 | 58.8 | 58.7 | 58.5 | 58.3 | 58.1 | 57.8 | 57.6 | 57.3 | 57.1 | 56.8
22 | 58.0 | 57.8 | 57.7 | 57.5 | 57.3 | 57.1 | 56.9 | 56.6 | 56.4 | 56.1
23 | 57.2 | 57.0 | 56.9 | 56.7 | 56.5 | 56.4 | 56.1 | 55.9 | 55.7 | 55.4
24 | 56.3 | 56.2 | 56.1 | 55.9 | 55.8 | 55.6 | 55.4 | 55.2 | 55.0 | 54.7
25 | 55.5 | 55.4 | 55.2 | 55.1 | 55.0 | 54.8 | 54.6 | 54.4 | 54.2 | 54.0
26 | 54.6 | 54.5 | 54.4 | 54.3 | 54.1 | 54.0 | 53.8 | 53.7 | 53.5 | 53.3
27 | 53.8 | 53.7 | 53.6 | 53.4 | 53.3 | 53.2 | 53.0 | 52.9 | 52.7 | 52.5
28 | 52.9 | 52.8 | 52.7 | 52.6 | 52.5 | 52.4 | 52.2 | 52.1 | 51.9 | 51.7
29 | 52.0 | 51.9 | 51.8 | 51.7 | 51.6 | 51.5 | 51.4 | 51.3 | 51.1 | 51.0
30 | 51.1 | 51.0 | 51.0 | 50.9 | 50.8 | 50.7 | 50.6 | 50.4 | 50.3 | 50.2
31 | 50.2 | 50.2 | 50.1 | 50.0 | 49.9 | 49.8 | 49.7 | 49.6 | 49.5 | 49.3
32 | 49.3 | 49.3 | 49.2 | 49.1 | 49.0 | 49.0 | 48.9 | 48.8 | 48.6 | 48.5
33 | 48.4 | 48.4 | 48.3 | 48.2 | 48.2 | 48.1 | 48.0 | 47.9 | 47.8 | 47.7
34 | 47.5 | 47.5 | 47.4 | 47.4 | 47.3 | 47.2 | 47.1 | 47.0 | 47.0 | 46.8
35 | 46.6 | 46.6 | 46.5 | 46.5 | 46.4 | 46.3 | 46.3 | 46.2 | 46.1 | 46.0
36 | 45.7 | 45.7 | 45.6 | 45.6 | 45.5 | 45.4 | 45.4 | 45.3 | 45.2 | 45.1
37 | 44.8 | 44.7 | 44.7 | 44.6 | 44.6 | 44.5 | 44.5 | 44.4 | 44.3 | 44.3
38 | 43.9 | 43.8 | 43.8 | 43.7 | 43.7 | 43.6 | 43.6 | 43.5 | 43.5 | 43.4
39 | 42.9 | 42.9 | 42.9 | 42.8 | 42.8 | 42.7 | 42.7 | 42.6 | 42.6 | 42.5
40 | 42.0 | 42.0 | 42.0 | 41.9 | 41.9 | 41.8 | 41.8 | 41.7 | 41.7 | 41.6
41 | 41.1 | 41.1 | 41.0 | 41.0 | 41.0 | 40.9 | 40.9 | 40.8 | 40.8 | 40.7
42 | 40.2 | 40.1 | 40.1 | 40.1 | 40.1 | 40.0 | 40.0 | 39.9 | 39.9 | 39.8
43 | 39.2 | 39.2 | 39.2 | 39.2 | 39.1 | 39.1 | 39.1 | 39.0 | 39.0 | 39.0
44 | 38.3 | 38.3 | 38.3 | 38.3 | 38.2 | 38.2 | 38.2 | 38.1 | 38.1 | 38.1
45 | 37.4 | 37.4 | 37.4 | 37.3 | 37.3 | 37.3 | 37.3 | 37.2 | 37.2 | 37.2
46 | 36.5 | 36.5 | 36.5 | 36.4 | 36.4 | 36.4 | 36.4 | 36.3 | 36.3 | 36.3
47 | 35.6 | 35.6 | 35.5 | 35.5 | 35.5 | 35.5 | 35.5 | 35.4 | 35.4 | 35.4
48 | 34.7 | 34.7 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.5 | 34.5 | 34.5
49 | 33.8 | 33.8 | 33.7 | 33.7 | 33.7 | 33.7 | 33.7 | 33.7 | 33.6 | 33.6
50 | 32.9 | 32.9 | 32.8 | 32.8 | 32.8 | 32.8 | 32.8 | 32.8 | 32.7 | 32.7
51 | 32.0 | 32.0 | 31.9 | 31.9 | 31.9 | 31.9 | 31.9 | 31.9 | 31.9 | 31.8
52 | 31.1 | 31.1 | 31.1 | 31.0 | 31.0 | 31.0 | 31.0 | 31.0 | 31.0 | 30.9
53 | 30.2 | 30.2 | 30.2 | 30.2 | 30.1 | 30.1 | 30.1 | 30.1 | 30.1 | 30.1
54 | 29.3 | 29.3 | 29.3 | 29.3 | 29.3 | 29.2 | 29.2 | 29.2 | 29.2 | 29.2
55 | 28.4 | 28.4 | 28.4 | 28.4 | 28.4 | 28.4 | 28.4 | 28.3 | 28.3 | 28.3
56 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5 | 27.5
57 | 26.7 | 26.7 | 26.7 | 26.6 | 26.6 | 26.6 | 26.6 | 26.6 | 26.6 | 26.6
58 | 25.8 | 25.8 | 25.8 | 25.8 | 25.8 | 25.8 | 25.8 | 25.7 | 25.7 | 25.7
59 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9 | 24.9
60 | 24.1 | 24.1 | 24.1 | 24.1 | 24.1 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0
61 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2 | 23.2
62 | 22.4 | 22.4 | 22.4 | 22.4 | 22.4 | 22.4 | 22.3 | 22.3 | 22.3 | 22.3
63 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5
64 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7 | 20.7
65 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9
66 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1
67 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3
68 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5
69 | 16.8 | 16.8 | 16.8 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7
70 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0
71 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.2
72 | 14.6 | 14.6 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5
73 | 13.9 | 13.9 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8
74 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2
75 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5
76 | 11.9 | 11.9 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8
77 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2
78 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6
79 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0
80 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.4 | 9.4
81 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9
82 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4
83 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9
84 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5
87 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.6 | 3.6 | 3.6 | 3.6
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24
15 | 59.8 | 59.3 | 58.8 | 58.2 | 57.6 | 57.0 | 56.4 | 55.8 | 55.1 | 54.5
16 | 59.3 | 58.8 | 58.3 | 57.8 | 57.2 | 56.7 | 56.1 | 55.5 | 54.8 | 54.2
17 | 58.8 | 58.3 | 57.8 | 57.3 | 56.8 | 56.3 | 55.7 | 55.1 | 54.5 | 53.9
18 | 58.2 | 57.8 | 57.3 | 56.9 | 56.4 | 55.9 | 55.3 | 54.7 | 54.2 | 53.5
19 | 57.6 | 57.2 | 56.8 | 56.4 | 55.9 | 55.4 | 54.9 | 54.4 | 53.8 | 53.2
20 | 57.0 | 56.7 | 56.3 | 55.9 | 55.4 | 54.9 | 54.5 | 53.9 | 53.4 | 52.8
21 | 56.4 | 56.1 | 55.7 | 55.3 | 54.9 | 54.5 | 54.0 | 53.5 | 53.0 | 52.4
22 | 55.8 | 55.5 | 55.1 | 54.7 | 54.4 | 53.9 | 53.5 | 53.0 | 52.5 | 52.0
23 | 55.1 | 54.8 | 54.5 | 54.2 | 53.8 | 53.4 | 53.0 | 52.5 | 52.1 | 51.6
24 | 54.5 | 54.2 | 53.9 | 53.5 | 53.2 | 52.8 | 52.4 | 52.0 | 51.6 | 51.1
25 | 53.8 | 53.5 | 53.2 | 52.9 | 52.6 | 52.2 | 51.9 | 51.5 | 51.1 | 50.6
26 | 53.0 | 52.8 | 52.5 | 52.3 | 52.0 | 51.6 | 51.3 | 50.9 | 50.5 | 50.1
27 | 52.3 | 52.1 | 51.8 | 51.6 | 51.3 | 51.0 | 50.7 | 50.3 | 50.0 | 49.6
28 | 51.5 | 51.3 | 51.1 | 50.9 | 50.6 | 50.3 | 50.0 | 49.7 | 49.4 | 49.0
29 | 50.8 | 50.6 | 50.4 | 50.2 | 49.9 | 49.7 | 49.4 | 49.1 | 48.8 | 48.4
30 | 50.0 | 49.8 | 49.6 | 49.4 | 49.2 | 49.0 | 48.7 | 48.4 | 48.1 | 47.8
31 | 49.2 | 49.0 | 48.9 | 48.7 | 48.5 | 48.3 | 48.0 | 47.8 | 47.5 | 47.2
32 | 48.4 | 48.2 | 48.1 | 47.9 | 47.7 | 47.5 | 47.3 | 47.1 | 46.8 | 46.5
33 | 47.6 | 47.4 | 47.3 | 47.1 | 47.0 | 46.8 | 46.6 | 46.3 | 46.1 | 45.9
34 | 46.7 | 46.6 | 46.5 | 46.3 | 46.2 | 46.0 | 45.8 | 45.6 | 45.4 | 45.2
35 | 45.9 | 45.8 | 45.7 | 45.5 | 45.4 | 45.2 | 45.1 | 44.9 | 44.7 | 44.4
36 | 45.0 | 44.9 | 44.8 | 44.7 | 44.6 | 44.4 | 44.3 | 44.1 | 43.9 | 43.7
37 | 44.2 | 44.1 | 44.0 | 43.9 | 43.8 | 43.6 | 43.5 | 43.3 | 43.2 | 43.0
38 | 43.3 | 43.2 | 43.1 | 43.0 | 42.9 | 42.8 | 42.7 | 42.5 | 42.4 | 42.2
39 | 42.4 | 42.4 | 42.3 | 42.2 | 42.1 | 42.0 | 41.9 | 41.7 | 41.6 | 41.4
40 | 41.6 | 41.5 | 41.4 | 41.3 | 41.2 | 41.1 | 41.0 | 40.9 | 40.8 | 40.6
41 | 40.7 | 40.6 | 40.5 | 40.5 | 40.4 | 40.3 | 40.2 | 40.1 | 40.0 | 39.8
42 | 39.8 | 39.7 | 39.7 | 39.6 | 39.5 | 39.4 | 39.4 | 39.3 | 39.1 | 39.0
43 | 38.9 | 38.9 | 38.8 | 38.7 | 38.7 | 38.6 | 38.5 | 38.4 | 38.3 | 38.2
44 | 38.0 | 38.0 | 37.9 | 37.9 | 37.8 | 37.7 | 37.7 | 37.6 | 37.5 | 37.4
45 | 37.1 | 37.1 | 37.0 | 37.0 | 36.9 | 36.9 | 36.8 | 36.7 | 36.6 | 36.5
46 | 36.2 | 36.2 | 36.2 | 36.1 | 36.1 | 36.0 | 35.9 | 35.9 | 35.8 | 35.7
47 | 35.3 | 35.3 | 35.3 | 35.2 | 35.2 | 35.1 | 35.1 | 35.0 | 34.9 | 34.9
48 | 34.5 | 34.4 | 34.4 | 34.4 | 34.3 | 34.3 | 34.2 | 34.2 | 34.1 | 34.0
49 | 33.6 | 33.5 | 33.5 | 33.5 | 33.4 | 33.4 | 33.4 | 33.3 | 33.2 | 33.2
50 | 32.7 | 32.7 | 32.6 | 32.6 | 32.6 | 32.5 | 32.5 | 32.4 | 32.4 | 32.3
51 | 31.8 | 31.8 | 31.8 | 31.7 | 31.7 | 31.7 | 31.6 | 31.6 | 31.5 | 31.5
52 | 30.9 | 30.9 | 30.9 | 30.9 | 30.8 | 30.8 | 30.8 | 30.7 | 30.7 | 30.6
53 | 30.0 | 30.0 | 30.0 | 30.0 | 30.0 | 29.9 | 29.9 | 29.9 | 29.8 | 29.8
54 | 29.2 | 29.2 | 29.1 | 29.1 | 29.1 | 29.1 | 29.0 | 29.0 | 29.0 | 28.9
55 | 28.3 | 28.3 | 28.3 | 28.3 | 28.2 | 28.2 | 28.2 | 28.2 | 28.1 | 28.1
56 | 27.4 | 27.4 | 27.4 | 27.4 | 27.4 | 27.3 | 27.3 | 27.3 | 27.3 | 27.2
57 | 26.6 | 26.6 | 26.5 | 26.5 | 26.5 | 26.5 | 26.5 | 26.5 | 26.4 | 26.4
58 | 25.7 | 25.7 | 25.7 | 25.7 | 25.7 | 25.6 | 25.6 | 25.6 | 25.6 | 25.6
59 | 24.9 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.8 | 24.7 | 24.7
60 | 24.0 | 24.0 | 24.0 | 24.0 | 24.0 | 23.9 | 23.9 | 23.9 | 23.9 | 23.9
61 | 23.2 | 23.2 | 23.1 | 23.1 | 23.1 | 23.1 | 23.1 | 23.1 | 23.1 | 23.0
62 | 22.3 | 22.3 | 22.3 | 22.3 | 22.3 | 22.3 | 22.3 | 22.2 | 22.2 | 22.2
63 | 21.5 | 21.5 | 21.5 | 21.5 | 21.5 | 21.4 | 21.4 | 21.4 | 21.4 | 21.4
64 | 20.7 | 20.7 | 20.7 | 20.6 | 20.6 | 20.6 | 20.6 | 20.6 | 20.6 | 20.6
65 | 19.9 | 19.8 | 19.8 | 19.8 | 19.8 | 19.8 | 19.8 | 19.8 | 19.8 | 19.8
66 | 19.1 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0 | 19.0
67 | 18.3 | 18.3 | 18.3 | 18.3 | 18.2 | 18.2 | 18.2 | 18.2 | 18.2 | 18.2
68 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.5 | 17.4 | 17.4
69 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7 | 16.7
70 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 15.9 | 15.9 | 15.9 | 15.9
71 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2
72 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5
73 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8
74 | 13.2 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1
75 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5
76 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8
77 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2
78 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6
79 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0
80 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4
81 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9
82 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4
83 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.8 | 7.8
84 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5
87 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | 33 | 34
25 | 50.2 | 49.7 | 49.2 | 48.6 | 48.1 | 47.5 | 46.9 | 46.2 | 45.6 | 44.9
26 | 49.7 | 49.2 | 48.7 | 48.2 | 47.7 | 47.1 | 46.5 | 45.9 | 45.3 | 44.6
27 | 49.2 | 48.7 | 48.3 | 47.8 | 47.3 | 46.7 | 46.2 | 45.6 | 45.0 | 44.3
28 | 48.6 | 48.2 | 47.8 | 47.3 | 46.8 | 46.3 | 45.8 | 45.2 | 44.6 | 44.0
29 | 48.1 | 47.7 | 47.3 | 46.8 | 46.4 | 45.9 | 45.4 | 44.8 | 44.3 | 43.7
30 | 47.5 | 47.1 | 46.7 | 46.3 | 45.9 | 45.4 | 44.9 | 44.4 | 43.9 | 43.3
31 | 46.9 | 46.5 | 46.2 | 45.8 | 45.4 | 44.9 | 44.5 | 44.0 | 43.5 | 42.9
32 | 46.2 | 45.9 | 45.6 | 45.2 | 44.8 | 44.4 | 44.0 | 43.5 | 43.0 | 42.5
33 | 45.6 | 45.3 | 45.0 | 44.6 | 44.3 | 43.9 | 43.5 | 43.0 | 42.6 | 42.1
34 | 44.9 | 44.6 | 44.3 | 44.0 | 43.7 | 43.3 | 42.9 | 42.5 | 42.1 | 41.6
35 | 44.2 | 44.0 | 43.7 | 43.4 | 43.1 | 42.7 | 42.4 | 42.0 | 41.6 | 41.1
36 | 43.5 | 43.3 | 43.0 | 42.7 | 42.4 | 42.1 | 41.8 | 41.4 | 41.0 | 40.6
37 | 42.8 | 42.5 | 42.3 | 42.1 | 41.8 | 41.5 | 41.2 | 40.8 | 40.5 | 40.1
38 | 42.0 | 41.8 | 41.6 | 41.4 | 41.1 | 40.8 | 40.6 | 40.2 | 39.9 | 39.5
39 | 41.3 | 41.1 | 40.9 | 40.7 | 40.4 | 40.2 | 39.9 | 39.6 | 39.3 | 39.0
40 | 40.5 | 40.3 | 40.1 | 39.9 | 39.7 | 39.5 | 39.2 | 39.0 | 38.7 | 38.4
41 | 39.7 | 39.5 | 39.4 | 39.2 | 39.0 | 38.8 | 38.5 | 38.3 | 38.0 | 37.7
42 | 38.9 | 38.8 | 38.6 | 38.4 | 38.3 | 38.1 | 37.8 | 37.6 | 37.4 | 37.1
43 | 38.1 | 38.0 | 37.8 | 37.7 | 37.5 | 37.3 | 37.1 | 36.9 | 36.7 | 36.4
44 | 37.3 | 37.2 | 37.0 | 36.9 | 36.7 | 36.6 | 36.4 | 36.2 | 36.0 | 35.8
45 | 36.5 | 36.3 | 36.2 | 36.1 | 36.0 | 35.8 | 35.6 | 35.5 | 35.3 | 35.1
46 | 35.6 | 35.5 | 35.4 | 35.3 | 35.2 | 35.0 | 34.9 | 34.7 | 34.5 | 34.4
47 | 34.8 | 34.7 | 34.6 | 34.5 | 34.4 | 34.3 | 34.1 | 34.0 | 33.8 | 33.6
48 | 34.0 | 33.9 | 33.8 | 33.7 | 33.6 | 33.5 | 33.4 | 33.2 | 33.1 | 32.9
49 | 33.1 | 33.0 | 33.0 | 32.9 | 32.8 | 32.7 | 32.6 | 32.4 | 32.3 | 32.2
50 | 32.3 | 32.2 | 32.1 | 32.1 | 32.0 | 31.9 | 31.8 | 31.7 | 31.5 | 31.4
51 | 31.4 | 31.4 | 31.3 | 31.2 | 31.2 | 31.1 | 31.0 | 30.9 | 30.8 | 30.6
52 | 30.6 | 30.5 | 30.5 | 30.4 | 30.3 | 30.3 | 30.2 | 30.1 | 30.0 | 29.9
53 | 29.7 | 29.7 | 29.6 | 29.6 | 29.5 | 29.5 | 29.4 | 29.3 | 29.2 | 29.1
54 | 28.9 | 28.9 | 28.8 | 28.8 | 28.7 | 28.6 | 28.6 | 28.5 | 28.4 | 28.3
55 | 28.1 | 28.0 | 28.0 | 27.9 | 27.9 | 27.8 | 27.8 | 27.7 | 27.6 | 27.5
56 | 27.2 | 27.2 | 27.1 | 27.1 | 27.0 | 27.0 | 26.9 | 26.9 | 26.8 | 26.7
57 | 26.4 | 26.3 | 26.3 | 26.3 | 26.2 | 26.2 | 26.1 | 26.1 | 26.0 | 25.9
58 | 25.5 | 25.5 | 25.5 | 25.4 | 25.4 | 25.4 | 25.3 | 25.3 | 25.2 | 25.1
59 | 24.7 | 24.7 | 24.6 | 24.6 | 24.6 | 24.5 | 24.5 | 24.5 | 24.4 | 24.3
60 | 23.9 | 23.8 | 23.8 | 23.8 | 23.8 | 23.7 | 23.7 | 23.6 | 23.6 | 23.5
61 | 23.0 | 23.0 | 23.0 | 23.0 | 22.9 | 22.9 | 22.9 | 22.8 | 22.8 | 22.7
62 | 22.2 | 22.2 | 22.2 | 22.1 | 22.1 | 22.1 | 22.1 | 22.0 | 22.0 | 21.9
63 | 21.4 | 21.4 | 21.3 | 21.3 | 21.3 | 21.3 | 21.3 | 21.2 | 21.2 | 21.2
64 | 20.6 | 20.6 | 20.5 | 20.5 | 20.5 | 20.5 | 20.5 | 20.4 | 20.4 | 20.4
65 | 19.8 | 19.8 | 19.7 | 19.7 | 19.7 | 19.7 | 19.7 | 19.6 | 19.6 | 19.6
66 | 19.0 | 19.0 | 19.0 | 18.9 | 18.9 | 18.9 | 18.9 | 18.9 | 18.8 | 18.8
67 | 18.2 | 18.2 | 18.2 | 18.2 | 18.2 | 18.1 | 18.1 | 18.1 | 18.1 | 18.1
68 | 17.4 | 17.4 | 17.4 | 17.4 | 17.4 | 17.4 | 17.4 | 17.3 | 17.3 | 17.3
69 | 16.7 | 16.7 | 16.7 | 16.6 | 16.6 | 16.6 | 16.6 | 16.6 | 16.6 | 16.6
70 | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 | 15.9 | 15.8 | 15.8
71 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.2 | 15.1 | 15.1 | 15.1
72 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.5 | 14.4 | 14.4 | 14.4
73 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.8 | 13.7 | 13.7
74 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1 | 13.1
75 | 12.5 | 12.5 | 12.5 | 12.4 | 12.4 | 12.4 | 12.4 | 12.4 | 12.4 | 12.4
76 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8 | 11.8
77 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.1
78 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.5
79 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0
80 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4
81 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9
82 | 8.4 | 8.4 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3
83 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8
84 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5
87 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 35 | 36 | 37 | 38 | 39 | 40 | 41 | 42 | 43 | 44
35 | 40.7 | 40.2 | 39.7 | 39.2 | 38.6 | 38.0 | 37.4 | 36.8 | 36.2 | 35.5
36 | 40.2 | 39.7 | 39.3 | 38.7 | 38.2 | 37.7 | 37.1 | 36.5 | 35.9 | 35.2
37 | 39.7 | 39.3 | 38.8 | 38.3 | 37.8 | 37.3 | 36.7 | 36.2 | 35.6 | 34.9
38 | 39.2 | 38.7 | 38.3 | 37.9 | 37.4 | 36.9 | 36.3 | 35.8 | 35.2 | 34.6
39 | 38.6 | 38.2 | 37.8 | 37.4 | 36.9 | 36.4 | 35.9 | 35.4 | 34.9 | 34.3
40 | 38.0 | 37.7 | 37.3 | 36.9 | 36.4 | 36.0 | 35.5 | 35.0 | 34.5 | 34.0
41 | 37.4 | 37.1 | 36.7 | 36.3 | 35.9 | 35.5 | 35.1 | 34.6 | 34.1 | 33.6
42 | 36.8 | 36.5 | 36.2 | 35.8 | 35.4 | 35.0 | 34.6 | 34.1 | 33.7 | 33.2
43 | 36.2 | 35.9 | 35.6 | 35.2 | 34.9 | 34.5 | 34.1 | 33.7 | 33.2 | 32.8
44 | 35.5 | 35.2 | 34.9 | 34.6 | 34.3 | 34.0 | 33.6 | 33.2 | 32.8 | 32.3
45 | 34.8 | 34.6 | 34.3 | 34.0 | 33.7 | 33.4 | 33.0 | 32.7 | 32.3 | 31.8
46 | 34.1 | 33.9 | 33.7 | 33.4 | 33.1 | 32.8 | 32.5 | 32.1 | 31.8 | 31.4
47 | 33.4 | 33.2 | 33.0 | 32.8 | 32.5 | 32.2 | 31.9 | 31.6 | 31.2 | 30.8
48 | 32.7 | 32.5 | 32.3 | 32.1 | 31.8 | 31.6 | 31.3 | 31.0 | 30.7 | 30.3
49 | 32.0 | 31.8 | 31.6 | 31.4 | 31.2 | 30.9 | 30.7 | 30.4 | 30.1 | 29.8
50 | 31.3 | 31.1 | 30.9 | 30.7 | 30.5 | 30.3 | 30.0 | 29.8 | 29.5 | 29.2
51 | 30.5 | 30.4 | 30.2 | 30.0 | 29.8 | 29.6 | 29.4 | 29.2 | 28.9 | 28.6
52 | 29.7 | 29.6 | 29.5 | 29.3 | 29.1 | 28.9 | 28.7 | 28.5 | 28.3 | 28.0
53 | 29.0 | 28.9 | 28.7 | 28.6 | 28.4 | 28.2 | 28.1 | 27.9 | 27.6 | 27.4
54 | 28.2 | 28.1 | 28.0 | 27.8 | 27.7 | 27.5 | 27.4 | 27.2 | 27.0 | 26.8
55 | 27.4 | 27.3 | 27.2 | 27.1 | 27.0 | 26.8 | 26.7 | 26.5 | 26.3 | 26.1
56 | 26.7 | 26.6 | 26.5 | 26.3 | 26.2 | 26.1 | 26.0 | 25.8 | 25.6 | 25.4
57 | 25.9 | 25.8 | 25.7 | 25.6 | 25.5 | 25.4 | 25.2 | 25.1 | 24.9 | 24.8
58 | 25.1 | 25.0 | 24.9 | 24.8 | 24.7 | 24.6 | 24.5 | 24.4 | 24.2 | 24.1
59 | 24.3 | 24.2 | 24.1 | 24.1 | 24.0 | 23.9 | 23.8 | 23.6 | 23.5 | 23.4
60 | 23.5 | 23.4 | 23.4 | 23.3 | 23.2 | 23.1 | 23.0 | 22.9 | 22.8 | 22.7
61 | 22.7 | 22.6 | 22.6 | 22.5 | 22.4 | 22.4 | 22.3 | 22.2 | 22.1 | 22.0
62 | 21.9 | 21.9 | 21.8 | 21.7 | 21.7 | 21.6 | 21.5 | 21.4 | 21.3 | 21.2
63 | 21.1 | 21.1 | 21.0 | 21.0 | 20.9 | 20.8 | 20.8 | 20.7 | 20.6 | 20.5
64 | 20.3 | 20.3 | 20.2 | 20.2 | 20.1 | 20.1 | 20.0 | 20.0 | 19.9 | 19.8
65 | 19.6 | 19.5 | 19.5 | 19.4 | 19.4 | 19.3 | 19.3 | 19.2 | 19.1 | 19.1
66 | 18.8 | 18.8 | 18.7 | 18.7 | 18.6 | 18.6 | 18.5 | 18.5 | 18.4 | 18.4
67 | 18.0 | 18.0 | 18.0 | 17.9 | 17.9 | 17.9 | 17.8 | 17.8 | 17.7 | 17.6
68 | 17.3 | 17.3 | 17.2 | 17.2 | 17.2 | 17.1 | 17.1 | 17.0 | 17.0 | 16.9
69 | 16.5 | 16.5 | 16.5 | 16.5 | 16.4 | 16.4 | 16.4 | 16.3 | 16.3 | 16.2
70 | 15.8 | 15.8 | 15.8 | 15.7 | 15.7 | 15.7 | 15.6 | 15.6 | 15.6 | 15.5
71 | 15.1 | 15.1 | 15.1 | 15.0 | 15.0 | 15.0 | 15.0 | 14.9 | 14.9 | 14.9
72 | 14.4 | 14.4 | 14.4 | 14.3 | 14.3 | 14.3 | 14.3 | 14.2 | 14.2 | 14.2
73 | 13.7 | 13.7 | 13.7 | 13.7 | 13.7 | 13.6 | 13.6 | 13.6 | 13.6 | 13.5
74 | 13.1 | 13.0 | 13.0 | 13.0 | 13.0 | 13.0 | 13.0 | 12.9 | 12.9 | 12.9
75 | 12.4 | 12.4 | 12.4 | 12.4 | 12.3 | 12.3 | 12.3 | 12.3 | 12.3 | 12.2
76 | 11.8 | 11.8 | 11.7 | 11.7 | 11.7 | 11.7 | 11.7 | 11.7 | 11.6 | 11.6
77 | 11.1 | 11.1 | 11.1 | 11.1 | 11.1 | 11.1 | 11.1 | 11.1 | 11.0 | 11.0
78 | 10.5 | 10.5 | 10.5 | 10.5 | 10.5 | 10.5 | 10.5 | 10.5 | 10.5 | 10.4
79 | 10.0 | 10.0 | 9.9 | 9.9 | 9.9 | 9.9 | 9.9 | 9.9 | 9.9 | 9.9
80 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.4 | 9.3 | 9.3 | 9.3
81 | 8.9 | 8.8 | 8.8 | 8.8 | 8.8 | 8.8 | 8.8 | 8.8 | 8.8 | 8.8
82 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3 | 8.3
83 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8 | 7.8
84 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4
87 | 6.1 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.6 | 5.6 | 5.6
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.6 | 4.6
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.6 | 2.6
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 45 | 46 | 47 | 48 | 49 | 50 | 51 | 52 | 53 | 54
45 | 31.4 | 30.9 | 30.5 | 30.0 | 29.4 | 28.9 | 28.3 | 27.7 | 27.1 | 26.5
46 | 30.9 | 30.5 | 30.0 | 29.6 | 29.1 | 28.5 | 28.0 | 27.4 | 26.9 | 26.3
47 | 30.5 | 30.0 | 29.6 | 29.2 | 28.7 | 28.2 | 27.7 | 27.1 | 26.6 | 26.0
48 | 30.0 | 29.6 | 29.2 | 28.7 | 28.3 | 27.8 | 27.3 | 26.8 | 26.3 | 25.7
49 | 29.4 | 29.1 | 28.7 | 28.3 | 27.9 | 27.4 | 26.9 | 26.5 | 25.9 | 25.4
50 | 28.9 | 28.5 | 28.2 | 27.4 | 27.4 | 27.0 | 26.5 | 26.1 | 25.6 | 25.1
51 | 28.3 | 28.0 | 27.7 | 27.3 | 26.9 | 26.5 | 26.1 | 25.7 | 25.2 | 24.7
52 | 27.7 | 27.4 | 27.1 | 26.8 | 26.5 | 26.1 | 25.7 | 25.3 | 24.8 | 24.4
53 | 27.1 | 26.9 | 26.6 | 26.3 | 25.9 | 25.6 | 25.2 | 24.8 | 24.4 | 24.0
54 | 26.5 | 26.3 | 26.0 | 25.7 | 25.4 | 25.1 | 24.7 | 24.4 | 24.0 | 23.6
55 | 25.9 | 25.7 | 25.4 | 25.1 | 24.9 | 24.6 | 24.2 | 23.9 | 23.5 | 23.2
56 | 25.2 | 25.0 | 24.8 | 24.6 | 24.3 | 24.0 | 23.7 | 23.4 | 23.1 | 22.7
57 | 24.6 | 24.4 | 24.2 | 24.0 | 23.7 | 23.5 | 23.2 | 22.9 | 22.6 | 22.2
58 | 23.9 | 23.7 | 23.5 | 23.3 | 23.1 | 22.9 | 22.6 | 22.4 | 22.1 | 21.7
59 | 23.2 | 23.1 | 22.9 | 22.7 | 22.5 | 22.3 | 22.1 | 21.8 | 21.5 | 21.2
60 | 22.5 | 22.4 | 22.2 | 22.1 | 21.9 | 21.7 | 21.5 | 21.2 | 21.0 | 20.7
61 | 21.8 | 21.7 | 21.6 | 21.4 | 21.2 | 21.1 | 20.9 | 20.6 | 20.4 | 20.2
62 | 21.1 | 21.0 | 20.9 | 20.7 | 20.6 | 20.4 | 20.2 | 20.0 | 19.8 | 19.6
63 | 20.4 | 20.3 | 20.2 | 20.1 | 19.9 | 19.8 | 19.6 | 19.4 | 19.2 | 19.0
64 | 19.7 | 19.6 | 19.5 | 19.4 | 19.3 | 19.1 | 19.0 | 18.8 | 18.6 | 18.5
65 | 19.0 | 18.9 | 18.8 | 18.7 | 18.6 | 18.5 | 18.3 | 18.2 | 18.0 | 17.9
66 | 18.3 | 18.2 | 18.1 | 18.0 | 17.9 | 17.8 | 17.7 | 17.6 | 17.4 | 17.3
67 | 17.6 | 17.5 | 17.4 | 17.3 | 17.3 | 17.2 | 17.1 | 16.9 | 16.8 | 16.7
68 | 16.9 | 16.8 | 16.7 | 16.7 | 16.6 | 16.5 | 16.4 | 16.3 | 16.2 | 16.1
69 | 16.2 | 16.1 | 16.1 | 16.0 | 15.9 | 15.8 | 15.8 | 15.7 | 15.6 | 15.4
70 | 15.5 | 15.4 | 15.4 | 15.3 | 15.3 | 15.2 | 15.1 | 15.0 | 14.9 | 14.8
71 | 14.8 | 14.8 | 14.7 | 14.7 | 14.6 | 14.5 | 14.5 | 14.4 | 14.3 | 14.2
72 | 14.1 | 14.1 | 14.1 | 14.0 | 14.0 | 13.9 | 13.8 | 13.8 | 13.7 | 13.6
73 | 13.5 | 13.5 | 13.4 | 13.4 | 13.3 | 13.3 | 13.2 | 13.2 | 13.1 | 13.0
74 | 12.8 | 12.8 | 12.8 | 12.7 | 12.7 | 12.7 | 12.6 | 12.6 | 12.5 | 12.4
75 | 12.2 | 12.2 | 12.2 | 12.1 | 12.1 | 12.1 | 12.0 | 12.0 | 11.9 | 11.9
76 | 11.6 | 11.6 | 11.6 | 11.5 | 11.5 | 11.5 | 11.4 | 11.4 | 11.3 | 11.3
77 | 11.0 | 11.0 | 11.0 | 10.9 | 10.9 | 10.9 | 10.8 | 10.8 | 10.8 | 10.7
78 | 10.4 | 10.4 | 10.4 | 10.4 | 10.3 | 10.3 | 10.3 | 10.2 | 10.2 | 10.2
79 | 9.9 | 9.8 | 9.8 | 9.8 | 9.8 | 9.8 | 9.7 | 9.7 | 9.7 | 9.6
80 | 9.3 | 9.3 | 9.3 | 9.3 | 9.2 | 9.2 | 9.2 | 9.2 | 9.1 | 9.1
81 | 8.8 | 8.8 | 8.7 | 8.7 | 8.7 | 8.7 | 8.7 | 8.7 | 8.6 | 8.6
82 | 8.3 | 8.2 | 8.2 | 8.2 | 8.2 | 8.2 | 8.2 | 8.2 | 8.1 | 8.1
83 | 7.8 | 7.8 | 7.7 | 7.7 | 7.7 | 7.7 | 7.7 | 7.7 | 7.7 | 7.6
84 | 7.3 | 7.3 | 7.3 | 7.3 | 7.3 | 7.2 | 7.2 | 7.2 | 7.2 | 7.2
85 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.8 | 6.7
86 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4 | 6.4 | 6.3 | 6.3
87 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 6.0 | 5.9
88 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6 | 5.6
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.2 | 5.2 | 5.2 | 5.2
90 | 5.0 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9
91 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6
92 | 4.4 | 4.4 | 4.4 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 55 | 56 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64
55 | 22.7 | 22.3 | 21.9 | 21.4 | 20.9 | 20.4 | 19.9 | 19.4 | 18.8 | 18.3
56 | 22.3 | 21.9 | 21.5 | 21.1 | 20.6 | 20.1 | 19.6 | 19.1 | 18.6 | 18.0
57 | 21.9 | 21.5 | 21.1 | 20.7 | 20.3 | 19.8 | 19.3 | 18.8 | 18.3 | 17.8
58 | 21.4 | 21.1 | 20.7 | 20.3 | 19.9 | 19.5 | 19.0 | 18.5 | 18.0 | 17.5
59 | 20.9 | 20.6 | 20.3 | 19.9 | 19.5 | 19.1 | 18.7 | 18.2 | 17.7 | 17.3
60 | 20.4 | 20.1 | 19.8 | 19.5 | 19.1 | 18.7 | 18.3 | 17.9 | 17.4 | 17.0
61 | 29.9 | 19.6 | 19.3 | 19.0 | 18.7 | 18.3 | 17.9 | 17.5 | 17.1 | 16.7
62 | 19.4 | 19.1 | 18.8 | 18.5 | 18.2 | 17.9 | 17.5 | 17.1 | 16.8 | 16.3
63 | 18.8 | 18.6 | 18.3 | 18.0 | 17.7 | 17.4 | 17.1 | 16.8 | 16.4 | 16.0
64 | 18.3 | 18.0 | 17.8 | 17.5 | 17.3 | 17.0 | 16.7 | 16.3 | 16.0 | 15.6
65 | 17.7 | 17.5 | 17.3 | 17.0 | 16.8 | 16.5 | 16.2 | 15.9 | 15.6 | 15.3
66 | 17.1 | 16.9 | 16.7 | 16.5 | 16.3 | 16.0 | 15.8 | 15.5 | 15.2 | 14.9
67 | 16.5 | 16.3 | 16.2 | 16.0 | 15.8 | 15.5 | 15.3 | 15.0 | 14.7 | 14.5
68 | 15.9 | 15.8 | 15.6 | 15.4 | 15.2 | 15.0 | 14.8 | 14.6 | 14.3 | 14.0
69 | 15.3 | 15.2 | 15.0 | 14.9 | 14.7 | 14.5 | 14.3 | 14.1 | 13.9 | 13.6
70 | 14.7 | 14.6 | 14.5 | 14.3 | 14.2 | 14.0 | 13.8 | 13.6 | 13.4 | 13.2
71 | 14.1 | 14.0 | 13.9 | 13.8 | 13.6 | 13.5 | 13.3 | 13.1 | 12.9 | 12.7
72 | 13.5 | 13.4 | 13.3 | 13.2 | 13.1 | 12.9 | 12.8 | 12.6 | 12.4 | 12.3
73 | 13.0 | 12.9 | 12.8 | 12.7 | 12.5 | 12.4 | 12.3 | 12.1 | 12.0 | 11.8
74 | 12.4 | 12.3 | 12.2 | 12.1 | 12.0 | 11.9 | 11.8 | 11.6 | 11.5 | 11.3
75 | 11.8 | 11.7 | 11.7 | 11.6 | 11.5 | 11.4 | 11.3 | 11.1 | 11.0 | 10.9
76 | 11.2 | 11.2 | 11.1 | 11.0 | 10.9 | 10.9 | 10.8 | 10.6 | 10.5 | 10.4
77 | 10.7 | 10.6 | 10.6 | 10.5 | 10.4 | 10.3 | 10.3 | 10.2 | 10.0 | 9.9
78 | 10.1 | 10.1 | 10.0 | 10.0 | 9.9 | 9.8 | 9.8 | 9.7 | 9.6 | 9.5
79 | 9.6 | 9.6 | 9.5 | 9.5 | 9.4 | 9.3 | 9.3 | 9.2 | 9.1 | 9.0
80 | 9.1 | 9.0 | 9.0 | 9.0 | 8.9 | 8.9 | 8.8 | 8.7 | 8.7 | 8.6
81 | 8.6 | 8.5 | 8.5 | 8.5 | 8.4 | 8.4 | 8.3 | 8.3 | 8.2 | 8.1
82 | 8.1 | 8.1 | 8.0 | 8.0 | 8.0 | 7.9 | 7.9 | 7.8 | 7.8 | 7.7
83 | 7.6 | 7.6 | 7.6 | 7.5 | 7.5 | 7.5 | 7.4 | 7.4 | 7.3 | 7.3
84 | 7.2 | 7.1 | 7.1 | 7.1 | 7.1 | 7.0 | 7.0 | 7.0 | 6.9 | 6.9
85 | 6.7 | 6.7 | 6.7 | 6.7 | 6.6 | 6.6 | 6.6 | 6.5 | 6.5 | 6.5
86 | 6.3 | 6.3 | 6.3 | 6.3 | 6.2 | 6.2 | 6.2 | 6.2 | 6.1 | 6.1
87 | 5.9 | 5.9 | 5.9 | 5.9 | 5.9 | 5.8 | 5.8 | 5.8 | 5.8 | 5.7
88 | 5.6 | 5.5 | 5.5 | 5.5 | 5.5 | 5.5 | 5.5 | 5.4 | 5.4 | 5.4
89 | 5.2 | 5.2 | 5.2 | 5.2 | 5.2 | 5.1 | 5.1 | 5.1 | 5.1 | 5.1
90 | 4.9 | 4.9 | 4.9 | 4.9 | 4.9 | 4.8 | 4.8 | 4.8 | 4.8 | 4.8
91 | 4.6 | 4.6 | 4.6 | 4.6 | 4.6 | 4.5 | 4.5 | 4.5 | 4.5 | 4.5
92 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3 | 4.3 | 4.2 | 4.2 | 4.2
93 | 4.1 | 4.1 | 4.0 | 4.0 | 4.0 | 4.0 | 4.0 | 4.0 | 4.0 | 4.0
94 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.8 | 3.7
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.6 | 3.5 | 3.5
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.3 | 3.3 | 3.3
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.1 | 3.1
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6
101 | 2.5 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.2
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 | 1.7 | 1.7
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 65 | 66 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 74
65 | 14.9 | 14.5 | 14.1 | 13.7 | 13.3 | 12.9 | 12.5 | 12.0 | 11.6 | 11.2
66 | 14.5 | 14.2 | 13.8 | 13.4 | 13.1 | 12.6 | 12.2 | 11.8 | 11.4 | 11.0
67 | 14.1 | 13.8 | 13.5 | 13.1 | 12.8 | 12.4 | 12.0 | 11.6 | 11.2 | 10.8
68 | 13.7 | 13.4 | 13.1 | 12.8 | 12.5 | 12.1 | 11.7 | 11.4 | 11.0 | 10.6
69 | 13.3 | 13.1 | 12.8 | 12.5 | 12.1 | 11.8 | 11.4 | 11.1 | 10.7 | 10.4
70 | 12.9 | 12.6 | 12.4 | 12.1 | 11.8 | 11.5 | 11.2 | 10.8 | 10.5 | 10.1
71 | 12.5 | 12.2 | 12.0 | 11.7 | 11.4 | 11.2 | 10.9 | 10.5 | 10.2 | 9.9
72 | 12.0 | 11.8 | 11.6 | 11.4 | 11.1 | 10.8 | 10.5 | 10.2 | 9.9 | 9.6
73 | 11.6 | 11.4 | 11.2 | 11.0 | 10.7 | 10.5 | 10.2 | 9.9 | 9.7 | 9.4
74 | 11.2 | 11.0 | 10.8 | 10.6 | 10.4 | 10.1 | 9.9 | 9.6 | 9.4 | 9.1
75 | 10.7 | 10.5 | 10.4 | 10.2 | 10.0 | 9.8 | 9.5 | 9.3 | 9.1 | 8.8
76 | 10.3 | 10.1 | 9.9 | 9.8 | 9.6 | 9.4 | 9.2 | 9.0 | 8.8 | 8.5
77 | 9.8 | 9.7 | 9.5 | 9.4 | 9.2 | 9.0 | 8.8 | 8.6 | 8.4 | 8.2
78 | 9.4 | 9.2 | 9.1 | 9.0 | 8.8 | 8.7 | 8.5 | 8.3 | 8.1 | 7.9
79 | 8.9 | 8.8 | 8.7 | 8.6 | 8.4 | 8.3 | 8.1 | 8.0 | 7.8 | 7.6
80 | 8.5 | 8.4 | 8.3 | 8.2 | 8.0 | 7.9 | 7.8 | 7.6 | 7.5 | 7.3
81 | 8.0 | 8.0 | 7.9 | 7.9 | 7.7 | 7.5 | 7.4 | 7.3 | 7.1 | 7.0
82 | 7.6 | 7.5 | 7.5 | 7.4 | 7.3 | 7.2 | 7.1 | 6.9 | 6.8 | 6.7
83 | 7.2 | 7.1 | 7.1 | 7.0 | 6.9 | 6.8 | 6.7 | 6.6 | 6.5 | 6.4
84 | 6.8 | 6.7 | 6.7 | 6.6 | 6.5 | 6.4 | 6.4 | 6.3 | 6.2 | 6.0
85 | 6.4 | 6.4 | 6.3 | 6.2 | 6.2 | 6.1 | 6.0 | 5.9 | 5.8 | 5.7
86 | 6.0 | 6.0 | 5.9 | 5.9 | 5.8 | 5.8 | 5.7 | 5.6 | 5.5 | 5.4
87 | 5.7 | 5.6 | 5.6 | 5.6 | 5.5 | 5.4 | 5.4 | 5.3 | 5.2 | 5.2
88 | 5.3 | 5.3 | 5.3 | 5.2 | 5.2 | 5.1 | 5.1 | 5.0 | 5.0 | 4.9
89 | 5.0 | 5.0 | 5.0 | 4.9 | 4.9 | 4.8 | 4.8 | 4.7 | 4.7 | 4.6
90 | 4.7 | 4.7 | 4.7 | 4.6 | 4.6 | 4.6 | 4.5 | 4.5 | 4.4 | 4.4
91 | 4.5 | 4.4 | 4.4 | 4.4 | 4.3 | 4.3 | 4.3 | 4.2 | 4.2 | 4.1
92 | 4.2 | 4.2 | 4.1 | 4.1 | 4.1 | 4.1 | 4.0 | 4.0 | 3.9 | 3.9
93 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.8 | 3.8 | 3.8 | 3.7 | 3.7
94 | 3.7 | 3.7 | 3.7 | 3.7 | 3.6 | 3.6 | 3.6 | 3.6 | 3.5 | 3.5
95 | 3.5 | 3.5 | 3.5 | 3.5 | 3.4 | 3.4 | 3.4 | 3.4 | 3.3 | 3.3
96 | 3.3 | 3.3 | 3.3 | 3.3 | 3.3 | 3.2 | 3.2 | 3.2 | 3.2 | 3.1
97 | 3.1 | 3.1 | 3.1 | 3.1 | 3.1 | 3.1 | 3.0 | 3.0 | 3.0 | 3.0
98 | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | 2.9 | 2.8 | 2.8
99 | 2.8 | 2.8 | 2.8 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.6
100 | 2.6 | 2.6 | 2.6 | 2.6 | 2.6 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
101 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.4 | 2.3 | 2.3
102 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2 | 2.2
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.0 | 2.0 | 2.0 | 2.0 | 2.0
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | .19 | 1.9
105 | 1.7 | 1.7 | 1.7 | 1.7 | .17 | 1.7 | 1.7 | 1.7 | 1.7 | 1.7
106 | 1.6 | 1.6 | .16 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.5 | 1.5
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .6 | .6 | .6 | .6 | .6
114 | .6 | .6 | .6 | .6 | .6 | .6 | .5 | .5 | .5 | .5
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 75 | 76 | 77 | 78 | 79 | 80 | 81 | 82 | 83 | 84
75 | 8.6 | 8.3 | 8.0 | 7.7 | 7.4 | 7.1 | 6.8 | 6.5 | 6.2 | 5.9
76 | 8.3 | 8.0 | 7.8 | 7.5 | 7.2 | 6.9 | 6.7 | 6.4 | 6.1 | 5.8
77 | 8.0 | 7.8 | 7.5 | 7.3 | 7.0 | 6.8 | 6.5 | 6.2 | 5.9 | 5.7
78 | 7.7 | 7.5 | 7.3 | 7.0 | 6.8 | 6.6 | 6.3 | 6.0 | 5.8 | 5.5
79 | 7.4 | 7.2 | 7.0 | 6.8 | 6.6 | 6.3 | 6.1 | 5.9 | 5.6 | 5.4
80 | 7.1 | 6.9 | 6.8 | 6.6 | 6.3 | 6.1 | 5.9 | 5.7 | 5.5 | 5.2
81 | 6.8 | 6.7 | 6.5 | 6.3 | 6.1 | 5.9 | 5.7 | 5.5 | 5.3 | 5.1
82 | 6.5 | 6.4 | 6.2 | 6.0 | 5.9 | 5.7 | 5.5 | 5.3 | 5.1 | 4.9
83 | 6.2 | 6.1 | 5.9 | 5.8 | 5.6 | 5.5 | 5.3 | 5.1 | 4.9 | 4.7
84 | 5.9 | 5.8 | 5.7 | 5.5 | 5.4 | 5.2 | 5.1 | 4.9 | 4.7 | 4.6
85 | 5.6 | 5.5 | 5.4 | 5.3 | 5.2 | 5.0 | 4.9 | 4.7 | 4.6 | 4.4
86 | 5.4 | 5.3 | 5.1 | 5.0 | 4.9 | 4.8 | 4.7 | 4.5 | 4.4 | 4.2
87 | 5.1 | 5.0 | 4.9 | 4.8 | 4.7 | 4.6 | 4.4 | 4.3 | 4.2 | 4.1
88 | 4.8 | 4.7 | 4.6 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0 | 3.9
89 | 4.5 | 4.5 | 4.4 | 4.3 | 4.2 | 4.1 | 4.0 | 3.9 | 3.8 | 3.7
90 | 4.3 | 4.2 | 4.2 | 4.1 | 4.0 | 3.9 | 3.8 | 3.8 | 3.7 | 3.5
91 | 4.1 | 4.0 | 4.0 | 3.9 | 3.8 | 3.7 | 3.7 | 3.6 | 3.5 | 3.4
92 | 3.9 | 3.8 | 3.7 | 3.7 | 3.6 | 3.6 | 3.5 | 3.4 | 3.3 | 3.2
93 | 3.7 | 3.6 | 3.6 | 3.5 | 3.4 | 3.4 | 3.3 | 3.2 | 3.2 | 3.1
94 | 3.5 | 3.4 | 3.4 | 3.3 | 3.3 | 3.2 | 3.2 | 3.1 | 3.0 | 3.0
95 | 3.3 | 3.2 | 3.2 | 3.2 | 3.1 | 3.1 | 3.0 | 3.0 | 2.9 | 2.8
96 | 3.1 | 3.1 | 3.0 | 3.0 | 3.0 | 2.9 | 2.9 | 2.8 | 2.8 | 2.7
97 | 2.9 | 2.9 | 2.9 | 2.9 | 2.8 | 2.8 | 2.7 | 2.7 | 2.6 | 2.6
98 | 2.8 | 2.8 | 2.7 | 2.7 | 2.7 | 2.6 | 2.6 | 2.6 | 2.5 | 2.5
99 | 2.6 | 2.6 | 2.6 | 2.6 | 2.5 | 2.5 | 2.5 | 2.4 | 2.4 | 2.3
100 | 2.5 | 2.5 | 2.4 | 2.4 | 2.4 | 2.4 | 2.3 | 2.3 | 2.3 | 2.2
101 | 2.3 | 2.3 | 2.3 | 2.3 | 2.2 | 2.2 | 2.2 | 2.2 | 2.1 | 2.1
102 | 2.2 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.0 | 2.0 | 2.0 | 2.0
103 | 2.0 | 2.0 | 2.0 | 2.0 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.8
104 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 | 1.7
105 | 1.7 | 1.7 | 1.7 | 1.7 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
106 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.5 | 1.4
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | 1.3 | 1.3
108 | 1.3 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .8 | .8
112 | .8 | .8 | .8 | .7 | .7 | .7 | .7 | .7 | .7 | .7
113 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
114 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 85 | 86 | 87 | 88 | 89 | 90 | 91 | 92 | 93 | 94
85 | 4.2 | 4.1 | 3.9 | 3.8 | 3.6 | 3.4 | 3.3 | 3.2 | 3.0 | 2.9
86 | 4.1 | 3.9 | 3.8 | 3.6 | 3.5 | 3.3 | 3.2 | 3.1 | 2.9 | 2.8
87 | 3.9 | 3.8 | 3.6 | 3.5 | 3.4 | 3.2 | 3.1 | 3.0 | 2.8 | 2.7
88 | 3.8 | 3.6 | 3.5 | 3.4 | 3.2 | 3.1 | 3.0 | 2.9 | 2.8 | 2.6
89 | 3.6 | 3.5 | 3.4 | 3.2 | 3.1 | 3.0 | 2.9 | 2.8 | 2.7 | 2.6
90 | 3.4 | 3.3 | 3.2 | 3.1 | 3.0 | 2.9 | 2.8 | 2.7 | 2.6 | 2.5
91 | 3.3 | 3.2 | 3.1 | 3.0 | 2.9 | 2.8 | 2.7 | 2.6 | 2.5 | 2.4
92 | 3.2 | 3.1 | 3.0 | 2.9 | 2.8 | 2.7 | 2.6 | 2.5 | 2.4 | 2.3
93 | 3.0 | 2.9 | 2.8 | 2.8 | 2.7 | 2.6 | 2.5 | 2.4 | 2.3 | 2.3
94 | 2.9 | 2.8 | 2.7 | 2.6 | 2.6 | 2.5 | 2.4 | 2.3 | 2.3 | 2.2
95 | 2.8 | 2.7 | 2.6 | 2.5 | 2.5 | 2.4 | 2.3 | 2.2 | 2.2 | 2.1
96 | 2.6 | 2.6 | 2.5 | 2.4 | 2.4 | 2.3 | 2.2 | 2.2 | 2.1 | 2.0
97 | 2.5 | 2.5 | 2.4 | 2.3 | 2.3 | 2.2 | 2.2 | 2.1 | 2.0 | 2.0
98 | 2.4 | 2.4 | 2.3 | 2.2 | 2.2 | 2.1 | 2.1 | 2.0 | 2.0 | 1.9
99 | 2.3 | 2.2 | 2.2 | 2.1 | 2.1 | 2.0 | 2.0 | 1.9 | 1.9 | 1.8
100 | 2.2 | 2.1 | 2.1 | 2.0 | 2.0 | 1.9 | 1.9 | 1.9 | 1.8 | 1.8
101 | 2.1 | 2.0 | 2.0 | 1.9 | 1.9 | 1.9 | 1.8 | 1.8 | 1.7 | 1.7
102 | 1.9 | 1.9 | 1.9 | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 | 1.6 | 1.6
103 | 1.8 | 1.8 | 1.8 | 1.7 | 1.7 | 1.7 | 1.6 | 1.6 | 1.5 | 1.5
104 | 1.7 | 1.7 | 1.6 | 1.6 | 1.6 | 1.5 | 1.5 | 1.5 | 1.5 | 1.4
105 | 1.6 | 1.5 | 1.5 | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3
106 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | 1.3 | 1.3 | 1.2
107 | 1.3 | 1.3 | 1.3 | 1.3 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2 | 1.2
108 | 1.2 | 1.2 | 1.2 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
109 | 1.1 | 1.1 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
110 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
111 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
112 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
113 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
114 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 95 | 96 | 97 | 98 | 99 | 100 | 101 | 102 | 103 | 104
95 | 2.0 | 2.0 | 1.9 | 1.8 | 1.8 | 1.7 | 1.6 | 1.6 | 1.5 | 1.4
96 | 2.0 | 1.9 | 1.9 | 1.8 | 1.7 | 1.7 | 1.6 | 1.5 | 1.5 | 1.4
97 | 1.9 | 1.9 | 1.8 | 1.7 | 1.7 | 1.6 | 1.6 | 1.5 | 1.4 | 1.3
98 | 1.8 | 1.8 | 1.7 | 1.7 | 1.6 | 1.6 | 1.5 | 1.5 | 1.4 | 1.3
99 | 1.8 | 1.7 | 1.7 | 1.6 | 1.6 | 1.5 | 1.5 | 1.4 | 1.4 | 1.3
100 | 1.7 | 1.7 | 1.6 | 1.6 | 1.5 | 1.5 | 1.4 | 1.4 | 1.3 | 1.3
101 | 1.6 | 1.6 | 1.6 | 1.5 | 1.5 | 1.4 | 1.4 | 1.3 | 1.3 | 1.2
102 | 1.6 | 1.5 | 1.5 | 1.5 | 1.4 | 1.4 | 1.3 | 1.3 | 1.2 | 1.2
103 | 1.5 | 1.5 | 1.4 | 1.4 | 1.4 | 1.3 | 1.3 | 1.2 | 1.2 | 1.1
104 | 1.4 | 1.4 | 1.3 | 1.3 | 1.3 | 1.3 | 1.2 | 1.2 | 1.1 | 1.1
105 | 1.3 | 1.3 | 1.3 | 1.2 | 1.2 | 1.2 | 1.2 | 1.1 | 1.1 | 1.0
106 | 1.2 | 1.2 | 1.2 | 1.2 | 1.1 | 1.1 | 1.1 | 1.1 | 1.0 | 1.0
107 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.0 | 1.0 | 1.0 | 1.0 | 9
108 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | .9 | .9 | .9
109 | 1.0 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .8 | .8
110 | .9 | .9 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
111 | .8 | .8 | .8 | .8 | .8 | .7 | .7 | .7 | .7 | .7
112 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .6 | .6
113 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
114 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIaa—Annuities for Joint Life Only; Two Lives—Expected Return Multiples
Ages | 105 | 106 | 107 | 108 | 109 | 110 | 111 | 112 | 113 | 114 | 115
105 | 1.0 | 1.0 | .9 | .9 | .8 | .7 | .7 | .6 | .6 | .5 | .5
106 | 1.0 | .9 | .9 | .8 | .8 | .7 | .7 | .6 | .6 | .5 | .5
107 | .9 | .9 | .8 | .8 | .7 | .7 | .7 | .6 | .6 | .5 | .5
108 | .9 | .8 | .8 | .8 | .7 | .7 | .6 | .6 | .5 | .5 | .5
109 | .8 | .8 | .7 | .7 | .7 | .7 | .6 | .6 | .5 | .5 | .5
110 | .7 | .7 | .7 | .7 | .7 | .6 | .6 | .6 | .5 | .5 | .5
111 | .7 | .7 | .7 | .6 | .6 | .6 | .6 | .5 | .5 | .5 | .5
112 | .6 | .6 | .6 | .6 | .6 | .6 | .5 | .5 | .5 | .5 | .5
113 | .6 | .6 | .6 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
114 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VII—Percent Value of Refund Feature; Duration of Guaranteed Amount
Age | Years—
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10
5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
6 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
7 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
8 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
9 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
10 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
11 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
12 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
13 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
14 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
15 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
16 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
17 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
18 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
19 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
20 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
21 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
22 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
23 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
24 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
25 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
26 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
27 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
28 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
29 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
30 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
31 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
32 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
33 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
34 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
35 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
36 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
37 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1
38 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1
39 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1
40 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1
41 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1
42 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
43 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
44 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1
45 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1
46 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
47 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
48 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
49 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 2
50 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 2
51 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 2 | 2
52 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 2 | 2
53 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
54 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
55 | 0 | 0 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
56 | 0 | 0 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3
57 | 0 | 0 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3
58 | 0 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3
59 | 0 | 1 | 1 | 1 | 1 | 2 | 2 | 3 | 3 | 4
60 | 0 | 1 | 1 | 1 | 2 | 2 | 2 | 3 | 3 | 4
61 | 0 | 1 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 4
62 | 0 | 1 | 1 | 2 | 2 | 2 | 3 | 4 | 4 | 5
63 | 0 | 1 | 1 | 2 | 2 | 3 | 3 | 4 | 5 | 5
64 | 0 | 1 | 1 | 2 | 2 | 3 | 4 | 4 | 5 | 6
65 | 0 | 1 | 2 | 2 | 3 | 3 | 4 | 5 | 6 | 6
66 | 1 | 1 | 2 | 2 | 3 | 4 | 5 | 5 | 6 | 7
67 | 1 | 1 | 2 | 3 | 3 | 4 | 5 | 6 | 7 | 8
68 | 1 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9
69 | 1 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 10
70 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 11
71 | 1 | 2 | 3 | 4 | 5 | 6 | 8 | 9 | 10 | 12
72 | 1 | 2 | 3 | 4 | 6 | 7 | 8 | 10 | 11 | 13
73 | 1 | 2 | 4 | 5 | 6 | 8 | 9 | 11 | 13 | 14
74 | 1 | 3 | 4 | 5 | 7 | 9 | 10 | 12 | 14 | 16
75 | 1 | 3 | 4 | 6 | 8 | 9 | 11 | 13 | 15 | 17
76 | 2 | 3 | 5 | 7 | 9 | 10 | 12 | 15 | 17 | 19
77 | 2 | 4 | 5 | 7 | 9 | 12 | 14 | 16 | 18 | 21
78 | 2 | 4 | 6 | 8 | 10 | 13 | 15 | 18 | 20 | 23
79 | 2 | 4 | 7 | 9 | 11 | 14 | 17 | 19 | 22 | 25
80 | 2 | 5 | 7 | 10 | 13 | 15 | 18 | 21 | 24 | 27
81 | 3 | 5 | 8 | 11 | 14 | 17 | 20 | 23 | 26 | 29
82 | 3 | 6 | 9 | 12 | 15 | 19 | 22 | 25 | 28 | 32
83 | 3 | 7 | 10 | 13 | 17 | 20 | 24 | 27 | 31 | 34
84 | 4 | 7 | 11 | 15 | 19 | 22 | 26 | 30 | 33 | 37
85 | 4 | 8 | 12 | 16 | 20 | 24 | 28 | 32 | 36 | 40
86 | 4 | 9 | 13 | 18 | 22 | 27 | 31 | 35 | 39 | 42
87 | 5 | 10 | 15 | 20 | 24 | 29 | 33 | 37 | 41 | 45
88 | 5 | 11 | 16 | 21 | 26 | 31 | 36 | 40 | 44 | 48
89 | 6 | 12 | 18 | 23 | 28 | 33 | 38 | 43 | 47 | 50
90 | 7 | 13 | 19 | 25 | 31 | 36 | 41 | 45 | 49 | 53
91 | 7 | 14 | 21 | 27 | 33 | 38 | 43 | 48 | 52 | 55
92 | 8 | 15 | 22 | 29 | 35 | 40 | 45 | 50 | 54 | 58
93 | 9 | 17 | 24 | 31 | 37 | 43 | 48 | 52 | 56 | 60
94 | 9 | 18 | 26 | 33 | 39 | 45 | 50 | 54 | 58 | 62
95 | 10 | 19 | 27 | 35 | 41 | 47 | 52 | 57 | 60 | 64
96 | 11 | 20 | 29 | 36 | 43 | 49 | 54 | 59 | 62 | 66
97 | 11 | 21 | 30 | 38 | 45 | 51 | 56 | 61 | 64 | 68
98 | 12 | 23 | 32 | 40 | 47 | 53 | 58 | 63 | 66 | 69
99 | 13 | 24 | 34 | 42 | 49 | 55 | 60 | 65 | 68 | 71
100 | 14 | 26 | 36 | 44 | 52 | 58 | 63 | 67 | 70 | 73
101 | 14 | 27 | 38 | 47 | 54 | 60 | 65 | 69 | 72 | 75
102 | 15 | 29 | 40 | 49 | 56 | 62 | 67 | 71 | 74 | 77
103 | 17 | 31 | 42 | 52 | 59 | 65 | 69 | 73 | 76 | 78
104 | 18 | 33 | 45 | 55 | 62 | 67 | 72 | 75 | 78 | 80
105 | 19 | 36 | 48 | 58 | 65 | 70 | 74 | 77 | 80 | 82
106 | 21 | 38 | 51 | 61 | 68 | 73 | 77 | 79 | 82 | 84
107 | 23 | 42 | 55 | 64 | 71 | 75 | 79 | 81 | 84 | 85
108 | 25 | 45 | 58 | 67 | 73 | 78 | 81 | 83 | 85 | 87
109 | 28 | 49 | 62 | 71 | 76 | 80 | 83 | 85 | 87 | 88
110 | 31 | 52 | 66 | 74 | 79 | 82 | 85 | 87 | 88 | 89
111 | 34 | 57 | 70 | 77 | 82 | 85 | 87 | 88 | 90 | 91
112 | 37 | 61 | 73 | 80 | 84 | 87 | 88 | 90 | 91 | 92
113 | 41 | 66 | 77 | 83 | 86 | 88 | 90 | 91 | 92 | 93
114 | 45 | 70 | 80 | 85 | 88 | 90 | 92 | 93 | 93 | 94
115 | 50 | 75 | 83 | 88 | 90 | 92 | 93 | 94 | 94 | 95
Table VII—Percent Value of Refund Feature; Duration of Guaranteed Amount
Age | Years—
11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20
5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
6 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
7 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
8 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
9 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
10 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
11 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
12 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
13 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
14 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
15 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
16 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
17 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
18 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
19 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
20 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1
21 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1
22 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1
23 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1
24 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1
25 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
26 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
27 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1
28 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
29 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
30 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1
31 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1
32 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
33 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
34 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
35 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
36 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
37 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
38 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2
39 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2
40 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
41 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
42 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
43 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 3
44 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 3 | 3
45 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
46 | 1 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
47 | 1 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 4
48 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 4 | 4
49 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 4 | 4 | 4
50 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 5
51 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5
52 | 2 | 2 | 3 | 3 | 3 | 4 | 4 | 5 | 5 | 5
53 | 2 | 3 | 3 | 3 | 4 | 4 | 5 | 5 | 5 | 6
54 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 6 | 7
55 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 6 | 7 | 7
56 | 3 | 3 | 4 | 4 | 5 | 5 | 6 | 7 | 7 | 8
57 | 3 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 8 | 9
58 | 4 | 4 | 5 | 5 | 6 | 6 | 7 | 8 | 9 | 9
59 | 4 | 5 | 5 | 6 | 6 | 7 | 8 | 9 | 9 | 10
60 | 4 | 5 | 6 | 6 | 7 | 8 | 9 | 10 | 10 | 11
61 | 5 | 6 | 6 | 7 | 8 | 9 | 10 | 10 | 11 | 13
62 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14
63 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15
64 | 7 | 8 | 8 | 9 | 10 | 12 | 13 | 14 | 15 | 17
65 | 7 | 8 | 9 | 10 | 12 | 13 | 14 | 15 | 17 | 18
66 | 8 | 9 | 10 | 12 | 13 | 14 | 15 | 17 | 18 | 20
67 | 9 | 10 | 11 | 13 | 14 | 15 | 17 | 18 | 20 | 22
68 | 10 | 11 | 13 | 14 | 15 | 17 | 19 | 20 | 22 | 24
69 | 11 | 12 | 14 | 15 | 17 | 19 | 20 | 22 | 24 | 26
70 | 12 | 14 | 15 | 17 | 19 | 20 | 22 | 24 | 26 | 28
71 | 13 | 15 | 17 | 18 | 20 | 22 | 24 | 26 | 28 | 30
72 | 15 | 17 | 18 | 20 | 22 | 24 | 26 | 28 | 30 | 32
73 | 16 | 18 | 20 | 22 | 24 | 26 | 28 | 31 | 33 | 35
74 | 18 | 20 | 22 | 24 | 26 | 28 | 31 | 33 | 35 | 37
75 | 19 | 22 | 24 | 26 | 28 | 31 | 33 | 35 | 38 | 40
76 | 21 | 24 | 26 | 28 | 31 | 33 | 36 | 38 | 40 | 43
77 | 23 | 26 | 28 | 31 | 33 | 36 | 38 | 41 | 43 | 45
78 | 25 | 28 | 31 | 33 | 36 | 38 | 41 | 43 | 46 | 48
79 | 28 | 30 | 33 | 36 | 38 | 41 | 44 | 46 | 48 | 51
80 | 30 | 33 | 36 | 38 | 41 | 44 | 46 | 49 | 51 | 53
81 | 32 | 35 | 38 | 41 | 44 | 47 | 49 | 51 | 54 | 56
82 | 35 | 38 | 41 | 44 | 47 | 49 | 52 | 54 | 56 | 58
83 | 38 | 41 | 44 | 47 | 49 | 52 | 54 | 57 | 59 | 61
84 | 40 | 44 | 47 | 49 | 52 | 55 | 57 | 59 | 61 | 63
85 | 43 | 46 | 49 | 52 | 55 | 57 | 59 | 62 | 63 | 65
86 | 46 | 49 | 52 | 55 | 57 | 60 | 62 | 64 | 66 | 67
87 | 48 | 52 | 55 | 57 | 60 | 62 | 64 | 66 | 68 | 69
88 | 51 | 54 | 57 | 60 | 62 | 64 | 66 | 68 | 70 | 71
89 | 54 | 57 | 60 | 62 | 65 | 67 | 68 | 70 | 72 | 73
90 | 56 | 59 | 62 | 64 | 67 | 69 | 70 | 72 | 74 | 75
91 | 59 | 62 | 64 | 67 | 69 | 71 | 72 | 74 | 75 | 76
92 | 61 | 64 | 66 | 69 | 71 | 72 | 74 | 75 | 77 | 78
93 | 63 | 66 | 68 | 70 | 72 | 74 | 75 | 77 | 78 | 79
94 | 65 | 68 | 70 | 72 | 74 | 75 | 77 | 78 | 79 | 80
95 | 67 | 69 | 72 | 74 | 75 | 77 | 78 | 79 | 81 | 82
96 | 69 | 71 | 73 | 75 | 77 | 78 | 80 | 81 | 82 | 83
97 | 70 | 73 | 75 | 77 | 78 | 80 | 81 | 82 | 83 | 84
98 | 72 | 74 | 76 | 78 | 79 | 81 | 82 | 83 | 84 | 85
99 | 74 | 76 | 78 | 79 | 81 | 82 | 83 | 84 | 85 | 86
100 | 75 | 78 | 79 | 81 | 82 | 83 | 84 | 85 | 86 | 86
101 | 77 | 79 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 87
102 | 79 | 81 | 82 | 83 | 84 | 85 | 86 | 87 | 88 | 88
103 | 80 | 82 | 83 | 85 | 86 | 87 | 87 | 88 | 89 | 89
104 | 82 | 84 | 85 | 86 | 87 | 88 | 88 | 89 | 90 | 90
105 | 84 | 85 | 86 | 87 | 88 | 89 | 89 | 90 | 90 | 91
106 | 85 | 86 | 87 | 88 | 89 | 90 | 90 | 91 | 91 | 92
107 | 87 | 88 | 89 | 89 | 90 | 91 | 91 | 92 | 92 | 93
108 | 88 | 89 | 90 | 90 | 91 | 92 | 92 | 93 | 93 | 93
109 | 89 | 90 | 91 | 92 | 92 | 93 | 93 | 93 | 94 | 94
110 | 90 | 91 | 92 | 92 | 93 | 93 | 94 | 94 | 94 | 95
111 | 92 | 92 | 93 | 93 | 94 | 94 | 95 | 95 | 95 | 95
112 | 93 | 93 | 94 | 94 | 95 | 95 | 95 | 96 | 96 | 96
113 | 94 | 94 | 95 | 95 | 95 | 96 | 96 | 96 | 96 | 97
114 | 95 | 95 | 95 | 96 | 96 | 96 | 97 | 97 | 97 | 97
115 | 95 | 96 | 96 | 96 | 97 | 97 | 97 | 97 | 97 | 98
Table VII—Percent Value of Refund Feature; Duration of Guaranteed Amount
Age | Years—
21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30
5 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
6 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
7 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0
8 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1
9 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1
10 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1
11 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
12 | 0 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1
13 | 0 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1
14 | 0 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1
15 | 0 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1
16 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
17 | 0 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
18 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
19 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
20 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
21 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
22 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
23 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
24 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
25 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
26 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
27 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2
28 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2
29 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
30 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
31 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
32 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2
33 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2
34 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3
35 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3
36 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
37 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
38 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4
39 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4 | 4
40 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4
41 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5
42 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5
43 | 3 | 3 | 3 | 4 | 4 | 4 | 4 | 5 | 5 | 6
44 | 3 | 3 | 4 | 4 | 4 | 4 | 5 | 5 | 6 | 6
45 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7
46 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7
47 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8
48 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 9
49 | 5 | 5 | 5 | 6 | 6 | 7 | 8 | 8 | 9 | 10
50 | 5 | 5 | 6 | 6 | 7 | 8 | 8 | 9 | 10 | 10
51 | 5 | 6 | 6 | 7 | 8 | 8 | 9 | 10 | 11 | 11
52 | 6 | 7 | 7 | 8 | 8 | 9 | 10 | 11 | 11 | 12
53 | 7 | 7 | 8 | 8 | 9 | 10 | 11 | 12 | 13 | 14
54 | 7 | 8 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15
55 | 8 | 9 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16
56 | 9 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 18
57 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 17 | 18 | 19
58 | 10 | 11 | 12 | 13 | 14 | 16 | 17 | 18 | 19 | 21
59 | 11 | 12 | 13 | 15 | 16 | 17 | 18 | 20 | 21 | 22
60 | 12 | 14 | 15 | 16 | 17 | 19 | 20 | 21 | 23 | 24
61 | 14 | 15 | 16 | 17 | 19 | 20 | 22 | 23 | 25 | 26
62 | 15 | 16 | 18 | 19 | 20 | 22 | 23 | 25 | 27 | 28
63 | 16 | 18 | 19 | 21 | 22 | 24 | 25 | 27 | 29 | 30
64 | 18 | 19 | 21 | 23 | 24 | 26 | 28 | 29 | 31 | 33
65 | 20 | 21 | 23 | 25 | 26 | 28 | 30 | 31 | 33 | 35
66 | 21 | 23 | 25 | 27 | 28 | 30 | 32 | 34 | 35 | 37
67 | 23 | 25 | 27 | 29 | 31 | 32 | 34 | 36 | 38 | 40
68 | 25 | 27 | 29 | 31 | 33 | 35 | 37 | 38 | 40 | 42
69 | 28 | 29 | 31 | 33 | 35 | 37 | 39 | 41 | 43 | 44
70 | 30 | 32 | 34 | 36 | 38 | 40 | 42 | 43 | 45 | 47
71 | 32 | 34 | 36 | 38 | 40 | 42 | 44 | 46 | 47 | 49
72 | 35 | 37 | 39 | 41 | 43 | 45 | 46 | 48 | 50 | 51
73 | 37 | 39 | 41 | 43 | 45 | 47 | 49 | 51 | 52 | 54
74 | 40 | 42 | 44 | 46 | 48 | 50 | 51 | 53 | 54 | 56
75 | 42 | 44 | 46 | 48 | 50 | 52 | 54 | 55 | 57 | 58
76 | 45 | 47 | 49 | 51 | 53 | 54 | 56 | 58 | 59 | 60
77 | 47 | 50 | 51 | 53 | 55 | 57 | 58 | 60 | 61 | 62
78 | 50 | 52 | 54 | 56 | 57 | 59 | 61 | 62 | 63 | 64
79 | 53 | 55 | 56 | 58 | 60 | 61 | 63 | 64 | 65 | 66
80 | 55 | 57 | 59 | 60 | 62 | 63 | 65 | 66 | 67 | 68
81 | 58 | 59 | 61 | 63 | 64 | 66 | 67 | 68 | 69 | 70
82 | 60 | 62 | 63 | 65 | 66 | 68 | 69 | 70 | 71 | 72
83 | 62 | 64 | 66 | 67 | 68 | 70 | 71 | 72 | 73 | 74
84 | 65 | 66 | 68 | 69 | 70 | 71 | 72 | 73 | 74 | 75
85 | 67 | 68 | 70 | 71 | 72 | 73 | 74 | 75 | 76 | 77
86 | 69 | 70 | 72 | 73 | 74 | 75 | 76 | 77 | 77 | 78
87 | 71 | 72 | 73 | 75 | 76 | 76 | 77 | 78 | 79 | 80
88 | 73 | 74 | 75 | 76 | 77 | 78 | 79 | 80 | 80 | 81
89 | 74 | 76 | 77 | 78 | 79 | 79 | 80 | 81 | 81 | 82
90 | 76 | 77 | 78 | 79 | 80 | 81 | 81 | 82 | 83 | 83
91 | 78 | 79 | 79 | 80 | 81 | 82 | 83 | 83 | 84 | 84
92 | 79 | 80 | 81 | 82 | 82 | 83 | 84 | 84 | 85 | 85
93 | 80 | 81 | 82 | 83 | 83 | 84 | 85 | 85 | 86 | 86
94 | 81 | 82 | 83 | 84 | 84 | 85 | 85 | 86 | 86 | 87
95 | 82 | 83 | 84 | 85 | 85 | 86 | 86 | 87 | 87 | 88
96 | 83 | 84 | 85 | 86 | 86 | 87 | 87 | 88 | 88 | 88
97 | 84 | 85 | 86 | 86 | 87 | 87 | 88 | 88 | 89 | 89
98 | 85 | 86 | 87 | 87 | 88 | 88 | 89 | 89 | 89 | 90
99 | 86 | 87 | 87 | 88 | 88 | 89 | 89 | 90 | 90 | 90
100 | 87 | 88 | 88 | 89 | 89 | 90 | 90 | 90 | 91 | 91
101 | 88 | 89 | 89 | 90 | 90 | 90 | 91 | 91 | 91 | 92
102 | 89 | 89 | 90 | 90 | 91 | 91 | 91 | 92 | 92 | 92
103 | 90 | 90 | 91 | 91 | 91 | 92 | 92 | 92 | 93 | 93
104 | 91 | 91 | 91 | 92 | 92 | 92 | 93 | 93 | 93 | 93
105 | 91 | 92 | 92 | 92 | 93 | 93 | 93 | 94 | 94 | 94
106 | 92 | 93 | 93 | 93 | 93 | 94 | 94 | 94 | 94 | 95
107 | 93 | 93 | 94 | 94 | 94 | 94 | 95 | 95 | 95 | 95
108 | 94 | 94 | 94 | 94 | 95 | 95 | 95 | 95 | 95 | 96
109 | 94 | 95 | 95 | 95 | 95 | 95 | 96 | 96 | 96 | 96
110 | 95 | 95 | 95 | 96 | 96 | 96 | 96 | 96 | 96 | 96
111 | 96 | 96 | 96 | 96 | 96 | 96 | 97 | 97 | 97 | 97
112 | 96 | 96 | 96 | 97 | 97 | 97 | 97 | 97 | 97 | 97
113 | 97 | 97 | 97 | 97 | 97 | 97 | 97 | 98 | 98 | 98
114 | 97 | 97 | 97 | 98 | 98 | 98 | 98 | 98 | 98 | 98
115 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98
Table VII—Percent Value of Refund Feature; Duration of Guaranteed Amount
Age | Years—
31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 | 40
5 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
6 | 0 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
7 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
8 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
9 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
10 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
11 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
12 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
13 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
14 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
15 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
16 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
17 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1
18 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2
19 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2
20 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2
21 | 1 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2
22 | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2
23 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2
24 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2
25 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3
26 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3
27 | 2 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3
28 | 2 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3
29 | 2 | 2 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 4
30 | 2 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4
31 | 2 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4
32 | 2 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5
33 | 3 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5
34 | 3 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5
35 | 3 | 3 | 3 | 4 | 4 | 4 | 5 | 5 | 5 | 6
36 | 3 | 4 | 4 | 4 | 4 | 5 | 5 | 5 | 6 | 6
37 | 4 | 4 | 4 | 4 | 5 | 5 | 6 | 6 | 6 | 7
38 | 4 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8
39 | 4 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8
40 | 5 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 8 | 9
41 | 5 | 5 | 6 | 6 | 7 | 7 | 8 | 9 | 9 | 10
42 | 6 | 6 | 6 | 7 | 7 | 8 | 9 | 9 | 10 | 11
43 | 6 | 7 | 7 | 8 | 8 | 9 | 9 | 10 | 11 | 12
44 | 7 | 7 | 8 | 8 | 9 | 10 | 10 | 11 | 12 | 13
45 | 7 | 8 | 8 | 9 | 10 | 10 | 11 | 12 | 13 | 14
46 | 8 | 9 | 9 | 10 | 11 | 11 | 12 | 13 | 14 | 15
47 | 9 | 9 | 10 | 11 | 12 | 12 | 13 | 14 | 15 | 16
48 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18
49 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19
50 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 20 | 21
51 | 12 | 13 | 14 | 15 | 16 | 17 | 19 | 20 | 21 | 22
52 | 13 | 14 | 15 | 17 | 18 | 19 | 20 | 21 | 23 | 24
53 | 15 | 16 | 17 | 18 | 19 | 20 | 22 | 23 | 24 | 26
54 | 16 | 17 | 18 | 19 | 21 | 22 | 23 | 25 | 26 | 28
55 | 17 | 18 | 20 | 21 | 22 | 24 | 25 | 27 | 28 | 30
56 | 19 | 20 | 21 | 23 | 24 | 26 | 27 | 29 | 30 | 32
57 | 20 | 22 | 23 | 25 | 26 | 28 | 29 | 31 | 32 | 34
58 | 22 | 24 | 25 | 27 | 28 | 30 | 31 | 33 | 34 | 36
59 | 24 | 25 | 27 | 28 | 30 | 32 | 33 | 35 | 36 | 38
60 | 26 | 27 | 29 | 31 | 32 | 34 | 35 | 37 | 38 | 40
61 | 28 | 29 | 31 | 33 | 34 | 36 | 37 | 39 | 40 | 42
62 | 30 | 32 | 33 | 35 | 36 | 38 | 40 | 41 | 42 | 44
63 | 32 | 34 | 35 | 37 | 39 | 40 | 42 | 43 | 45 | 46
64 | 34 | 36 | 38 | 39 | 41 | 42 | 44 | 45 | 47 | 48
65 | 37 | 38 | 40 | 42 | 43 | 45 | 46 | 47 | 49 | 50
66 | 39 | 41 | 42 | 44 | 45 | 47 | 48 | 50 | 51 | 52
67 | 41 | 43 | 45 | 46 | 48 | 49 | 50 | 52 | 53 | 54
68 | 44 | 45 | 47 | 48 | 50 | 51 | 52 | 54 | 55 | 56
69 | 46 | 48 | 49 | 51 | 52 | 53 | 54 | 56 | 57 | 58
70 | 48 | 50 | 51 | 53 | 54 | 55 | 57 | 58 | 59 | 60
71 | 51 | 52 | 54 | 55 | 56 | 57 | 59 | 60 | 61 | 62
72 | 53 | 54 | 56 | 57 | 58 | 59 | 60 | 62 | 62 | 63
73 | 55 | 57 | 58 | 59 | 60 | 61 | 62 | 63 | 64 | 65
74 | 57 | 59 | 60 | 61 | 62 | 63 | 64 | 65 | 66 | 67
75 | 59 | 61 | 62 | 63 | 64 | 65 | 66 | 67 | 68 | 69
76 | 62 | 63 | 64 | 65 | 66 | 67 | 68 | 69 | 69 | 70
77 | 64 | 65 | 66 | 67 | 68 | 69 | 70 | 70 | 71 | 72
78 | 66 | 67 | 68 | 69 | 70 | 70 | 71 | 72 | 73 | 73
79 | 67 | 68 | 69 | 70 | 71 | 72 | 73 | 73 | 74 | 75
80 | 69 | 70 | 71 | 72 | 73 | 74 | 74 | 75 | 76 | 76
81 | 71 | 72 | 73 | 74 | 74 | 75 | 76 | 76 | 77 | 78
82 | 73 | 74 | 74 | 75 | 76 | 77 | 77 | 78 | 78 | 79
83 | 74 | 75 | 76 | 77 | 77 | 78 | 79 | 79 | 80 | 80
84 | 76 | 77 | 77 | 78 | 79 | 79 | 80 | 80 | 81 | 81
85 | 78 | 78 | 79 | 79 | 80 | 81 | 81 | 82 | 82 | 83
86 | 79 | 80 | 80 | 81 | 81 | 82 | 82 | 83 | 83 | 84
87 | 80 | 81 | 81 | 82 | 83 | 83 | 83 | 84 | 84 | 85
88 | 82 | 82 | 83 | 83 | 84 | 84 | 85 | 85 | 85 | 86
89 | 83 | 83 | 84 | 84 | 85 | 85 | 85 | 86 | 86 | 87
90 | 84 | 84 | 85 | 85 | 86 | 86 | 86 | 87 | 87 | 87
91 | 85 | 85 | 86 | 86 | 87 | 87 | 87 | 88 | 88 | 88
92 | 86 | 86 | 87 | 87 | 87 | 88 | 88 | 88 | 89 | 89
93 | 87 | 87 | 87 | 88 | 88 | 88 | 89 | 89 | 89 | 90
94 | 87 | 88 | 88 | 88 | 89 | 89 | 89 | 90 | 90 | 90
95 | 88 | 88 | 89 | 89 | 89 | 90 | 90 | 90 | 91 | 91
96 | 89 | 89 | 89 | 90 | 90 | 90 | 91 | 91 | 91 | 91
97 | 89 | 90 | 90 | 90 | 91 | 91 | 91 | 91 | 92 | 92
98 | 90 | 90 | 91 | 91 | 91 | 91 | 92 | 92 | 92 | 92
99 | 91 | 91 | 91 | 92 | 92 | 92 | 92 | 92 | 93 | 93
100 | 91 | 92 | 92 | 92 | 92 | 92 | 93 | 93 | 93 | 93
101 | 92 | 92 | 92 | 93 | 93 | 93 | 93 | 93 | 94 | 94
102 | 92 | 93 | 93 | 93 | 93 | 94 | 94 | 94 | 94 | 94
103 | 93 | 93 | 93 | 94 | 94 | 94 | 94 | 94 | 94 | 95
104 | 94 | 94 | 94 | 94 | 94 | 95 | 95 | 95 | 95 | 95
105 | 94 | 94 | 95 | 95 | 95 | 95 | 95 | 95 | 95 | 95
106 | 95 | 95 | 95 | 95 | 95 | 95 | 96 | 96 | 96 | 96
107 | 95 | 95 | 96 | 96 | 96 | 96 | 96 | 96 | 96 | 96
108 | 96 | 96 | 96 | 96 | 96 | 96 | 96 | 96 | 97 | 97
109 | 96 | 96 | 96 | 97 | 97 | 97 | 97 | 97 | 97 | 97
110 | 97 | 97 | 97 | 97 | 97 | 97 | 97 | 97 | 97 | 97
111 | 97 | 97 | 97 | 97 | 97 | 97 | 98 | 98 | 98 | 98
112 | 97 | 97 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98
113 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98
114 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 98 | 99
115 | 98 | 98 | 98 | 99 | 99 | 99 | 99 | 99 | 99 | 99
Table VIII—Temporary Life Annuities; 1 One Life—Expected Return Multiples
[See footnote at end of tables]
Age | Years—
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10
5 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
6 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
7 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
8 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
9 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
10 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
11 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
12 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
13 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
14 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
15 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
16 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
17 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
18 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
19 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
20 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
21 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
22 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
23 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
24 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
25 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
26 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
27 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
28 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
29 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
30 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
31 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
32 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
33 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
34 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
35 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
36 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 10.0
37 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 9.9
38 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 9.9
39 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 9.0 | 9.9
40 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
41 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
42 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 8.0 | 8.9 | 9.9
43 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
44 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
45 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 7.0 | 7.9 | 8.9 | 9.9
46 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
47 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
48 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.9
49 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 6.0 | 6.9 | 7.9 | 8.9 | 9.8
50 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.9 | 9.8
51 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.9 | 9.8
52 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
53 | 1.0 | 2.0 | 3.0 | 4.0 | 5.0 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
54 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.9 | 8.8 | 9.8
55 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
56 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
57 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.8 | 9.7
58 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.9 | 7.8 | 8.7 | 9.7
59 | 1.0 | 2.0 | 3.0 | 4.0 | 4.9 | 5.9 | 6.8 | 7.8 | 8.7 | 9.6
60 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.8 | 8.7 | 9.6
61 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.9 | 6.8 | 7.7 | 8.7 | 9.6
62 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.8 | 7.7 | 8.6 | 9.5
63 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.8 | 7.7 | 8.6 | 9.5
64 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.7 | 7.6 | 8.5 | 9.4
65 | 1.0 | 2.0 | 3.0 | 3.9 | 4.9 | 5.8 | 6.7 | 7.6 | 8.5 | 9.3
66 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.8 | 6.7 | 7.6 | 8.4 | 9.3
67 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.5 | 8.4 | 9.2
68 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.5 | 8.3 | 9.1
69 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.7 | 6.6 | 7.4 | 8.2 | 9.0
70 | 1.0 | 2.0 | 2.9 | 3.9 | 4.8 | 5.6 | 6.5 | 7.3 | 8.1 | 8.9
71 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.6 | 6.5 | 7.3 | 8.1 | 8.8
72 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.6 | 6.4 | 7.2 | 8.0 | 8.7
73 | 1.0 | 2.0 | 2.9 | 3.8 | 4.7 | 5.5 | 6.3 | 7.1 | 7.9 | 8.6
74 | 1.0 | 1.9 | 2.9 | 3.8 | 4.6 | 5.5 | 6.3 | 7.0 | 7.7 | 8.4
75 | 1.0 | 1.9 | 2.9 | 3.8 | 4.6 | 5.4 | 6.2 | 6.9 | 7.6 | 8.3
76 | 1.0 | 1.9 | 2.8 | 3.7 | 4.6 | 5.4 | 6.1 | 6.8 | 7.5 | 8.1
77 | 1.0 | 1.9 | 2.8 | 3.7 | 4.5 | 5.3 | 6.0 | 6.7 | 7.3 | 7.9
78 | 1.0 | 1.9 | 2.8 | 3.7 | 4.5 | 5.2 | 5.9 | 6.6 | 7.2 | 7.7
79 | 1.0 | 1.9 | 2.8 | 3.6 | 4.4 | 5.1 | 5.8 | 6.4 | 7.0 | 7.5
80 | 1.0 | 1.9 | 2.8 | 3.6 | 4.4 | 5.1 | 5.7 | 6.3 | 6.8 | 7.3
81 | 1.0 | 1.9 | 2.8 | 3.6 | 4.3 | 5.0 | 5.6 | 6.1 | 6.6 | 7.0
82 | 1.0 | 1.9 | 2.7 | 3.5 | 4.2 | 4.9 | 5.4 | 6.0 | 6.4 | 6.8
83 | 1.0 | 1.9 | 2.7 | 3.5 | 4.1 | 4.8 | 5.3 | 5.8 | 6.2 | 6.5
84 | 1.0 | 1.8 | 2.7 | 3.4 | 4.1 | 4.6 | 5.2 | 5.6 | 6.0 | 6.3
85 | 1.0 | 1.8 | 2.6 | 3.3 | 4.0 | 4.5 | 5.0 | 5.4 | 5.7 | 6.0
86 | 1.0 | 1.8 | 2.6 | 3.3 | 3.9 | 4.4 | 4.8 | 5.2 | 5.5 | 5.7
87 | .9 | 1.8 | 2.5 | 3.2 | 3.8 | 4.3 | 4.7 | 5.0 | 5.3 | 5.5
88 | .9 | 1.8 | 2.5 | 3.1 | 3.7 | 4.1 | 4.5 | 4.8 | 5.0 | 5.2
89 | .9 | 1.8 | 2.5 | 3.1 | 3.6 | 4.0 | 4.3 | 4.6 | 4.8 | 4.9
90 | .9 | 1.7 | 2.4 | 3.0 | 3.4 | 3.8 | 4.1 | 4.4 | 4.5 | 4.7
91 | .9 | 1.7 | 2.4 | 2.9 | 3.3 | 3.7 | 4.0 | 4.2 | 4.3 | 4.4
92 | .9 | 1.7 | 2.3 | 2.8 | 3.2 | 3.5 | 3.8 | 4.0 | 4.1 | 4.2
93 | .9 | 1.7 | 2.3 | 2.7 | 3.1 | 3.4 | 3.6 | 3.8 | 3.9 | 4.0
94 | .9 | 1.6 | 2.2 | 2.7 | 3.0 | 3.3 | 3.5 | 3.6 | 3.7 | 3.8
95 | .9 | 1.6 | 2.2 | 2.6 | 2.9 | 3.1 | 3.3 | 3.4 | 3.5 | 3.6
96 | .9 | 1.6 | 2.1 | 2.5 | 2.8 | 3.0 | 3.2 | 3.3 | 3.3 | 3.4
97 | .9 | 1.6 | 2.1 | 2.4 | 2.7 | 2.9 | 3.0 | 3.1 | 3.2 | 3.2
98 | .9 | 1.5 | 2.0 | 2.4 | 2.6 | 2.8 | 2.9 | 3.0 | 3.0 | 3.0
99 | .9 | 1.5 | 2.0 | 2.3 | 2.5 | 2.6 | 2.7 | 2.8 | 2.8 | 2.8
100 | .9 | 1.5 | 1.9 | 2.2 | 2.4 | 2.5 | 2.6 | 2.6 | 2.6 | 2.7
101 | .8 | 1.4 | 1.8 | 2.1 | 2.3 | 2.4 | 2.4 | 2.5 | 2.5 | 2.5
102 | .8 | 1.4 | 1.8 | 2.0 | 2.1 | 2.2 | 2.3 | 2.3 | 2.3 | 2.3
103 | .8 | 1.4 | 1.7 | 1.9 | 2.0 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | .8 | 1.3 | 1.6 | 1.8 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | .8 | 1.3 | 1.5 | 1.7 | 1.7 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | .8 | 1.2 | 1.4 | 1.5 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | .7 | 1.1 | 1.3 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | .7 | 1.1 | 1.2 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | .7 | 1.0 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | .7 | .9 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .6 | .8 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .6 | .7 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .6 | .6 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .5 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIII—Temporary Life Annuities; 1 One Life—Expected Return Multiples
[See footnote at end of tables]
Age | Years—
11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20
5 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 19.0 | 19.9
6 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 19.0 | 19.9
7 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 19.0 | 19.9
8 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 18.9 | 19.9
9 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 18.9 | 19.9
10 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 18.0 | 18.9 | 19.9
11 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 17.9 | 18.9 | 19.9
12 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 17.9 | 18.9 | 19.9
13 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 17.0 | 17.9 | 18.9 | 19.9
14 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 16.9 | 17.9 | 18.9 | 19.9
15 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 16.9 | 17.9 | 18.9 | 19.9
16 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 16.0 | 16.9 | 17.9 | 18.9 | 19.9
17 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
18 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
19 | 11.0 | 12.0 | 13.0 | 14.0 | 15.0 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
20 | 11.0 | 12.0 | 13.0 | 14.0 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
21 | 11.0 | 12.0 | 13.0 | 14.0 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
22 | 11.0 | 12.0 | 13.0 | 14.0 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
23 | 11.0 | 12.0 | 13.0 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
24 | 11.0 | 12.0 | 13.0 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
25 | 11.0 | 12.0 | 13.0 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
26 | 11.0 | 12.0 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
27 | 11.0 | 12.0 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.9
28 | 11.0 | 12.0 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.8
29 | 11.0 | 12.0 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.9 | 19.8
30 | 11.0 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.8 | 19.8
31 | 11.0 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.9 | 18.8 | 19.8
32 | 11.0 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.8 | 18.8 | 19.8
33 | 11.0 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.9 | 17.8 | 18.8 | 19.8
34 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.8 | 17.8 | 18.8 | 19.8
35 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.9 | 16.8 | 17.8 | 18.8 | 19.7
36 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.8 | 19.7
37 | 10.9 | 11.9 | 12.9 | 13.9 | 14.9 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
38 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.8 | 18.7 | 19.7
39 | 10.9 | 11.9 | 12.9 | 13.9 | 14.8 | 15.8 | 16.8 | 17.7 | 18.7 | 19.6
40 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.7 | 17.7 | 18.7 | 19.6
41 | 10.9 | 11.9 | 12.9 | 13.8 | 14.8 | 15.8 | 16.7 | 17.7 | 18.6 | 19.6
42 | 10.9 | 11.9 | 12.8 | 13.8 | 14.8 | 15.7 | 16.7 | 17.6 | 18.6 | 19.5
43 | 10.9 | 11.9 | 12.8 | 13.8 | 14.8 | 15.7 | 16.7 | 17.6 | 18.6 | 19.5
44 | 10.9 | 11.8 | 12.8 | 13.8 | 14.7 | 15.7 | 16.6 | 17.6 | 18.5 | 19.4
45 | 10.9 | 11.8 | 12.8 | 13.8 | 14.7 | 15.7 | 16.6 | 17.5 | 18.5 | 19.4
46 | 10.9 | 11.8 | 12.8 | 13.7 | 14.7 | 15.6 | 16.6 | 17.5 | 18.4 | 19.3
47 | 10.8 | 11.8 | 12.8 | 13.7 | 14.7 | 15.6 | 16.5 | 17.5 | 18.4 | 19.3
48 | 10.8 | 11.8 | 12.7 | 13.7 | 14.6 | 15.6 | 16.5 | 17.4 | 18.3 | 19.2
49 | 10.8 | 11.8 | 12.7 | 13.7 | 14.6 | 15.5 | 16.4 | 17.4 | 18.3 | 19.2
50 | 10.8 | 11.7 | 12.7 | 13.6 | 14.6 | 15.5 | 16.4 | 17.3 | 18.2 | 19.1
51 | 10.8 | 11.7 | 12.7 | 13.6 | 14.5 | 15.4 | 16.3 | 17.2 | 18.1 | 19.0
52 | 10.8 | 11.7 | 12.6 | 13.6 | 14.5 | 15.4 | 16.3 | 17.2 | 18.0 | 18.9
53 | 10.7 | 11.7 | 12.6 | 13.5 | 14.4 | 15.3 | 16.2 | 17.1 | 18.0 | 18.8
54 | 10.7 | 11.6 | 12.6 | 13.5 | 14.4 | 15.3 | 16.2 | 17.0 | 17.9 | 18.7
55 | 10.7 | 11.6 | 12.5 | 13.4 | 14.3 | 15.2 | 16.1 | 16.9 | 17.8 | 18.6
56 | 10.7 | 11.6 | 12.5 | 13.4 | 14.3 | 15.1 | 16.0 | 16.8 | 17.6 | 18.4
57 | 10.6 | 11.5 | 12.4 | 13.3 | 14.2 | 15.1 | 15.9 | 16.7 | 17.5 | 18.3
58 | 10.6 | 11.5 | 12.4 | 13.3 | 14.1 | 15.0 | 15.8 | 16.6 | 17.4 | 18.1
59 | 10.6 | 11.4 | 12.3 | 13.2 | 14.0 | 14.9 | 15.7 | 16.4 | 17.2 | 17.9
60 | 10.5 | 11.4 | 12.3 | 13.1 | 13.9 | 14.7 | 15.5 | 16.3 | 17.0 | 17.7
61 | 10.5 | 11.3 | 12.2 | 13.0 | 13.8 | 14.6 | 15.4 | 16.1 | 16.8 | 17.5
62 | 10.4 | 11.3 | 12.1 | 12.9 | 13.7 | 14.5 | 15.2 | 15.9 | 16.6 | 17.2
63 | 10.3 | 11.2 | 12.0 | 12.8 | 13.6 | 14.3 | 15.0 | 15.7 | 16.3 | 17.0
64 | 10.3 | 11.1 | 11.9 | 12.7 | 13.4 | 14.1 | 14.8 | 15.5 | 16.1 | 16.7
65 | 10.2 | 11.0 | 11.8 | 12.5 | 13.2 | 13.9 | 14.6 | 15.2 | 15.8 | 16.3
66 | 10.1 | 10.9 | 11.6 | 12.4 | 13.1 | 13.7 | 14.4 | 14.9 | 15.5 | 16.0
67 | 10.0 | 10.8 | 11.5 | 12.2 | 12.9 | 13.5 | 14.1 | 14.7 | 15.2 | 15.6
68 | 9.9 | 10.6 | 11.4 | 12.0 | 12.7 | 13.3 | 13.8 | 14.3 | 14.8 | 15.3
69 | 9.8 | 10.5 | 11.2 | 11.8 | 12.4 | 13.0 | 13.5 | 14.0 | 14.4 | 14.8
70 | 9.6 | 10.3 | 11.0 | 11.6 | 12.2 | 12.7 | 13.2 | 13.7 | 14.0 | 14.4
71 | 9.5 | 10.2 | 10.8 | 11.4 | 11.9 | 12.4 | 12.9 | 13.3 | 13.6 | 13.9
72 | 9.4 | 10.0 | 10.6 | 11.2 | 11.7 | 12.1 | 12.5 | 12.9 | 13.2 | 13.5
73 | 9.2 | 9.8 | 10.4 | 10.9 | 11.4 | 11.8 | 12.1 | 12.5 | 12.7 | 13.0
74 | 9.0 | 9.6 | 10.1 | 10.6 | 11.0 | 11.4 | 11.7 | 12.0 | 12.3 | 12.5
75 | 8.8 | 9.4 | 9.9 | 10.3 | 10.7 | 11.0 | 11.3 | 11.6 | 11.8 | 12.0
76 | 8.6 | 9.1 | 9.6 | 10.0 | 10.3 | 10.6 | 10.9 | 11.1 | 11.3 | 11.4
77 | 8.4 | 8.9 | 9.3 | 9.7 | 10.0 | 10.2 | 10.5 | 10.6 | 10.8 | 10.9
78 | 8.2 | 8.6 | 9.0 | 9.3 | 9.6 | 9.8 | 10.0 | 10.2 | 10.3 | 10.4
79 | 7.9 | 8.3 | 8.7 | 9.0 | 9.2 | 9.4 | 9.5 | 9.7 | 9.8 | 9.8
80 | 7.7 | 8.0 | 8.3 | 8.6 | 8.8 | 9.0 | 9.1 | 9.2 | 9.3 | 9.3
81 | 7.4 | 7.7 | 8.0 | 8.2 | 8.4 | 8.5 | 8.6 | 8.7 | 8.8 | 8.8
82 | 7.1 | 7.4 | 7.6 | 7.8 | 8.0 | 8.1 | 8.2 | 8.2 | 8.3 | 8.3
83 | 6.8 | 7.1 | 7.3 | 7.4 | 7.5 | 7.6 | 7.7 | 7.8 | 7.8 | 7.8
84 | 6.5 | 6.7 | 6.9 | 7.0 | 7.1 | 7.2 | 7.3 | 7.3 | 7.3 | 7.4
85 | 6.2 | 6.4 | 6.6 | 6.7 | 6.7 | 6.8 | 6.8 | 6.9 | 6.9 | 6.9
86 | 5.9 | 6.1 | 6.2 | 6.3 | 6.4 | 6.4 | 6.4 | 6.5 | 6.5 | 6.5
87 | 5.6 | 5.8 | 5.9 | 5.9 | 6.0 | 6.0 | 6.0 | 6.1 | 6.1 | 6.1
88 | 5.3 | 5.4 | 5.5 | 5.6 | 5.6 | 5.6 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.1 | 5.1 | 5.2 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 4.8 | 4.9 | 4.9 | 4.9 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.5 | 4.6 | 4.6 | 4.6 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.3 | 4.3 | 4.3 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.0 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.8 | 3.8 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.6 | 3.6 | 3.6 | 3.6 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIII—Temporary Life Annuities; 1 One Life—Expected Return Multiples
[See footnote at end of tables]
Age | Years—
21 | 22 | 23 | 24 | 25 | 26 | 27 | 28 | 29 | 30
5 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.9 | 29.9
6 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.9 | 29.9
7 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.9 | 29.9
8 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.9 | 29.8
9 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.9 | 29.8
10 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.8 | 29.8
11 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.9 | 28.8 | 29.8
12 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.8 | 28.8 | 29.8
13 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.9 | 27.8 | 28.8 | 29.8
14 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.8 | 27.8 | 28.8 | 29.8
15 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.9 | 26.8 | 27.8 | 28.8 | 29.8
16 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.8 | 26.8 | 27.8 | 28.8 | 29.8
17 | 20.9 | 21.9 | 22.9 | 23.9 | 24.9 | 25.8 | 26.8 | 27.8 | 28.8 | 29.8
18 | 20.9 | 21.9 | 22.9 | 23.9 | 24.8 | 25.8 | 26.8 | 27.8 | 28.8 | 29.7
19 | 20.9 | 21.9 | 22.9 | 23.9 | 24.8 | 25.8 | 26.8 | 27.8 | 28.8 | 29.7
20 | 20.9 | 21.9 | 22.9 | 23.8 | 24.8 | 25.8 | 26.8 | 27.8 | 28.7 | 29.7
21 | 20.9 | 21.9 | 22.9 | 23.8 | 24.8 | 25.8 | 26.8 | 27.8 | 28.7 | 29.7
22 | 20.9 | 21.9 | 22.8 | 23.8 | 24.8 | 25.8 | 26.8 | 27.7 | 28.7 | 29.7
23 | 20.9 | 21.9 | 22.8 | 23.8 | 24.8 | 25.8 | 26.7 | 27.7 | 28.7 | 29.7
24 | 20.9 | 21.8 | 22.8 | 23.8 | 24.8 | 25.8 | 26.7 | 27.7 | 28.7 | 29.6
25 | 20.9 | 21.8 | 22.8 | 23.8 | 24.8 | 25.7 | 26.7 | 27.7 | 28.6 | 29.6
26 | 20.8 | 21.8 | 22.8 | 23.8 | 24.8 | 25.7 | 26.7 | 27.7 | 28.6 | 29.6
27 | 20.8 | 21.8 | 22.8 | 23.8 | 24.7 | 25.7 | 26.7 | 27.6 | 28.6 | 29.5
28 | 20.8 | 21.8 | 22.8 | 23.7 | 24.7 | 25.7 | 26.6 | 27.6 | 28.6 | 29.5
29 | 20.8 | 21.8 | 22.8 | 23.7 | 24.7 | 25.7 | 26.6 | 27.6 | 28.5 | 29.5
30 | 20.8 | 21.8 | 22.7 | 23.7 | 24.7 | 25.6 | 26.6 | 27.5 | 28.5 | 29.4
31 | 20.8 | 21.8 | 22.7 | 23.7 | 24.6 | 25.6 | 26.6 | 27.5 | 28.4 | 29.4
32 | 20.8 | 21.7 | 22.7 | 23.7 | 24.6 | 25.6 | 26.5 | 27.5 | 28.4 | 29.3
33 | 20.8 | 21.7 | 22.7 | 23.6 | 24.6 | 25.5 | 26.5 | 27.4 | 28.4 | 29.3
34 | 20.7 | 21.7 | 22.7 | 23.6 | 24.6 | 25.5 | 26.4 | 27.4 | 28.3 | 29.2
35 | 20.7 | 21.7 | 22.6 | 23.6 | 24.5 | 25.5 | 26.4 | 27.3 | 28.2 | 29.2
36 | 20.7 | 21.6 | 22.6 | 23.5 | 24.5 | 25.4 | 26.3 | 27.3 | 28.2 | 29.1
37 | 20.7 | 21.6 | 22.6 | 23.5 | 24.4 | 25.4 | 26.3 | 27.2 | 28.1 | 29.0
38 | 20.6 | 21.6 | 22.5 | 23.4 | 24.4 | 25.3 | 26.2 | 27.1 | 28.0 | 28.9
39 | 20.6 | 21.5 | 22.5 | 23.4 | 24.3 | 25.2 | 26.1 | 27.0 | 27.9 | 28.8
40 | 20.6 | 21.5 | 22.4 | 23.3 | 24.3 | 25.2 | 26.1 | 27.0 | 27.8 | 28.7
41 | 20.5 | 21.4 | 22.4 | 23.3 | 24.2 | 25.1 | 26.0 | 26.9 | 27.7 | 28.6
42 | 20.5 | 21.4 | 22.3 | 23.2 | 24.1 | 25.0 | 25.9 | 26.8 | 27.6 | 28.5
43 | 20.4 | 21.3 | 22.2 | 23.2 | 24.0 | 24.9 | 25.8 | 26.6 | 27.5 | 28.3
44 | 20.4 | 21.3 | 22.2 | 23.1 | 24.0 | 24.8 | 25.7 | 26.5 | 27.3 | 28.2
45 | 20.3 | 21.2 | 22.1 | 23.0 | 23.9 | 24.7 | 25.6 | 26.4 | 27.2 | 28.0
46 | 20.2 | 21.1 | 22.0 | 22.9 | 23.8 | 24.6 | 25.4 | 26.2 | 27.0 | 27.8
47 | 20.2 | 21.1 | 21.9 | 22.8 | 23.6 | 24.5 | 25.3 | 26.1 | 26.8 | 27.6
48 | 20.1 | 21.0 | 21.8 | 22.7 | 23.5 | 24.3 | 25.1 | 25.9 | 26.6 | 27.4
49 | 20.0 | 20.9 | 21.7 | 22.6 | 23.4 | 24.2 | 25.0 | 25.7 | 26.4 | 27.1
50 | 19.9 | 20.8 | 21.6 | 22.4 | 23.2 | 24.0 | 24.8 | 25.5 | 26.2 | 26.9
51 | 19.8 | 20.7 | 21.5 | 22.3 | 23.1 | 23.8 | 24.6 | 25.3 | 25.9 | 26.6
52 | 19.7 | 20.6 | 21.4 | 22.1 | 22.9 | 23.6 | 24.3 | 25.0 | 25.7 | 26.3
53 | 19.6 | 20.4 | 21.2 | 22.0 | 22.7 | 23.4 | 24.1 | 24.7 | 25.3 | 25.9
54 | 19.5 | 20.3 | 21.0 | 21.8 | 22.5 | 23.2 | 23.8 | 24.4 | 25.0 | 25.6
55 | 19.3 | 20.1 | 20.8 | 21.6 | 22.2 | 22.9 | 23.5 | 24.1 | 24.6 | 25.2
56 | 19.2 | 19.9 | 20.6 | 21.3 | 22.0 | 22.6 | 23.2 | 23.7 | 24.3 | 24.7
57 | 19.0 | 19.7 | 20.4 | 21.1 | 21.7 | 22.3 | 22.8 | 23.4 | 23.8 | 24.3
58 | 18.8 | 19.5 | 20.2 | 20.8 | 21.4 | 21.9 | 22.5 | 22.9 | 23.4 | 23.8
59 | 18.6 | 19.3 | 19.9 | 20.5 | 21.1 | 21.6 | 22.0 | 22.5 | 22.9 | 23.2
60 | 18.4 | 19.0 | 19.6 | 20.2 | 20.7 | 21.2 | 21.6 | 22.0 | 22.4 | 22.7
61 | 18.1 | 18.7 | 19.3 | 19.8 | 20.3 | 20.7 | 21.1 | 21.5 | 21.8 | 22.1
62 | 17.8 | 18.4 | 18.9 | 19.4 | 19.9 | 20.3 | 20.6 | 21.0 | 21.2 | 21.5
63 | 17.5 | 18.1 | 18.5 | 19.0 | 19.4 | 19.8 | 20.1 | 20.4 | 20.6 | 20.8
64 | 17.2 | 17.7 | 18.1 | 18.6 | 18.9 | 19.3 | 19.5 | 19.8 | 20.0 | 20.2
65 | 16.8 | 17.3 | 17.7 | 18.1 | 18.4 | 18.7 | 18.9 | 19.2 | 19.3 | 19.5
66 | 16.5 | 16.9 | 17.3 | 17.6 | 17.9 | 18.1 | 18.3 | 18.5 | 18.7 | 18.8
67 | 16.1 | 16.4 | 16.8 | 17.1 | 17.3 | 17.5 | 17.7 | 17.9 | 18.0 | 18.1
68 | 15.6 | 16.0 | 16.3 | 16.5 | 16.7 | 16.9 | 17.1 | 17.2 | 17.3 | 17.4
69 | 15.2 | 15.5 | 15.7 | 16.0 | 16.1 | 16.3 | 16.4 | 16.5 | 16.6 | 16.7
70 | 14.7 | 15.0 | 15.2 | 15.4 | 15.5 | 15.7 | 15.8 | 15.8 | 15.9 | 15.9
71 | 14.2 | 14.4 | 14.6 | 14.8 | 14.9 | 15.0 | 15.1 | 15.2 | 15.2 | 15.2
72 | 13.7 | 13.9 | 14.1 | 14.2 | 14.3 | 14.4 | 14.4 | 14.5 | 14.5 | 14.5
73 | 13.2 | 13.3 | 13.5 | 13.6 | 13.7 | 13.7 | 13.8 | 13.8 | 13.8 | 13.9
74 | 12.6 | 12.8 | 12.9 | 13.0 | 13.0 | 13.1 | 13.1 | 13.1 | 13.2 | 13.2
75 | 12.1 | 12.2 | 12.3 | 12.4 | 12.4 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5
76 | 11.5 | 11.6 | 11.7 | 11.8 | 11.8 | 11.8 | 11.8 | 11.9 | 11.9 | 11.9
77 | 11.0 | 11.1 | 11.1 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2
78 | 10.4 | 10.5 | 10.5 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6
79 | 9.9 | 9.9 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0
80 | 9.4 | 9.4 | 9.4 | 9.4 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5
81 | 8.8 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9
82 | 8.3 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4
83 | 7.8 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9
84 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5
87 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
Table VIII—Temporary Life Annuities; 1 One Life—Expected Return Multiples
[See footnote at end of tables]
Age | Years—
31 | 32 | 33 | 34 | 35 | 36 | 37 | 38 | 39 | 40
5 | 30.8 | 31.8 | 32.8 | 33.8 | 34.8 | 35.8 | 36.8 | 37.7 | 38.7 | 39.7
6 | 30.8 | 31.8 | 32.8 | 33.8 | 34.8 | 35.8 | 36.8 | 37.7 | 38.7 | 39.7
7 | 30.8 | 31.8 | 32.8 | 33.8 | 34.8 | 35.8 | 36.7 | 37.7 | 38.7 | 39.7
8 | 30.8 | 31.8 | 32.8 | 33.8 | 34.8 | 35.7 | 36.7 | 37.7 | 38.7 | 39.7
9 | 30.8 | 31.8 | 32.8 | 33.8 | 34.8 | 35.7 | 36.7 | 37.7 | 38.7 | 39.6
10 | 30.8 | 31.8 | 32.8 | 33.8 | 34.7 | 35.7 | 36.7 | 37.7 | 38.6 | 39.6
11 | 30.8 | 31.8 | 32.8 | 33.8 | 34.7 | 35.7 | 36.7 | 37.7 | 38.6 | 39.6
12 | 30.8 | 31.8 | 32.8 | 33.7 | 34.7 | 35.7 | 36.7 | 37.6 | 38.6 | 39.6
13 | 30.8 | 31.8 | 32.7 | 33.7 | 34.7 | 35.7 | 36.6 | 37.6 | 38.6 | 39.5
14 | 30.8 | 31.8 | 32.7 | 33.7 | 34.7 | 35.7 | 36.6 | 37.6 | 38.6 | 39.5
15 | 30.8 | 31.7 | 32.7 | 33.7 | 34.7 | 35.6 | 36.6 | 37.6 | 38.5 | 39.5
16 | 30.8 | 31.7 | 32.7 | 33.7 | 34.6 | 35.6 | 36.6 | 37.5 | 38.5 | 39.4
17 | 30.7 | 31.7 | 32.7 | 33.7 | 34.6 | 35.6 | 36.5 | 37.5 | 38.5 | 39.4
18 | 30.7 | 31.7 | 32.7 | 33.6 | 34.6 | 35.6 | 36.5 | 37.5 | 38.4 | 39.4
19 | 30.7 | 31.7 | 32.6 | 33.6 | 34.6 | 35.5 | 36.5 | 37.4 | 38.4 | 39.3
20 | 30.7 | 31.7 | 32.6 | 33.6 | 34.5 | 35.5 | 36.4 | 37.4 | 38.3 | 39.3
21 | 30.7 | 31.6 | 32.6 | 33.6 | 34.5 | 35.5 | 36.4 | 37.4 | 38.3 | 39.2
22 | 30.6 | 31.6 | 32.6 | 33.5 | 34.5 | 35.4 | 36.4 | 37.3 | 38.2 | 39.2
23 | 30.6 | 31.6 | 32.5 | 33.5 | 34.4 | 35.4 | 36.3 | 37.3 | 38.2 | 39.1
24 | 30.6 | 31.5 | 32.5 | 33.5 | 34.4 | 35.3 | 36.3 | 37.2 | 38.1 | 39.0
25 | 30.6 | 31.5 | 32.5 | 33.4 | 34.3 | 35.3 | 36.2 | 37.1 | 38.1 | 39.0
26 | 30.5 | 31.5 | 32.4 | 33.4 | 34.3 | 35.2 | 36.2 | 37.1 | 38.0 | 38.9
27 | 30.5 | 31.4 | 32.4 | 33.3 | 34.2 | 35.2 | 36.1 | 37.0 | 37.9 | 38.8
28 | 30.5 | 31.4 | 32.3 | 33.3 | 34.2 | 35.1 | 36.0 | 36.9 | 37.8 | 38.7
29 | 30.4 | 31.4 | 32.3 | 33.2 | 34.1 | 35.0 | 35.9 | 36.8 | 37.7 | 38.6
30 | 30.4 | 31.3 | 32.2 | 33.1 | 34.1 | 35.0 | 35.8 | 36.7 | 37.6 | 38.5
31 | 30.3 | 31.2 | 32.2 | 33.1 | 34.0 | 34.9 | 35.8 | 36.6 | 37.5 | 38.3
32 | 30.3 | 31.2 | 32.1 | 33.0 | 33.9 | 34.8 | 35.6 | 36.5 | 37.4 | 38.2
33 | 30.2 | 31.1 | 32.0 | 32.9 | 33.8 | 34.7 | 35.5 | 36.4 | 37.2 | 38.0
34 | 30.1 | 31.0 | 31.9 | 32.8 | 33.7 | 34.6 | 35.4 | 36.2 | 37.1 | 37.9
35 | 30.1 | 31.0 | 31.8 | 32.7 | 33.6 | 34.4 | 35.3 | 36.1 | 36.9 | 37.7
36 | 30.0 | 30.9 | 31.7 | 32.6 | 33.5 | 34.3 | 35.1 | 35.9 | 36.7 | 37.4
37 | 29.9 | 30.8 | 31.6 | 32.5 | 33.3 | 34.1 | 34.9 | 35.7 | 36.5 | 37.2
38 | 29.8 | 30.7 | 31.5 | 32.3 | 33.2 | 34.0 | 34.7 | 35.5 | 36.2 | 37.0
39 | 29.7 | 30.5 | 31.4 | 32.2 | 33.0 | 33.8 | 34.5 | 35.3 | 36.0 | 36.7
40 | 29.6 | 30.4 | 31.2 | 32.0 | 32.8 | 33.6 | 34.3 | 35.0 | 35.7 | 36.4
41 | 29.4 | 30.2 | 31.0 | 31.8 | 32.6 | 33.3 | 34.1 | 34.7 | 35.4 | 36.0
42 | 29.3 | 30.1 | 30.9 | 31.6 | 32.4 | 33.1 | 33.8 | 34.4 | 35.1 | 35.7
43 | 29.1 | 29.9 | 30.7 | 31.4 | 32.1 | 32.8 | 33.5 | 34.1 | 34.7 | 35.3
44 | 28.9 | 29.7 | 30.5 | 31.2 | 31.9 | 32.5 | 33.2 | 33.8 | 34.3 | 34.9
45 | 28.8 | 29.5 | 30.2 | 30.9 | 31.6 | 32.2 | 32.8 | 33.4 | 33.9 | 34.4
46 | 28.5 | 29.3 | 30.0 | 30.6 | 31.3 | 31.9 | 32.4 | 33.0 | 33.5 | 33.9
47 | 28.3 | 29.0 | 29.7 | 30.3 | 30.9 | 31.5 | 32.0 | 32.5 | 33.0 | 33.4
48 | 28.1 | 28.7 | 29.4 | 30.0 | 30.6 | 31.1 | 31.6 | 32.1 | 32.5 | 32.9
49 | 27.8 | 28.4 | 29.0 | 29.6 | 30.2 | 30.7 | 31.1 | 31.5 | 31.9 | 32.3
50 | 27.5 | 28.1 | 28.7 | 29.2 | 29.7 | 30.2 | 30.6 | 31.0 | 31.4 | 31.7
51 | 27.2 | 27.8 | 28.3 | 28.8 | 29.3 | 29.7 | 30.1 | 30.4 | 30.7 | 31.0
52 | 26.8 | 27.4 | 27.9 | 28.4 | 28.8 | 29.2 | 29.5 | 29.8 | 30.1 | 30.3
53 | 26.5 | 27.0 | 27.4 | 27.9 | 28.3 | 28.6 | 28.9 | 29.2 | 29.4 | 29.6
54 | 26.1 | 26.5 | 27.0 | 27.4 | 27.7 | 28.0 | 28.3 | 28.5 | 28.7 | 28.9
55 | 25.6 | 26.1 | 26.5 | 26.8 | 27.1 | 27.4 | 27.6 | 27.8 | 28.0 | 28.1
56 | 25.2 | 25.6 | 25.9 | 26.2 | 26.5 | 26.7 | 26.9 | 27.1 | 27.2 | 27.3
57 | 24.7 | 25.0 | 25.3 | 25.6 | 25.8 | 26.0 | 26.2 | 26.3 | 26.5 | 26.5
58 | 24.1 | 24.4 | 24.7 | 25.0 | 25.2 | 25.3 | 25.5 | 25.6 | 25.7 | 25.7
59 | 23.6 | 23.8 | 24.1 | 24.3 | 24.4 | 24.6 | 24.7 | 24.8 | 24.9 | 24.9
60 | 23.0 | 23.2 | 23.4 | 23.6 | 23.7 | 23.8 | 23.9 | 24.0 | 24.0 | 24.1
61 | 22.3 | 22.5 | 22.7 | 22.9 | 23.0 | 23.1 | 23.1 | 23.2 | 23.2 | 23.3
62 | 21.7 | 21.9 | 22.0 | 22.1 | 22.2 | 22.3 | 22.3 | 22.4 | 22.4 | 22.4
63 | 21.0 | 21.1 | 21.3 | 21.4 | 21.4 | 21.5 | 21.5 | 21.6 | 21.6 | 21.6
64 | 20.3 | 20.4 | 20.5 | 20.6 | 20.6 | 20.7 | 20.7 | 20.7 | 20.8 | 20.8
65 | 19.6 | 19.7 | 19.8 | 19.8 | 19.9 | 19.9 | 19.9 | 19.9 | 19.9 | 20.0
66 | 18.9 | 19.0 | 19.0 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1 | 19.1
67 | 18.2 | 18.2 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.3 | 18.4 | 18.4
68 | 17.4 | 17.5 | 17.5 | 17.5 | 17.5 | 17.6 | 17.6 | 17.6 | 17.6 | 17.6
69 | 16.7 | 16.7 | 16.8 | 16.8 | 16.8 | 16.8 | 16.8 | 16.8 | 16.8 | 16.8
70 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0 | 16.0
71 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3 | 15.3
72 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6 | 14.6
73 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9 | 13.9
74 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2 | 13.2
75 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5 | 12.5
76 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9 | 11.9
77 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2 | 11.2
78 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6 | 10.6
79 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0 | 10.0
80 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5 | 9.5
81 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9 | 8.9
82 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4 | 8.4
83 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9 | 7.9
84 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4 | 7.4
85 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9 | 6.9
86 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5
87 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1 | 6.1
88 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7 | 5.7
89 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3 | 5.3
90 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0 | 5.0
91 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7 | 4.7
92 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4 | 4.4
93 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1 | 4.1
94 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9 | 3.9
95 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 | 3.7
96 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4 | 3.4
97 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2 | 3.2
98 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0 | 3.0
99 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8 | 2.8
100 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7 | 2.7
101 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5 | 2.5
102 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3 | 2.3
103 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1 | 2.1
104 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9 | 1.9
105 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8 | 1.8
106 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6 | 1.6
107 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4 | 1.4
108 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3 | 1.3
109 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1 | 1.1
110 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 | 1.0
111 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9 | .9
112 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8 | .8
113 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7 | .7
114 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6 | .6
115 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5 | .5
1 The multiples in this table are not applicable to annuities for a term certain; for such cases see paragraph (c) of § 1.72-5.
If (a) the terms of the contract involve a life or lives, and are such that the above tables cannot be correctly applied, and (b) the amounts received under the contract are at least partly “amounts received as an annuity” under a contract to which section 72 applies, the taxpayer may submit with his return an actuarial computation based upon the applicable annuity table (described below) with ages set back one year, showing the appropriate factors applied in his case, subject to the approval of the Commissioner upon examination of such return. The applicable annuity table is the 1937 Standard Annuity Table (if the investment in the contract does not include a post-June 1986 investment in the contract) or the gender-neutral version of the 1983 Basic Table (if the investment in the contract includes a post-June 1986 investment in the contract). In the case of a contract to which § 1.72-6(d) (relating to contracts in which amounts were invested both before July 1, 1986, and after June 30, 1986) applies, the actuarial computation shall be based on both tables in accordance with the principles of § 1.72-6(d). Computations involving factors to compensate for the effects of contingencies other than mortality, such as marriage or remarriage, re-employment, recovery from disability, or the like, will not be approved.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as amended by T.D. 8115, 51 FR 45706, Dec. 19, 1986; 60 FR 16381, Mar. 30, 1995]
§ 1.72-10 Effect of transfer of contracts on investment in the contract.
(a) If a contract to which section 72 applies, or any interest therein, is transferred for a valuable consideration, by assignment or otherwise, only the actual value of the consideration given for such transfer and the amount of premiums or other consideration subsequently paid by the transferee shall be included in the transferee's aggregate of premiums or other consideration paid. In accordance with the provisions of section 72(g)(3) and paragraph (b) of § 1.72-4, an annuity starting date shall be determined for the transferee without regard to the annuity starting date, if any, of the transferor. In determining the transferee's investment in the contract, the aggregate amount of premiums or other consideration paid shall be reduced by all amounts received by the transferee before the receipt of an amount as an annuity or before the annuity starting date, whichever is the later, to the extent that such amounts were excludable from his gross income under the applicable income tax law at the time of receipt. For the treatment of amounts received by the transferee subsequent to both the annuity starting date and the date of receipt of a payment as an annuity, but not received as annuity payments, see § 1.72-11. For a limitation on adjustments to the basis of annuity contracts sold, see section 1021.
(b) In the case of a transfer of such a contract without valuable consideration, the annuity starting date and the expected return under the contract shall be determined as though no such transfer had taken place. See paragraph (b) of § 1.72-4. The transferee shall include the aggregate of premiums or other consideration paid or deemed to have been paid by his transferor in the aggregate of premiums or other consideration as though paid by him. In determining the transferee's investment in the contract, the transferee's aggregate amount of premiums or other consideration paid (as so found) shall be reduced by all amounts either received or deemed to have been received by himself or his transferor before the annuity starting date, or before the date on which an amount is first received as an annuity, whichever is the later, to the extent that such amounts were excludable from the gross income of the actual recipient under the applicable income tax law at the time of receipt. For treatment of amounts received subsequent to both the above dates by such transferee, but not received as annuity payments, see § 1.72-11.
§ 1.72-11 Amounts not received as annuity payments.
(a) Introductory. (1) This section applies to amounts received under a contract to which section 72 applies if either:
(i) Paragraph (b) of § 1.72-2 is inapplicable to such amounts.
(ii) Paragraph (b) of § 1.72-2 is applicable but the annuity payments received differ either in amount, duration, or both, from those originally provided under the contract, or
(iii) Paragraph (b) of § 1.72 is applicable, but such annuity payments are received by a beneficiary after the death of an annuitant (or annuitants) in full discharge of the obligation under the contract and solely because of a guarantee.
The payments referred to in subdivision (i) of this subparagraph include all amounts other than “amounts received as an annuity” as that term is defined in paragraphs (b) (2) and (3) of § 1.72-2. If such amounts are received as dividends or payments in the nature of dividends, or as a return of premiums, see paragraph (b) of this section. If such amounts are paid in full discharge of the obligation under the contract and are in the nature of a refund of the consideration, see paragraph (c) of this section. If such amounts are paid upon the surrender, redemption, or maturity of the contract, see paragraph (d) of this section. The payments referred to in subdivision (ii) of this subparagraph include all annuity payments which are paid as the result of a modification or an exchange of the annuity obligations originally provided under a contract for different annuity obligations (whether or not such modification or exchange is accompanied by the payment of an amount to which subdivision (i) of this subparagraph applies). If the duration of the new annuity obligations differs from the duration of the old annuity obligations, paragraph (e) of this section applies to the new annuity obligations and paragraph (d) of this section applies to any lump sum payment received. If, however, the duration of the new annuity obligations is the same as the duration of the old obligations, paragraph (f) of this section applies to the new obligations and to any lump sum received in connection therewith. The annuity payments referred to in subdivision (iii) of this subparagraph are annuity payments which are made to a beneficiary after the death of annuitant (or annuitants) in full discharge of the obligations under a contract because of a provision in the contract requiring the payment of a guaranteed amount or minimum number of payments for a fixed period; see paragraph (c) of this section.
(2) The principles of this section apply, to the extent appropriate thereto, to amounts paid which are taxable under section 72 (except, for taxable years beginning before January 1, 1964, section 72(e)(3)) in accordance with sections 402 and 403 and the regulations thereunder. However, if contributions used to purchase the contract include amounts for which a deduction was allowed under section 404 as contributions on behalf of an owner-employee, the rules of this section are modified by the rules of paragraph (b) of § 1.72-17. Further, in applying the provisions of this section, the aggregate premiums or other consideration paid shall not include contributions on behalf of self-employed individuals to the extent that deductions were allowed under section 404 for such contributions. Nor, shall the aggregate of premiums or other consideration paid include amounts used to purchase life, accident, health, or other insurance protection for an owner-employee. See paragraph (b)(4) of § 1.72-16 and paragraph (c) of § 1.72-17. The principles of this section also apply to payments made in the manner described in paragraph (b)(3)(i) of § 1.72-2.
(b) Amounts received in the nature of dividends or similar distributions. (1) If dividends (or payments in the nature of dividends or a return of premiums or other consideration) are received under a contract to which section 72 applies and such payments are received before the annuity starting date or before the date on which an amount is first received as an annuity, whichever is the later, such payments are includible in the gross income of the recipient only to the extent that they, taken together with all previous payments received under the contract which were excludable from the gross income of the recipient under the applicable income tax law, exceed the aggregate of premiums or other consideration paid or deemed to have been paid by the recipient. Such payments shall also be subtracted from the consideration paid (or deemed paid) both for the purpose of determining an exclusion ratio to be applied to subsequent amounts paid as an annuity and for the purpose of determining the applicability of section 72(d) and § 1.72-13, relating to employee contributions recoverable in three years.
(2) If dividends or payments in the nature of dividends are paid under a contract to which section 72 applies and such payments are received on or after the annuity starting date or the date on which an amount is first received as an annuity, whichever is later, such payments shall be fully includible in the gross income of the recipient. The receipt of such payments shall not affect the aggregate of premiums or other consideration paid nor the amounts contributed or deemed to have been contributed by an employee as otherwise calculated for purposes of section 72. Since the investment in the contract and the expected return are not affected by a payment which is fully includible in the gross income of the recipient under this rule, the exclusion ratio will not be affected by such payment and will continue to be applied to amounts received as annuity payments in the future as though such payment had not been made. This subparagraph shall apply to amounts received under a contract described in paragraph (b)(3)(i) of § 1.72-2 to the extent that the amounts received exceed the portion of the investment in the contract allocable to each taxable year in accordance with paragraph (d)(3) of § 1.72-4. Hence, such excess is fully includible in the gross income of the recipient.
(c) Amounts received in the nature of a refund of the consideration under a contract and in full discharge of the obligation thereof. (1) Any amount received under a contract to which section 72 applies, if it is at least in part a refund of the consideration paid, including amounts payable to a beneficiary after the death of an annuitant by reason of a provision in the contract for a life annuity with minimum period of payments certain or with a minimum amount which must be paid in any event, shall be considered an amount received in the nature of a refund of the consideration paid for such contract. If such an amount is in full discharge of an obligation to pay a fixed amount (whether in a lump sum or otherwise) or to pay amounts for a fixed number of years (including amounts described in paragraph (b)(3)(i) of § 1.72-2), it shall be included in the gross income of the recipient only to the extent that it, when added to amounts previously received under the contract which were excludable from gross income under the law applicable at the time of receipt, exceeds the aggregate of premiums or other consideration paid. See section 73(e)(2)(A). This paragraph shall not apply if the total of the amounts to be paid in discharge of the obligation can in any event exceed the total of the annuity payments which would otherwise fully discharge the obligation. For rules to be applied in such a case, see paragraph (e) of this section.
(2) The principles of subparagraph (1) of this paragraph may be illustrated by the following examples:
Example 1. A, a male employee, retired on December 31, 1954, at the age of 60. A life annuity of $75 per month was payable to him beginning January 31, 1955. The annuity contract guaranteed that if A did not live for at least ten years after his retirement his beneficiary, B, would receive the monthly payments for any balance of such ten-year period which remained at the date of A's death. Under section 72, A was deemed to have paid $3,600 toward the cost of the annuity. A lived for five years after his retirement receiving a total of $4,500 in annuity payments. After A's death, B began receiving the monthly payments of $75 beginning with the January 31, 1960 payment. B will exclude such payments from his gross income throughout 1960, 1961, and 1962, and will exclude only $18 of the first payment in 1963 from his gross income for that year. Thereafter, B will include the entire amount of all such payments in his gross income for the taxable year of receipt. This result is determined as follows:
A's investment in the contract (unadjusted) | $3,600
Multiple from Table III of § 1.72-9 for male, age 60, where duration of guaranteed amount is 10 years (percent) | 11
Subtract value of the refund feature to the nearest dollar (11 percent of $3,600) | 396
Investment in the contract adjusted for the present value of the refund feature without discount for interest | 3,204
Aggregate of premiums or other consideration paid | 3,600
A's exclusion ratio ($3,204 ÷ $16,380 [$900 × 18.2]) (percent) | 19.6
Subtract amount excludable during five years A received payments (19.6 percent of $4,500 [$900 × 5]) | 882
Remainder of aggregate of premiums or other consideration paid excludable from gross income of B under section 72(e) | 2,718
As a result of the above computation, the number of payments to B which will exhaust the remainder of consideration paid which is excludable from gross income of the recipient is 36 6/25 ($2,718 ÷ $75) and B will exclude the payments from his gross income for three years, then exclude only $18 of the first payment for the fourth year from his gross income, and thereafter include the entire amount of all payments he receives in his gross income.
Example 2.The facts are the same as in example (1), except that B, the beneficiary, elects to receive $50 per month for his life in lieu of the payments guaranteed under the original contractual obligation. Since such amounts will be received as an annuity and may, because of the length of time B may live, exceed the amount guaranteed, they are not amounts to which this paragraph applies. See paragraph (e) of this section.
Example 3.The facts are the same as in example (1), except that B, the beneficiary, elects to receive the remaining guaranteed amount in installments which are larger or smaller than the $75 per month provided until, under the terms of the contract, the guaranteed amount is exhausted. The rule of subparagraph (1) of this paragraph and the computation illustrated in example (1) apply to such installments since the total of such installments will not exceed the original amount guaranteed to be paid at A's death in any event.
Example 4.C pays $12,000 for a contract providing that he is to be paid an annuity of $1,000 per year for 15 years. His exclusion ratio is therefore 80 percent ($12,000 ÷ $15,000). He directs that the annuity is to be paid to D, his beneficiary, if he should die before the full 15-year period has expired. C dies after 5 years and D is paid $1,000 in 1960. D will include $200 ($1,000−$800 [80 percent of $1,000]) in his gross income for the taxable year in which he receives the $1,000 since section 72(e) and this section do not apply to the annuity payments made in accordance with the provisions and during the term of the contract. D will continue with the same exclusion ratio used by C (80 percent).
Example 5.In 1954, E paid $50,000 into a fund and was promised an annual income for life the amount of which would depend in part upon the earnings realized from the investment of the fund in accordance with an agreed formula. The contract also specified that if E should die before ten years had elapsed, his beneficiary, F, would be paid the amounts determined annually under the formula until ten payments had been received by E and F together. E died in 1960, having received five payments totaling $30,000. Assuming that $22,000 of this amount was properly excludable from E's gross income prior to his death, F will exclude from his gross income the payments he receives until the taxable year in which his total receipts from the fund exceed $28,000 ($50,000−$22,000). F will include any excess over the $28,000 in his gross income for that taxable year. Thereafter, F will include in his gross income the entire amount of any payments made to him from the fund.
Example 6. Assume the facts are the same as in example (1), except that the total investment in the contract is made after June 30, 1986, that A is to receive payments under the life annuity contract beginning on January 31, 1987, and that B will begin to receive the monthly payments on January 31, 1992. B will exclude the $75 monthly payments from gross income throughout 1992, 1993, and 1994. B will exclude only the first two monthly payments and $21 of the third monthly payment in 1995. This is determined as follows:
A's investment in the contract (unadjusted) | $3,600
Multiple from Table VII, age 60, 10 years (percent) | 4
Subtract value of the refund feature (4 percent of $3,600 | $144
Investment in the contract adjusted for the present value of the refund feature without discount for interest | $3,456
Aggregate of premiums or other consideration paid | $3,600.00
A's exclusion ratio ($3,456 ÷ $21,780 [$900 × 24.2]) (percent) | 15.9
Subtract amount excludable during five years A received payments (15.9 percent of $4,500 [$900 × 5]) | $715.50
Remainder of aggregate of premiums or other consideration paid excludable from gross income of B under section 72(e) | $2,884.50
As a result of the above computation, the number of payments to B which will exhaust the remainder of consideration paid which is excludable from gross income of the recipient is 38 23/50 ($2,884.50 ÷ 75) and B will exclude the payments from gross income for three years, then exclude only the first two monthly payments and $34.50 of the third. Thereafter B shall include the entire amount of all payments received in gross income.
(3) For the purpose of applying the rule contained in subparagraph (1) of this paragraph, it is immaterial whether the recipient of the amount received in full discharge of the obligation is the same person as the recipient of amounts previously received under the contract which were excludable from gross income, except in the case of a contract transferred for a valuable consideration, with respect to which see paragraph (a) of § 1.72-10. For the limit on the tax, for taxable years beginning before January 1, 1964, attributable to the receipt of a lump sum to which this paragraph applies, see paragraph (g) of this section.
(d) Amounts received upon the surrender, redemption, or maturity of a contract. (1) Any amount received upon the surrender, redemption, or maturity of a contract to which section 72 applies, which is not received as an annuity under the regulations of paragraph (b) of § 1.72-2, shall be included in the gross income of the recipient to the extent that it, when added to amounts previously received under the contract and which were excludable from the gross income of the recipient under the law applicable at the time of receipt, exceeds the aggregate of premiums or other consideration paid. See section 72(e)(2)(B). If amounts are to be received as an annuity, whether in lieu of or in addition to amounts described in the preceding sentence, such amounts shall be included in the gross income of the recipient in accordance with the provisions of paragraph (e) or (f) of this section, whichever is applicable. The rule stated in the first sentence of this paragraph shall not apply to payments received as an annuity or otherwise after the date of the first receipt of an amount as an annuity subsequent to the maturity, redemption, or surrender of the original contract. If amounts are so received and are other than amounts received as an annuity, they are includible in the gross income of the recipient. See section 72(e)(1)(A) and paragraph (b)(2) of this section.
(2) For the purpose of applying the rule contained in subparagraph (1) of this paragraph, it is immaterial whether the recipient of the amount received upon the surrender, redemption, or maturity of the contract is the same as the recipient of amounts previously received under the contract which were excludable from gross income, except in the case of a contract transferred for a valuable consideration, with respect to which see paragraph (a) of § 1.72-10. For the limit on the amount of tax, for taxable years beginning before January 1, 1964, attributable to the receipt of certain lump sums to which this paragraph applies, see paragraph (g) of this section.
(e) Periodic payments received for a different term. If, after the date on which an amount is first received as an annuity under a contract to which section 72 applies, the terms of the contract are modified or the annuity obligations are exchanged so that periodic payments are to be received for a different term than originally provided under the contract (whether or not accompanied by the receipt of a lump sum to which paragraph (d) of this section applies), the rules of this paragraph shall apply to such payments. Hence, the provisions of section 72(e) and paragraphs (b), (c), (d), and (f) of this section are inapplicable for the purpose of determining the includibility of such payments in gross income and the general principles of section 72 with respect to the use of an exclusion ratio shall be applied to such payments as if they were provided under a new contract received in exchange for the contract providing the original annuity payments. If such payments are received as the result of the surrender, redemption, or discharge of a contract to which section 72 applies, they shall be considered to be received as an annuity under a contract exchanged for the contract whose redemption, surrender, or discharge was involved. For the purpose of determining the extent to which the payments so received are to be included in the gross income of the recipient, an exclusion ratio shall be determined for such contract as of the later of January 1, 1954, or the first day of the first period for which an amount is received as an annuity thereunder, whichever is the later. See paragraph (b) of § 1.72-4. In determining the investment in the contract for this purpose, any lump sum amount received at the time of the exchange shall not be considered an amount to which paragraph (a)(2) of § 1.72-6 applies. However, such lump sum shall be subtracted from the aggregate of premiums or other consideration paid to the extent it is excludable as an amount not received as an annuity under this section as if it were an amount received before the annuity starting date of the contract obtained in exchange.
(f) Periodic payments received for the same term after a lump sum withdrawal. (1) If, after the date of the first receipt of a payment as an annuity, the annuitant receives a lump sum and is thereafter to receive annuity payments in a reduced amount under the contract for the same term, life, or lives as originally specified in the contract, a portion of the contract shall be considered to have been surrendered or redeemed in consideration of the payment of such lump sum and the exclusion ratio originally determined for the contract shall continue to apply to the amounts received as an annuity without regard to the fact that such amounts are less than the original amounts which were to be paid periodically. The lump sum shall be includible in the gross income of the recipient in accordance with the provisions of subparagraph (2) of this paragraph. However, except in the case of amounts to which sections 402 and 403 apply, the tax, for taxable years beginning before January 1, 1964, attributable to the inclusion of all or part of the lump sum in gross income shall not exceed the amount determined under section 72(e)(3) and paragraph (g) of this section. For taxable years beginning after December 31, 1963, such amounts may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
(2) There shall be excluded from gross income that portion of the lump sum which bears the same ratio to the aggregate premiums or other consideration paid for the contract, as reduced by all amounts previously received under the contract and excludable from the gross income of the recipient under the applicable income tax law, as:
(i) In the case of payments to be made in the manner described in paragraph (b)(2) of § 1.72-2, the amount of the reduction in the annuity payments to be made thereafter bears to the annuity payments originally provided under the contract, or
(ii) In the case of a contract providing for payments to be made in the manner described in paragraph (b)(3)(i) of § 1.72-2, the amount of the reduction in the number of units per period to be paid thereafter bears to the number of units per period payable under the contract immediately before the lump sum withdrawal.
(3) This paragraph may be illustrated by the following examples:
Example 1. Taxpayer A pays $20,000 for an annuity contract providing for payments to him of $100 per month for his life. At the annuity starting date he has a life expectancy of 20 years. His expected return is therefore $24,000 and the exclusion ratio is five-sixths. He continues to receive the original annuity payments for 5 years, receiving a total of $6,000, and properly excludes a total of $5,000 from his gross income in his income tax returns for those years. At the beginning of the next year, A agrees with the insurer to take a reduced annuity of $75 per month and a lump sum payment of $4,000 in cash. Of the lump sum he receives, he will include $250 and exclude $3,750 from his gross income for his taxable year of receipt, determined as follows:
Aggregate of premiums or other consideration paid | $20,000
Less amounts received as an annuity to the extent they were excludable from A's income | $5,000
Remainder of the consideration | $15,000
Ratio of the reduction in the amount of the annuity payments to the original annuity payments | 25/$100 or 1/4
Lump sum received | $4,000
Less one-fourth of the remainder of the consideration ( 1/4 of $15,000) | $3,750
Portion of the lump sum includible in gross income | $250
For taxable years beginning before January 1, 1964, the limit on tax of section 72(e)(3), as in effect before such date, applies to the portion of the lump sum includible in gross income. For taxable years beginning after December 31, 1963, such portion may be taken into account in computations under sections 1301 through 1305 (relating to income averaging). If, in this example, the annuity were a pension payable to A as a retired employee, but the facts were otherwise the same (assuming that, for instance, the $20,000 aggregate of premiums or other consideration paid were A's contributions as determined under section 72(f) and § 1.72-8) the result would be the same except that the tax attributable to the inclusion of the $250 in A's gross income, for taxable years beginning before January 1, 1964, would not be limited by section 72(e)(3), as in effect before such date. If such a lump sum is received in a taxable year beginning after December 31, 1963, the portion of such sum includible in gross income may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
Example 2. Taxpayer B pays $30,000 for a contract providing for monthly payments to be made to him for 15 years with respect to the principal and earnings of 10 units of an investment fund. B receives $12,000 during the first 5 years of participation and of this amount he has properly excluded a total of $10,000 from his gross income in his income returns for the taxable years, since $2,000 of $2,400 he received in each such year represented his investment divided by the term of the annuity ($30,000 ÷ 15). At the beginning of the 6th year, B agrees to take $11,000 in a lump sum and thereafter to accept the payments arising with respect to five units for the remaining 10 years of payments in full discharge of the original obligations of the contract. B shall include $1,000 in his gross income for the 6th year as the result of the lump sum he receives and allocates $1,000 of his original investment in the contract to each of the remaining 10 years with respect to the payments which will continue, determined as follows:
Aggregate of premiums or other consideration paid | $30,000
Total amount received and excludable from gross income | $10,000
Remainder of the consideration | $20,000
Ratio of units discontinued to the total units originally provided | 5/10 or 1/2
Lump sum received at the time of reduction in the number of units to be paid | $11,000
Less one-half of the remainder of the consideration ( 1/2 of $20,000) | $10,000
Portion of the lump sum received and includible in gross income | $1,000
Remainder of the consideration less the portion of such remainder attributable to the excludable portion of the lump sum ($20,000−$10,000) | $10,000
Remainder of the consideration properly allocable to each taxable year for the remaining 10 years ($10,000 ÷ 10) | $1,000
For the taxable years beginning before January 1, 1964, the limit on tax of section 72(e)(3), as in effect before such date, applies to the portion of the lump sum received and includible in gross income. For taxable years beginning after December 31, 1963, such portion may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
(g) Limit on tax attributable to the receipt of a lump sum. (1) For taxable years beginning before January 1, 1964, if the entire amount of the proceeds received upon the redemption, maturity, surrender, or discharge of a contract to which section 72 applies is received in a lump sum and paragraph (c), (d), or (f) of this section is applicable in determining the portion of such amount which is includible in gross income, the tax attributable to such portion shall not exceed the tax which would have been attributable thereto had such portion been received ratably in the taxable year in which received and the 2 preceding taxable years. The amount of tax attributable to the includible portion of the lump sum received shall be the lesser of:
(i) The difference between the amount of tax for the taxable year of receipt computed by including such portion in gross income and the amount of tax for such taxable year computed by excluding such portion from gross income; or
(ii) The difference between the total amount of tax for the taxable year of receipt and the 2 preceding taxable years computed by including one-third of such portion in gross income for each of the 3 taxable years, and the total amount of the tax for the taxable year of receipt and the 2 preceding taxable years computed by entirely excluding such portion from the gross income of all 3 taxable years.
For the definition of “taxable year”, see section 441(b). This subparagraph shall not apply, for taxable years beginning before January 1, 1964, to payments excepted from the application of section 72(e)(3), as in effect before such date, under the provisions of section 402 or 403. See paragraph (a) of § 1.72-2 and paragraph (d) of § 1.72-14.
(2) For taxable years beginning after December 31, 1963, any amount includible in gross income to which this section relates may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
(h) Amounts deemed to be paid or received by a transferee. Amounts deemed to have been paid or received by a transferee for the purposes of § 1.72-10 shall also be deemed to have been so paid or received by such transferee for the purposes of this section. Thus, if a donee is deemed to have paid the premiums or other consideration actually paid by his transferor for the purposes of section 72(g) and paragraph (b) of § 1.72-10, such consideration shall be deemed premiums or other consideration paid by the donee for the purposes of this section.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6885, 31 FR 7798, June 2, 1966; T.D. 8115, 51 FR 45734, Dec. 19, 1986]
§ 1.72-12 Effect of taking an annuity in lieu of a lump sum upon the maturity of a contract.
If a contract to which section 72 applies provides for the payment of a lump sum in full discharge of the obligation thereunder and the obligee entitled thereto, prior to receiving any portion of such lump sum and within 60 days after the date on which such lump sum first becomes payable, exercises an option or irrevocably agrees with the obligor to take, in lieu thereof, payments which will constitute “amounts received as an annuity”, as that term is defined in paragraph (b) of § 1.72-2, no part of such lump sum shall be deemed to have been received by the obligee at the time he was first entitled thereto merely because he would have been entitled to such amount had he not exercised the option or made such an agreement with the obligor.
§ 1.72-13 Special rule for employee contributions recoverable in three years.
(a) Amounts received as an annuity. (1) Section 72(d) provides a special rule for the treatment of amounts received as an annuity by an employee (or by the beneficiary or beneficiaries of an employee) under a contract to which section 72 applies. This special rule is applicable only in the event that:
(i) At least part of the consideration paid for the contract is contributed by the employer, and
(ii) The aggregate amount receivable as an annuity under such contract by the employee (or by his beneficiary or beneficiaries if the employee died before any amount was received as an annuity under the contract) within the 3-year period beginning on the date (whether or not before January 1, 1954) on which an amount is first received as an annuity equals or exceeds the total consideration contributed (or deemed contributed under section 72(f) and § 1.72-8) by the employee as of such date as reduced by all amounts previously received and excludable from the gross income of the recipient under the applicable income tax law.
In such an event, section 72(d) provides that all amounts received as an annuity under the contract during a taxable year to which the Code applies shall be excluded from gross income until the total of the amounts excluded under that section plus all amounts excluded under prior income tax laws equals or exceeds the consideration contributed (or deemed contributed) by the employee. The excess, if any, and all amounts received by any recipient thereafter (whether or not received as an annuity), shall be fully included in gross income. See paragraph (b) of this section.
(2) If the aggregate amount receivable as an annuity under the contract within three years from the date on which an amount is first received as an annuity thereunder will not equal or exceed the consideration contributed (or deemed contributed) by the employee in accordance with the provisions of § 1.72-8, computed as of such date, the special rule of section 72(d) shall not apply to amounts received as an annuity under the contract and the general rules of section 72 shall apply thereto.
(3) The aggregate of the amounts receivable as an annuity within the prescribed 3-year period shall be the total of all annuity payments anticipatable by an employee (or a beneficiary or beneficiaries of an employee, if the employee died before any amount was received as an annuity) under the contract as a whole as defined in paragraph (a) of § 1.72-2. See paragraph (a)(3) of § 1.72-2 for rules for determining what constitutes “the contract” in the case of distributions from an employees' trust or plan.
(4) If subparagraphs (1) and (3) of this paragraph apply to amounts received as an annuity under a contract, the rule prescribed in subparagraph (1) of this paragraph shall apply to all amounts so received thereunder regardless of the fact that they may be payable (i) to more than one beneficiary, (ii) for the same or different intervals, (iii) in different sums, or (iv) for a different period certain, life, or lives.
(5) For purposes of section 72(d), contributions which are made with respect to a self-employed individual and which are allowed as a deduction under section 404(a) are not considered contributions by the employee, but such contributions are considered contributions by the employer. A contribution which is deemed paid in a prior taxable year under the provisions of section 404(a)(6) shall be considered made with respect to a self-employed individual if the individual on whose behalf the contribution is made was self-employed for the taxable year in which the contribution is deemed paid, whether or not such individual is self-employed at the time the contribution is actually paid. Contributions with respect to a self-employed individual who is an owner-employee used to purchase life, accident, health, or other insurance protection for such owner-employee shall not be treated as consideration for the contract contributed by the employee in computing the employee contributions for purposes of section 72(d).
(b) Amounts not received as an annuity. If the rule of paragraph (a) of this section applies to a contract and, after the date on which an annuity payment is first received, amounts are received other than as an annuity under such contract in a taxable year to which the Code applies, they shall be included in the gross income of the recipient in accordance with the provisions of § 1.72-11. Thus, if such amounts are received as a dividend or a similar distribution after the date on which an amount is first received as an annuity under the contract, they shall be included in the gross income of the recipient (in accordance with section 72(e)(1)(A) and paragraph (b)(2) of § 1.72-11. All other amounts not received as an annuity shall be included in the gross income of the recipient in accordance with the provisions of section 72(e)(1)(B) and paragraph (c), (d), or (f), whichever is applicable, of § 1.72-11. See section 72(e)(2).
(c) Amounts received after the exhaustion of employee contributions. (1) Amounts received under a contract to which the rule of paragraph (a) of this section applies (whether or not such amounts are received as an annuity) shall be included in the gross income of the recipient if such amounts are received after the date on which the aggregate of all amounts excluded from gross income by the recipients under section 72(d) and prior income tax laws equalled or exceeded the consideration contributed (or deemed contributed) by the employee.
(2) If the rule of paragraph (a) of this section applies to amounts received by an employee (or his beneficiary or beneficiaries) under a joint and survivor annuity contract, payments made to a prior annuitant may entirely exhaust the amounts excludable from gross income. In such case, amounts paid to the surviving annuitant (or annuitants) shall be included in gross income by such recipients.
(d) Application of section 72(d) to a contract, trust, or plan providing for payments in a manner described in paragraph (b)(3)(i) of § 1.72-2. For the purpose of applying section 72(d) and this section, any amount received in the nature of a periodic payment under a contract, trust, or plan which provides for the payment of amounts in a manner described in paragraph (b)(3)(i) of § 1.72-2 shall be considered an amount received as an annuity notwithstanding the provisions of any other section of the regulations under section 72. The special exclusion rule of section 72(d) and paragraph (a) of this section shall apply to all amounts so received if the first amount received, when multiplied by the number of periodic payments to be made within the three years beginning on the date of its receipt, results in an amount in excess of the aggregate premiums or other consideration contributed (or deemed contributed) by the employee as of that date. If more than one series of periodic payments is to be paid under the same contract, trust, or plan, all payments anticipatable, whether because fixed in amount or determinable in the manner described in the preceding sentence, shall be aggravated for the purpose of determining the applicability of section 72 (d) to the contract, trust, or plan as a whole.
(e) Inapplicability of section 72(d) and this section. Section 72(d) and this section do not apply to:
(1) Amounts received as proceeds of a life insurance contract to which section 101(a) applies, nor to
(2) Amounts paid to a surviving annuitant under a joint and survivor annuity contract to which paragraph (b)(3) of § 1.72-5 applies, nor to
(3) Amounts paid to an annuitant under Chapter 73 of title 10 of the United States Code with respect to which section 72(o) and § 1.122-1 apply.
See also paragraph (d) of § 1.72-14.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6497, 25 FR 10021, Oct. 20, 1960; T.D. 6676, 28 FR 10135, Sept. 17, 1963; T.D. 7043, 35 FR 8477, June 2, 1970]
§ 1.72-14 Exceptions from application of principles of section 72.
(a) Payments of interest. If any amount is received under an agreement to pay interest on a sum or sums held by the obligor, such amount shall not be excludable from the gross income of the recipient under the provisions of section 72 to the extent that it is an actual interest payment. See section 72(j). An amount shall be considered to be held under an agreement to pay interest thereon if the amount payable after the term of the annuity (whether for a term certain or for a life or lives) is substantially equal to or larger than the aggregate amount of premiums or other consideration paid therefor. For this purpose, however, the aggregate amount of premiums or other consideration paid shall include all contributions made by an employer and not merely those to which section 72(f) applies.
(b) Alimony payments. To the extent that payments made to a wife are includable in her gross income by reason of either or both section 71 and 682, they shall not be excluded from the wife's gross income under the principles of section 72 although made under a contract to which that section applies. However, section 72 shall apply in the case of amounts received under such a contract if a husband and wife are entitled to make and do make a single return jointly.
(c) Certain “face-amount certificates.” The principles of section 72 do not apply to “face-amount certificates” described in section 72(1) which were issued before January 1, 1955.
(d) Employer plans. The provisions of §§ 1.72-1 to 1.72-13, inclusive, shall be disregarded to the extent that they are inconsistent with the treatment of amounts received provided in section 402 (relating to the taxability of a beneficiary of an employees' trust), section 403 (relating to the taxation of employee annuities), or the regulations under either of such sections.
§ 1.72-15 Applicability of section 72 to accident or health plans.
(a) Applicability of section. This section provides the rules for determining the taxation of amounts received from an employer-established plan which provides for distributions that are taxable under section 72 (or for distributions that are taxable under section 402 (a)(2) or (e), or section 403(a)(2), in the case of lump sum distributions) and which also provides for distributions that may be excludable from gross income under section 104 or 105 as accident or health benefits. For example, this section will apply to a pension plan described in section 401 and exempt under section 501 which provides for the payment of pensions at retirement and the payment of an earlier pension in the event of permanent disability. This section will also apply to a profit-sharing plan described in section 401 and exempt under section 501 which provides for periodic distribution of the amount standing to the account of a participant during any period that the participant is absent from work due to a personal injury or sickness and for the distribution of any balance standing to the account of the participant upon his separation from service. For purposes of this section, the term “contributions of the employee” includes contributions by the employer which were includible in the employee's gross income. Paragraphs (d), (h), and (i) of this section apply for taxable years beginning on or after January 1, 2015.
(b) General rule. Section 72 does not apply to any amount received as an accident or health benefit, and the tax treatment of any such amount shall be determined under sections 104 and 105. See paragraphs (c) and (d) of this section, paragraph (d) of § 1.104-1, and §§ 1.105-1 through 1.105-5. Section 72 (or, in the case of certain total distributions, section 402(a)(2) or section 403(a)(2)) does apply to any amount which is received under a plan to which this section applies and which is not an accident or health benefit. See paragraph (e) of this section.
(c) Accident or health benefits attributable to employee contributions. (1) If a plan to which this section applies provides that any portion of the accident or health benefits is attributable to the contributions of the employee to such plan, then such portion of such benefits is excludable from gross income under section 104(a)(3) and paragraph (d) of § 1.104-1. Neither section 72 nor section 105 applies to any accident or health benefits (whether paid before or after retirement) attributable to contributions of the employee. Since such portion is excludable under section 104(a)(3), such portion is not subject to the dollar limitation of section 105(d) and if such portion is payable after the retirement of the employee, it is excludable without regard to the provisions of § 1.105-4 and section 72.
(2) In determining the taxation of any amounts received as accident or health benefits from a plan to which this section applies, the first step is to determine the portion, if any, of the contributions of the employee which is used to provide the accident or health benefits and the portion of the accident or health benefits attributable to such portion of the employee's contributions. If such a plan expressly provides that the accident or health benefits are provided in whole or in part by employee contributions and the portion of employee contributions to be used for such purpose, the contributions so used will be treated as used to provide accident or health benefits. However, if the plan does not expressly provide that the accident or health benefits are to be provided with employee contributions and the portion of employee contributions to be used for such purpose, it will be presumed that none of the employee contributions is used to provide such benefits. Thus, in the case of a contributory pension plan, it will be presumed that the disability pension is provided by employer contributions, unless the plan expressly provides otherwise, or in the case of a contributory profit-sharing plan providing that a portion of the amount standing to the account of each participant will be used to purchase accident or health insurance, it will be presumed that such insurance is purchased with employer contributions, unless the plan expressly provides otherwise. Similarly, unless the plan expressly provides otherwise, it will be presumed that if a contributory profit-sharing plan provides for periodic distributions from the account of a participant during any absence from work because of a personal injury or sickness, all such distributions which do not exceed the contributions of the employer plus earnings thereon are provided by employer contributions.
(3) Any employee contributions that are treated under subparagraph (2) of this paragraph as used to provide accident or health benefits shall not be included for any purpose under section 72 as employee contributions or as aggregate premiums or other consideration paid. Thus, in the case of a pension plan, or in the case of a profit-sharing plan providing that a portion of the amount standing to the account of each participant will be used to purchase accident or health insurance, any employee whose contributions are so used must make the adjustment provided by this subparagraph irrespective of whether such employee receives any accident or health benefits under such plan. However, in the case of a profit-sharing plan providing for periodic distributions from the account of a participant during any absence from work because of a personal injury or sickness, an adjustment under this subparagraph is required only when an employee receives distributions in excess of the employer contributions and earnings thereon or receives distributions consisting in whole or in part of his own contributions.
(4) If any of the employee contributions are treated under subparagraph (2) of this paragraph as used to provide any of the accident or health benefits, the portion of the benefits attributable to employee contributions shall be determined in accordance with § 1.105-1. Any accident or health benefits that are excludable under section 104(a)(3) shall not be included in the expected return for purposes of section 72.
(d) Accident or health benefits attributable to employer contributions. Any amounts received as accident or health benefits and not attributable to contributions of the employee are includible in gross income except to the extent that the amounts are excludable from gross income under section 105(b) or (c) and the regulations under those sections. See § 1.402(a)-1(e) for rules relating to the use of a qualified plan under section 401(a) to pay premiums for accident or health insurance.
(e) Other benefits under the plan. The taxability of amounts that are received under a plan to which this section applies and that are not accident or health benefits is determined under section 72 (or, in the case of certain total distributions, under section 402(a)(2) or section 403(a)(2)) without regard to any exclusion or inclusion of accident or health benefits under sections 104 and 105. For example, the investment in the contract or aggregate premiums paid is determined without regard to the exclusion of any amount under section 104 or 105, and the annuity starting date is determined without regard to the receipt of any accident or health benefits. However, if any employee contributions are used to provide any accident or health benefits, the investment in the contract or aggregate premiums paid must be adjusted as provided in paragraph (c)(3) of this section.
(f) [Reserved]
(g) Payments to or on behalf of a self-employed individual. A self-employed individual is not considered an employee for purposes of section 105, relating to amounts received by employees under accident and health plans, nor for purposes of excluding under section 104(a)(3) amounts received by him under an accident and health plan as referred to in section 105(e). See section 105(g) and paragraph (a) of § 1.105-1. Therefore, the other paragraphs of this section are not applicable to amounts received by or on behalf of a self-employed individual. Except where accident or health benefits are provided through an insurance contract or an arrangement having the effect of insurance, all amounts received by or on behalf of a self-employed individual from a plan described in section 401(a) and exempt under section 501(a) or a plan described in section 403(a) shall be taxed as otherwise provided in section 72, 402, or 403. If the accident or health benefits are paid under an insurance contract or under an arrangement having the effect of insurance, section 104(a)(3) shall apply. Section 72 shall not apply to any amounts received under such circumstances.
(h) Medical benefits for retired employees, etc. See § 1.402(a)-1(e)(2) for rules relating to the payment of medical benefits described in section 401(h) under a qualified pension or annuity plan.
(i) Special rules—(1) In general. For purposes of section 72(b) and (d) and this section, the taxpayer must maintain such records as are necessary to substantiate the amount treated as an investment in the taxpayer's annuity contract.
(2) Delegation to Commissioner. The Commissioner may prescribe a form and instructions with respect to the taxpayer's past and current treatment of amounts received under section 72 or 105, and the taxpayer's computation, or recomputation, of the taxpayer's investment in his or her annuity contract. This form may be required to be filed with the taxpayer's returns for years in which the amounts are excluded under section 72 or 105.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6676, 28 FR 10135, Sept. 17, 1963; T.D. 6722, 29 FR 5069, Apr. 14, 1964; T.D. 6770, 29 FR 15366, Nov. 17, 1964; T.D. 7352, 40 FR 16664, Apr. 14, 1975; T.D. 9665, 79 FR 26841, May 12, 2014; T.D. 9849, 84 FR 9233, Mar. 14, 2019]
§ 1.72-16 Life insurance contracts purchased under qualified employee plans.
(a) Applicability of section. This section provides rules for the tax treatment of premiums paid under qualified pension, annuity, or profit-sharing plans for the purchase of life insurance contracts and rules for the tax treatment of the proceeds of such a life insurance contract and of annuity contracts purchased under such plans. For purposes of this section, the term “life insurance contract” means a retirement income, an endowment, or other contract providing life insurance protection. The rules of this section apply to plans covering only common-law employees as well as to plans covering self-employed individuals.
(b) Treatment of cost of life insurance protection. (1) The rules of this paragraph are applicable to any life insurance contract—
(i) Purchased as a part of a plan described in section 403(a), or
(ii) Purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant.
The proceeds of a contract described in subdivision (ii) of this subparagraph will be considered payable indirectly to a participant or beneficiary of such participant where they are payable to the trustee but under the terms of the plan the trustee is required to pay over all of such proceeds to the beneficiary.
(2) If under a plan or trust described in subparagraph (1) of this paragraph, amounts which were allowed as a deduction under section 404, or earnings of the trust, are applied toward the purchase of a life insurance contract described in subparagraph (1) of this paragraph, the cost of the life insurance protection under such contract shall be included in the gross income of the participant for the taxable year or years in which such contributions or earnings are so applied.
(3) If the amount payable upon death at any time during the year exceeds the cash value of the insurance policy at the end of the year, the entire amount of such excess is considered current life insurance protection. The cost of such insurance will be considered to be a reasonable net premium cost, as determined by the Commissioner, for such amount of insurance for the appropriate period.
(4) The amount includible in the gross income of the employee under this paragraph shall be considered as premiums or other consideration paid or contributed by the employee only with respect to any benefits attributable to the contract (within the meaning of paragraph (a)(3) of § 1.72-2) providing the life insurance protection. However, if under the rules of this paragraph an owner-employee is required to include any amounts in his gross income, such amounts shall not in any case be treated as part of his investment in the contract.
(5) The determination of the cost of life insurance protection may be illustrated by the following example:
Example.An annual premium policy purchased by a qualified trust for a common-law employee provides an annuity of $100 per month upon retirement at age 65, with a minimum death benefit of $10,000. The insurance payable if death occurred in the first year would be $10,000. The cash value at the end of the first year is 0. The net insurance is therefore $10,000 minus 0, or $10,000. Assuming that the Commissioner has determined that a reasonable net premium cost for the employee's age is $5.85 per $1,000, the premium for $10,000 of life insurance is therefore $58.50, and this is the amount to be reported as income by the employee for his taxable year in which the premium is paid. The balance of the premium is the amount contributed for the annuity, which is not taxable to the employee under a plan meeting the requirements of section 401(a), except as provided under section 402(a). Assuming that the cash value at the end of the second year is $500, the net insurance would then be $9,500 for the second year. With a net 1-year term rate of $6.30 for the employee's age in the second year, the amount to be reported as income to the employee would be $59.85.
(6) This paragraph shall not apply if the trust has a right under any circumstances to retain any part of the proceeds of the life insurance contract. But see paragraph (c)(4) of this section relating to the taxability of the distribution of such proceeds to a beneficiary.
(c) Treatment of proceeds of life insurance and annuity contracts. (1) If under a qualified pension, annuity, or profit-sharing plan, there is purchased either—
(i) A life insurance contract described in paragraph (b)(1) of this section, and the employee either paid the cost of the insurance or was taxable on the cost of the insurance under paragraph (b) of this section, or
(ii) An annuity contract,
the amounts payable under any such contract by reason of the death of the employee are taxable under the rules of subparagraph (2) of this paragraph, except in the case of a joint and survivor annuity.
(2)(i) In the case of an annuity contract, the death benefit is the accumulation of the premiums (plus earnings thereon) which is intended to fund pension or other deferred benefits under a pension, annuity, or profit-sharing plan. Such death benefits are not in the nature of life insurance and are not excludable from gross income under section 101(a).
(ii) In the case of a life insurance contract under which there is a reserve accumulation which is intended to fund pension or other deferred benefits under a pension, annuity, or profit-sharing plan, such reserve accumulation constitutes the source of the cash value of the contract and approximates the amount of such cash value. The portion of the proceeds paid upon the death of the insured employee which is equal to the cash value immediately before death is not excludable from gross income under section 101(a). The remaining portion, if any, of the proceeds paid to the beneficiary by reason of the death of the insured employee—that is, the amount in excess of the cash value—constitutes current insurance protection and is excludable under section 101(a).
(iii) The death benefit under an annuity contract, or the portion of the death proceeds under a life insurance contract which is equal to the cash value of the contract immediately before death, constitutes a distribution under the plan consisting in whole or in part of deferred compensation and is taxable to the beneficiary in accordance with section 72(m)(3) and the provisions of this paragraph, except to the extent that the limited exclusion from income provided in section 101(b) is applicable.
(iv) In the case of a life insurance contract under which the benefits are paid at a date or dates later than the death of the employee, section 101(d) is applicable only to the portion of the benefits which is attributable to the amount excludable under section 101(a). The portion of such benefits which is attributable to the cash value of the contract immediately before death is taxable under section 72, and in such case, any amount excludable under section 101(b) is treated as additional consideration paid by the employee in accordance with section 101(b)(2)(D).
(3) The application of the rules under subparagraph (2) of this paragraph with respect to the taxability of proceeds of a life insurance contract paid by reason of the death of an insured common-law employee who has paid no contributions under the plan is illustrated by the following examples:
Example 1.
Total face amount of the contract payable in a lump sum at time of death | $25,000
Cash value of the contract immediately before death | 11,000
Excess over cash value, excludable under section 101(a) | 14,000
Cash value subject to limited exclusion under section 101(b) | 11,000
Excludable under section 101(b) (assuming that there is no other death benefit paid by or on behalf of any employer with respect to the employee) | 5,000
Balance taxable in accordance with section 402(a)(2) or 403(a)(2) (assuming a total distribution in one taxable year of the distributee) | 6,000
Portion of premiums taxed to employee under the provisions of paragraph (b) of this section and considered as contributions of the employee | 940
Balance taxable as long-term capital gain | 5,060
Example 2. The facts are the same as in example (1), except that the contract provides that the beneficiary may elect within 60 days after the death of the employee either to take the $25,000 or to receive 10 annual installments of $3,000 each, and the beneficiary elects to receive the 10 installments. In addition, the employee's rights to the cash value immediately before his death were forfeitable at least to the extent of $5,000. Section 101(d) is applicable to the amount excludable under section 101(a), that is, $14,000. The portion of each annual installment of $3,000 which is attributable to this $14,000 is determined by allocating each installment in accordance with the ratio which this $14,000 bears to the total amount which was payable at death ($25,000). Accordingly, the portion of each annual installment which is subject to section 101(d) is $1,680 ( 14/25 of $3,000), of which $1,400 ( 1/10 of $14,000) is excludable under section 101(a), and the remaining $280 is includible in the gross income of the beneficiary. However, if the beneficiary is a surviving spouse as defined in section 101(d)(3), the exclusion provided by section 101(d)(1)(B) is applicable to such $280. The remaining portion of each annual $3,000 installment, $1,320, is attributable to the cash value of the contract and is treated under section 72, as follows:
Amount actually contributed by the employee | 0
Amount considered contributed by employee by reason of section 101(b) | $5,000
Portion of premiums taxed to employee under the provisions of paragraph (b) of this section and considered as contributions of the employee | $940
Investment in the contract | $5,940
Expected return, 10 × $1,320 | $13,200
Exclusion ratio, $5,940 ÷ $13,200 | 0.45
Annual exclusion, 0.45 × $1,320 | $594
Accordingly, $594 of the $1,320 portion of each annual installment is excludable each year under section 72, and the remaining $726 is includible. Thus, if the beneficiary is not a surviving spouse, a total of $1,006 ($280 plus $726) of each annual $3,000 installment is includible in income each year. If the beneficiary is a surviving spouse, and can exclude all of the $280 under section 101(d)(1)(B), the amount includible in gross income each year is $726 of each annual $3,000 installment.
(4) If an employee neither paid the total cost of the life insurance protection provided under a life insurance contract, nor was taxable under paragraph (b) of this section with respect thereto, no part of the proceeds of such a contract which are paid to the beneficiaries of the employee as a death benefit is excludable under section 101(a). The entire distribution is taxable to the beneficiaries under section 402(a) or 403(a) except to the extent that a limited exclusion may be allowable under section 101(b).
[T.D. 6676, 28 FR 10135, Sept. 17, 1963]
§ 1.72-17 Special rules applicable to owner-employees.
(a) In general. Under section 401(c) and section 403(a), certain self-employed individuals may participate in qualified pension, annuity, and profit-sharing plans, and the amounts received by such individuals from such plans are taxable under section 72. Section 72(m) and this section contain special rules for the taxation of amounts received from qualified pension, profit-sharing, or annuity plans covering an owner-employee. For purposes of section 72 and the regulations thereunder, the term “employee” shall include the self-employed individual who is treated as an employee by section 401(c)(1) (see paragraph (b) of § 1.401-10), and the term “owner-employee” has the meaning assigned to it in section 401(c)(3) (see paragraph (d) of § 1.401-10). See also paragraph (a)(2) of § 1.401-10 for the rule for determining when a plan covers an owner-employee. For purposes of this section, a self-employed individual may not treat as consideration for the contract contributed by the employee any contributions under the plan for which deductions were allowed under section 404 and which, consequently, are considered employer contributions.
(b) Certain amounts received before annuity starting date. (1) The rules of this paragraph are applicable to amounts received from a qualified pension, profit-sharing, or annuity plan by an employee (or his beneficiary) who is or was an owner-employee with respect to such plan when such amounts—
(i) Are received before the annuity starting date; and
(ii) Are not received as an annuity.
For the definition of annuity starting date, see paragraph (b) of § 1.72-4 and subparagraph (4) of this paragraph. As to what constitutes amounts not received as an annuity, see paragraphs (c) and (d) of § 1.72-11.
(2) Amounts to which this paragraph applies shall be included in the recipient's gross income for the taxable year in which received. However, the sum of the amounts so included under this subparagraph in all taxable years shall not exceed the aggregate deductions allowed under section 404 for premiums or other consideration paid under the plan on behalf of the employee while he was an owner-employee, including any such deductions taken in the taxable year of receipt.
(3) Any amounts to which this paragraph applies and which are not includible in gross income under the rules of subparagraph (2) of this paragraph shall be subject to the provisions of section 72(e) and § 1.72-11. However, for taxable years beginning before January 1, 1964, section 72(e)(3), as in effect before such date, shall not apply to such amounts. For taxable years beginning after December 31, 1963, such amounts (other than amounts subject to a penalty under section 72(m)(5) and paragraph (e) of this section) may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
(4) Under section 401(d)(4), a qualified pension, profit-sharing, or annuity plan may not provide for distributions to an owner-employee before he reaches age 59 1/2 years, except in the case of his earlier disability. Therefore, in the case of a distribution from a qualified plan to an individual for whom contributions have been made to the plan as an owner-employee, the annuity starting date cannot be prior to the time such individual attains the age 59 1/2 years unless he is entitled to benefits before reaching such age because of his disability. For taxable years beginning after December 31, 1966, see section 72(m)(7) and paragraph (f) of this section for the meaning of disabled. For taxable years beginning before January 1, 1967, see section 213(g)(3) for the meaning of disabled.
(5) The rules of this paragraph are not applicable to amounts credited to an individual in his capacity as a policy-holder of an annuity, endowment, or life insurance contract which are in the nature of a dividend or refund of premium, and which are applied in accordance with paragraph (a)(4) of § 1.404(a)-8 towards the purchase of benefits under the policy.
(6) The rules of this paragraph may be illustrated by the following example:
Example.B, a self-employed individual, received $8,000 as a distribution under a qualified pension plan before the annuity starting date. At the time of such distribution, $10,000 had been contributed (the whole amount being allowed as a deduction) under the plan on behalf of such individual while he was a common-law employee and $5,000 had been contributed under the plan on his behalf while he was an owner-employee, of which $2,500 was allowed as a deduction. In addition, B had contributed $1,000 on his own behalf as an employee under the plan. Of the $8,000, $2,500 (the amount allowed as a deduction with respect to contributions on behalf of the individual while he was an owner-employee) is includable in gross income under subparagraph (2) of this paragraph. With respect to the remaining $5,500, B has a basis of $3,500, consisting of the $2,500 contributed on his behalf while he was an owner-employee which was not allowed as a deduction and the $1,000 which B contributed as an employee. The difference between the $5,500 and B's basis of $3,500, or $2,000, is includable in gross income under section 72(e).
(c) Amounts paid for life, accident, health, or other insurance. Amounts used to purchase life, accident, health, or other insurance protection for an owner-employee shall not be taken into account in computing the following:
(1) The aggregate amount of premiums or other consideration paid for the contract for purposes of determining the investment in the contract under section 72(c)(1)(A) and § 1.72-6;
(2) The consideration for the contract contributed by the employee for purposes of section 72(d)(1) and § 1.72-13, which provide the method of taxing employees' annuities where the employee's contributions will be recoverable within 3 years; and
(3) The aggregate premiums or other consideration paid for purposes of section 72(e)(1)(B) and § 1.72-11, which provide the rules for taxing amounts not received as annuities prior to the annuity starting date.
The cost of such insurance protection will be considered to be a reasonable net premium cost, as determined by the Commissioner, for the appropriate period.
(d) Amounts constructively received. (1) If during any taxable year an owner-employee assigns or pledges (or agrees to assign or pledge) any portion of his interest in a trust described in section 401(a) which is exempt from tax under section 501(a), or any portion of the value of a contract purchased as part of a plan described in section 403(a), such portion shall be treated as having been received by such owner-employee as a distribution from the trust or as an amount received under the contract during such taxable year.
(2) If during any taxable year an owner-employee receives, either directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as part of a plan described in section 403(a), and issued by such insurance company, such amount shall be treated as an amount received under the contract during such taxable year. An owner-employee will be considered to have received an amount under a contract if a premium, which is otherwise in default, is paid by the insurance company in the form of a loan against the cash surrender value of the contract. Further, an owner-employee will be considered to have received an amount to which this subparagraph applies if an amount is received from the issuer of a face-amount certificate as a loan under such a certificate purchased as part of a qualified trust or plan.
(e) Penalties applicable to certain amounts received by owner-employees. (1)(i) The rules of this paragraph are applicable to amounts, to the extent includable in gross income, received from a trust described in section 401(a) or under a plan described in section 403(a) by or on behalf of an individual who is or has been an owner-employee with respect to such plan or trust—
(a) Which are received before the owner-employee reaches the age 59 1/2 years and which are attributable to contributions paid on behalf of such owner-employee (whether or not paid by him) while he was an owner-employee (see subdivision (ii) of this subparagraph),
(b) Which are in excess of the benefits provided for such owner-employee under the plan formula (see subdivision (iii) of this subparagraph), or
(c) Which are received by reason of a distribution of the owner-employee's entire interest under the provisions of section 401(e)(2)(E), relating to excess contributions on behalf of an owner-employee which are willfully made.
(ii) The amounts referred to in subdivision (i)(a) of this subparagraph do not include—
(a) Amounts received by reason of the owner-employee becoming disabled, or
(b) Amounts received by the owner-employee in his capacity as a policy-holder of an annuity, endowment, or life insurance contract which are in the nature of a dividend or similar distribution.
Amounts attributable to contributions paid on behalf of an owner-employee and which are paid to a person other than the owner-employee before the owner-employee dies or reaches the age 59 1/2 shall be considered received by the owner-employee for purposes of this paragraph. For taxable years beginning after December 31, 1966, see section 72(m)(7) and paragraph (f) of this section for the meaning of disabled. For taxable years beginning before January 1, 1967, see section 213(g)(3) for the meaning of disabled. For taxable years beginning after December 31, 1968, if an amount is not included in the amounts referred to in subdivision (i)(a) of this subparagraph solely by reason of the owner-employee becoming disabled and if a penalty would otherwise be applicable with respect to all or a portion of such amount, then for the taxable year in which such amount is received, there must be submitted with the owner-employee's income tax return a doctor's statement as to the impairment, and a statement by the owner-employee with respect to the effect of such impairment upon his substantial gainful activity and the date such impairment occurred. For taxable years which are subsequent to the first taxable year beginning after December 31, 1968, with respect to which the statements referred to in the preceding sentence are submitted, the owner-employee may, in lieu of such statements, submit a statement declaring the continued existence (without substantial diminution) of the impairment and its continued effect upon his substantial gainful activity.
(iii) This paragraph applies to amounts described in subdivision (i)(b) of this subparagraph (relating to excess benefits) even though a portion of such amounts may be attributable to contributions made on behalf of an individual while he was not an owner-employee and even though the amounts are received by his successor. However, these amounts do not include the portion of a distribution to which section 402(a)(2) or 403(a)(2) (relating to certain total distributions in one taxable year) applies.
(iv)(a) For purposes of subdivision (i)(a) of this subparagraph, the portion of any distribution or payment attributable to contributions on behalf of an employee-participant while he was an owner-employee includes the contributions made on his behalf while he was an owner-employee and the increments in value attributable to such contributions.
(b) The increments in value of an individual's account may be allocated to contributions on his behalf while he was an owner-employee either by maintaining a separate account, or an accounting, which reflects the actual increment attributable to such contributions, or by the method described in (c) of this subdivision.
(c) Where an individual is covered under the same plan both as an owner-employee and as a nonowner-employee, the portion of the increment in value of his interest attributable to contributions made on his behalf while he was an owner-employee may be determined by multiplying the total increment in value in his account by a fraction. The numerator of the fraction is the total contributions made on behalf of the individual as an owner-employee, weighted for the number of years that each contribution was in the plan. The denominator is the total contributions made on behalf of the individual, whether or not an owner-employee, weighted for the number of years each contribution was in the plan. The contributions are weighted for the number of years in the plan by multiplying each contribution by the number of years it was in the plan. For purposes of this computation, any forfeiture allocated to the account of the individual is treated as a contribution to the account made at the time so allocated.
(d) The method described in (c) of this subdivision may be illustrated by the following example:
Example. B was a member of the XYZ Partnership and a participant in the partnership's profit-sharing plan which was created in 1963. Until the end of 1967, B's interest in the partnership was less than 10 percent. On January 1, 1968, B obtained an interest in excess of 10 percent in the partnership and continued to participate in the profit-sharing plan until 1972. During 1972, prior to the time he attained the age of 59 1/2 years and during a time when he was not disabled, B withdrew his entire interest in the profit-sharing plan. At that time his interest was $15,000, $9,600 contributions and $5,400 increment attributable to the contributions. The portion of the increment attributable to contributions while B was an owner-employee is $667.80, determined as follows:
A | B | C
Contribution | Number of years contribution was in trust— | Contribution weighted for years in trust (A × B)
1972 | $1,000 | 0 | 0
1971 | 800 | 1 | 800
1970 | 1,200 | 2 | 2,400
1969 | 600 | 3 | 1,800
1968 | 200 | 4 | 800
1967 | 400 | 5 | 2,000
1966 | 2,000 | 6 | 12,000
1965 | 1,000 | 7 | 7,000
1964 | 1,500 | 8 | 12,000
1963 | 900 | 9 | 8,100
Total | $9,600 | 46,900
Total weighted contributions as owner-employee (1968-1972)—5,800. Total weighted contributions—46,900. $5,400 × (5,800 ÷ 46,900) = $667.80
(2)(i) If the aggregate of the amounts to which this paragraph applies received by any person in his taxable year equals or exceeds $2,500 the tax with respect to such amount shall be the greater of—
(a) The increase in tax attributable to the inclusion of the amounts so received in his gross income for the taxable year in which received, or
(b) 110 percent of the aggregate increase in taxes, for such taxable year and the four immediately preceding taxable years, which would have resulted if such amounts had been included in such person's gross income ratably over such taxable years. However, if deductions were allowed under section 404 for contributions to the plan on behalf of the individual as an owner-employee for less than four prior taxable years (whether or not consecutive), the number of immediately preceding taxable years taken into account shall be the number of prior taxable years in which such deductions were allowed.
(ii) If the aggregate of the amounts to which this paragraph applies received by any person in his taxable year is less than $2,500, the tax with respect to such amounts shall be 110 percent of the increase in tax which results from including such amounts in the person's gross income for the taxable year in which received.
(3)(i) For purposes of making the ratable inclusion computations of subparagraph (2)(i) of this paragraph, the taxable income of the recipient for each taxable year involved (notwithstanding section 63, relating to definition of taxable income) shall be treated as being not less than the amount required to be treated as includible in the taxable year pursuant to the ratable inclusion.
(ii) For purposes of subparagraph (2)(i)(a) and (ii) of this paragraph, the recipient's taxable income (notwithstanding section 63, relating to definition of taxable income) shall be treated as being not less than the aggregate of the amounts to which this paragraph applies reduced by the deductions allowed the recipient for such taxable year under section 151 (relating to deductions for personal exemptions).
(iii) In any case in which the application of subdivision (i) or (ii) of this subparagraph results in an increase in taxable income for any taxable year, the resulting increase in taxes imposed by section 1 or 3 for such taxable year shall be reduced by the credits against tax provided by section 31 (tax withheld on wages) and section 39 (certain uses of gasoline and lubricating oil), but shall not be reduced by any other credits against tax.
(4) The application of the rules of subparagraph (2)(i) and (3) of this paragraph may be illustrated by the following example:
Example.B, a sole proprietor and a calendar-year basis taxpayer, established a qualified pension trust to which he made annual contributions for 10 years of 10 percent of his earned income. B withdrew his entire interest in the trust during 1973 when he was 55 years old and not disabled and for which, without regard to the distribution, he had a net operating loss and for which he is allowed under section 151 a deduction for one personal exemption. The portion of the distribution includible in B's gross income is $25,750. In addition, B had a net operating loss for 1972. The other 3 taxable years involved in the computation under subparagraph (2)(i) of this paragraph were years of substantial income. For purposes of determining B's increase in tax attributable to the receipt of the $25,750 (before the application of the provisions of subparagraph (2)(i)(b) of this paragraph), B's taxable income for the year he received the $25,750 is treated, under subparagraph (3)(ii) of this paragraph, as being $25,000 ($25,750 minus $750, the amount of the deduction allowed for each personal exemption under section 151 for 1973). For purposes of determining whether 110 percent of the aggregate increase in taxes which would have resulted if 20 percent of the amount of the withdrawal had been included in B's gross income for the year of receipt and for each of the 4 preceding taxable years is greater (and thus is the amount of his increase in tax attributable to the receipt of the $25,750), B's taxable income for the taxable year of receipt, and for the immediately preceding taxable year, is treated, under subparagraph (3)(i) of this paragraph, as being $5,150 ($25,750 divided by 5).
(f) Meaning of disabled. (1) For taxable years beginning after December 31, 1966, section 72(m)(7) provides that an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. In determining whether an individual's impairment makes him unable to engage in any substantial gainful activity, primary consideration shall be given to the nature and severity of his impairment. Consideration shall also be given to other factors such as the individual's education, training, and work experience. The substantial gainful activity to which section 72(m)(7) refers is the activity, or a comparable activity, in which the individual customarily engaged prior to the arising of the disability (or prior to retirement if the individual was retired at the time the disability arose).
(2) Whether or not the impairment in a particular case constitutes a disability is to be determined with reference to all the facts in the case. The following are examples of impairments which would ordinarily be considered as preventing substantial gainful activity:
(i) Loss of use of two limbs;
(ii) Certain progressive diseases which have resulted in the physical loss or atrophy of a limb, such as diabetes, multiple sclerosis, or Buerger's disease;
(iii) Diseases of the heart, lungs, or blood vessels which have resulted in major loss of heart or lung reserve as evidenced by X-ray, electrocardiogram, or other objective findings, so that despite medical treatment breathlessness, pain, or fatigue is produced on slight exertion, such as walking several blocks, using public transportation, or doing small chores;
(iv) Cancer which is inoperable and progressive;
(v) Damage to the brain or brain abnormality which has resulted in severe loss of judgment, intellect, orientation, or memory;
(vi) Mental diseases (e.g. psychosis or severe psychoneurosis) requiring continued institutionalization or constant supervision of the individual;
(vii) Loss or diminution of vision to the extent that the affected individual has a central visual acuity of no better than 20/200 in the better eye after best correction, or has a limitation in the fields of vision such that the widest diameter of the visual fields subtends an angle no greater than 20 degrees;
(viii) Permanent and total loss of speech;
(ix) Total deafness uncorrectible by a hearing aid.
The existence of one or more of the impairments described in this subparagraph (or of an impairment of greater severity) will not, however, in and of itself always permit a finding that an individual is disabled as defined in section 72(m)(7). Any impairment, whether of lesser or greater severity, must be evaluated in terms of whether it does in fact prevent the individual from engaging in his customary or any comparable substantial gainful activity.
(3) In order to meet the requirements of section 72(m)(7), an impairment must be expected either to continue for a long and indefinite period or to result in death. Ordinarily, a terminal illness because of disease or injury would result in disability. Indefinite is used in the sense that it cannot reasonably be anticipated that the impairment will, in the foreseeable future, be so diminished as no longer to prevent substantial gainful activity. For example, an individual who suffers a bone fracture which prevents him from working for an extended period of time will not be considered disabled, if his recovery can be expected in the foreseeable future; if the fracture persistently fails to knit, the individual would ordinarily be considered disabled.
(4) An impairment which is remediable does not constitute a disability within the meaning of section 72(m)(7). An individual will not be deemed disabled if, with reasonable effort and safety to himself, the impairment can be diminished to the extent that the individual will not be prevented by the impairment from engaging in his customary or any comparable substantial gainful activity.
(g) Years to which this section applies. This section applies to taxable years ending before September 3, 1974. For taxable years ending after September 2, 1974, see § 1.72-17A.
[T.D. 6676, 28 FR 10136, Sept. 17, 1963, as amended by T.D. 6885, 31 FR 7800, June 2, 1966; T.D. 6985, 33 FR 19811, Dec. 27, 1968; T.D. 7114, 36 FR 9018, May 18, 1971; T.D. 7636, 44 FR 47049, Aug. 10, 1979]
§ 1.72-17A Special rules applicable to employee annuities and distributions under deferred compensation plans to self-employed individuals and owner-employees.
(a) In general. Section 72(m) and this section contain special rules for the taxation of amounts received from qualified pension, profit-sharing, or annuity plans covering an owner-employee. This section applies to such amounts for taxable years of the recipient ending after September 2, 1974, unless another date is specified. For purposes of this section, the term “employee” shall include the self-employed individual who is treated as an employee by section 401(c)(1), and the term “owner-employee” has the meaning assigned to it in section 401(c)(3). Paragraph (b) of this section provides rules dealing with the computation of consideration paid by self-employed individuals and paragraph (c) of this section provides rules dealing with such computation when insurance is purchased for owner-employees. Paragraph (d) of this section provides rules for constructive receipt and, for purposes of these rules, treats as an owner-employee an individual for whose benefit an individual retirement account or annuity described in section 408 (a) or (b) is maintained after December 31, 1974. Paragraph (e) of this section provides rules for penalties provided by section 72(m)(5) with respect to certain distributions received by owner-employees or their successors. Paragraph (f) of this section provides rules for determining whether a person is disabled within the meaning of section 72(m)(7). See § 1.72-16, relating to life insurance contracts purchased under qualified employee plans, for rules under section 72(m)(3).
(b) Computation of consideration paid by self-employed individuals. Under section 72(m)(2), consideration paid or contributed for the contract by any self-employed individual shall for purposes of section 72 be deemed not to include any contributions paid or contributed under a plan described in paragraph (a), or any other plan of deferred compensation described in section 404(a) (whether or not qualified), if the contributions are—
(1) Paid under such plan with respect to a time during which the employee was an employee only by reason of sections 401(c)(1) and 404(a)(8), and
(2) Deductible under section 404 by the employer, including an employer within the meaning of sections 401(c)(4) and 404(a)(8), of such self-employed individual at the time of such payment, or subsequent to such time of payment.
For purposes of this paragraph the term “consideration paid or contributed for the contract” has the same meaning as under subparagraphs (1), (2), and (3) of paragraph (c) of this section.
(c) Amounts paid for life, accident, health, or other insurance. Under section 72(m)(2), amounts used to purchase life, accident, health, or other insurance protection for an owner-employee shall not be taken into account in computing the following:
(1) The aggregate amount of premiums or other consideration paid for the contract for purposes of determining the investment in the contract under section 72(c)(1)(A) and § 1.72-6;
(2) The consideration for the contract contributed by the employee for purposes of section 72(d)(1) and § 1.72-13, which provide the method of taxing employee's annuities where the employee's contributions will be recoverable within 3 years; and
(3) The aggregate premiums or other consideration paid for purposes of section 72(e)(1)(B) and § 1.72-11, which provide the rules for taxing amounts not received as annuities prior to the annuity starting date.
The cost of such insurance protection will be considered to be a reasonable net premium cost, as determined by the Commissioner, for the appropriate period.
(d) Amounts constructively received. (1) The references in this paragraph (d) to section 72(m)(4) are to that section as in effect on August 13, 1982. Section 236(b)(1) of the Tax Equity and Fiscal Responsibility Act of 1982 (96 Stat. 324) repealed section 72(m)(4), generally effective for assignments, pledges and loans made after August 13, 1982, and added section 72(p). See section 72(p) and § 1.72(p)-1 for rules governing the income tax treatment of certain assignments, pledges and loans from qualified employer plans made after August 13, 1982.
(2) Under section 72(m)(4)(A), if during any taxable year an owner-employee assigns or pledges (or agrees to assign or pledge) any portion of his interest in a trust described in section 401(a) which is exempt from tax under section 501(a), or any portion of the value of a contract purchased as part of a plan described in section 403(a), such portion shall be treated as having been received by such owner-employee as a distribution from the trust or as an amount received under the contract during such taxable year.
(3)(i) Under paragraphs (4)(A) and (6) of section 72(m), if after December 31, 1974, during any taxable year an individual for whose benefit an individual retirement account or annuity described in section 408 (a) or (b) is maintained assigns or pledges (or agrees to assign or pledge) any portion of his interest in such account or annuity, such portion shall be treated as having been received by such individual as a distribution from such account or trust during such taxable year. See subsections (d) and (f) of section 408 and the regulations thereunder for the tax treatment of an amount treated as a distribution under this subparagraph.
(ii) Notwithstanding subdivision (i) of this subparagraph, if an individual retirement account or annuity, or portion thereof, is subject to the additional tax imposed by section 408(f), that amount shall be deemed not to be a distribution under section 72(m)(4)(A) and subdivision (i) of this subparagraph.
(4) Under section 72(m)(4)(B), if during any taxable year an owner-employee receives, either directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as part of a plan described in section 403(a), and issued by such insurance company, such amount shall be treated as an amount received under the contract during such taxable year. An owner-employee will be considered to have received an amount under a contract if a premium, which is otherwise in default, is paid by the insurance company in the form of a loan against the cash surrender value of the contract. Further, an owner-employee will be considered to have received an amount to which this subparagraph applies if an amount is received from the issuer of a face-amount certificate as a loan under such a certificate purchased as part of a qualified trust or plan.
(e) Penalties applicable to certain amounts received with respect to owner-employees under section 72(m)(5). (1)(i) For taxable years of the recipient beginning after December 31, 1975, if any person receives an amount to which subparagraph (2) of this paragraph applies, his tax under Chapter 1 for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such taxable year.
(ii) For taxable years of the recipient beginning before January 1, 1976, see subparagraph (3) of this paragraph.
(2)(i) This subparagraph is applicable to amounts, to the extent includible in gross income, received from a qualified trust described in section 401(a) or under a plan described in section 403(a) by or on behalf of an individual who is or has been an owner-employee with respect to such trust or plan—
(A) Which are received before the owner-employee reaches the age of 59 1/2 years, and which are attributable to contributions paid on behalf of such owner-employee by his employer (that is employer contributions within the meaning of section 401(c)(5)(A) and the increments in value attributable to such employer contributions) and the increments in value attributable to contributions made by him as an owner-employee while he was an owner-employee (that is, the increments attributable to owner-employee contributions within the meaning of section 401(c)(5)(B), but not such contributions; see subdivision (ii) of this subparagraph).
(B) Which are in excess of the benefits provided for such owner-employee under the plan formula (see subdivision (iii) of this subparagraph), or
(C) Which are subject to the transitional rules with respect to willful excess contributions made on behalf of an owner-employee in his employer's taxable years which begin before January 1, 1976 (see subdivision (v) of this subparagraph).
(ii) The amounts referred to in subdivision (i)(A) of this subparagraph do not include—
(A) Amounts received by reason of the owner-employee becoming disabled (see paragraph (f) of this section).
(B) Amounts received by the owner-employee in his capacity as a policyholder of an annuity, endowment, or life insurance contract which are in the nature of a dividend or similar distribution, or
(C) Amounts attributable to contributions (and increments in value thereon) made for years for which the recipient was not an owner-employee.
If an amount is not included in the amounts referred to in subdivision (i)(A) of this subparagraph solely by reason of the owner-employee's becoming disabled and if a penalty would otherwise be applicable with respect to all or a portion of such amount, then for the owner-employee's taxable year in which such amount is received, there must be submitted with his income tax return a doctor's statement as to the impairment, and a statement by the owner-employee with respect to the effect of such impairment upon his substantial gainful activity and the date such impairment occurred. For taxable years which are subsequent to the first taxable year with respect to which the statements referred to in the preceding sentence are submitted, the owner-employee may, in lieu of such statements, submit a statement declaring the continued existence (without substantial diminution) of the impairment and its continued effect upon his substantial gainful activity.
(iii) This subparagraph applies to amounts described in subdivision (i)(B) of this subparagraph (relating to benefits in excess of the plan formula) even though a portion of such amounts may be attributable to contributions made on behalf of an individual while he was not an owner-employee and even if he is deceased and the amounts are received by his successor.
(iv)(A) The rules described in subdivisions (i)(A) and (iii) of this subparagraph, relating to the treatment under section 72(m)(5)(A)(i) of certain premature distributions, may be illustrated by the following example:
Example. (1) A was a member of the X partnership, consisting of partners A through I, and a participant in the partnership's qualified profit-sharing plan which was established on January 1, 1972. A's taxable years, the X partnership's taxable years, the plan years, and other relevant years are all calendar years at all relevant times. For the three calendar years, 1972 through 1974, A was an owner-employee in the X partnership. On January 1, 1975, new partners J and K became partners in the X partnership, and as of that date, each of partners A through K held a 1/11 interest in the capital and profits of the X partnership. On that date, A became a partner who was not an owner-employee. A continued in this status for the 2 calendar years 1975 and 1976. On January 1, 1977, when A was 50 years old and not disabled, he liquidated his interest in the X partnership and became an employee of an unrelated employer. On that date, A received a distribution representing his entire interest in the X partnership's plan of $54,000 cash in violation of the plan provision required by section 401(d)(4)(B). As of that date, the distribution was attributable to the following sources and times, computed by the plan in a manner consistent with the subparagraph:
Calendar years | A | B | C | D
X contributions on behalf of A deductible under sec. 404 | A's contributions made as an employee | Increments in value attributable to column A yearly contributions | Increments in value attributable to column B yearly contributions
1977 | 0 | 0 | 0 | 0
1976 | $7,500 | $2,500 | $900 | $300
1975 | 7,500 | 2,500 | 4,000 | 1,300
1974 | 7,500 | 2,500 | 1,800 | 700
1973 | 2,500 | 2,500 | 1,200 | 1,200
1972 | 2,500 | 2,500 | 1,300 | 1,300
Totals | 27,500 | 12,500 | 9,200 | 4,800
(2) The amount of the $54,000 distribution to which subdivision (i)(A) of this subparagraph applies is $20,000, computed as follows:
X contributions on behalf of A made in years A was an owner-employee:
1974 | $7,500
1973 | 2,500
1972 | 2,500
Total | 12,500
Increments in value attributable to such contributions:
1974 | 1,800
1973 | 1,200
1972 | 1,300
Total | 4,300
Increments in value attributable to contributions made by A as an employee for years in which he was an owner-employee:
1974 | 700
1973 | 1,200
1972 | 1,300
Total | 3,200
Grand total | 20,000
In this example, the $20,000 amount computed above would be includible in A's gross income for 1977 and would be subject to the 10 percent tax described in subparagraph (1)(i) of this paragraph. (3) Subdivision (i)(A) of this subparagraph does not apply to the contributions made by X on behalf of A for 1976 and 1975 ($7,500 each year, totaling $15,000) nor to the increments in value attributable to those contributions ($900 for 1976 and $4,000 for 1975, totaling $4,900), because A was not an owner-employee with respect to these two years, 1976 and 1975, on account of which these employer contributions were made. For the same reason, subdivision (i)(A) of this subparagraph does not apply to the increments in value attributable to A's contributions for 1976 and 1975 ($300 and $1,300, respectively, totaling $1,600). See section 4972(c) for the amount of employee contributions which is permitted to be contributed by an owner-employee (as an employee) without subjecting an owner-employee to the tax on excess contributions. (4) Subdivision (i)(A) of this subparagraph does not apply to the contributions made by A, as an employee during the years when he was an owner-employee ($2,500 during each of the years 1972, 1973, and 1974, totaling $7,500), because the distribution was received in a taxable year of A ending after September 2, 1974; see subparagraph (3) of this paragraph. Furthermore, because the distribution of the amount of A's contributions ($12,500) constitutes consideration for the contract paid by A for purposes of section 72, the $7,500 amount described in the preceding sentence is not includible in his gross income, and that amount is not subject to the rules of this subparagraph; see subdivision (i) of this subparagraph, and paragraphs (b) and (c) of this section.
(B) The increments in value of an individual's account may be allocated to contributions on his behalf, by his employer or by such individual as an owner-employee, while he was an owner-employee either by maintaining a separate account, or an accounting, which reflects the actual increment attributable to such contributions, or by the method described in (C) of this subdivision.
(C) Where an individual is covered under the same plan both as an owner-employee and as a non-owner-employee, the portion of the increment in value of his interest attributable to contributions made on his behalf while he was an owner-employee may be determined by multiplying the total increment in value in his account by a fraction. The numerator of the fraction is the total contributions made on behalf of the individual as an owner-employee, weighted for the number of years that each contribution was in the plan. The denominator is the total contributions made on behalf of the individual, whether or not as an owner-employee, weighted for the number of years each contribution was in the plan. The contributions are weighted for the number of years in the plan by multiplying each contribution by the number of years it was in the plan. For purposes of this computation, any forfeiture allocated to the account of the individual is treated as a contribution to the account made at the time so allocated. For purposes of this computation, where the individual has received a prior distribution from such account, an appropriate adjustment must be made to reflect such prior distribution.
(D) The method described in (C) of this subdivision may be illustrated by the following example:
Example. B was a member of the XYZ Partnership and a participant in the partnership's profit-sharing plan which was created in 1973. Until the end of 1977, B's interest in the partnership was less than 10 percent. On January 1, 1978, B obtained an interest in excess of 10 percent in the partnership and continued to participate in the profit-sharing plan until 1982. During 1982, prior to the time he attained the age of 59 1/2 years and during a time when he was not disabled, B, who had not received any prior plan distributions, withdrew his entire interest in the profit-sharing plan. At the time his interest was $15,000, $9,600 contributions and $5,400 increment attributable to the contributions. The portion of the increment attributable to contributions while B was an owner-employee is $667.80, determined as follows:
A | B | C
Contribution | Number of years contribution was in trust | Contribution weighted for years in trust (A × B)
1982 | $1,000 | 0 | 0
1981 | 800 | 1 | 800
1980 | 1,200 | 2 | 2,400
1979 | 600 | 3 | 1,800
1978 | 200 | 4 | 800
1977 | 400 | 5 | 2,000
1976 | 2,000 | 6 | 12,000
1975 | 1,000 | 7 | 7,000
1974 | 1,500 | 8 | 12,000
1973 | 900 | 9 | 8,100
Total | 9,600 | 46,900
Total weighted contributions as owner-employee (1978-1982) = $5,800. Total weighted contributions = $46,900.
(E)(1) The rules set forth in subdivision (iv)(E)(2) of this subparagraph shall be used to determine the amounts to which subdivision (i)(A) of this subparagraph applies in the case of a distribution of less than the entire balance of the employee's account from a plan in which he has been covered at different times as owner-employee or as an employee other than an owner-employee.
(2) Distributions or payments from a plan for any employee taxable year shall be deemed to be attributable to contributions to the plan, and increments thereon, in the following order—
(i) Excess contributions, within the meaning of section 4972 (b), designated as such by the trustee;
(ii) Employee contributions;
(iii) Employer contributions, other than those described in (i), and the increments in value attributable to the employee's own contributions and his employer's contributions on the basis of the taxable years of his employer in succeeding order of time whether or not the employee was an owner-employee for any such year.
For purposes of (iii) of this subdivision, the time of contributions made on the basis of any employer taxable year shall take into account the rule specified in section 404(a)(6), relating to time when contributions deemed made.
(v) The amounts referred to in subdivision (i)(C) of this subparagraph are amounts which are received by reason of a distribution of the owner-employee's entire interest under the provisions of section 401(e)(2)(E), as in effect on September 1, 1974, relating to excess contributions on behalf of an owner-employee which are willfully made. Notwithstanding the preceding sentence, an owner-employee's entire interest in all plans with respect to which he is an owner-employee (within the meaning of subsections (d)(8)(C) and (e)(2)(E)(ii) of section 401, as in effect on September 1, 1974) does not include any distribution or payment attributable to his employer's contributions or his own contributions made with respect to his employer's taxable years beginning after December 31, 1975. However, his entire interest in all plans does include all of the distribution or payment attributable to his employer's contributions and his own contributions made with respect to all of his employer's taxable years beginning before January 1, 1976, if any portion thereof is attributable in whole or in part to such a willful excess contribution and such entire interest is received because of a willful excess contribution pursuant to section 401(e)(2)(E)(ii). A distribution or payment is described in the preceding sentence even though it is received in an owner-employee's taxable year beginning after December 31, 1975. For purposes of computing the increments in value attributable to employer taxable years which begin before January 1, 1976, and such increments attributable to such years beginning after December 31, 1975, the rules specified in subdivision (iv)(B), (C), (D), and (E) of this subparagraph shall be applied to the extent applicable.
(3)(i) For taxable years of the recipient beginning before January 1, 1976, the tax with respect to amounts to which subparagraph (2) of this paragraph applies shall be computed under subparagraphs (B), (C), (D), and (E) of section 72(m)(5) as such subparagraphs were in effect prior to the amendments made by subsections (g)(1) and (2)(A) of section 2001 of the Employee Retirement Income Security Act of 1974 (88 Stat. 957) except as provided in subdivisions (ii) and (iii) of this subparagraph (see paragraph (e) of § 1.72-17). For purposes of the preceding sentence, amounts to which subparagraph (2) of this paragraph applies in the case of an amount described in section 72(m)(5)(A)(i) shall be determined under subdivisions (i)(a) and (ii) of § 1.72-17(e)(1), except as provided in subdivision (ii) of this subparagraph. For purposes of the first sentence of this subdivision, amounts to which subparagraph (2) of this paragraph applies in the case of an amount described in section 72(m)(5)(A)(ii) shall be determined under subdivisions (i)(b) and (iii) of § 1.72-17(e)(1), except as provided in subdivision (iii) of this subparagraph.
(ii) For purposes of applying section 72(m)(5)(A)(i), after the amendment made by section 2001(h)(3) of such Act, and subdivisions (i)(a) and (ii) of § 1.72-17(e)(1), to a distribution or payment received in recipient taxable years ending after September 2, 1974, and beginning before January 1, 1976, with respect to contributions made on behalf of an owner-employee which were made by him as an owner-employee (that is, employee contributions within the meaning of section 401(c)(5)(B)) the portion of any distribution or payment attributable to such contributions shall not include such contributions but shall include the increments in value attributable to such contributions.
(iii) For purposes of applying section 72(m)(5)(D) and subdivisions (i)(b) and (iii) of § 1.72-17(e)(1) to recipient taxable years beginning after December 31, 1973, and beginning before January 1, 1976, in the case of distributions or payments made after December 31, 1973, the amounts to which section 402 (a)(2) or 403(a)(2) applies after the amendments made by section 2005(b) (1) and (2) of such Act (88 Stat. 990 and 991) (which are amounts to which subdivision (i)(b) of § 1.72-17(e)(1) does not apply) shall be deemed to be the amount which is treated as a gain from the sale or exchange of a capital asset held for more than 6 months under either of such sections.
(f) Meaning of disabled. (1) Section 72(m)(7) provides that an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. In determining whether an individual's impairment makes him unable to engage in any substantial gainful activity, primary consideration shall be given to the nature and severity of his impairment. Consideration shall also be given to other factors such as the individual's education, training, and work experience. The substantial gainful activity to which section 72(m)(7) refers is the activity, or a comparable activity, in which the individual customarily engaged prior to the arising of the disability or prior to retirement if the individual was retired at the time the disability arose.
(2) Whether or not the impairment in a particular case constitutes a disability is to be determined with reference to all the facts in the case. The following are examples of impairments which would ordinarily be considered as preventing substantial gainful activity:
(i) Loss of use of two limbs;
(ii) Certain progressive diseases which have resulted in the physical loss or atrophy of a limb, such as diabetes, multiple sclerosis, or Buerger's disease;
(iii) Diseases of the heart, lungs, or blood vessels which have resulted in major loss of heart or lung reserve as evidenced by X-ray, electrocardiogram, or other objective findings, so that despite medical treatment breathlessness, pain, or fatigue is produced on slight exertion, such as walking several blocks, using public transportation, or doing small chores;
(iv) Cancer which is inoperable and progressive;
(v) Damage to the brain or brain abnormality which has resulted in severe loss of judgment, intellect, orientation, or memory;
(vi) Mental diseases (e.g. psychosis or severe psychoneurosis) requiring continued institutionalization or constant supervision of the individual;
(vii) Loss or diminution of vision to the extent that the affected individual has a central visual acuity of no better than 20/200 in the better eye after best correction, or has a limitation in the fields of vision such that the widest diameter of the visual fields subtends an angle no greater than 20 degrees;
(viii) Permanent and total loss of speech;
(ix) Total deafness uncorrectible by a hearing aid.
The existence of one or more of the impairments described in this subparagraph (or of an impairment of greater severity) will not, however, in and of itself always permit a finding that an individual is disabled as defined in section 72(m)(7). Any impairment, whether of lesser or greater severity, must be evaluated in terms of whether it does in fact prevent the individual from engaging in his customary or any comparable substantial gainful activity.
(3) In order to meet the requirements of section 72(m)(7), an impairment must be expected either to continue for a long and indefinite period or to result in death. Ordinarily, a terminal illness because of disease or injury would result in disability. The term “indefinite” is used in the sense that it cannot reasonably be anticipated that the impairment will, in the foreseeable future, be so diminished as no longer to prevent substantial gainful activity. For example, an individual who suffers a bone fracture which prevents him from working for an extended period of time will not be considered disabled, if his recovery can be expected in the foreseeable future; if the fracture persistently fails to knit, the individual would ordinarily be considered disabled.
(4) An impairment which is remediable does not constitute a disability within the meaning of section 72(m)(7). An individual will not be deemed disabled if, with reasonable effort and safety to himself, the impairment can be diminished to the extent that the individual will not be prevented by the impairment from engaging in his customary or any comparable substantial gainful activity.
[T.D. 7636, 44 FR 47049, Aug. 10, 1979, as amended by T.D. 8894, 65 FR 46591, July 31, 2000; T.D.9849, 84 FR 9233, Mar. 14, 2019]
§ 1.72-18 Treatment of certain total distributions with respect to self-employed individuals.
(a) In general. The Self-Employed Individuals Tax Retirement Act of 1962 permits self-employed individuals to be treated as employees for purposes of participation in pension, profit-sharing, and annuity plans described in sections 401(a) and 403(a). In general, amounts received by a distributee or payee which are attributable to contributions made on behalf of a participant while he was self-employed are taxed in the same manner as amounts which are attributable to contributions made on behalf of a common-law employee. However, such amounts which are paid in one taxable year representing the total distributions payable to a distributee or payee with respect to an employee are not eligible for the capital gains treatment of section 402(a)(2) or 403(a)(2). This section sets forth the treatment of such distributions, except where such a distribution is subject to the penalties of section 72(m)(5) and paragraph (e) of § 1.72-17.
(b) Distributions to which this section applies. (1)(i) Except as provided in subparagraphs (2) and (3) of this paragraph, this section applies to amounts distributed to a distributee in one taxable year of the distributee in the case of an employees' trust described in section 401(a) which is exempt under section 501(a), or to amounts paid to a payee in one taxable year of the payee in the case of an annuity plan described in section 403(a), which constitute the total distributions payable, or the total amounts payable, to the distributee or payee with respect to an employee.
(ii) For the total distributions or amounts payable to a distributee or payee to be considered paid within one taxable year of the distributee or payee for purposes of this section, all amounts to the credit of the employee-participant through the end of such taxable year which are payable to the distributee or payee must be distributed or paid within such taxable year. Thus, the provisions of this section are not applicable to a distribution or payment to a distributee or payee if the trust or plan retains any amounts after the close of such taxable year which are payable to the same distributee or payee even though the amounts retained may be attributable to contributions on behalf of the employee-participant while he was a common-law employee in the business with respect to which the plan was established.
(iii) For purposes of this section, the total amounts payable to a distributee or the amounts to the credit of the employee do not include United States Retirement Plan Bonds held by a trust to the credit of the employee. Thus, a distribution to a distributee by a qualified trust may constitute a distribution to which this section applies even though the trust retains retirement plan bonds registered in the name of the employee on whose behalf the distribution is made which are to be distributed to the same distributee. Moreover, the proceeds of a retirement bond received as part of a distribution which constitutes the total distributions payable to the distributee are not entitled to the special tax treatment of this section.
(iv) If the amounts payable to a distributee from a qualified trust with respect to an employee-participant includes an annuity contract, such contract must be distributed along with all other amounts payable to the distributee in order to have a distribution to which this section applies. However, the proceeds of an annuity contract received in a total distribution will not be entitled to the tax treatment of this section unless the contract is surrendered in the taxable year of the distributee in which the total distribution was received.
(v) In the case of a qualified annuity plan, the term “total amounts” means all annuities payable to a payee. If more than one annuity contract is received under the plan by a distributee, this section shall not apply to an amount received on surrender of any such contracts unless all contracts under the plan payable to the payee are surrendered within one taxable year of the payee.
(vi)(a) The provisions of this section are applicable where the total amounts payable to a distributee or payee are paid within one taxable year of the distributee or payee whether or not a portion of the employee-participant's interest which is payable to another distributee or payee is paid within the same taxable year. However, a distributee or payee who, in prior taxable years received amounts (except amounts described in (b) of this subdivision) after the employee-participant ceases to be eligible for additional contributions to be made on his behalf, does not receive a distribution or payment to which this section applies, even though the total amount remaining to be paid to such distributee or payee with respect to such employee is paid within one taxable year. On the other hand, a distribution to a distributee or payee prior to the time that the employee-participant ceases to be eligible for additional contributions on his behalf does not preclude the application of this section to a later distribution to the same distributee or payee.
(b) The receipt of an amount which constitutes—
(1) A payment in the nature of a dividend or similar distribution to an individual in his capacity as a policyholder of an annuity, endowment, or life insurance contract, or
(2) A return of excess contributions which were not willfully made,
does not prevent the application of this section to a total distribution even though the amount is received after the employee-participant ceases to be eligible for additional contributions and in a taxable year other than the taxable year in which the total amount is received.
(vii) For purposes of this section, the total amounts payable to a distributee or payee, or the amounts to the credit of the employee, do not include any amounts which have been placed in a separate account for the funding of medical benefits described in section 401(h) as defined in paragraph (a) of § 1.401-14. Thus, a distribution by a qualified trust or annuity plan may constitute a distribution to which this section applies even though amounts attributable to the funding of section 401(h) medical benefits as defined in paragraph (a) of § 1.401-14 are not so distributed.
(2) This section shall apply—
(i) Only if the distribution or payment is made—
(a) On account of the employee's death at any time,
(b) After the employee has attained the age 59 1/2 years, or
(c) After the employee has become disabled; and
(ii) Only to so much of the distribution or payment as is attributable to contributions made on behalf of an employee while he was a self-employed individual in the business with respect to which the plan was established. Any distribution or payment, or any portion thereof, which is not so attributable shall be subject to the rules of taxation which apply to any distribution or payment that is attributable to contributions on behalf of common-law employees.
For taxable years beginning after December 31, 1966, see section 72(m)(7) and paragraph (f) of § 1.72-17 for the meaning of disabled. For taxable years beginning before January 1, 1967, see section 213(g)(3) for the meaning of disabled. For taxable years beginning after December 31, 1968, if this section is applicable by reason of the distribution or payment being made after the employee has become disabled, then for the taxable year in which the amounts to which this section applies are distributed or paid, there shall be submitted with the recipient's income tax return a doctor's statement as to the nature and effect of the employee's impairment.
(3) This section shall not apply to—
(i) Distributions or payments to which the penalty provisions of section 72(m)(5) and paragraph (e) of § 1.72-17 apply,
(ii) Distributions or payments from a trust or plan made to or on behalf of an individual prior to the time such individual ceases to be eligible for additional contributions (except the contribution attributable to the last year of service) to be made to the trust or plan on his behalf as a self-employed individual, and
(iii) Distributions or payments made to the employee from a plan or trust unless contributions which were allowed as a deduction under section 404 have been made on behalf of such employee as a self-employed individual under such trust or plan for 5 or more taxable years (whether or not consecutive) prior to the taxable year in which such distributions or payments are made. Distributions or payments to which this section does not apply by reason of this subdivision are taxed as otherwise provided in section 72. However, for taxable years beginning before January 1, 1964, section 72(e)(3), as in effect before such date, is not applicable. For taxable years beginning after December 31, 1963, such distributions or payments may be taken into account in computations under sections 1301 through 1305 (relating to income averaging).
(4) The portion of any distribution or payment attributable to contributions on behalf of an employee-participant while he was self-employed includes the contributions made on his behalf while he was self-employed and the increments in value attributable to such contributions. Where the amounts to the credit of an employee-participant include amounts attributable to contributions on his behalf while he was a self-employed individual and amounts attributable to contributions on his behalf while he was a common-law employee, the increment in value attributable to the employee-participant's interest shall be allocated to the contributions on his behalf while he was self-employed either by maintaining a separate account, or an accounting, which reflects the actual increment attributable to such contributions, or by the method described in paragraph (e)(1)(iv)(c) of § 1.72-17. However, if the latter method is used, the numerator of the fraction is the total contributions made on behalf of the individual as a self-employed individual, weighted for the number of years that each contribution was in the plan.
(c) Amounts includible in gross income. (1) Where a total distribution or payment to which this section applies is made to one distributee or payee and includes the total amount remaining to the credit of the employee-participant on whose behalf the distribution or payment was made, the distributee or payee shall include in gross income an amount equal to the portion of the distribution or payment which exceeds the employee-participant's investment in the contract. For purposes of this paragraph, the investment in the contract shall be reduced by any amounts previously received from the plan or trust by or on behalf of the employee-participant which were excludable from gross income as a return of the investment in the contract.
(2) In the case of a distribution to which this section applies and which is made to more than one distributee or payee, each element of the amounts to the credit of an employee-participant shall be allocated among the several distributees or payees on the basis of the ratio of the value of the distributee's or payee's distribution or payment to the total amount to the credit of the employee-participant. The elements to be so allocated include the investment in the contract, the increments in value, and the portion of the amounts to the credit of the employee-participant which is attributable to the contributions on behalf of the employee-participant while he was a self-employed individual.
(d) Computation of tax. (1) The tax attributable to the amounts to which this section applies for the taxable year in which such amounts are received is the greater of—
(i) 5 times the increase in tax which would result from the inclusion in gross income of the recipient of 20 percent of so much of the amount so received as is includible in gross income, or
(ii) 5 times the increase which would result if the taxable income of the recipient for such taxable year equaled 20 percent of the excess of the aggregate of the amounts so received and includible in gross income over the amount of the deductions allowed the recipient for such taxable year under section 151 (relating to deduction for personal exemptions).
In any case in which the application of subdivision (ii) of this subparagraph results in an increase in taxable income for any taxable year, the resulting increase in taxes imposed by section 1 or 3 for such taxable year shall be reduced by the credit against tax provided by section 31 (tax withheld on wages), but shall not be reduced by any other credits against tax.
(2) The application of the rules of this paragraph may be illustrated by the following example:
Example.B, a sole proprietor and a calendar-year basis taxpayer, established a qualified pension trust to which he made annual contributions for 10 years of 10 percent of his earned income. B withdrew his entire interest in the trust during 1973, for which year, without regard to the distribution, he had a net operating loss and is allowed under section 151 a deduction for one personal exemption. At the time of the withdrawal, B was 64 years old. The amount of the distribution that is includible in his gross income is $25,750. Because of B's net operating loss, the tax attributable to the distribution is determined under the rule of subparagraph (1)(ii) of this paragraph. For purposes of determining the tax attributable to the $25,750, B's taxable income for 1973 is treated, under subparagraph (1)(ii) of this paragraph, as being 20 percent of $25,000 ($25,750 minus $750, the amount of the deduction allowed for each personal exemption under section 151 for 1973). Thus, under subparagraph (1) of this paragraph, the tax attributable to the $25,750 would be 5 times the increase which would result if the taxable income of B for the taxable year he received such amount equaled $5,000. B has had no amounts withheld from wages and thus is not entitled to reduce the increase in taxes by the credit against tax provided in section 31 and may not reduce the increase in taxes by any other credits against tax.
[T.D. 6676, 28 FR 10138, Sept. 17, 1963, as amended by T.D. 6722, 29 FR 5070, Apr. 14, 1964, T.D. 6885, 31 FR 7800, June 2, 1966, T.D. 6985, 33 FR 19812, Dec. 27, 1968; T.D. 7114, 36 FR 9018, May 18, 1971; T.D. 9849, 84 FR 9233, Mar. 14, 2019]
§ 1.72(e)-1T Treatment of distributions where substantially all contributions are employee contributions (temporary).
Q-1: How did the Tax Reform Act (TRA) of 1984 change the law with regard to the treatment of non-annuity distributions (i.e., amounts distributed prior to the annuity starting date and not received as annuities) from a qualified plan that is treated as a single contract under section 72 and under which substantially all of the contributions are employee contributions?
A-1: (a) Prior to the amendment of section 72(e) by the TRA of 1984, non-annuity distributions from such a qualified plan generally were allocable, first, to nondeductible employee contributions and thus were not includible in gross income. After distributions equaled the balance of nondeductible employee contributions, further non-annuity distributions generally were includible in gross income.
(b) Pursuant to section 72(e)(7), as added by the TRA of 1984, non-annuity distributions from such a qualified plan that are allocable to investment in the plan after August 13, 1982 (as determined in accordance with section 72(e)(5)(B)), generally will be treated, first, as allocable to income and, second, as allocable to nondeductible employee contributions. Distributions allocable to income are includible in gross income. Distributions allocable to nondeductible employee contributions are not includible in gross income.
Q-2: To which qualified plans and contracts does section 72(e)(7) apply?
A-2: Section 72(e)(7) applies to any plan or contract under which substantially all of the contributions are employee contributions if—
(a) Such plan is described in section 401(a) and the related trust or trusts are exempt from tax under section 501(a); or
(b) Such contract is—
(1) Purchased by a trust described in (a) above,
(2) Purchased as part of a plan described in section 403(a), or
(3) Described in section 403(b).
Q-3: What is the definition of a qualified plan or contract under which substantially all of the contributions are employee contributions?
A-3: (a) A qualified plan or contract under which substantially all of the contributions are employee contributions is a plan or contract with respect to which 85 percent or more of the total contributions during the “representative period” are employee contributions. The “representative period” means the five-plan-year period preceding the plan year during which a distribution occurs. However, if less than 85 percent of the total contributions for all plan years during which the plan or contract is in existence prior to the plan year of distribution are employee contributions, then the plan or contract is not one with respect to which substantially all of the contributions are employee contributions.
(b) For purposes of the 85 percent test, contributions made to a predecessor plan or contract are aggregated with contributions made to the plan or contract to which the 85 percent test is being applied (the successor plan or contract). For purposes of the preceding sentence, a predecessor plan or contract is a plan or contract the terms of which are substantially the same as the successor plan or contract.
Q-4: What is the definition of employee contributions for purposes of section 72(e)(7)?
A-4: For purposes of section 72(e)(7), employee contributions are those amounts contributed by the employee and those amounts considered contributed by the employee under section 72(f). For example, amounts contributed to a section 401(k) qualified cash or deferred arrangement, pursuant to an employee's election to defer such amounts, are employer contributions to the extent that such amounts are not currently includible in gross income. In addition, deductible employee contributions under section 72(o) are disregarded in their entirety (i.e., treated as neither employee contributions nor employer contributions) in determining whether substantially all the contributions are employee contributions.
Q-5: How is the 85 percent test of section 72(e)(7) applied to a qualified plan or contract?
A-5: (a) Except as provided in paragraphs (b), (c), and (d), the 85 percent test is applied separately with respect to each contract under section 72.
(b) If a single qualified plan described in section 401(a) or section 403(a) comprises more than one contract under section 72, regardless of whether such plan includes multiple trusts or combinations of profit-sharing and pension features, these contracts are aggregated for purposes of applying the 85 percent test. Thus, if substantially all of the contributions under a qualified plan comprising two contracts under section 72 are employee contributions, section 72(e)(5)(D) shall not apply to non-annuity distributions under either of the contracts.
(c) With respect to the plans maintained by the Federal Government or by instrumentalities of the Federal Government, the 85 percent test shall be applied by aggregating all such plans. This aggregation rule applies only to those plans that are actively administered by the Federal Government or an instrumentality thereof. Thus, if a plan of the Federal Government is administered by a commercial financial institution, it would not be aggregated with other plans of the Federal Government and its instrumentalities for purposes of applying the 85 percent test.
(d) In the case of a contract described in section 403(b), the 85 percent test is applied separately to each such contract.
Q-6: Is a loan from a qualified plan or contract described in section 72(e)(7) treated as a distribution under section 72(e)(4)(A)?
A-6: Yes. Pursuant to section 72(e)(4)(A), if an employee receives, either directly or indirectly, any amount as a loan from a qualified plan or contract described in section 72(e)(7), such amount shall be treated as a distribution from the plan or contract of an amount not received as an annuity. Similarly, if an employee assigns or pledges, or agrees to assign or pledge, any portion of the value of any qualified plan or contract, such portion shall be treated as a distribution from the plan or contract of an amount not received as an annuity.
Q-7: Does the five percent penalty for premature distributions from annuity contracts, as described in section 72(q), apply to distributions from a qualified plan or contract described in section 72(e)(7)?
A-7: No.
Q-8: When is section 72(e)(7) effective?
A-8: Section 72(e)(7) is effective for amounts received or loans made on or after October 17, 1984. For purposes of this effective date provision, loan amounts outstanding on October 16, 1984, which are renegotiated, extended, renewed, or revised after that date generally are treated as loans made on the date of the renegotiation, etc.
[T.D. 8073, 51 FR 4314, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986]
§ 1.72(p)-1 Loans treated as distributions.
The questions and answers in this section provide guidance under section 72(p) pertaining to loans from qualified employer plans (including government plans and tax-sheltered annuities and employer plans that were formerly qualified). The examples included in the questions and answers in this section are based on the assumption that a bona fide loan is made to a participant from a qualified defined contribution plan pursuant to an enforceable agreement (in accordance with paragraph (b) of Q&A-3 of this section), with adequate security and with an interest rate and repayment terms that are commercially reasonable. (The particular interest rate used, which is solely for illustration, is 8.75 percent compounded annually.) In addition, unless the contrary is specified, it is assumed in the examples that the amount of the loan does not exceed 50 percent of the participant's nonforfeitable account balance, the participant has no other outstanding loan (and had no prior loan) from the plan or any other plan maintained by the participant's employer or any other person required to be aggregated with the employer under section 414(b), (c) or (m), and the loan is not excluded from section 72(p) as a loan made in the ordinary course of an investment program as described in Q&A-18 of this section. The regulations and examples in this section do not provide guidance on whether a loan from a plan would result in a prohibited transaction under section 4975 of the Internal Revenue Code or on whether a loan from a plan covered by title I of the Employee Retirement Income Security Act of 1974 (88 Stat. 829) (ERISA) would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. The questions and answers are as follows:
Q-1: In general, what does section 72(p) provide with respect to loans from a qualified employer plan?
A-1: (a) Loans. Under section 72(p), an amount received by a participant or beneficiary as a loan from a qualified employer plan is treated as having been received as a distribution from the plan (a deemed distribution), unless the loan satisfies the requirements of Q&A-3 of this section. For purposes of section 72(p) and this section, a loan made from a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered a loan made under a qualified employer plan.
(b) Pledges and assignments. Under section 72(p), if a participant or beneficiary assigns or pledges (or agrees to assign or pledge) any portion of his or her interest in a qualified employer plan as security for a loan, the portion of the individual's interest assigned or pledged (or subject to an agreement to assign or pledge) is treated as a loan from the plan to the individual, with the result that such portion is subject to the deemed distribution rule described in paragraph (a) of this Q&A-1. For purposes of section 72(p) and this section, any assignment or pledge of (or agreement to assign or to pledge) any portion of a participant's or beneficiary's interest in a contract that has been purchased under a qualified employer plan (including a contract that has been distributed to the participant or beneficiary) is considered an assignment or pledge of (or agreement to assign or pledge) an interest in a qualified employer plan. However, if all or a portion of a participant's or beneficiary's interest in a qualified employer plan is pledged or assigned as security for a loan from the plan to the participant or the beneficiary, only the amount of the loan received by the participant or the beneficiary, not the amount pledged or assigned, is treated as a loan.
Q-2: What is a qualified employer plan for purposes of section 72(p)?
A-2: For purposes of section 72(p) and this section, a qualified employer plan means—
(a) A plan described in section 401(a) which includes a trust exempt from tax under section 501(a);
(b) An annuity plan described in section 403(a);
(c) A plan under which amounts are contributed by an individual's employer for an annuity contract described in section 403(b);
(d) Any plan, whether or not qualified, established and maintained for its employees by the United States, by a State or political subdivision thereof, or by an agency or instrumentality of the United States, a State or a political subdivision of a State; or
(e) Any plan which was (or was determined to be) described in paragraph (a), (b), (c), or (d) of this Q&A-2.
Q-3: What requirements must be satisfied in order for a loan to a participant or beneficiary from a qualified employer plan not to be a deemed distribution?
A-3: (a) In general. A loan to a participant or beneficiary from a qualified employer plan will not be a deemed distribution to the participant or beneficiary if the loan satisfies the repayment term requirement of section 72(p)(2)(B), the level amortization requirement of section 72(p)(2)(C), and the enforceable agreement requirement of paragraph (b) of this Q&A-3, but only to the extent the loan satisfies the amount limitations of section 72(p)(2)(A).
(b) Enforceable agreement requirement. A loan does not satisfy the requirements of this paragraph unless the loan is evidenced by a legally enforceable agreement (which may include more than one document) and the terms of the agreement demonstrate compliance with the requirements of section 72(p)(2) and this section. Thus, the agreement must specify the amount and date of the loan and the repayment schedule. The agreement does not have to be signed if the agreement is enforceable under applicable law without being signed. The agreement must be set forth either—
(1) In a written paper document; or
(2) In a document that is delivered through an electronic medium under an electronic system that satisfies the requirements of § 1.401(a)-21 of this chapter.
Q-4: If a loan from a qualified employer plan to a participant or beneficiary fails to satisfy the requirements of Q&A-3 of this section, when does a deemed distribution occur?
A-4: (a) Deemed distribution. For purposes of section 72, a deemed distribution occurs at the first time that the requirements of Q&A-3 of this section are not satisfied, in form or in operation. This may occur at the time the loan is made or at a later date. If the terms of the loan do not require repayments that satisfy the repayment term requirement of section 72(p)(2)(B) or the level amortization requirement of section 72(p)(2)(C), or the loan is not evidenced by an enforceable agreement satisfying the requirements of paragraph (b) of Q&A-3 of this section, the entire amount of the loan is a deemed distribution under section 72(p) at the time the loan is made. If the loan satisfies the requirements of Q&A-3 of this section except that the amount loaned exceeds the limitations of section 72(p)(2)(A), the amount of the loan in excess of the applicable limitation is a deemed distribution under section 72(p) at the time the loan is made. If the loan initially satisfies the requirements of section 72(p)(2)(A), (B) and (C) and the enforceable agreement requirement of paragraph (b) of Q&A-3 of this section, but payments are not made in accordance with the terms applicable to the loan, a deemed distribution occurs as a result of the failure to make such payments. See Q&A-10 of this section regarding when such a deemed distribution occurs and the amount thereof and Q&A-11 of this section regarding the tax treatment of a deemed distribution.
(b) Examples. The following examples illustrate the rules in paragraph (a) of this Q&A-4 and are based upon the assumptions described in the introductory text of this section:
Example 1. (i) A participant has a nonforfeitable account balance of $200,000 and receives $70,000 as a loan repayable in level quarterly installments over five years.
(ii) Under section 72(p), the participant has a deemed distribution of $20,000 (the excess of $70,000 over $50,000) at the time of the loan, because the loan exceeds the $50,000 limit in section 72(p)(2)(A)(i). The remaining $50,000 is not a deemed distribution.
Example 2. (i) A participant with a nonforfeitable account balance of $30,000 borrows $20,000 as a loan repayable in level monthly installments over five years.
(ii) Because the amount of the loan is $5,000 more than 50% of the participant's nonforfeitable account balance, the participant has a deemed distribution of $5,000 at the time of the loan. The remaining $15,000 is not a deemed distribution. (Note also that, if the loan is secured solely by the participant's account balance, the loan may be a prohibited transaction under section 4975 because the loan may not satisfy 29 CFR 2550.408b-1(f)(2).)
Example 3. (i) The nonforfeitable account balance of a participant is $100,000 and a $50,000 loan is made to the participant repayable in level quarterly installments over seven years. The loan is not eligible for the section 72(p)(2)(B)(ii) exception for loans used to acquire certain dwelling units.
(ii) Because the repayment period exceeds the maximum five-year period in section 72(p)(2)(B)(i), the participant has a deemed distribution of $50,000 at the time the loan is made.
Example 4. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over five years in level monthly installments due at the end of each month. After making monthly payments through July 2003, the participant fails to make any of the payments due thereafter.
(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level monthly installments, the participant has a deemed distribution. See paragraph (c) of Q&A-10 of this section regarding when such a deemed distribution occurs and the amount thereof.
Q-5: What is a principal residence for purposes of the exception in section 72(p)(2)(B)(ii) from the requirement that a loan be repaid in five years?
A-5: Section 72(p)(2)(B)(ii) provides that the requirement in section 72(p)(2)(B)(i) that a plan loan be repaid within five years does not apply to a loan used to acquire a dwelling unit which will within a reasonable time be used as the principal residence of the participant (a principal residence plan loan). For this purpose, a principal residence has the same meaning as a principal residence under section 121.
Q-6: In order to satisfy the requirements for a principal residence plan loan, is a loan required to be secured by the dwelling unit that will within a reasonable time be used as the principal residence of the participant?
A-6: A loan is not required to be secured by the dwelling unit that will within a reasonable time be used as the participant's principal residence in order to satisfy the requirements for a principal residence plan loan.
Q-7: What tracing rules apply in determining whether a loan qualifies as a principal residence plan loan?
A-7: The tracing rules established under section 163(h)(3)(B) apply in determining whether a loan is treated as for the acquisition of a principal residence in order to qualify as a principal residence plan loan.
Q-8: Can a refinancing qualify as a principal residence plan loan?
A-8: (a) Refinancings. In general, no, a refinancing cannot qualify as a principal residence plan loan. However, a loan from a qualified employer plan used to repay a loan from a third party will qualify as a principal residence plan loan if the plan loan qualifies as a principal residence plan loan without regard to the loan from the third party.
(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-8 and is based upon the assumptions described in the introductory text of this section:
Example. (i) On July 1, 2003, a participant requests a $50,000 plan loan to be repaid in level monthly installments over 15 years. On August 1, 2003, the participant acquires a principal residence and pays a portion of the purchase price with a $50,000 bank loan. On September 1, 2003, the plan loans $50,000 to the participant, which the participant uses to pay the bank loan.
(ii) Because the plan loan satisfies the requirements to qualify as a principal residence plan loan (taking into account the tracing rules of section 163(h)(3)(B)), the plan loan qualifies for the exception in section 72(p)(2)(B)(ii).
Q-9: Does the level amortization requirement of section 72(p)(2)(C) apply when a participant is on a leave of absence without pay?
A-9: (a) Leave of absence. The level amortization requirement of section 72(p)(2)(C) does not apply for a period, not longer than one year (or such longer period as may apply under section 414(u) and paragraph (b) of this Q&A-9), that a participant is on a bona fide leave of absence, either without pay from the employer or at a rate of pay (after applicable employment tax withholdings) that is less than the amount of the installment payments required under the terms of the loan. However, the loan (including interest that accrues during the leave of absence) must be repaid by the latest permissible term of the loan and the amount of the installments due after the leave ends must not be less than the amount required under the terms of the original loan.
(b) Military service. In accordance with section 414(u)(4), if a plan suspends the obligation to repay a loan made to an employee from the plan for any part of a period during which the employee is performing service in the uniformed services (as defined in 38 U.S.C. chapter 43), whether or not qualified military service, such suspension shall not be taken into account for purposes of section 72(p) or this section. Thus, if a plan suspends loan repayments for any part of a period during which the employee is performing military service described in the preceding sentence, such suspension shall not cause the loan to be deemed distributed even if the suspension exceeds one year and even if the term of the loan is extended. However, the loan will not satisfy the repayment term requirement of section 72(p)(2)(B) and the level amortization requirement of section 72(p)(2)(C) unless loan repayments resume upon the completion of such period of military service and the loan is repaid thereafter by amortization in substantially level installments over a period that ends not later than the latest permissible term of the loan.
(c) Latest permissible term of a loan. For purposes of this Q&A-9, the latest permissible term of a loan is the latest date permitted under section 72(p)(2)(B) (i.e., five years from the date of the loan, assuming that the replacement loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans) plus any additional period of suspension permitted under paragraph (b) of this Q&A-9.
(d) Examples. The following examples illustrate the rules of this Q&A-9 and are based upon the assumptions described in the introductory text of this section:
Example 1. (i) On July 1, 2003, a participant with a nonforfeitable account balance of $80,000 borrows $40,000 to be repaid in level monthly installments of $825 each over 5 years. The loan is not a principal residence plan loan. The participant makes 9 monthly payments and commences an unpaid leave of absence that lasts for 12 months. The participant was not performing military service during this period. Thereafter, the participant resumes active employment and resumes making repayments on the loan until the loan is repaid. The amount of each monthly installment is increased to $1,130 in order to repay the loan by June 30, 2008.
(ii) Because the loan satisfies the requirements of section 72(p)(2), the participant does not have a deemed distribution. Alternatively, section 72(p)(2) would be satisfied if the participant continued the monthly installments of $825 after resuming active employment and on June 30, 2008 repaid the full balance remaining due.
Example 2. (i) The facts are the same as in Example 1, except the participant was on leave of absence performing service in the uniformed services (as defined in chapter 43 of title 38, United States Code) for two years and the rate of interest charged during this period of military service is reduced to 6 percent compounded annually under 50 App. section 526 (relating to the Soldiers' and Sailors' Civil Relief Act Amendments of 1942). After the military service ends on April 2, 2006, the participant resumes active employment on April 19, 2006, continues the monthly installments of $825 thereafter, and on June 30, 2010, repays the full balance remaining due ($6,487).
(ii) Because the loan satisfies the requirements of section 72(p)(2) and paragraph (b) of this Q&A-9, the participant does not have a deemed distribution. Alternatively, section 72(p)(2) would also be satisfied if the amount of each monthly installment after April 19, 2006, is increased to $930 in order to repay the loan by June 30, 2010 (without any balance remaining due then).
Q-10: If a participant fails to make the installment payments required under the terms of a loan that satisfied the requirements of Q&A-3 of this section when made, when does a deemed distribution occur and what is the amount of the deemed distribution?
A-10: (a) Timing of deemed distribution. Failure to make any installment payment when due in accordance with the terms of the loan violates section 72(p)(2)(C) and, accordingly, results in a deemed distribution at the time of such failure. However, the plan administrator may allow a cure period and section 72(p)(2)(C) will not be considered to have been violated if the installment payment is made not later than the end of the cure period, which period cannot continue beyond the last day of the calendar quarter following the calendar quarter in which the required installment payment was due.
(b) Amount of deemed distribution. If a loan satisfies Q&A-3 of this section when made, but there is a failure to pay the installment payments required under the terms of the loan (taking into account any cure period allowed under paragraph (a) of this Q&A-10), then the amount of the deemed distribution equals the entire outstanding balance of the loan (including accrued interest) at the time of such failure.
(c) Example. The following example illustrates the rules in paragraphs (a) and (b) of this Q&A-10 and is based upon the assumptions described in the introductory text of this section:
Example. (i) On August 1, 2002, a participant has a nonforfeitable account balance of $45,000 and borrows $20,000 from a plan to be repaid over 5 years in level monthly installments due at the end of each month. After making all monthly payments due through July 31, 2003, the participant fails to make the payment due on August 31, 2003 or any other monthly payments due thereafter. The plan administrator allows a three-month cure period.
(ii) As a result of the failure to satisfy the requirement that the loan be repaid in level installments pursuant to section 72(p)(2)(C), the participant has a deemed distribution on November 30, 2003, which is the last day of the three-month cure period for the August 31, 2003 installment. The amount of the deemed distribution is $17,157, which is the outstanding balance on the loan at November 30, 2003. Alternatively, if the plan administrator had allowed a cure period through the end of the next calendar quarter, there would be a deemed distribution on December 31, 2003 equal to $17,282, which is the outstanding balance of the loan at December 31, 2003.
Q-11: Does section 72 apply to a deemed distribution as if it were an actual distribution?
A-11: (a) Tax basis. If the employee's account includes after-tax contributions or other investment in the contract under section 72(e), section 72 applies to a deemed distribution as if it were an actual distribution, with the result that all or a portion of the deemed distribution may not be taxable.
(b) Section 72(t) and (m). Section 72(t) (which imposes a 10 percent tax on certain early distributions) and section 72(m)(5) (which imposes a separate 10 percent tax on certain amounts received by a 5-percent owner) apply to a deemed distribution under section 72(p) in the same manner as if the deemed distribution were an actual distribution.
Q-12: Is a deemed distribution under section 72(p) treated as an actual distribution for purposes of the qualification requirements of section 401, the distribution provisions of section 402, the distribution restrictions of section 401(k)(2)(B) or 403(b)(11), or the vesting requirements of § 1.411(a)-7(d)(5) (which affects the application of a graded vesting schedule in cases involving a prior distribution)?
A-12: No; thus, for example, if a participant in a money purchase plan who is an active employee has a deemed distribution under section 72(p), the plan will not be considered to have made an in-service distribution to the participant in violation of the qualification requirements applicable to money purchase plans. Similarly, the deemed distribution is not eligible to be rolled over to an eligible retirement plan and is not considered an impermissible distribution of an amount attributable to elective contributions in a section 401(k) plan. See also § 1.402(c)-2(c)(3) and § 1.401(k)-1(d)(5)(iii).
Q-13: How does a reduction (offset) of an account balance in order to repay a plan loan differ from a deemed distribution?
A-13: (a) Difference between deemed distribution and plan loan offset amount. (1) Loans to a participant from a qualified employer plan can give rise to two types of taxable distributions—
(i) A deemed distribution pursuant to section 72(p); and
(ii) A distribution of an offset amount.
(2) As described in Q&A-4 of this section, a deemed distribution occurs when the requirements of Q&A-3 of this section are not satisfied, either when the loan is made or at a later time. A deemed distribution is treated as a distribution to the participant or beneficiary only for certain tax purposes and is not a distribution of the accrued benefit. A distribution of a plan loan offset amount (as defined in § 1.402(c)-2(g)(3)(i)) occurs when, under the terms governing a plan loan, the accrued benefit of the participant or beneficiary is reduced (offset) in order to repay the loan (including the enforcement of the plan's security interest in the accrued benefit). A distribution of a plan loan offset amount could occur in a variety of circumstances, such as where the terms governing the plan loan require that, in the event of the participant's request for a distribution, a loan be repaid immediately or treated as in default.
(b) Plan loan offset. In the event of a plan loan offset, the amount of the account balance that is offset against the loan is an actual distribution for purposes of the Internal Revenue Code, not a deemed distribution under section 72(p). Accordingly, a plan may be prohibited from making such an offset under the provisions of section 401(a), 401(k)(2)(B) or 403(b)(11) prohibiting or limiting distributions to an active employee. See Example 6 in § 1.402(c)-2(g)(5)(vi). See also Q&A-19 of this section for rules regarding the treatment of a loan after a deemed distribution.
Q-14: How is the amount includible in income as a result of a deemed distribution under section 72(p) required to be reported?
A-14: The amount includible in income as a result of a deemed distribution under section 72(p) is required to be reported on Form 1099-R (or any other form prescribed by the Commissioner).
Q-15: What withholding rules apply to plan loans?
A-15: To the extent that a loan, when made, is a deemed distribution or an account balance is reduced (offset) to repay a loan, the amount includible in income is subject to withholding. If a deemed distribution of a loan or a loan repayment by benefit offset results in income at a date after the date the loan is made, withholding is required only if a transfer of cash or property (excluding employer securities) is made to the participant or beneficiary from the plan at the same time. See §§ 35.3405-1, f-4, and 31.3405(c)-1, Q&A-9 and Q&A-11, of this chapter for further guidance on withholding rules.
Q-16: If a loan fails to satisfy the requirements of Q&A-3 of this section and is a prohibited transaction under section 4975, is the deemed distribution of the loan under section 72(p) a correction of the prohibited transaction?
A-16: No, a deemed distribution is not a correction of a prohibited transaction under section 4975. See §§ 141.4975-13 and 53.4941(e)-1(c)(1) of this chapter for guidance concerning correction of a prohibited transaction.
Q-17: What are the income tax consequences if an amount is transferred from a qualified employer plan to a participant or beneficiary as a loan, but there is an express or tacit understanding that the loan will not be repaid?
A-17: If there is an express or tacit understanding that the loan will not be repaid or, for any reason, the transaction does not create a debtor-creditor relationship or is otherwise not a bona fide loan, then the amount transferred is treated as an actual distribution from the plan for purposes of the Internal Revenue Code, and is not treated as a loan or as a deemed distribution under section 72(p).
Q-18: If a qualified employer plan maintains a program to invest in residential mortgages, are loans made pursuant to the investment program subject to section 72(p)?
A-18: (a) Residential mortgage loans made by a plan in the ordinary course of an investment program are not subject to section 72(p) if the property acquired with the loans is the primary security for such loans and the amount loaned does not exceed the fair market value of the property. An investment program exists only if the plan has established, in advance of a specific investment under the program, that a certain percentage or amount of plan assets will be invested in residential mortgages available to persons purchasing the property who satisfy commercially customary financial criteria. A loan will not be considered as made under an investment program if—
(1) Any of the loans made under the program matures upon a participant's termination from employment;
(2) Any of the loans made under the program is an earmarked asset of a participant's or beneficiary's individual account in the plan; or
(3) The loans made under the program are made available only to participants or beneficiaries in the plan.
(b) Paragraph (a)(3) of this Q&A-18 shall not apply to a plan which, on December 20, 1995, and at all times thereafter, has had in effect a loan program under which, but for paragraph (a)(3) of this Q&A-18, the loans comply with the conditions of paragraph (a) of this Q&A-18 to constitute residential mortgage loans in the ordinary course of an investment program.
(c) No loan that benefits an officer, director, or owner of the employer maintaining the plan, or their beneficiaries, will be treated as made under an investment program.
(d) This section does not provide guidance on whether a residential mortgage loan made under a plan's investment program would result in a prohibited transaction under section 4975, or on whether such a loan made by a plan covered by title I of ERISA would be consistent with the fiduciary standards of ERISA or would result in a prohibited transaction under section 406 of ERISA. See 29 CFR 2550.408b-1.
Q-19: If there is a deemed distribution under section 72(p), is the interest that accrues thereafter on the amount of the deemed distribution an indirect loan for income tax purposes and what effect does the deemed distribution have on subsequent loans?
A-19: (a) General rule. Except as provided in paragraph (b) of this Q&A-19, a deemed distribution of a loan is treated as a distribution for purposes of section 72. Therefore, a loan that is deemed to be distributed under section 72(p) ceases to be an outstanding loan for purposes of section 72, and the interest that accrues thereafter under the plan on the amount deemed distributed is disregarded for purposes of applying section 72 to the participant or the beneficiary. Even though interest continues to accrue on the outstanding loan (and is taken into account for purposes of determining the tax treatment of any subsequent loan in accordance with paragraph (b) of this Q&A-19), this additional interest is not treated as an additional loan (and thus, does not result in an additional deemed distribution) for purposes of section 72(p). However, a loan that is deemed distributed under section 72(p) is not considered distributed for all purposes of the Internal Revenue Code. See Q&A-11 through Q&A-16 of this section.
(b) Effect on subsequent loans—(1) Application of section 72(p)(2)(A). A loan that is deemed distributed under section 72(p) (including interest accruing thereafter) and that has not been repaid (such as by a plan loan offset) is considered outstanding for purposes of applying section 72(p)(2)(A) to determine the maximum amount of any subsequent loan to the participant or beneficiary.
(2) Additional security for subsequent loans. If a loan is deemed distributed to a participant or beneficiary under section 72(p) and has not been repaid (such as by a plan loan offset), then no payment made thereafter to the participant or beneficiary is treated as a loan for purposes of section 72(p)(2) unless the loan otherwise satisfies section 72(p)(2) and this section and either of the following conditions is satisfied:
(i) There is an arrangement among the plan, the participant or beneficiary, and the employer, enforceable under applicable law, under which repayments will be made by payroll withholding. For this purpose, an arrangement will not fail to be enforceable merely because a party has the right to revoke the arrangement prospectively.
(ii) The plan receives adequate security from the participant or beneficiary that is in addition to the participant's or beneficiary's accrued benefit under the plan.
(3) Condition no longer satisfied. If, following a deemed distribution that has not been repaid, a payment is made to a participant or beneficiary that satisfies the conditions in paragraph (b)(2) of this Q&A-19 for treatment as a plan loan and, subsequently, before repayment of the second loan, the conditions in paragraph (b)(2) of this Q&A-19 are no longer satisfied with respect to the second loan (for example, if the loan recipient revokes consent to payroll withholding), the amount then outstanding on the second loan is treated as a deemed distribution under section 72(p).
Q-20: May a participant refinance an outstanding loan or have more than one loan outstanding from a plan?
A-20: (a) Refinancings and multiple loans—(1) General rule. A participant who has an outstanding loan that satisfies section 72(p)(2) and this section may refinance that loan or borrow additional amounts if, under the facts and circumstances, the loans collectively satisfy the amount limitations of section 72(p)(2)(A) and the prior loan and the additional loan each satisfy the requirements of section 72(p)(2)(B) and (C) and this section. For this purpose, a refinancing includes any situation in which one loan replaces another loan.
(2) Loans that repay a prior loan and have a later repayment date. For purposes of section 72(p)(2) and this section (including the amount limitations of section 72(p)(2)(A)), if a loan that satisfies section 72(p)(2) is replaced by a loan (a replacement loan) and the term of the replacement loan ends after the latest permissible term of the loan it replaces (the replaced loan), then the replacement loan and the replaced loan are both treated as outstanding on the date of the transaction. For purposes of the preceding sentence, the latest permissible term of the replaced loan is the latest date permitted under section 72(p)(2)(C) (i.e., five years from the original date of the replaced loan, assuming that the replaced loan does not qualify for the exception at section 72(p)(2)(B)(ii) for principal residence plan loans and that no additional period of suspension applied to the replaced loan under Q&A-9 (b) of this section). Thus, for example, if the term of the replacement loan ends after the latest permissible term of the replaced loan and the sum of the amount of the replacement loan plus the outstanding balance of all other loans on the date of the transaction, including the replaced loan, fails to satisfy the amount limitations of section 72(p)(2)(A), then the replacement loan results in a deemed distribution. This paragraph (a)(2) does not apply to a replacement loan if the terms of the replacement loan would satisfy section 72(p)(2) and this section determined as if the replacement loan consisted of two separate loans, the replaced loan (amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replaced loan) and, to the extent the amount of the replacement loan exceeds the amount of the replaced loan, a new loan that is also amortized in substantially level payments over a period ending not later than the last day of the latest permissible term of the replacement loan.
(b) Examples. The following examples illustrate the rules of this Q&A-20 and are based on the assumptions described in the introductory text of this section:
Example 1. (i) A participant with a vested account balance that exceeds $100,000 borrows $40,000 from a plan on January 1, 2005, to be repaid in 20 quarterly installments of $2,491 each. Thus, the term of the loan ends on December 31, 2009. On January 1, 2006, when the outstanding balance on the loan is $33,322, the loan is refinanced and is replaced by a new $40,000 loan from the plan to be repaid in 20 quarterly installments. Under the terms of the refinanced loan, the loan is to be repaid in level quarterly installments (of $2,491 each) over the next 20 quarters. Thus, the term of the new loan ends on December 31, 2010.
(ii) Under section 72(p)(2)(A), the amount of the new loan, when added to the outstanding balance of all other loans from the plan, must not exceed $50,000 reduced by the excess of the highest outstanding balance of loans from the plan during the 1-year period ending on December 31, 2005, over the outstanding balance of loans from the plan on January 1, 2006, with such outstanding balance to be determined immediately prior to the new $40,000 loan. Because the term of the new loan ends later than the term of the loan it replaces, under paragraph (a)(2) of this Q&A-20, both the new loan and the loan it replaces must be taken into account for purposes of applying section 72(p)(2), including the amount limitations in section 72(p)(2)(A). The amount of the new loan is $40,000, the outstanding balance on January 1, 2006, of the loan it replaces is $33,322, and the highest outstanding balance of loans from the plan during 2005 was $40,000. Accordingly, under section 72(p)(2)(A), the sum of the new loan and the outstanding balance on January 1, 2006, of the loan it replaces must not exceed $50,000 reduced by $6,678 (the excess of the $40,000 maximum outstanding loan balance during 2005 over the $33,322 outstanding balance on January 1, 2006, determined immediately prior to the new loan) and, thus, must not exceed $43,322. The sum of the new loan ($40,000) and the outstanding balance on January 1, 2006, of the loan it replaces ($33,322) is $73,322. Since $73,322 exceeds the $43,322 limit under section 72(p)(2)(A) by $30,000, there is a deemed distribution of $30,000 on January 1, 2006.
(iii) However, no deemed distribution would occur if, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan were equal to $2,907, which is the sum of the $2,491 originally scheduled quarterly installment payment amount under the first loan, plus $416 (which is the amount required to repay, in level quarterly installments over 5 years beginning on January 1, 2006, the excess of the refinanced loan over the January 1, 2006, balance of the first loan ($40,000 minus $33,322 equals $6,678)), and the amount of the 4 remaining installments was equal to $416. The refinancing would not be subject to paragraph (a)(2) of this Q&A-20 because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan) and the other of which is in the additional amount ($6,678) borrowed under the new loan. Similarly, the transaction also would not result in a deemed distribution (and would not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the refinanced loan provided for repayments to be made in level quarterly installments (of $2,990 each) over the next 16 quarters.
Example 2. (i) The facts are the same as in Example 1(i), except that the applicable interest rate used by the plan when the loan is refinanced is significantly lower due to a reduction in market rates of interest and, under the terms of the refinanced loan, the amount of the first 16 installments on the refinanced loan is equal to $2,848 and the amount of the next 4 installments on the refinanced loan is equal to $406. The $2,848 amount is the sum of $2,442 to repay the first loan by December 31, 2009 (the term of the first loan), plus $406 (which is the amount to repay, in level quarterly installments over 5 years beginning on January 1, 2006, the $6,678 excess of the refinanced loan over the January 1, 2006, balance of the first loan).
(ii) The transaction does not result in a deemed distribution (and is not subject to paragraph (a)(2) of this Q&A-20) because the terms of the new loan would satisfy section 72(p)(2) and this section (including the substantially level amortization requirements of section 72(p)(2)(B) and (C)) determined as if the new loan consisted of 2 loans, one of which is in the amount of the first loan ($33,322) and is amortized in substantially level payments over a period ending December 31, 2009 (the last day of the term of the first loan), and the other of which is in the additional amount ($6,678) borrowed under the new loan. The transaction would also not result in a deemed distribution (and not be subject to paragraph (a)(2) of this Q&A-20) if the terms of the new loan provided for repayments to be made in level quarterly installments (of $2,931 each) over the next 16 quarters.
Q-21: Is a participant's tax basis under the plan increased if the participant repays the loan after a deemed distribution?
A-21: (a) Repayments after deemed distribution. Yes, if the participant or beneficiary repays the loan after a deemed distribution of the loan under section 72(p), then, for purposes of section 72(e), the participant's or beneficiary's investment in the contract (tax basis) under the plan increases by the amount of the cash repayments that the participant or beneficiary makes on the loan after the deemed distribution. However, loan repayments are not treated as after-tax contributions for other purposes, including sections 401(m) and 415(c)(2)(B).
(b) Example. The following example illustrates the rules in paragraph (a) of this Q&A-21 and is based on the assumptions described in the introductory text of this section:
Example. (i) A participant receives a $20,000 loan on January 1, 2003, to be repaid in 20 quarterly installments of $1,245 each. On December 31, 2003, the outstanding loan balance ($19,179) is deemed distributed as a result of a failure to make quarterly installment payments that were due on September 30, 2003 and December 31, 2003. On June 30, 2004, the participant repays $5,147 (which is the sum of the three installment payments that were due on September 30, 2003, December 31, 2003, and March 31, 2004, with interest thereon to June 30, 2004, plus the installment payment due on June 30, 2004). Thereafter, the participant resumes making the installment payments of $1,245 from September 30, 2004 through December 31, 2007. The loan repayments made after December 31, 2003 through December 31, 2007 total $22,577.
(ii) Because the participant repaid $22,577 after the deemed distribution that occurred on December 31, 2003, the participant has investment in the contract (tax basis) equal to $22,577 (14 payments of $1,245 each plus a single payment of $5,147) as of December 31, 2007.
Q-22: When is the effective date of section 72(p) and the regulations in this section?
A-22: (a) Statutory effective date. Section 72(p) generally applies to assignments, pledges, and loans made after August 13, 1982.
(b) Regulatory effective date. This section applies to assignments, pledges, and loans made on or after January 1, 2002.
(c) Loans made before the regulatory effective date—(1) General rule. A plan is permitted to apply Q&A-19 and Q&A-21 of this section to a loan made before the regulatory effective date in paragraph (b) of this Q&A-22 (and after the statutory effective date in paragraph (a) of this Q&A-22) if there has not been any deemed distribution of the loan before the transition date or if the conditions of paragraph (c)(2) of this Q&A-22 are satisfied with respect to the loan.
(2) Consistency transition rule for certain loans deemed distributed before the regulatory effective date. (i) The rules in this paragraph (c)(2) of this Q&A-22 apply to a loan made before the regulatory effective date in paragraph (b) of this Q&A-22 (and after the statutory effective date in paragraph (a) of this Q&A-22) if there has been any deemed distribution of the loan before the transition date.
(ii) The plan is permitted to apply Q&A-19 and Q&A-21 of this section to the loan beginning on any January 1, but only if the plan reported, in Box 1 of Form 1099-R, for a taxable year no later than the latest taxable year that would be permitted under this section (if this section had been in effect for all loans made after the statutory effective date in paragraph (a) of this Q&A-22), a gross distribution of an amount at least equal to the initial default amount. For purposes of this section, the initial default amount is the amount that would be reported as a gross distribution under Q&A-4 and Q&A-10 of this section and the transition date is the January 1 on which a plan begins applying Q&A-19 and Q&A-21 of this section to a loan.
(iii) If a plan applies Q&A-19 and Q&A-21 of this section to such a loan, then the plan, in its reporting and withholding on or after the transition date, must not attribute investment in the contract (tax basis) to the participant or beneficiary based upon the initial default amount.
(iv) This paragraph (c)(2)(iv) of this Q&A-22 applies if—
(A) The plan attributed investment in the contract (tax basis) to the participant or beneficiary based on the deemed distribution of the loan;
(B) The plan subsequently made an actual distribution to the participant or beneficiary before the transition date; and
(C) Immediately before the transition date, the initial default amount (or, if less, the amount of the investment in the contract so attributed) exceeds the participant's or beneficiary's investment in the contract (tax basis). If this paragraph (c)(2)(iv) of this Q&A-22 applies, the plan must treat the excess (the loan transition amount) as a loan amount that remains outstanding and must include the excess in the participant's or beneficiary's income at the time of the first actual distribution made on or after the transition date.
(3) Examples. The rules in paragraph (c)(2) of this Q&A-22 are illustrated by the following examples, which are based on the assumptions described in the introductory text of this section (and, except as specifically provided in the examples, also assume that no distributions are made to the participant and that the participant has no investment in the contract with respect to the plan). Example 1, Example 2, and Example 4 of this paragraph (c)(3) of this Q&A-22 illustrate the application of the rules in paragraph (c)(2) of this Q&A-22 to a plan that, before the transition date, did not treat interest accruing after the initial deemed distribution as resulting in additional deemed distributions under section 72(p). Example 3 of this paragraph (c)(3) of this Q&A-22 illustrates the application of the rules in paragraph (c)(2) of this Q&A-22 to a plan that, before the transition date, treated interest accruing after the initial deemed distribution as resulting in additional deemed distributions under section 72(p). The examples are as follows:
Example 1. (i) In 1998, when a participant's account balance under a plan is $50,000, the participant receives a loan from the plan. The participant makes the required repayments until 1999 when there is a deemed distribution of $20,000 as a result of a failure to repay the loan. For 1999, as a result of the deemed distribution, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $20,000 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and, in Box 2 of Form 1099-R, a taxable amount of $20,000. The plan then records an increase in the participant's tax basis for the same amount ($20,000). Thereafter, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution is $20,000 and the plan's records show that the participant's tax basis is the same amount ($20,000). As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is zero. Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 1/2 in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of $60,000 in Box 1 of Form 1099-R and a taxable amount of $60,000 in Box 2 of Form 1099-R.
Example 2. (i) The facts are the same as in Example 1, except that in 1999, immediately prior to the deemed distribution, the participant's account balance under the plan totals $50,000 and the participant's tax basis is $10,000. For 1999, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $20,000 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and reports, in Box 2 of Form 1099-R, a taxable amount of $16,000 (the $20,000 deemed distribution minus $4,000 of tax basis ($10,000 times ($20,000/$50,000)) allocated to the deemed distribution). The plan then records an increase in tax basis equal to the $20,000 deemed distribution, so that the participant's remaining tax basis as of December 31, 1999, totals $26,000 ($10,000 minus $4,000 plus $20,000). Thereafter, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution is $16,000 and the plan's records show that the participant's tax basis is $26,000. As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is $6,000. Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 1/2 in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of $60,000 in Box 1 of Form 1099-R and a taxable amount of $54,000 in Box 2 of Form 1099-R.
Example 3. (i) In 1993, when a participant's account balance in a plan is $100,000, the participant receives a loan of $50,000 from the plan. The participant makes the required loan repayments until 1995 when there is a deemed distribution of $28,919 as a result of a failure to repay the loan. For 1995, as a result of the deemed distribution, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $28,919 (which is the initial default amount in accordance with paragraph (c)(2)(ii) of this Q&A-22) and, in Box 2 of Form 1099-R, a taxable amount of $28,919. For 1995, the plan also records an increase in the participant's tax basis for the same amount ($28,919). Each year thereafter through 2001, the plan reports a gross distribution equal to the interest accruing that year on the loan balance, reports a taxable amount equal to the interest accruing that year on the loan balance reduced by the participant's tax basis allocated to the gross distribution, and records a net increase in the participant's tax basis equal to that taxable amount. As of December 31, 2001, the taxable amount reported by the plan as a result of the loan totals $44,329 and the plan's records for purposes of section 72 show that the participant's tax basis totals the same amount ($44,329). As of January 1, 2002, the plan decides to apply Q&A-19 of this section. Accordingly, it reduces the participant's tax basis by the initial default amount of $28,919, so that the participant's remaining tax basis in the plan is $15,410 ($44,329 minus $28,919). Thereafter, the amount of the outstanding loan is not treated as part of the account balance for purposes of section 72. The participant attains age 59 1/2 in the year 2003 and receives a distribution of the full account balance under the plan consisting of $180,000 in cash and the loan receivable equal to the $28,919 outstanding loan amount in 1995 plus interest accrued thereafter to the payment date in 2003. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $180,000 in cash.
(ii) For the year 2003, the plan must report a gross distribution of $180,000 in Box 1 of Form 1099-R and a taxable amount of $164,590 in Box 2 of Form 1099-R ($180,000 minus the remaining tax basis of $15,410).
Example 4. (i) The facts are the same as in Example 1, except that in 2000, after the deemed distribution, the participant receives a $10,000 hardship distribution. At the time of the hardship distribution, the participant's account balance under the plan totals $50,000. For 2000, the plan reports, in Box 1 of Form 1099-R, a gross distribution of $10,000 and, in Box 2 of Form 1099-R, a taxable amount of $6,000 (the $10,000 actual distribution minus $4,000 of tax basis ($10,000 times ($20,000/$50,000)) allocated to this actual distribution). The plan then records a decrease in tax basis equal to $4,000, so that the participant's remaining tax basis as of December 31, 2000, totals $16,000 ($20,000 minus $4,000). After 1999, the plan disregards, for purposes of section 72, the interest that accrues on the loan after the 1999 deemed distribution. Thus, as of December 31, 2001, the total taxable amount reported by the plan as a result of the deemed distribution plus the 2000 actual distribution is $26,000 and the plan's records show that the participant's tax basis is $16,000. As of January 1, 2002, the plan decides to apply Q&A-19 of this section to the loan. Accordingly, it reduces the participant's tax basis by the initial default amount of $20,000, so that the participant's remaining tax basis in the plan is reduced from $16,000 to zero. However, because the $20,000 initial default amount exceeds $16,000, the plan records a loan transition amount of $4,000 ($20,000 minus $16,000). Thereafter, the amount of the outstanding loan, other than the $4,000 loan transition amount, is not treated as part of the account balance for purposes of section 72. The participant attains age 59 1/2 in the year 2003 and receives a distribution of the full account balance under the plan consisting of $60,000 in cash and the loan receivable. At that time, the plan's records reflect an offset of the loan amount against the loan receivable in the participant's account and a distribution of $60,000 in cash.
(ii) In accordance with paragraph (c)(2)(iv) of this Q&A-22, the plan must report in Box 1 of Form 1099-R a gross distribution of $64,000 and in Box 2 of Form 1099-R a taxable amount for the participant for the year 2003 equal to $64,000 (the sum of the $60,000 paid in the year 2003 plus $4,000 as the loan transition amount).
(d) Effective date for Q&A-19(b)(2) and Q&A-20. Q&A-19(b)(2) and Q&A-20 of this section apply to assignments, pledges, and loans made on or after January 1, 2004.
[T.D. 8894, 65 FR 46591, July 31, 2000, as amended by T.D. 9021, 67 FR 71824, Dec. 3, 2002; 68 FR 9532, 9535, Feb. 28, 2003; T.D. 9169, 69 FR 78153, Dec. 29, 2004; T.D. 9294, 71 FR 61883, Oct. 20, 2006; T.D. 10001, 89 FR 58906, July 19, 2024]
§ 1.73-1 Services of child.
(a) Compensation for personal services of a child shall, regardless of the provisions of State law relating to who is entitled to the earnings of the child, and regardless of whether the income is in fact received by the child, be deemed to be the gross income of the child and not the gross income of the parent of the child. Such compensation, therefore, shall be included in the gross income of the child and shall be reflected in the return rendered by or for such child. The income of a minor child is not required to be included in the gross income of the parent for income tax purposes. For requirements for making the return by such child, or for such child by his guardian, or other person charged with the care of his person or property, see section 6012.
(b) In the determination of taxable income or adjusted gross income, as the case may be, all expenditures made by the parent or the child attributable to amounts which are includible in the gross income of the child and not of the parent solely by reason of section 73 are deemed to have been paid or incurred by the child. In such determination, the child is entitled to take deductions not only for expenditures made on his behalf by his parent which would be commonly considered as business expenses, but also for other expenditures such as charitable contributions made by the parent in the name of the child and out of the child's earnings.
(c) For purposes of section 73, the term “parent” includes any individual who is entitled to the services of the child by reason of having parental rights and duties in respect of the child. See section 6201(c) and the regulations in Part 301 of this chapter (Procedure and Administration) for assessment of tax against the parent in certain cases.
§ 1.74-1 Prizes and awards.
(a) Inclusion in gross income. (1) Section 74(a) requires the inclusion in gross income of all amounts received as prizes and awards, unless such prizes or awards qualify as an exclusion from gross income under subsection (b), or unless such prize or award is a scholarship or fellowship grant excluded from gross income by section 117. Prizes and awards which are includible in gross income include (but are not limited to) amounts received from radio and television giveaway shows, door prizes, and awards in contests of all types, as well as any prizes and awards from an employer to an employee in recognition of some achievement in connection with his employment.
(2) If the prize or award is not made in money but is made in goods or services, the fair market value of the goods or services is the amount to be included in income.
(b) Exclusion from gross income. Section 74(b) provides an exclusion from gross income of any amount received as a prize or award, if (1) such prize or award was made primarily in recognition of past achievements of the recipient in religious, charitable, scientific, educational, artistic, literary, or civic fields; (2) the recipient was selected without any action on his part to enter the contest or proceedings; and (3) the recipient is not required to render substantial future services as a condition to receiving the prize or award. Thus, such awards as the Nobel prize and the Pulitzer prize would qualify for the exclusion. Section 74(b) does not exclude prizes or awards from an employer to an employee in recognition of some achievement in connection with his employment.
(c) Scholarships and fellowship grants. See section 117 and the regulations thereunder for provisions relating to scholarships and fellowship grants.
§ 1.75-1 Treatment of bond premiums in case of dealers in tax-exempt securities.
(a) In general. (1) Section 75 requires certain adjustments to be made by dealers in securities with respect to premiums paid on municipal bonds which are held for sale to customers in the ordinary course of the trade or business. The adjustments depend upon the method of accounting used by the taxpayer in computing the gross income from the trade or business. See paragraphs (b) and (c) of this section.
(2) The term “municipal bond” under section 75 means any obligation issued by a government or political subdivision thereof if the interest on the obligation is excludable from gross income under section 103. However, such term does not include an obligation—
(i) If the earliest maturity or call date of the obligation is more than 5 years from the date of acquisition by the taxpayer or the obligation is sold or otherwise disposed of by the taxpayer within 30 days after the date of acquisition by him, and
(ii) If, in case of an obligation acquired after December 31, 1957, the amount realized upon its sale (or, in the case of any other disposition, its fair market value at the time of disposition) is higher than its adjusted basis.
For purposes of this subparagraph, the amount realized on the sale of the obligation, or the fair market value of the obligation, shall not include any amount attributable to interest, and the adjusted basis shall be computed without regard to any adjustment for amortization of bond premium required under section 75 and section 1016(a)(6). For purposes of determining whether the obligation is sold or otherwise disposed of by the taxpayer within 30 days after the date of its acquisition by him, it is immaterial whether or not such 30-day period is entirely within one taxable year.
(3) The term “cost of securities sold” means the amount ascertained by subtracting the inventory value of the closing inventory of a taxable year from the sum of the inventory value of the opening inventory for such year and the cost of securities and other property purchased during such year which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.
(b) Inventories not valued at cost. (1) In the case of a dealer in securities who computes gross income from his trade or business by the use of inventories and values such inventories on any basis other than cost, the adjustment required by section 75 is, except as provided in subparagraph (2) of this paragraph, the reduction of “cost of securities sold” by the amount equal to the amortizable bond premium which would be disallowed as a deduction under section 171(a)(2) with respect to the municipal bond if the dealer were an ordinary investor holding such bond. Such amortizable bond premium is computed under section 171(b) by reference to the cost or other original basis of the bond on the date of acquisition (determined without regard to section 1013, relating to inventory value on a subsequent date).
(2) With respect to an obligation acquired after December 31, 1957, which has as its earliest maturity or call date a date more than five years from the date on which it was acquired by the taxpayer, the following rules shall apply:
(i) If the taxpayer holds the obligation at the end of the taxable year, he is not required by section 75 to reduce the “cost of securities sold” for such year with respect to the obligation.
(ii) If the taxpayer sells or otherwise disposes of the obligation during the taxable year, he shall reduce the “cost of securities sold” for the taxable year of the sale or disposition unless he sold the obligation for more than its adjusted basis or otherwise disposed of it when its fair market value was more than its adjusted basis. For purposes of determining whether or not the taxpayer sold the obligation for more than its adjusted basis, or otherwise disposed of it when its fair market value was more than its adjusted basis, the amount realized on the sale of the obligation, or the fair market value of the obligation, shall not include any amount attributable to interest, and the adjusted basis shall be computed without regard to any adjustment for amortization of bond premium required under sections 75 and 1016(a)(6). The amount of the reduction referred to in the first sentence of this subdivision is the total amount by which the adjusted basis of the obligation would be required to be reduced under section 1016(a)(5) were the obligation subject to the amortizable bond premium provisions of section 171; that is, the amount of the amortizable bond premium attributable to the period during which the obligation was held which would be disallowed as a deduction under section 171(a)(2) if the taxpayer were an ordinary investor.
(3) This paragraph may be illustrated by the following examples:
Example 1. X, a dealer in securities who values his inventories on a basis other than cost, makes his income tax returns on the calendar year basis. On July 1, 1954, he bought, for $1,060 each, three municipal bonds (A, B, an C) having a face obligation of $1,000, and maturing on July 1, 1959. Bond A is sold on December 31, 1954, bond B is sold on December 31, 1955, and bond C is sold on June 30, 1956. For each bond the amortizable bond premium to maturity is $60, the period from date of acquisition to maturity is 60 months, and the amortizable bond premium per month is $1. The adjustment for each of the years 1954, 1955, and 1956 is as follows:
Bond | Date acquired | Date sold | Adjustment to “cost of securities sold” for—
1954 | 1955 | 1956
A | July 1, 1954 | Dec. 31, 1954 | $6
B | July 1, 1954 | Dec. 31, 1955 | 6 | $12
C | July 1, 1954 | Jun. 30, 1956 | 6 | 12 | $6
Total | 18 | 24 | 6
Example 2. Y is a dealer in securities who values his inventories on a basis other than cost. He makes his income tax returns on the calendar year basis. On January 1, 1958, Y bought five bonds (D, E, F, G, and H) issued by various municipalities. Each bond has a face obligation of $1,000 and was purchased for $1,060. The interest on each is excludable from gross income under section 103. Bonds D, E, and F mature on December 31, 1962, and bonds G and H mature on December 31, 1967. The amortizable bond premium per month is $1 with respect to bonds D, E, and F, and is $.50 with respect to bonds G and H. The following table indicates the reduction in “cost of securities sold” which Y should make for the years shown, assuming that he sells the bonds on the dates and for the prices set forth:
Bond | Date sold | Sale price | Adjustment to “cost of securities sold” for—
1958 | 1959 | 1960
D | Feb. 1, 1959 | $1,090 | $12 | $1
E | Jan. 30, 1958 | 1,100 | None
F | Jan. 30, 1958 | 1,000 | 1
G | Dec. 31, 1960 | 1,065 | None | None | None
H | Dec. 31, 1960 | 1,050 | None | None | $18
Total | 13 | 1 | 18
An adjustment to “cost of securities sold” must be made with respect to bond D (even though it was ultimately sold at a gain) because the bond neither had an earliest maturity or call date of more than 5 years from the date on which Y acquired it, nor was it disposed of within 30 days after such date. An adjustment must be made for the years 1958 and 1959 since section 75(a)(1) requires that an adjustment be made with respect to such a bond at the close of each taxable year in which it is held. On the other hand, since bonds E, F, G, and H either were disposed of within 30 days after the date of such acquisition or had an earliest maturity or call date more than 5 years from the date of acquisition, and were acquired after December 31, 1957, it is necessary to determine whether Y disposed of them at a loss so as to require an adjustment under section 75. No adjustment is necessary with respect to bonds E and G because they were sold at a gain. An adjustment to “cost of securities sold” is required with respect to bonds F and H because they were sold at a loss. As in the case of bond D, an adjustment with respect to bond F is made in 1958 in accordance with section 75(a)(1); however, the adjustment with respect to bond H is made entirely in 1960, the taxable year in which Y sold that bond, in accordance with the last sentence of section 75(a). If Y had acquired bonds before January 1, 1958, it would be unnecessary to determine whether they were disposed of at a loss since that factor is significant only with respect to bonds acquired on or after that date.
(c) Inventories not used or inventories valued at cost. (1) In the case of a dealer in securities who computes gross income from his trade or business without the use of inventories or by use of inventories valued at cost, the adjustment required by section 75 is a reduction of the adjusted basis of each municipal bond sold or otherwise disposed of during the taxable year. The amount of such reduction is the total amount by which the adjusted basis of the bond would be required to be reduced under section 1016(a)(5) were the bond subject to the amortizable bond premium provisions of section 171; that is, the amount of the amortizable bond premium attributable to the period during which the bond was held which would be disallowed as a deduction under section 171(a)(2) if the taxpayer were an ordinary investor.
(2) Subparagraph (1) of this paragraph may be illustrated by the following example:
Example. Z, a dealer in securities who values his inventories on the basis of cost, makes his income tax returns on the calendar year basis. On January 1, 1954, he buys, for $1,060 each, three municipal bonds (I, J, and K) having a face obligation of $1,000, and maturing on January 1, 1959. Bond I is sold on December 31, 1954, bond J is sold on June 30, 1955, and bond K is sold on December 31, 1956. For each bond, the amortizable bond premium to maturity is $60, the period from the date of acquisition to maturity is 60 months, and the amortizable bond premium per month is $1.
Bond | Date acquired | Date sold | Adjustment for—
1954 | 1955 | 1956
I | Jan. 1, 1954 | Dec. 31,1954 | $12
J | Jan. 1,1954 | June 30,1955 | None | $18
K | Jan. 1,1954 | Dec. 31,1956 | None | None | $36
(d) Bonds acquired before July 1, 1950. Under section 203(c) of the Revenue Act of 1950, adjustment is required for a municipal bond acquired before July 1, 1950, only with respect to taxable years beginning on or after that date. Accordingly, if the municipal bond was acquired before July 1, 1950, then for purposes of section 75 the amortizable bond premium under section 171 must be computed after adjusting the bond premium to the extent proper to reflect unamortized bond premium for so much of the holding period (as determined under section 1223) as precedes the taxable year of the dealer beginning on or after July 1, 1950. Thus, in example (1) of paragraph (b) and in the example in paragraph (c) of this section, the first taxable year beginning on or after July 1, 1950, is, for each dealer, the taxable year beginning January 1, 1951. If each dealer had purchased for $1,060 on April 1, 1950, a municipal bond having a face obligation of $1,000 and maturing April 1, 1955, and had sold such bond on February 28, 1955, the adjustment under section 75 would be computed as follows:
Dealer X | Dealer Z
Bond premium | $60 | $60
Adjustment for holding period prior to Jan. 1, 1951 | 9 | 9
Amortizable bond premium to maturity, as adjusted | 51 | 51
Amortizable bond premium per month | 1 | 1
Total adjustments under sec. (o), 1939 Code, for years 1951-53 | 36 | None
Adjustment under sec. 75 for 1954 | 12 | None
Adjustment under sec. 75 for 1955 | 2 | 50
[T.D. 6647, 28 FR 3519, Apr. 11, 1963]
§ 1.77-1 Election to consider Commodity Credit Corporation loans as income.
A taxpayer who receives a loan from the Commodity Credit Corporation may, at his election, include the amount of such loan in his gross income for the taxable year in which the loan is received. If a taxpayer makes such an election (or has made such an election under section 123 of the Internal Revenue Code of 1939 or under section 223(d) of the Revenue Act of 1939 (53 Stat. 897)), then for subsequent taxable years he shall include in his gross income all amounts received during those years as loans from the Commodity Credit Corporation, unless he secures the permission of the Commissioner to change to a different method of accounting. Application for permission to change such method of accounting and the basis upon which the return is made shall be filed with the Commission of Internal Revenue, Washington, D.C. 20224, within 90 days after the beginning of the taxable year to be covered by the return.
§ 1.77-2 Effect of election to consider commodity credit loans as income.
(a) If a taxpayer elects or has elected under section 77, section 123 of the Internal Revenue Code of 1939, or section 223(d) of the Revenue Act of 1939 (53 Stat. 897), as amended, to include in his gross income the amount of a loan from the Commodity Credit Corporation for the taxable year in which it is received, then—
(1) No part of the amount realized by the Commodity Credit Corporation upon the sale or other disposition of the commodity pledged for such loan shall be recognized as income to the taxpayer, unless the taxpayer receives an amount in addition to that advanced to him as the loan, in which event such additional amount shall be included in the gross income of the taxpayer for the taxable year in which it is received, and
(2) No deductible loss to the taxpayer shall be recognized on account of any deficiency realized by the Commodity Credit Corporation on such loan if the taxpayer was relieved from liability for such deficiency.
(b) The application of paragraph (a) of this section may be illustrated by the following example:
Example.A, a taxpayer who elected for his taxable year 1952 to include in gross income amounts received as loans from the Commodity Credit Corporation, received as loans $500 in 1952, $700 in 1953, and $900 in 1954. In 1956 all the pledged commodity was sold by the Commodity Credit Corporation for an amount $100 and $200 less than the loans with respect to the commodity pledged in 1952 and 1953, respectively, and for an amount $150 greater than the loan with respect to the commodity pledged in 1954. A, in making his return for 1956, shall include in gross income the sum of $150 if it is received during that year, but will not be allowed a deduction for the deficiencies of $100 and $200 unless he is required to satisfy such deficiencies and does satisfy them during that year.
§ 1.78-1 Gross up for deemed paid foreign tax credit.
(a) Taxes deemed paid by certain domestic corporations treated as a dividend. If a domestic corporation chooses to have the benefits of the foreign tax credit under section 901 for any taxable year, an amount that is equal to the U.S. dollar amount of foreign income taxes deemed to be paid by the corporation for the year under section 960 (in the case of section 960(d), determined without regard to the phrase “80 percent of” in section 960(d)(1)) is, to the extent provided by this section, treated as a dividend (a section 78 dividend) received by the domestic corporation from the foreign corporation. A section 78 dividend is treated as a dividend for all purposes of the Code, except that it is not treated as a dividend for purposes of section 245 or 245A, and does not increase the earnings and profits of the domestic corporation or decrease the earnings and profits of the foreign corporation. Any reduction under section 907(a) of the foreign income taxes deemed paid with respect to combined foreign oil and gas income does not affect the amount treated as a section 78 dividend. See § 1.907(a)-1(e)(3). Similarly, any reduction under section 901(e) of the foreign income taxes deemed paid with respect to foreign mineral income does not affect the amount treated as a section 78 dividend. See § 1.901-3(a)(2)(i), (b)(2)(i)(b), and (d) Example 8. Any reduction under section 6038(c)(1)(B) in the foreign taxes paid or accrued by a foreign corporation is taken into account in determining foreign taxes deemed paid and the amount treated as a section 78 dividend. See, for example, § 1.6038-2(k)(5) Example 1. To the extent provided in the Code, section 78 does not apply to any tax not allowed as a credit. See, for example, sections 901(j)(3), 901(k)(7), 901(l)(4), 901(m)(6), and 908(b). For rules on determining the source of a section 78 dividend in computing the limitation on the foreign tax credit under section 904, see §§ 1.861-3(a)(3), 1.862-1(a)(1)(ii), and 1.904-5(m)(6). For rules on assigning a section 78 dividend to a separate category, see § 1.904-4.
(b) Date on which section 78 dividend is received. A section 78 dividend is considered received by a domestic corporation on the date on which—
(1) The corporation includes in gross income under section 951(a)(1)(A) the amounts by reason of which there are deemed paid under section 960(a) the foreign income taxes that give rise to that section 78 dividend, notwithstanding that the foreign income taxes may be carried back or carried over to another taxable year and deemed to be paid or accrued in such other taxable year under section 904(c); or
(2) The corporation includes in gross income under section 951A(a) the amounts by reason of which there are deemed paid under section 960(d) the foreign income taxes that give rise to that section 78 dividend.
(c) Applicability date. This section applies to taxable years of foreign corporations that begin after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. The second sentence of paragraph (a) of this section also applies to section 78 dividends that are received after December 31, 2017, by reason of taxes deemed paid under section 960(a) with respect to a taxable year of a foreign corporation beginning before January 1, 2018.
[T.D. 9866, 84 FR 29335, June 21, 2019]
§ 1.79-0 Group-term life insurance—definitions of certain terms.
The following definitions apply for purposes of section 79, this section, and §§ 1.79-1, 1.79-2, and 1.79-3.
Carried directly or indirectly. A policy of life insurance is “carried directly or indirectly” by an employer if—
(a) The employer pays any part of the cost of the life insurance directly or through another person; or
(b) The employer or two or more employers arrange for payment of the cost of the life insurance by their employees and charge at least one employee less than the cost of his or her insurance, as determined under Table I of § 1.79-3(d)(2), and at least one other employee more than the cost of his or her insurance, determined in the same way.
Employee. An “employee” is—
(a) A person who performs services if his or her relationship to the person for whom services are performed is the legal relationship of employer and employee described in § 31.3401(c)-1; or
(b) A full-time life insurance salesperson described in section 7701(a)(20); or
(c) A person who formerly performed services as an employee.
A person who formerly performed services as an employee and currently performs services for the same employer as an independent contractor is considered an employee only with respect to insurance provided because of the person's former services as an employee.
Group of employees. A “group of employees” is all employees of an employer, or less than all employees if membership in the group is determined solely on the basis of age, marital status, or factors related to employment. Examples of factors related to employment are membership in a union some or all of whose members are employed by the employer, duties performed, compensation received, and length of service. Ordinarily the purchase of something other than group-term life insurance is not a factor related to employment. For example, if an employer provides credit life insurance to all employees who purchase automobiles, these employees are not a “group of employees” because membership is not determined solely on the basis of age, marital status, or factors related to employment. On the other hand, participation in an employer's pension, profit-sharing or accident and health plan is considered a factor related to employment even if employees are required to contribute to the cost of the plan. Ownership of stock in the employer corporation is not a factor related to employment. However, participation in an employer's stock bonus plan may be a factor related to employment and a “group of employees” may include employees who own stock in the employer corporation.
Permanent benefit. A “permanent benefit” is an economic value extending beyond one policy year (for example, a paid-up or cash surrender value) that is provided under a life insurance policy. However, the following features are not permanent benefits:
(a) A right to convert (or continue) life insurance after group life insurance coverage terminates;
(b) Any other feature that provides no economic benefit (other than current insurance protection) to the employee; or
(c) A feature under which term life insurance is provided at a level premium for a period of five years or less.
Policy. The term “policy” includes two or more obligations of an insurer (or its affiliates) that are sold in conjunction. Obligations that are offered or available to members of a group of employees are sold in conjunction if they are offered or available because of the employment relationship. The actuarial sufficiency of the premium charged for each obligation is not taken into account in determining whether the obligations are sold in conjunction. In addition, obligations may be sold in conjunction even if the obligations are contained in separate documents, each document is filed with and approved by the applicable state insurance commission, or each obligation is independent of any other obligation. Thus, a group of individual contracts under which life insurance is provided to a group of employees may be a policy. Similarly, two benefits provided to a group of employees, one term life insurance and the other a permanent benefit, may be a policy, even if one of the benefits is provided only to employees who decline the other benefit. However, an employer may elect to treat two or more obligations each of which provides no permanent benefits as separate policies if the premiums are properly allocated among such policies. An employer also may elect to treat an obligation which provides permanent benefits as a separate policy if—
(a) The insurer sells the obligation directly to the employee who pays the full cost thereof;
(b) The participation of the employer with respect to sales of the obligation to employees is limited to selection of the insurer and the type of coverage and to sales assistance activities such as providing employee lists to the insurer, permitting the insurer to use the employer's premises for solicitation, and collecting premiums through payroll deduction;
(c) The insurer sells the obligation on the same terms and in substantial amounts to individuals who do not purchase (and whose employers do not purchase) any other obligation from the insurer; and
(d) No employer-provided benefit is conditioned on purchase of the obligation.
[T.D. 7623, 44 FR 28797, May 17, 1979, as amended by T.D. 7917, 48 FR 45762, Oct. 7, 1983]
§ 1.79-1 Group-term life insurance—general rules.
(a) What is group-term life insurance? Life insurance is not group-term life insurance for purposes of section 79 unless it meets the following conditions:
(1) It provides a general death benefit that is excludable from gross income under section 101(a).
(2) It is provided to a group of employees.
(3) It is provided under a policy carried directly or indirectly by the employer.
(4) The amount of insurance provided to each employee is computed under a formula that precludes individual selection. This formula must be based on factors such as age, years of service, compensation, or position. This condition may be satisfied even if the amount of insurance provided is determined under a limited number of alternative schedules that are based on the amount each employee elects to contribute. However, the amount of insurance provided under each schedule must be computed under a formula that precludes individual selection.
(b) May group-term life insurance be combined with other benefits? No part of the life insurance provided under a policy that provides a permanent benefit is group-term life insurance unless—
(1) The policy or the employer designates in writing the part of the death benefit provided to each employee that is group-term life insurance; and
(2) The part of the death benefit that is provided to an employee and designated as the group-term life insurance benefit for any policy year is not less than the difference between the total death benefit provided under the policy and the employee's deemed death benefit (DDB) at the end of the policy year determined under paragraph (d)(3) of this section.
(c) May a group include fewer than 10 employees? (1) As a general rule, life insurance provided to a group of employees cannot qualify as group-term life insurance for purposes of section 79 unless, at some time during the calendar year, it is provided to at least 10 full-time employees who are members of the group of employees. For purposes of this rule, all life insurance provided under policies carried directly or indirectly by the employer is taken into account in determining the number of employees to whom life insurance is provided.
(2) The general rule of paragraph (c)(1) of this section does not apply if the following conditions are met:
(i) The insurance is provided to all full-time employees of the employer or, if evidence of insurability affects eligibility, to all full-time employees who provide evidence of insurability satisfactory to the insurer.
(ii) The amount of insurance provided is computed either as a uniform percentage of compensation or on the basis of coverage brackets established by the insurer. However, the amount computed under either method may be reduced in the case of employees who do not provide evidence of insurability satisfactory to the insurer. In general, no bracket may exceed 2 1/2 times the next lower bracket and the lowest bracket must be at least 10 percent of the highest bracket. However, the insurer may establish a separate schedule of coverage brackets for employees who are over age 65, but no bracket in the over-65 schedule may exceed 2 1/2 times the next lower bracket and the lowest bracket in the over-65 schedule must be at least 10 percent of the highest bracket in the basic schedule.
(iii) Evidence of insurability affecting employee's eligibility for insurance or the amount of insurance provided to that employee is limited to a medical questionnaire completed by the employee that does not require a physical examination.
(3) The general rule of paragraph (c)(1) of this section does not apply if the following conditions are met:
(i) The insurance is provided under a common plan to the employees of two or more unrelated employers.
(ii) The insurance is restricted to, but mandatory for, all employees of the employer who belong to or are represented by an organization (such as a union) that carries on substantial activities in addition to obtaining insurance.
(iii) Evidence of insurability does not affect an employee's eligibility for insurance or the amount of insurance provided to that employee.
(4) For purposes of paragraph (c) (2) and (3) of this section, employees are not taken into account if they are denied insurance for the following reasons:
(i) They are not eligible for insurance under the terms of the policy because they have not been employed for a waiting period, specified in the policy, which does not exceed six months.
(ii) They are part-time employees. Employees whose customary employment is for not more than 20 hours in any week, or 5 months in any calendar year, are presumed to be part-time employees.
(iii) They have reached the age of 65.
(5) For purposes of paragraph (c) (1) and (2) of this section, insurance is considered to be provided to an employee who elects not to receive insurance unless, in order to receive the insurance, the employee is required to contribute to the cost of benefits other than term life insurance. Thus, if an employee could receive term life insurance by contributing to its cost, the employee is taken into account in determining whether the insurance is provided to 10 or more employees even if such employee elects not to receive the insurance. However, an employee who must contribute to the cost of permanent benefits to obtain term life insurance is not taken into account in determining whether the term life insurance is provided to 10 or more employees unless the term life insurance is actually provided to such employee.
(d) How much must an employee receiving permanent benefits include in income?—(1) In general. If an insurance policy that meets the requirements of this section provides permanent benefits to an employee, the cost of the permanent benefits reduced by the amount paid for permanent benefits by the employee is included in the employee's income. The cost of the permanent benefits is determined under the formula in paragraph (d)(2) of this section.
(2) Formula for determining cost of the permanent benefits. In each policy year the cost of the permanent benefits for any particular employee must be no less than:
X(DDB2−DDB1)
where DDB2 is the employee's deemed death benefit at the end of the policy year: DDB1 is the employee's deemed death benefit at the end of the preceding policy year; and X is the net single premium for insurance (the premium for one dollar of paid-up whole-life insurance) at the employee's attained age at the beginning of the policy year.
(3) Formula for determining deemed death benefit. The deemed death benefit (DDB) at the end of any policy year for any particular employee is equal to—
R/Y
Where— R is the net level premium reserve at the end of that policy year for all benefits provided to the employee by the policy or, if greater, the fair market value of the policy at the end of that policy year; and Y is the net single premium for insurance (the premium for one dollar of paid-up, whole life insurance) at the employee's age at the end of that policy year.
(4) Mortality tables and interest rates used. For purposes of paragraph (d) (2) and (3) of this section, the net level premium reserve (R) and the net single premium (X or Y) shall be based on the 1958 CSO Mortality Table and 4 percent interest.
(5) Dividends. If an insurance policy that meets the requirements of this section provides permanent benefits, part or all of the dividends under the policy may be includible in the employee's income. If the employee pays nothing for the permanent benefits, all dividends under the policy that are actually or constructively received by the employee are includible in the employee's income. In all other cases, the amount of dividends included in the employee's income is equal to:
(D + C)−(PI + DI + AP)
where D is the total amount of dividends actually or constructively received under the policy by the employee in the current and all preceding taxable years of the employee; C is the total cost of the permanent benefits for the current and all preceding taxable years of the employee determined under the formulas in paragraph (d) (2) and (6) of this section: PI is the total amount of premium included in the employee's income under paragraph (d)(1) of this section for the current and all preceding taxable years of the employee; DI is the total amount of dividends included in the employee's income under this paragraph (d)(5) in all preceding taxable years of the employee; and AP is the total amount paid for permanent benefits by the employee in the current and all preceding taxable years of the employee.
(6) Different policy and taxable years. (i) If a policy year begins in one employee taxable year and ends in another employee taxable year, the cost of the permanent benefits, determined under the formula in paragraph (d)(2) of this section, is allocated between the employee taxable years.
(ii) The cost of permanent benefits for a policy year is allocated first to the employee taxable year in which the policy year begins. The cost of permanent benefits allocated to that policy year is equal to:
F × C
where F is the fraction of the premium for that policy year that is paid on or before the last day of the employee taxable year; and C is the cost of permanent benefits for the policy year determined under the formula in paragraph (d)(2) of this section.
(iii) Any part of the cost of permanent benefits that is not allocated to the employee taxable year in which the policy year begins is allocated to the subsequent employee taxable year.
(iv) The cost of permanent benefits for an employee taxable year is the sum of the costs of permanent benefits allocated to that year under paragraph (d)(6) (ii) and (iii) of this section.
(7) Example. The provisions of this paragraph may be illustrated by the following example:
Example. An employer provides insurance to employee A under a policy that meets the requirements of this section. Under the policy, A, who is 47 years old, received $70,000 of group-term life insurance and elects to receive a permanent benefit under the policy. A pays $2 for each $1,000 of group-term life insurance through payroll deductions and the employer pays the remainder of the premium for the group-term life insurance. The employer also pays one half of the premium specified in the policy for the permanent benefit. A pays the other half of the premium for the permanent benefit through payroll deductions. The policy specifies that the annual premium paid for the permanent benefit is $300. However, the amount of premium allocated to the permanent benefit by the formula in paragraph (d)(2) of this section is $350. A is a calendar year taxpayer; the policy year begins January 1. In year 2000, $200 is includible in A's income because of insurance provided by the employer. This amount is computed as follows:
(1) Cost of permanent benefits | $350
(2) Amounts considered paid by A for permanent benefits ( 1/2 × $300) | 150
(3) Line (1) minus line (2) | 200
(4) Cost of $70,000 of group-term life insurance under Table I of § 1.79-3 | 126
(5) Cost of $50,000 of group-term life insurance under Table I of § 1.79-3 | 90
(6) Cost of group-term insurance in excess of $50,000 (line (4) minus line(5)) | 36
(7) Amount considered paid by A for group-term life insurance (70 × $2) | 140
(8) Line (6) minus line (7) (but not less than 0) | 0
(9) Amount includible in income (line (3) plus line (8)) | 200
(e) What is the effect of State law limits? Section 79 does not apply to life insurance in excess of the limits under applicable state law on the amount of life insurance that can be provided to an employee under a single contract of group-term life insurance.
(f) Cross references. (1) See section 79(b) and § 1.79-2 for rules relating to group-term life insurance provided to certain retired individuals.
(2) See section 61(a) and the regulations thereunder for rules relating to life insurance not meeting the requirements of section 79, this section, or § 1.79-2, such as insurance provided on the life of a non-employee (for example, an employee's spouse), insurance not provided as compensation for personal services performed as an employee, insurance not provided under a policy carried directly or indirectly by the employer, or permanent benefits.
(3) See sections 106 and § 1.106-1 for rules relating to certain insurance that does not provide general death benefits, such as travel insurance or accident and health insurance (including amounts payable under a double indemnity clause or rider).
(g) [Reserved]
(h) Effective date. Section 1.79-0 applies to insurance provided in employee taxable years beginning on or after January 1, 1977 (except as provided in 26 CFR 1.79-1(g) (revised as of April 1, 1983) with respect to insurance provided in employee taxable years beginning in 1977). Sections 1.79-1 through 1.79-3 apply to insurance provided in employee taxable years beginning after December 31, 1982. See 26 CFR 1.79-1 through 1.79-3 (revised as of April 1, 1983) for rules applicable to insurance provided in employee taxable years beginning before January 1, 1983.
(Secs. 79(c) and 7805 of the Internal Revenue Code of 1954 (78 Stat. 36, 26 U.S.C. 79(c); 68A Stat. 917, 26 U.S.C. 7805))
[T.D. 7623, 44 FR 28797, May 17, 1979, as amended by T.D. 7917, 48 FR 45762, Oct. 7, 1983; T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8821, 64 FR 29790, June 3, 1999; T.D. 9223, 70 FR 50971, Aug. 29, 2005]
§ 1.79-2 Exceptions to the rule of inclusion.
(a) In general. (1) Section 79(b) provides exceptions for the cost of group-term life insurance provided under certain policies otherwise described in section 79(a). The policy or policies of group-term life insurance which are described in section 79(a) but which qualify for one of the exceptions set forth in section 79(b) are described in paragraphs (b) through (d) of this section. Paragraph (b) of this section discusses the exception provided in section 79(b) (1); paragraph (c) of this section discusses the exception provided in section 79(b)(2); and paragraph (d) of this section discusses the exception provided in section 79(b)(3).
(2)(i) If a policy of group-term life insurance qualifies for an exception provided by section 79(b), then the amount equal to the cost of such insurance is excluded from the application of the provisions of section 79(a).
(ii) If a policy, or portion of a policy of group-term life insurance qualifies for an exception provided by section 79(b), the amount (if any) paid by the employee toward the purchase of such insurance is not to be taken into account as an amount referred to in section 79 (a)(2). In the case of a policy or policies of group-term life insurance which qualify for an exception provided by section 79(b) (1) or (3), the amount paid by the employee which is not to be taken into account as an amount referred to in section 79(a) (2) is the amount paid by the employee for the particular policy or policies of group-term life insurance which qualify for an exception provided under such section. If the exception provided in section 79(b)(2) is applicable only to a portion of the group-term life insurance on the employee's life, the amount considered to be paid by the employee toward the purchase of such portion is the amount equal to the excess of the cost of such portion of the insurance over the amount otherwise includible in the employee's gross income with respect to the group-term life insurance on his life carried directly or indirectly by such employer.
(iii) The rules of this subparagraph may be illustrated by the following example:
Example.A is an employee of X Corporation and is also an employee of Y Corporation, a subsidiary of X Corporation. A is provided, under a separate plan arranged by each of his employers, group-term life insurance on his life. During his taxable year, under the group-term life insurance plan of X Corporation, A is provided $60,000 of group-term life insurance on his life, and A pays $360.00 toward the purchase of such insurance. Under the group-term life insurance plan of Y Corporation, A is provided $65,000 of group-term life insurance on his life, but does not pay any part of the cost of such insurance. At the beginning of his taxable year, A terminates his employment with the X Corporation after he has reached the retirement age with respect to such employer, and the policy carried by the X Corporation qualifies for the exception provided by section 79(b)(1). For that taxable year, the cost of the group-term life insurance on A's life which is provided under the plan of X Corporation is not taken into account in determining the amount includible in A's gross income under section 79(a), and A may not take into account as an amount described in section 79(a)(2) the $360.00 he pays toward the purchase of such insurance.
(b) Retired and disabled employees—(1) In general. Section 79(b)(1) provides an exception for the cost of group-term life insurance on the life of an individual which is provided under a policy or policies otherwise described in section 79(a) if the individual has terminated his employment (as defined in subparagraph (2) of this paragraph) with such employer and either has reached the retirement age with respect to such employer (as defined in subparagraph (3) of this paragraph), or has become disabled (as defined in subparagraph (4)(i) of this paragraph). If an individual who has terminated his employment attains retirement age or has become disabled during his taxable year, or if an employee who has attained retirement age or has become disabled terminates his employment during the taxable year, the exception provided by section 79(b)(1) applies only to the portion of the cost of group-term life insurance which is provided subsequent to the happening of the last event which qualifies the policy of insurance on the employee's life for the exception provided in such section.
(2) Termination of employment. For purposes of section 79(b)(1), an individual has terminated his employment with an employer providing such individual group-term life insurance when such individual no longer renders services to that employer as an employee of such employer.
(3) Retirement age. For purposes of section 79(b)(1) and this section, the meaning of the term “retirement age” is determined in accordance with the following rules—
(i)(a) If the employee is covered under a written pension or annuity plan of the employer providing such individual group-term life insurance on his life (whether or not such plan is qualified under section 401(a) or 403(a)), then his retirement age shall be considered to be the earlier of—
(1) The earliest age indicated by such plan at which an active employee has the right (or an inactive individual would have the right had he continued in employment) to retire without disability and without the consent of his employer and receive immediate retirement benefits computed at either the full rate or a rate proportionate to completed service as set forth in the normal retirement formula of the plan, i.e., without actuarial or similar reduction because of retirement before some later specified age, or
(2) The age at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which he last belonged.
(b) For purposes of (a) of this subdivision, if an employee is covered under more than one pension or annuity plan of the employer, his retirement age shall be determined with regard to that plan which covers that class of employees of the employer to which the employee last belonged. If the class of employees to which the employee last belonged is covered under more than one pension or annuity plan, then the employee's retirement age shall be determined with regard to that plan which covers the greatest number of the employer's employees.
(ii) In the absence of a written employee's pension or annuity plan described in subdivision (i) of this subparagraph, retirement age is the age, if any, at which it has been the practice of the employer to terminate, due to age, the services of the class of employees to which the particular employee last belonged, provided such age is reasonable in view of all the pertinent facts and circumstances.
(iii) If neither subdivision (i) or (ii) of this subparagraph applies, the retirement age is considered to be age 65.
(4) Disabled. (i) For taxable years beginning after December 31, 1966, an individual is considered disabled for purposes of section 79(b)(1) and subparagraph (1) of this paragraph if he is disabled within the meaning of section 72(m)(7) and paragraph (f) of § 1.72-17. For taxable years beginning before January 1, 1967, an individual is considered disabled for purposes of section 79(b)(1) and subparagraph (1) of this paragraph if he is disabled within the meaning of section 213(g)(3), relating to the meaning of disabled, but the determination of the individual's status shall be made without regard to the provisions of section 213(g)(4), relating to the determination of status.
(ii)(a) In any taxable year in which an individual seeks to apply the exception set forth in section 79(b)(1) by reason of his being disabled within the meaning of subdivision (i) of this subparagraph, and in which the aggregate amount of insurance on the individual's life subject to the rule of inclusion set forth in section 79(a), but determined without regard to the amount of any insurance subject to any exception set forth in section 79(b), is greater than $50,000 of such insurance, the substantiation required by (b) or (c) of this subdivision must be submitted with the individual's tax return.
(b) For the first taxable year for which the individual seeks to apply the exception set forth in section 79(b)(1) by reason of his being disabled within the meaning of subdivision (i) of this subparagraph, there must be submitted with his income tax return a doctor's statement as to his impairment. There must also be submitted with the return a statement by the individual with respect to the effect of the impairment upon his substantial gainful activity, and the date such impairment occurred. For subsequent taxable years, the taxpayer may, in lieu of such statements, submit a statement declaring the continued existence (without substantial diminution) of the impairment and its continued effect upon his substantial gainful activity.
(c) In lieu of the substantiation required to be submitted by (b) of this subdivision for the taxable year, the individual may submit a signed statement issued to him by the insurer to the effect that the individual is disabled within the meaning of subdivision (i) of this paragraph. Such statement must set forth the basis for the insurer's determination that the individual was so disabled, and, for the first taxable year in which the individual is so disabled, the date such disability occurred.
(c) Employer or charity a beneficiary—(1) General rule. Section 79(b)(2) provides an exception with respect to the amounts referred to in section 79 (a) for the cost of any portion of the group-term life insurance on the life of an employee provided during part or all of the taxable year of the employee under which the employer is directly or indirectly the beneficiary, or under which a person described in section 170(c) (relating to definition of charitable contributions) is the sole beneficiary, for the entire period during such taxable year for which the employee receives such insurance.
(2) Employer is a beneficiary. For purposes of section 79(b)(2) and subparagraph (1) of this paragraph, the determination of whether the employer is directly or indirectly the beneficiary under a policy or policies of group-term life insurance depends upon the facts and circumstances of the particular case. Such determination is not made solely with regard to whether the employer possesses all the incidents of ownership in the policy. Thus, for example, if the employer is the nominal beneficiary under a policy of group-term life insurance on the life of his employee but there is an arrangement whereby the employer is required to pay over all (or a portion) of the proceeds of such policy to the employee's estate or his beneficiary, the employer is not considered a beneficiary under such policy (or such portion of the policy).
(3) Charity a beneficiary. (i) For purposes of section 79(b)(2) and subparagraph (1) of this paragraph, a person described in section 170(c) is a beneficiary under a policy providing group-term life insurance if such person is designated the beneficiary under the policy by any assignment or designation of beneficiary under the policy which, under the law of the jurisdiction which is applicable to the policy, has the effect of making such person the beneficiary under such policy (whether or not such designation is revocable during the taxable year). Such a designation may be made by the employee with respect to any portion of the group-term life insurance on his life. However, no deduction is allowed under section 170, relating to charitable, etc., contributions and gifts, with respect to any such assignment or designation.
(ii) A person described in section 170(c) must be designated the sole beneficiary under the policy or portion of the policy. Such requirement is satisfied if the person described in section 170(c) is the beneficiary under such policy or portion of the policy, and there is no contingent or similar beneficiary under such policy or such portion other than a person described in section 170(c). A general “preference beneficiary clause” in a policy governing payment where there is no designated beneficiary in existence at the death of the employee will not of itself be considered to create a contingent or similar beneficiary. A person described in section 170(c) may be designated the beneficiary under a portion of the policy if such person is designated the sole beneficiary under a beneficiary designation which is expressed, for example, as a fraction of the amount of insurance on the insured's life.
(iii) If a person described in section 170(c) is designated, before May 1, 1964, the beneficiary under the policy (or portion thereof) and such person remains the beneficiary for the period beginning May 1, 1964, and ending with the close of the first taxable year of the employee ending after April 30, 1964, such person shall be treated as the beneficiary under the policy (or the portion thereof) for the period beginning January 1, 1964, and ending April 30, 1964.
(d) Insurance contracts purchased under qualified employee plans. (1) Section 79(b)(3) provides an exception with respect to the cost of any group-term life insurance which is provided under a life insurance contract purchased as a part of a plan described in section 403(a), or purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indirectly to a participant in such trust or to a beneficiary of such participant. The provisions of section 72(m)(3) and § 1.72-16 apply to the cost of such group-term life insurance, and, therefore, no part of such cost is excluded from the gross income of the employee by reason of the provisions of section 79.
(2) Whether the life insurance protection on an employee's life is provided under a qualified employee plan referred to in subparagraph (1) of this paragraph depends upon the provisions of such plan. In determining whether a pension, profit-sharing, stock bonus, or annuity plan satisfies the requirements for qualification set forth in sections 401(a) or 403(a), only group-term life insurance which is provided under such plan is taken into account.
[T.D. 6888, 31 FR 9201, July 6, 1966, as amended by T.D. 6919, 32 FR 7390, May 18, 1967; T.D. 6985, 33 FR 19812, Dec. 27, 1968; T.D. 7623, 44 FR 28800, May 17, 1979]
§ 1.79-3 Determination of amount equal to cost of group-term life insurance.
(a) In general. This section prescribes the rules for determining the amount equal to the cost of group-term life insurance on an employee's life which is to be included in his gross income pursuant to the rule of inclusion set forth in section 79(a). Such amount is determined by—
(1) Computing the cost of the portion of the group-term life insurance on the employee's life to be taken into account (determined in accordance with the rules set forth in paragraph (b) of this section) for each “period of coverage” (as defined in paragraph (c) of this section) and aggregating the costs so determined, then
(2) Reducing the amount determined under subparagraph (1) of this paragraph by the amount determined in accordance with the rules set forth in paragraph (e) of this section, relating to the amount paid by the employee toward the purchase of group-term life insurance.
(b) Determination of the portion of the group-term life insurance on the employee's life to be taken into account. (1) For each “period of coverage” (as defined in paragraph (c) of this section), the portion of the group-term life insurance to be taken into account in computing the amount includible in an employee's gross income for purposes of paragraph (a)(1) of this section is the sum of the proceeds payable upon the death of the employee under each policy, or portion of a policy, of group-term life insurance on such employee's life to which the rule of inclusion set forth in section 79(a) applies, less $50,000 of such insurance. Thus, the amount of any proceeds payable under a policy, or portion of a policy, which qualifies for one of the exceptions to the rule of inclusion provided by section 79(b) is not taken into account. For the regulations relating to such exceptions to the rule of inclusion, see § 1.79-2.
(2) For purposes of making the computation required by subparagraph (1) of this paragraph in any case in which the amount payable under the policy, or portion thereof, varies during the period of coverage, the amount payable under such policy during such period is considered to be the average of the amount payable under such policy at the beginning and the end of such period.
(3)(i) For purposes of making the computation required by subparagraph (1) of this paragraph in any case in which the amount payable under the policy is not payable as a specific amount upon the death of the employee in full discharge of the liability of the insurer, and such form of payment is not one of alternative methods of payment, the amount payable under such policy is the present value of the agreement by the insurer under the policy to make the payments to the beneficiary or beneficiaries entitled to such amounts upon the employee's death. For each period of coverage, such present value is to be determined as if the first and last day of such period is the date of death of the employee.
(ii) The present value of the agreement by the insurer under the policy to make payments shall be determined by the use of the mortality tables and interest rate employed by the insurer with respect to such a policy in calculating the amount held by the insurer (as defined in section 101(d)(2)), unless the Commissioner otherwise determines that a particular mortality table and interest rate, representative of the mortality table and interest rate used by commercial insurance companies with respect to such policies, shall be used to determine the present value of the policy for purposes of this subdivision.
(iii) For purposes of making the computation required by subdivision (i) of this subparagraph in any case in which it is necessary to determine the age of an employee's beneficiary and such beneficiary remains the same (under the policy, or the portion of the policy, with respect to which the determination of the present value of the agreement of the insurer to pay benefits is being made) for the entire period during the employee's taxable year for which such policy is in effect, the age of such beneficiary is such beneficiary's age at his nearest birthday on June 30th of the calendar year.
(iv) If the policy of group-term life insurance on the employee's life is such that the present value of the agreement by the insurer under the policy to pay benefits cannot be determined by the rules prescribed in this subparagraph, the taxpayer may submit with his return a computation of such present value, consistent with the actuarial and other assumptions set forth in this subparagraph, showing the appropriate factors applied in his case. Such computation shall be subject to the approval of the Commissioner upon examination of such return.
(c) Period of coverage. For purposes of this section, the phrase “period of coverage” means any one calendar month period, or part thereof, during the employee's taxable year during which the employee is provided group-term life insurance on his life to which the rule of inclusion set forth in section 79(a) applies. The phrase “part thereof” as used in the preceding sentence means any continuous period which is less than the one calendar month period referred to in the preceding sentence for which premiums are charged by the insurer.
(d) The cost of the portion of the group-term life insurance on an employee's life. (1) This paragraph sets forth the rules for determining the cost, for each period of coverage, of the portion of the group-term life insurance on the employee's life to be taken into account in computing the amount includible in the employee's gross income for purposes of paragraph (a)(1) of this section. The portion of the group-term life insurance on the employee's life to be taken into account is determined in accordance with the provisions of paragraph (b) of this section. Table I, which is set forth in subparagraph (2) of this paragraph, determines the cost for each $1,000 of such portion of the group-term life insurance on the employee's life for each one-month period. The cost of the portion of the group-term life insurance on the employee's life for each period of coverage of one month is obtained by multiplying the number of thousand dollars of such insurance computed to the nearest tenth which is provided during such period by the appropriate amount set forth in Table I. In any case in which group-term life insurance is provided for a period of coverage of less than one month, the amount set forth in Table I is prorated over such period of coverage.
(2) For the cost of group-term life insurance provided after June 30, 1999, the following table sets forth the cost of $1,000 of group-term life insurance provided for one month, computed on the basis of 5-year age brackets. See 26 CFR 1.79-3(d)(2) in effect prior to July 1, 1999, and contained in the 26 CFR part 1 edition revised as of April 1, 1999, for a table setting forth the cost of group-term life insurance provided before July 1, 1999. For purposes of Table I, the age of the employee is the employee's attained age on the last day of the employee's taxable year.
Table I—Uniform Premiums for $1,000 of Group-Term Life Insurance Protection
5-year age bracket | Cost per $1,000 of protection for one month
Under 25 | $0.05
25 to 29 | .06
30 to 34 | .08
35 to 39 | .09
40 to 44 | .10
45 to 49 | .15
50 to 54 | .23
55 to 59 | .43
60 to 64 | .66
65 to 69 | 1.27
70 and above | 2.06
(3) The net premium cost of group-term life insurance as provided in Table I of subparagraph (2) of this paragraph applies only to the cost of group-term life insurance subject to the rule of inclusion set forth in section 79(a). Therefore, such net premium cost is not applicable to the determination of the cost of group-term life insurance provided under a policy which is not subject to such rule of inclusion.
(e) Effective date—(1) General effective date for table. Except as provided in paragraph (e)(2) of this section, the table in paragraph (d)(2) of this section is applicable July 1, 1999. Until January 1, 2000, an employer may calculate imputed income for all its employees under age 30 using the 5-year age bracket for ages 25 to 29.
(2) Effective date for table for purposes of § 1.79-0. For a policy of life insurance issued under a plan in existence on June 30, 1999, which would not be treated as carried directly or indirectly by an employer under § 1.79-0 (taking into account the Table I in effect on that date), until January 1, 2003, an employer may use either the table in paragraph (d)(2) of this section or the table in effect prior to July 1, 1999 (as described in paragraph (d)(2) of this section) for determining if the policy is carried directly or indirectly by the employer.
(f) Amount paid by the employee toward the purchase of group-term life insurance. (1) Except as otherwise provided in subparagraph (2) of this paragraph, if an employee pays any amount toward the purchase of group-term life insurance provided for a taxable year which is subject to the rule of inclusion set forth in paragraph (a)(2) of § 1.79-1, the sum of all such amounts is the amount referred to in section 79(a)(2) and paragraph (a)(2) of this section. The rule of the preceding sentence applies even though the payments made by the employee are made with respect to a period of coverage during which no portion of the group-term life insurance on his life is taken into account under paragraph (b)(1) of this section.
(2) In determining the amount paid by the employee for purposes of section 79(a)(2) and paragraph (a)(2) of this section, there is not taken into account any amounts paid by the employee for group-term life insurance provided (or to be provided) for a different taxable year (other than amounts applicable to regular pay periods extending into the next taxable year). Thus, for example, if part of an employee's payment during a taxable year represents a prepayment for insurance to be provided after his retirement, such part does not reduce the amount includible in his gross income for the current taxable year. Furthermore, in determining such amount, there is not taken into account any amount paid by an employee toward the purchase of group-term life insurance which qualifies for one of the exceptions described in section 79(b). The amount paid by an employee toward the purchase of group-term life insurance which qualifies for one of the exceptions described in section 79(b) is determined under the rules of paragraph (a)(2) of § 1.79-2.
(3) If payments are made by the employer and his employees to provide group-term life insurance which is subject to the rule of inclusion set forth in section 79(a) as well as to provide other benefits for the employees, and if the amount paid by the employee toward the purchase of such insurance cannot be determined by the provisions of the policy or plan under which such benefits are provided, then the determination of the portion of the cost of group-term life insurance (computed in accordance with the provisions of this section) which is attributable to the contributions of the employee shall be made in accordance with the provisions of this subparagraph. The amount paid by the employee toward the purchase of all the group-term life insurance on his life for his taxable year (or for the portion of his taxable year if such portion is the basis of the computation) under such group policy shall be an amount determined first by ascertaining the total amount paid by all employees who are covered for multiple benefits which is allocable toward the purchase of group-term life insurance on their lives for the year, and then by ascertaining the pro rata portion of such total amount attributable to the individual employee. The total amount paid by all employees who are covered for multiple benefits which is allocable toward the purchase of group-term life insurance on their lives with respect to such year shall be an amount which bears the same ratio to the total amount paid by all employees for multiple benefits with respect to such year as the aggregate premiums paid to the insurer for group-term life insurance on such employees' lives with respect to such year bears to the aggregate premiums paid to the insurer for such multiple benefits with respect to such year. The pro rata portion of such total amount attributable to the individual employee for the cost of group-term life insurance on his life shall be an amount which bears the same ratio to the total amount paid by all employees which is allocable toward the purchase of group-term insurance on their lives with respect to such year as the amount of group-term life insurance on the life of the employee at a specified time during the year, as determined by the employer, bears to the total amount of group-term life insurance on the lives of all employees insured for such multiple benefits at such time.
(g) Effect of provision of other benefits—(1) In general. This paragraph discusses the effect of the provision of certain benefits other than group-term life insurance on the life of the employee if the provision of such benefits is contingent upon the underwriting of group-term life insurance on the employee's life to which the rule of inclusion set forth in section 79(a) applies.
(2) Dependent coverage. An amount equal to the cost of group-term life insurance on the life of the spouse or other family member of the employee which is provided under a policy of group-term life insurance carried directly or indirectly by his employer is not subject to the provisions of section 79 since it is not on the life of the employee. See paragraph (d)(2)(ii)(b) of § 1.61-2 for rules regarding the tax treatment of such insurance.
(3) Disability provisions. Payments made for disability benefits provided under a group-term life insurance contract are considered to constitute payments made for accident and health insurance. Thus, employer contributions to provide such benefits are excluded from gross income by reason of the provisions of section 106.
(4) Cost of other benefits. If a benefit described in this paragraph is provided under a policy under which both the employer and his employees contribute, then, except as otherwise provided in this subparagraph, the employer and the employees will be treated as contributing toward the payment of such benefit at the same rate as they contribute toward the cost of group-term life insurance on the employees' lives. A separate allocation of employer and employee contributions for such benefits is permissible only if—
(i) Such separate allocation is set forth in the group policy and is applicable to all the employees covered under such policy;
(ii) Such separate allocation is followed in transactions between the insurer and the group-policyholder; and
(iii) The allocation set forth in the policy satisfies the requirements of the law of the jurisdiction which is applicable to the contract regarding any minimum or maximum contribution rate by the employer or the employees.
(Secs. 79(c) and 7805 of the Internal Revenue Code of 1954 (78 Stat. 36, 26 U.S.C. 79(c); 68A Stat. 917, 28 U.S.C. 7805))
[T.D. 6888, 31 FR 9203, July 6, 1966, as amended by T.D. 7623, 44 FR 28800, May 17, 1979; T.D. 7924, 48 FR 54595, Dec. 6, 1983; T.D. 8273, 54 FR 47979, Nov. 20, 1989; T.D. 8424, 57 FR 33635, July 30, 1992; T.D. 8821, 64 FR 29790, June 3, 1999]
§ 1.79-4T Questions and answers relating to the nondiscrimination requirements for group-term life insurance (temporary).
Q-1: When does section 79, as amended by the Tax Reform Act of 1984, become effective?
A-1: (a) Generally, section 79, as amended, applies to taxable years (of the employee receiving insurance coverage) beginning after December 31, 1983. There are, however, several exceptions to this effective date where there is coverage under a group-term life insurance plan of the employer that was in existence on January 1, 1984, or a comparable successor to such a plan maintained by the employer or a successor employer.
(b) First, the new rules of section 79 (b) and (e), that require the inclusion in income of a retired employee of amounts attributable to the cost of group-term life insurance in excess of $50,000 and that include former employees within the definition of the term “employee,” will not apply to any employee who retired from employment on or before January 1, 1984.
(c) Second, in the case of an individual who retires after January 1, 1984, and before January 1, 1987, the new rules of section 79 (b) and (e) do not apply if (1) the individual attained age 55 on or before January 1, 1984, and (2) the plan was maintained by the same employer who employed the individual during 1983, or by a successor employer.
(d) Third, in the case of an individual who retires after December 31, 1986, the new rules of section 79 (b) and (e) do not apply if (1) the individual attained age 55 on or before January 1, 1984, (2) the plan was maintained by the same employer who employed the individual during 1983, or by a successor employer, and (3) the plan is not, after December 31, 1986, a discriminatory group-term life insurance plan (not taking into account any group-term life insurance coverage provided to employees who retired before January 1, 1987).
(e) For purposes of determining whether a plan is, after December 31, 1986, a discriminatory group-term life insurance plan, there shall be ignored any insurance coverage provided pursuant to a state law requirement that an insurer continue to provide insurance coverage for a period of time not in excess of two months following the termination of a policy.
Q-2: What is meant by a “group-term life insurance plan of the employer that was in existence on January 1, 1984”?
A-2: A group-term life insurance plan of the employer was in existence on January 1, 1984, only if the group policy or policies providing group-term life insurance benefits under the plan were executed on or before January 1, 1984, and were not terminated prior to such date. The applicability of section 79, as amended, to an employee will not be affected by the transfer of the employee between employers treated as a single employer under section 79(d)(7) if the employee continues, after the transfer, to be provided with group-term life insurance benefits under a plan that is comparable (determined under the principles set forth in Q&A 3) to the plan provided by the former employer.
Q-3: When is a plan of group-term life insurance a “comparable successor” to another such plan?
A-3: A plan of group-term life insurance will be a comparable successor to another plan of group-term life insurance (the first plan) only if the plan does not differ from the first plan in any significant aspect with respect to individuals who are potentially eligible for benefits provided under the grandfather provisions in Q&A 1. These individuals consist of those persons who are covered under a plan of group-term life insurance of the employer that was in existence on January 1, 1984, or a comparable successor to such a plan maintained by the employer or a successor employer, and who either retired on or before January 1, 1984, or who both attained age 55 on or before January 1, 1984, and were employed by the employer maintaining the plan (or a predecessor of that employer) during the year 1983. Accordingly, if significant additional or reduced benefits are provided only to individuals who are not described in the preceding sentence, the plan will be considered a comparable successor plan. A plan will not fail to be a comparable successor plan merely because the employer purchases a policy or policies identical to the employer's first plan from a different insurance company. If the new plan provides significant additional or reduced benefits (either as to the type or amount available) to employees, or provides benefits to a category of employees that was formerly excluded from participating in the plan, the plan is generally not a comparable successor to the first plan. However, a plan will not be considered as providing significant additional or reduced benefits merely because a participant's coverage is based on a percentage of compensation and the participant's compensation for the taxable year has been increased or decreased. Furthermore, a plan will not be considered a non-comparable successor plan merely because it is amended, either to decrease benefits provided to key employees or to increase benefits provided to non-key employees, solely in order to comply with the nondiscrimination requirements of section 79(d). Finally, a plan will not be considered a non-comparable successor plan merely because a policy that is part of a discriminatory plan is terminated in order to end discriminatory coverage.
Q-4: For purposes of determining the effective date of section 79, as amended by the Tax Reform Act of 1984, what is a “successor employer”?
A-4: A successor employer is an employer who employs a group of individuals formerly employed by another employer as a result of a business merger, acquisition or division.
Q-5: Under what circumstances will separate policies of group-term life insurance of an employer be considered to be a single plan in determining whether the employer's plan of group-term life insurance is discriminatory?
A-5: All policies providing group-term life insurance to a common key employee or key employees (as defined in this Q&A) carried directly or indirectly by an employer (or by a group of employers described in section 79(d)(7)) will be considered as a single plan for purposes of determining whether an employer's group-term life insurance plan is discriminatory. For example, if a key employee receives $50,000 of group-term life insurance coverage under one policy and the same key employee receives an additional $250,000 of coverage under a separate group-term life insurance policy, the two policies will be treated as a single plan in determining whether the group-term life insurance provided by the employer is discriminatory. If it is discriminatory, the key employees covered by either policy will not receive the benefit of section 79(a)(1) or section 79(c) for either policy. The result is the same even if each policy, considered alone, would be nondiscriminatory. A policy that provides group-term life insurance to a key employee and a policy under which the same key employee is eligible to receive group-term life insurance upon separation from service will be considered to provide group-term life insurance to a common key employee. In addition, an employer may treat two or more policies that do not provide group-term life insurance to a common key employee as constituting a single plan for purposes of satisfying the nondiscrimination provisions of section 79(d). For example, if the employer provides group-term life insurance coverage for non-key employees under one policy and provides group-term life insurance coverage for key employees under a second policy, the two policies may be considered together in determining whether the requirements of section 79(d) are satisfied with regard to the second policy. For purposes of this section, the term “key employee” has the meaning given to such term by paragraph (1) of section 416(i), except that subparagraph (A)(iv) of such paragraph shall be applied by not taking into account employees described in section 79(d)(3)(B) who are not participants in the plan. For purposes of this section, all references to “plan year” or “plan years” in section 416(g)(4)(C) and section 416(i) shall be deleted and replaced with “taxable year of the employer” or “taxable years of the employer,” respectively.
Q-6: In the case of a discriminatory group-term life insurance plan, what amounts should be included in the gross income of a key employee?
A-6: (a) In the case of a discriminatory group-term life insurance plan, each key employee must include in gross income for the taxable year the cost of his or her insurance benefit for that year provided by the employer under the plan.
(b) The cost of group-term life insurance coverage provided by an employer for a key employee during the employee's taxable year is determined by apportioning the net premium (group premium less policy dividends, premium refunds or experience rating credits) allocable to the group-term life insurance coverage during the key employee's taxable year, less the actual cost allocated to other key employees pursuant to the method described in the subparagraph (d) of this answer, if applicable, among the covered employees. In the event that the employer has other forms and types of coverage with the same insurer, the employer must make a reasonable allocation of the total premiums paid to the insurer. For example, where an employer has both health insurance coverage and a plan of group-term life insurance with the same insurer, and there is no volume discount, the net premium for the plan of group-term life insurance must include the excess, if any, of the payments the employer makes for the health insurance coverage over the payments the employer would make for such coverage if the plan of group-term life insurance for which this calculation is being made did not exist.
(c) In general, the portion of the net premium for group-term life insurance that should be apportioned to a key employee, other than a key employee to whom the method in subparagraph (d) of this answer is applicable, is determined by: (1) Calculating a “tabular” premium for the entire group (with the exception of all key employees to whom the method in subparagraph (d) of this answer is applicable), in the manner described below, (2) determining the ratio of the total actual net premium (less the actual cost allocated to key employees pursuant to the method in the subparagraph (d) of this answer) to the total tabular premium and (3) multiplying the tabular premium for the key employee at his or her attained age by such ratio. Thus, if the total actual net premium is 125 percent of the total tabular premium for all covered employees and the tabular premium at the key employee's attained age is $2.00 per thousand per month, the cost for such employee would be $2.50 per thousand per month ($2.00 times 125 percent). For these purposes the table used to calculate tabular premiums will be determined as follows:
(i) If the group policy contains a reasonable table (based on recognized mortality assumptions) of premium rates on an attained age basis (which table may use age brackets not exceeding five years) with reference to which the group premium is determined, such table will be used;
(ii) If such table is not available, the 1960 Basic Group Table published by the Society of Actuaries will be used.
(d) In cases where the mortality charge for group-term life insurance coverage provided to a key employee is calculated separately by the insurer (for example, where the charge for the coverage provided to a key employee is based on a medical examination) and the amount of such mortality charge plus a proportionate share of the loading charge for the coverage provided to the group is higher than the amount that would be allocable to such employee under the allocation method in subparagraph (c) the cost of group-term life insurance coverage for that employee shall be that higher amount.
Q-7: Must all active and former employees be considered in applying the coverage tests in section 79(d)(3) to determine whether or not a plan of group-term life insurance is discriminatory with respect to coverage?
A-7: No. Generally, a plan of group-term life insurance which covers both active and former employees will not satisfy the nondiscrimination requirements of section 79(d) unless the coverage tests in section 79(d)(3) are satisfied with respect to both the active and the former employees of the employer, except to the extent they are excluded from tests for discrimination by application of the grandfather provisions set forth in Q&A 1. However, for purposes of determining whether a plan is discriminatory with respect to coverage, the coverage tests must be applied separately to active and former employees. In addition, if the plan limits participation by former employees to employees who retired from employment with the employer, then only retired employees must be considered in applying the coverage tests to former employees. Also, in applying the coverage tests in section 79(d)(3), the employer may make reasonable mortality assumptions regarding former employees who are not covered under the plan but must be considered in applying the coverage tests. Furthermore, only those former employees who terminated employment on or after the earliest date of termination from employment for any former employee covered by the plan must be considered. Finally, for purposes of determining whether a plan of group-term life insurance of the employer (or a successor employer) that was in existence on January 1, 1984 (or a comparable successor to such a plan) is discriminatory, after December 31, 1986, with respect to group-term life insurance coverage for former employees, coverage provided to employees who retired on or before December 31, 1986, shall not be taken into account.
Q-8: Will a group-term life insurance plan be considered discriminatory if active employees receive greater benefits as a percentage of compensation than former employees, or vice versa?
A-8: No. For purposes of determining whether a plan is discriminatory with respect to the type and amount of benefits available, insurance coverage for former employees must be tested separately from insurance coverage for active employees. For example, a group-term life insurance plan that provides group-term life insurance benefits equal to 200 percent of compensation for all active employees and 100 percent of final compensation (based on the average annual compensation for the final five years) for all former employees would satisfy the nondiscrimination requirements of section 79(d). However, a group-term life insurance plan that provides group-term life insurance benefits equal to 200 percent of compensation for all active employees and 100 percent of final compensation (based on the average annual compensation for the final five years) only for key employees who are no longer employed by the employer (or a successor employer) would not satisfy the nondiscrimination requirement of section 79(d)(2)(A).
Q-9: Under what circumstances will the amount of benefits available under a plan of group-term life insurance be considered not to discriminate in favor of participants who are key employees?
A-9: A plan of group-term life insurance will be considered not to discriminate in favor of participants who are key employees, as to the amount of benefits available, if the plan provides a fixed amount of insurance which is the same for all covered employees. In other circumstances, the determination of whether a plan is nondiscriminatory will be based on all of the facts and circumstances. Such plans will be considered not to discriminate in favor of participants who are key employees, as to the amount of benefits available, if the plan contains no group of employees described in the following sentence that, if tested separately, would fail to satisfy the requirements of section 79(d)(2)(A). The group subject to separate testing under the preceding sentence consists of a key employee and all other participants (including other key employees) who receive, under the plan, an amount of insurance (as a multiple of compensation (either total compensation or the basic or regular rate of compensation)) that is equal to or greater than the amount of insurance received by such key employee. As described in Q&As 7&8, active and former employees are tested separately under section 79(d)(2)(A).
Example:Assume that a plan of group-term life insurance has 500 participants, 10 of whom are key employees. Under the plan, 400 of the non-key employees receive an amount of insurance equal to 100 percent of compensation, while all of the key employees and 90 of the non-key employees receive an amount of insurance equal to 200 percent of compensation. The plan will be considered not to discriminate in favor of the participants who are key employees because, tested separately, the group of participants receiving an amount of insurance equal to or greater than 200 percent of compensation would satisfy the requirements of section 79(d)(2)(A) (by reason of section 79(d)(3)(A)(ii)). If one of the key employees received an amount of insurance equal to 300 percent of compensation, the plan would be considered to discriminate in favor of participants who are key employees, because, tested separately, the group consisting of the single key employee receiving an amount of insurance equal to or greater than 300 percent of compensation would fail to satisfy the requirements of section 79(d)(2)(A).
In determining the groups of employees that are tested separately for this purpose, allowance shall be made for reasonable differences in amount of insurance (as a multiple of compensation) due to rounding, the use of compensation brackets or other similar factors. Thus, if a plan bases group-term life insurance coverage on “compensation brackets,” it is not intended that any participants will be treated as receiving an amount of insurance (as a multiple of compensation) that is greater (or less) than that of any other participant merely because the first participant's compensation is at the lower (or higher) end of a compensation bracket while the second participant's compensation is at the higher (or lower) end of a compensation bracket. However, any compensation brackets utilized by a plan will be examined to determine if the brackets, or compensation groupings, result in discrimination in favor of key employees. In addition, a plan does not meet the requirements for nondiscrimination as to the type and amount of benefits available under the plan unless all types of benefits (including permanent benefits) and all terms and conditions with respect to such benefits which are available to any participant who is a key employee are also available on a nondiscriminatory basis to non-key employee participants.
Q-10: How is additional coverage purchased by employees under a plan of group-term life insurance treated for purposes of determining whether a plan of group-term life insurance is discriminatory?
A-10: (a) The extent to which employees purchase additional coverage under a plan of group-term life insurance is not taken into account for purposes of determining whether a plan of group-term life insurance is discriminatory. For example, a plan providing insurance to all employees of 1 times annual compensation, which gives all employees the option to purchase additional insurance of 1 times annual compensation at their own expense, would not be considered discriminatory as to the type and amount of benefits available, even if the group (or groups) of participants who purchase additional insurance, if tested separately, would not satisfy the requirements of section 79(d)(2)(A). Solely for this purpose, the choice of an amount of group-term life insurance as a benefit under a cafeteria plan will be treated as the purchase of group-term life insurance by an employee. If additional insurance coverage is available to any key employee that is not available, on a nondiscriminatory basis, to non-key employees, the plan will be considered discriminatory, even if the full cost of such additional insurance coverage is paid by the employee(s) electing such benefits.
(b) If the employer bears a part of the expense of any additional coverage that is purchased by an employee under a plan of group-term life insurance, the additional insurance shall be treated, in part, as an amount of insurance provided by the employer under the plan and, in part, as an amount of insurance purchased by the employee. Except to the extent provided in subparagraph (a) above, the portion of insurance treated as an amount of insurance purchased by the employee is not taken into account for purposes of determining whether the plan is discriminatory. Whether such insurance (together with any other insurance provided by the employer under the plan) will cause the plan to be considered to discriminate in favor of participants who are key employees is determined under the rules of Q&A 9.
Q-11: What effect do the provisions of section 79(d)(1) have if a plan of group-term life insurance is discriminatory for only part of a year?
A-11: If a plan of group-term life insurance is discriminatory at any time during the key employee's taxable year, then it is a discriminatory group-term life insurance plan for that taxable year and the provisions of section 79(d)(1) will be applicable with respect to all group-term life insurance costs allocable to that employee for that year.
Q-12: Are the section 79(d) provisions independent from the requirements contained in Treas. Reg. § 1.79-1?
A-12: Yes. Treasury regulation § 1.79-1(c)(1) provides that life insurance provided to a group of employees cannot qualify as group-term life insurance if it is provided to less than ten full-time employees unless certain requirements are satisfied. The satisfaction of these requirements does not guarantee that the plan will be nondiscriminatory, and vice versa. Treasury regulation § 1.79-1(a)(4) provides that life insurance is not group-term life insurance unless the amount of insurance provided to each employee is computed under a formula that precludes individual selection. The mere fact that a life insurance policy is nondiscriminatory is not determinative as to whether the policy precludes individual selection, and vice versa.
[T.D. 8073, 51 FR 4315, Feb. 4, 1986; 51 FR 7262, Mar. 3, 1986]
§ 1.82-1 Payments for or reimbursements of expenses of moving from one residence to another residence attributable to employment or self-employment.
(a) Reimbursements in gross income—(1) In general. Any amount received or accrued, directly or indirectly, by an individual as a payment for or reimbursement of expenses of moving from one residence to another residence attributable to employment or self-employment is includible in gross income under section 82 as compensation for services in the taxable year received or accrued. For rules relating to the year a deduction may be allowed for expenses of moving from one residence to another residence, see section 217 and the regulations thereunder.
(2) Amounts received or accrued as reimbursement or payment. For purposes of this section, amounts are considered as being received or accrued by an individual as reimbursement or payment whether received in the form of money, property, or services. A cash basis taxpayer will include amounts in gross income under section 82 when they are received or treated as received by him. Thus, for example, if an employer moves an employee's household goods and personal effects from the employee's old resident to his new residence using the employer's facilities, the employee is considered as having received a payment in the amount of the fair market value of the services furnished at the time the services are furnished by the employer. If the employer pays a mover for moving the employee's household goods and personal effects, the employee is considered as having received the payment at the time the employer pays the mover, rather than at the time the mover moves the employee's household goods and personal effects. Where an employee receives a loan or advance from an employer to enable him to pay his moving expenses, the employee will not be deemed to have received a reimbursement of moving expenses until such time as he accounts to his employer if he is not required to repay such loan or advance and if he makes such accounting within a reasonable time. Such loan or advance will be deemed to be a reimbursement of moving expenses at the time of such accounting to the extent used by the employee for such moving expenses.
(3) Direct or indirect payments or reimbursements. For purposes of this section amounts are considered as being received or accrued whether received directly (paid or provided to an individual by an employer, a client, a customer, or similar person) or indirectly (paid to a third party on behalf of an individual by an employer, a client, a customer, or similar person). Thus, if an employer pays a mover for the expenses of moving an employee's household goods and personal effects from one residence to another residence, the employee has indirectly received a payment which is includible in his gross income under section 82.
(4) Expenses of moving from one residence to another residence. An expense of moving from one residence to another residence is any expenditure, cost, loss, or similar item paid or incurred in connection with a move from one residence to another residence. Moving expenses include (but are not limited to) any expenditure, cost, loss, or similar item directly or indirectly resulting from the acquisition, sale, or exchange of property, the transportation of goods or property, or travel (by the taxpayer or any other person) in connection with a change in residence. Such expenses include items described in section 217(b) (relating to the definition of moving expenses), irrespective of the dollar limitations contained in section 217(b)(3) and the conditions contained in section 217(c), as well as items not described in section 217 (b), such as a loss sustained on the sale or exchange of personal property, storage charges, taxes, or expenses of refitting rugs or draperies.
(5) Attributable to employment or self-employment. Any amount received or accrued from an employer, a client, a customer, or similar person in connection with the performance of services for such employer, client, customer, or similar person, is attributable to employment or self-employment. Thus, for example, if an employer reimburses an employee for a loss incurred on the sale of the employee's house, reimbursement is attributable to the performance of services if made because of the employer-employee relationship. Similarly, if an employer in order to prevent an employee's sustaining a loss on a sale of a house acquires the property from the employee at a price in excess of fair market value, the employee is considered to have received a payment attributable to employment to the extent that such payment exceeds the fair market value of the property.
(b) Effective date—(1) In general. Except as provided in subparagraph (2) of this paragraph, paragraph (a) of this section is applicable only to amounts received or accrued in taxable years beginning after December 31, 1969.
(2) Election with respect to payments or reimbursements for expenses paid or incurred before January 1, 1971. Paragraph (a) of this section does not apply with respect to moving expenses paid or incurred before January 1, 1971, in connection with the commencement of work by an employee at a new principal place of work where such employee had been notified by his employer on or before December 19, 1969, of such move and the employee makes an election under paragraph (h) of § 1.217-2.
[T.D. 7195, 37 FR 13533, July 11, 1972, as amended by T.D. 7578, 43 FR 59355, Dec. 20, 1978]
§ 1.83-1 Property transferred in connection with the performance of services.
(a) Inclusion in gross income—(1) General rule. Section 83 provides rules for the taxation of property transferred to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services by such employee or independent contractor. In general, such property is not taxable under section 83(a) until it has been transferred (as defined in § 1.83-3(a)) to such person and become substantially vested (as defined in § 1.83-3(b)) in such person. In that case, the excess of—
(i) The fair market value of such property (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) at the time that the property becomes substantially vested, over
(ii) The amount (if any) paid for such property,
shall be included as compensation in the gross income of such employee or independent contractor for the taxable year in which the property becomes substantially vested. Until such property becomes substantially vested, the transferor shall be regarded as the owner of such property, and any income from such property received by the employee or independent contractor (or beneficiary thereof) or the right to the use of such property by the employee or independent contractor constitutes additional compensation and shall be included in the gross income of such employee or independent contractor for the taxable year in which such income is received or such use is made available. This paragraph applies to a transfer of property in connection with the performance of services even though the transferor is not the person for whom such services are performed.
(2) Life insurance. The cost of life insurance protection under a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection is taxable generally under section 61 and the regulations thereunder during the period such contract remains substantially nonvested (as defined in § 1.83-3(b)). For the taxation of life insurance protection under a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)), see § 1.61-22.
(3) Cross references. For rules concerning the treatment of employers and other transferors of property in connection with the performance of services, see section 83(h) and § 1.83-6. For rules concerning the taxation of beneficiaries of an employees' trust that is not exempt under section 501(a), see section 402(b) and the regulations thereunder.
(b) Subsequent sale, forfeiture, or other disposition of nonvested property. (1) If substantially nonvested property (that has been transferred in connection with the performance of services) is subsequently sold or otherwise disposed of to a third party in an arm's length transaction while still substantially nonvested, the person who performed such services shall realize compensation in an amount equal to the excess of—
(i) The amount realized on such sale or other disposition, over
(ii) The amount (if any) paid for such property.
Such amount of compensation is includible in his gross income in accordance with his method of accounting. Two preceding sentences also apply when the person disposing of the property has received it in a non-arm's length transaction described in paragraph (c) of this section. In addition, section 83(a) and paragraph (a) of this section shall thereafter cease to apply with respect to such property.
(2) If substantially nonvested property that has been transferred in connection with the performance of services to the person performing such services is forfeited while still substantially nonvested and held by such person, the difference between the amount paid (if any) and the amount received upon forfeiture (if any) shall be treated as an ordinary gain or loss. This paragraph (b)(2) does not apply to property to which § 1.83-2(a) applies.
(3) This paragraph (b) shall not apply to, and no gain shall be recognized on, any sale, forfeiture, or other disposition described in this paragraph to the extent that any property received in exchange therefor is substantially nonvested. Instead, section 83 and this section shall apply with respect to such property received (as if it were substituted for the property disposed of).
(c) Dispositions of nonvested property not at arm's length. If substantially nonvested property (that has been transferred in connection with the performance of services) is disposed of in a transaction which is not at arm's length and the property remains substantially nonvested, the person who performed such services realizes compensation equal in amount to the sum of any money and the fair market value of any substantially vested property received in such disposition. Such amount of compensation is includible in his gross income in accordance with his method of accounting. However, such amount of compensation shall not exceed the fair market value of the property disposed of at the time of disposition (determined without regard to any lapse restriction), reduced by the amount paid for such property. In addition, section 83 and these regulations shall continue to apply with respect to such property, except that any amount previously includible in gross income under this paragraph (c) shall thereafter be treated as an amount paid for such property. For example, if in 1971 an employee pays $50 for a share of stock which has a fair market value of $100 and is substantially monvested at that time and later in 1971 (at a time when the property still has a fair market value of $100 and is still substantially nonvested) the employee disposes of, in a transaction not at arm's length, the share of stock to his wife for $10, the employee realizes compensation of $10 in 1971. If in 1972, when the share of stock has a fair market value of $120, it becomes substantially vested, the employee realizes additional compensation in 1972 in the amount of $60 (the $120 fair market value of the stock less both the $50 price paid for the stock and the $10 taxed as compensation in 1971). For purposes of this paragraph, if substantially nonvested property has been transferred to a person other than the person who performed the services, and the transferee dies holding the property while the property is still substantially nonvested and while the person who performed the services is alive, the transfer which results by reason of the death of such transferee is a transfer not at arm's length.
(d) Certain transfers upon death. If substantially nonvested property has been transferred in connection with the performance of services and the person who performed such services dies while the property is still substantially nonvested, any income realized on or after such death with respect to such property under this section is income in respect of a decedent to which the rules of section 691 apply. In such a case the income in respect of such property shall be taxable under section 691 (except to the extent not includible under section 101(b)) to the estate or beneficiary of the person who performed the services, in accordance with section 83 and the regulations thereunder. However, if an item of income is realized upon such death before July 21, 1978, because the property became substantially vested upon death, the person responsible for filing decedent's income tax return for decedent's last taxable year may elect to treat such item as includible in gross income for decedent's last taxable year by including such item in gross income on the return or amended return filed for decedent's last taxable year.
(e) Forfeiture after substantial vesting. If a person is taxable under section 83(a) when the property transferred becomes substantially vested and thereafter the person's beneficial interest in such property is nevertheless forfeited pursuant to a lapse restriction, any loss incurred by such person (but not by a beneficiary of such person) upon such forfeiture shall be an ordinary loss to the extent the basis in such property has been increased as a result of the recognition of income by such person under section 83(a) with respect to such property.
(f) Examples. The provisions of this section may be illustrated by the following examples:
Example 1.On November 1, 1978, X corporation sells to E, an employee, 100 shares of X corporation stock at $10 per share. At the time of such sale the fair market value of the X corporation stock is $100 per share. Under the terms of the sale each share of stock is subject to a substantial risk of forfeiture which will not lapse until November 1, 1988. Evidence of this restriction is stamped on the face of E's stock certificates, which are therefore nontransferable (within the meaning of § 1.83-3(d)). Since in 1978 E's stock is substantially nonvested, E does not include any of such amount in his gross income as compensation in 1978. On November 1, 1988, the fair market value of the X corporation stock is $250 per share. Since the X corporation stock becomes substantially vested in 1988, E must include $24,000 (100 shares of X corporation stock × $250 fair market value per share less $10 price paid by E for each share) as compensation for 1988. Dividends paid by X to E on E's stock after it was transferred to E on November 1, 1973, are taxable to E as additional compensation during the period E's stock is substantially nonvested and are deductible as such by X.
Example 2.Assume the facts are the same as in example (1), except that on November 1, 1985, each share of stock of X corporation in E's hands could as a matter of law be transferred to a bona fide purchaser who would not be required to forfeit the stock if the risk of forfeiture materialized. In the event, however, that the risk materializes, E would be liable in damages to X. On November 1, 1985, the fair market value of the X corporation stock is $230 per share. Since E's stock is transferable within the meaning of § 1.83-3(d) in 1985, the stock is substantially vested and E must include $22,000 (100 shares of X corporation stock × $230 fair market value per share less $10 price paid by E for each share) as compensation for 1985.
Example 3.Assume the facts are the same as in example (1) except that, in 1984 E sells his 100 shares of X corporation stock in an arm's length sale to I, an investment company, for $120 per share. At the time of this sale each share of X corporation's stock has a fair market value of $200. Under paragraph (b) of this section, E must include $11,000 (100 shares of X corporation stock × $120 amount realized per share less $10 price paid by E per share) as compensation for 1984 notwithstanding that the stock remains nontransferable and is still subject to a substantial risk of forfeiture at the time of such sale. Under § 1.83-4(b)(2), I's basis in the X corporation stock is $120 per share.
[T.D. 7554, 43 FR 31913, July 24, 1978, as amended by T.D. 9092, 68 FR 54351, Sept. 17, 2003]
§ 1.83-2 Election to include in gross income in year of transfer.
(a) In general. If property is transferred (within the meaning of § 1.83-3(a)) in connection with the performance of services, the person performing such services may elect to include in gross income under section 83(b) the excess (if any) of the fair market value of the property at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) over the amount (if any) paid for such property, as compensation for services. The fact that the transferee has paid full value for the property transferred, realizing no bargain element in the transaction, does not preclude the use of the election as provided for in this section. If this election is made, the substantial vesting rules of section 83(a) and the regulations thereunder do not apply with respect to such property, and except as otherwise provided in section 83(d)(2) and the regulations thereunder (relating to the cancellation of a nonlapse restriction), any subsequent appreciation in the value of the property is not taxable as compensation to the person who performed the services. Thus, property with respect to which this election is made shall be includible in gross income as of the time of transfer, even though such property is substantially nonvested (as defined in § 1.83-3(b)) at the time of transfer, and no compensation will be includible in gross income when such property becomes substantially vested (as defined in § 1.83-3(b)). In computing the gain or loss from the subsequent sale or exchange of such property, its basis shall be the amount paid for the property increased by the amount included in gross income under section 83(b). If property for which a section 83(b) election is in effect is forfeited while substantially nonvested, such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of—
(1) The amount paid (if any) for such property, over,
(2) The amount realized (if any) upon such forfeiture.
If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss. A sale or other disposition of the property that is in substance a forfeiture, or is made in contemplation of a forfeiture, shall be treated as a forfeiture under the two immediately preceding sentences.
(b) Time for making election. Except as provided in the following sentence, the election referred to in paragraph (a) of this section shall be filed not later than 30 days after the date the property was transferred (or, if later, January 29, 1970) and may be filed prior to the date of transfer. Any statement filed before February 15, 1970, which was amended not later than February 16, 1970, in order to make it conform to the requirements of paragraph (e) of this section, shall be deemed a proper election under section 83(b).
(c) Manner of making election. The election referred to in paragraph (a) of this section is made by filing one copy of a written statement with the internal revenue office with which the person who performed the services files his return.
(d) Additional copies. The person who performed the services shall also submit a copy of the statement referred to in paragraph (c) of this section to the person for whom the services are performed. In addition, if the person who performs the services and the transferee of such property are not the same person, the person who performs the services shall submit a copy of such statement to the transferee of the property.
(e) Content of statement. The statement shall be signed by the person making the election and shall indicate that it is being made under section 83(b) of the Code, and shall contain the following information:
(1) The name, address and taxpayer identification number of the taxpayer;
(2) A description of each property with respect to which the election is being made;
(3) The date or dates on which the property is tansferred and the taxable year (for example, “calendar year 1970” or “fiscal year ending May 31, 1970”) for which such election was made;
(4) The nature of the restriction or restrictions to which the property is subject;
(5) The fair market value at the time of transfer (determined without regard to any lapse restriction, as defined in § 1.83-3(i)) of each property with respect to which the election is being made;
(6) The amount (if any) paid for such property; and
(7) With respect to elections made after July 21, 1978, a statement to the effect that copies have been furnished to other persons as provided in paragraph (d) of this section.
(f) Revocability of election. An election under section 83(b) may not be revoked except with the consent of the Commissioner. Consent will be granted only in the case where the transferee is under a mistake of fact as to the underlying transaction and must be requested within 60 days of the date on which the mistake of fact first became known to the person who made the election. In any event, a mistake as to the value, or decline in the value, of the property with respect to which an election under section 83(b) has been made or a failure to perform an act contemplated at the time of transfer of such property does not constitute a mistake of fact.
(g) Effective/applicability date. Paragraph (c) of this section applies to property transferred on or after January 1, 2016.
[T.D. 7554, 43 FR 31915, July 24, 1978, as amended by T.D. 9779, 81 FR 48708, July 26, 2016]
§ 1.83-3 Meaning and use of certain terms.
(a) Transfer—(1) In general. For purposes of section 83 and the regulations thereunder, a transfer of property occurs when a person acquires a beneficial ownership interest in such property (disregarding any lapse restriction, as defined in § 1.83-3(i)). For special rules applying to the transfer of a life insurance contract (or an undivided interest therein) that is part of a split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)), see § 1.61-22(g).
(2) Option. The grant of an option to purchase certain property does not constitute a transfer of such property. However, see § 1.83-7 for the extent to which the grant of the option itself is subject to section 83. In addition, if the amount paid for the transfer of property is an indebtedness secured by the transferred property, on which there is no personal liability to pay all or a substantial part of such indebtedness, such transaction may be in substance the same as the grant of an option. The determination of the substance of the transaction shall be based upon all the facts and circumstances. The factors to be taken into account include the type of property involved, the extent to which the risk that the property will decline in value has been transferred, and the likelihood that the purchase price will, in fact, be paid. See also § 1.83-4(c) for the treatment of forgiveness of indebtedness that has constituted an amount paid.
(3) Requirement that property be returned. Similarly, no transfer may have occurred where property is transferred under conditions that require its return upon the happening of an event that is certain to occur, such as the termination of employment. In such a case, whether there is, in fact, a transfer depends upon all the facts and circumstances. Factors which indicate that no transfer has occurred are described in paragraph (a) (4), (5), and (6) of this section.
(4) Similarity to option. An indication that no transfer has occurred is the extent to which the conditions relating to a transfer are similar to an option.
(5) Relationship to fair market value. An indication that no transfer has occurred is the extent to which the consideration to be paid the transferee upon surrendering the property does not approach the fair market value of the property at the time of surrender. For purposes of paragraph (a) (5) and (6) of this section, fair market value includes fair market value determined under the rules of § 1.83-5(a)(1), relating to the valuation of property subject to nonlapse restrictions. Therefore, the existence of a nonlapse restriction referred to in § 1.83-5(a)(1) is not a factor indicating no transfer has occurred.
(6) Risk of loss. An indication that no transfer has occurred is the extent to which the transferee does not incur the risk of a beneficial owner that the value of the property at the time of transfer will decline substantially. Therefore, for purposes of this (6), risk of decline in property value is not limited to the risk that any amount paid for the property may be lost.
(7) Examples. The provisions of this paragraph may be illustrated by the following examples:
Example 1.On January 3, 1971, X corporation sells for $500 to S, a salesman of X, 10 shares of stock in X corporation with a fair market value of $1,000. The stock is nontransferable and subject to return to the corporation (for $500) if S's sales do not reach a certain level by December 31, 1971. Disregarding the restriction concerning S's sales (since the restrictions is a lapse restriction), S's interest in the stock is that of a beneficial owner and therefore a transfer occurs on January 3, 1971.
Example 2.On November 17, 1972, W sells to E 100 shares of stock in W corporation with a fair market value of $10,000 in exchange for a $10,000 note without personal liability. The note requires E to make yearly payments of $2,000 commencing in 1973. E collects the dividends, votes the stock and pays the interest on the note. However, he makes no payments toward the face amount of the note. Because E has no personal liability on the note, and since E is making no payments towards the face amount of the note, the likelihood of E paying the full purchase price is in substantial doubt. As a result E has not incurred the risks of a beneficial owner that the value of the stock will decline. Therefore, no transfer of the stock has occurred on November 17, 1972, but an option to purchase the stock has been granted to E.
Example 3.On January 3, 1971, X corporation purports to transfer to E, an employee, 100 shares of stock in X corporation. The X stock is subject to the sole restriction that E must sell such stock to X on termination of employment for any reason for an amount which is equal to the excess (if any) of the book value of the X stock at termination of employment over book value on January 3, 1971. The stock is not transferable by E and the restrictions on transfer are stamped on the certificate. Under these facts and circumstances, there is no transfer of the X stock within the meeting of section 83.
Example 4.Assume the same facts as in example (3) except that E paid $3,000 for the stock and that the restriction required E upon termination of employment to sell the stock to M for the total amount of dividends that have been declared on the stock since September 2, 1971, or $3,000 whichever is higher. Again, under the facts and circumstances, no transfer of the X stock has occurred.
Example 5.On July 4, 1971, X corporation purports to transfer to G, an employee, 100 shares of X stock. The stock is subject to the sole restriction that upon termination of employment G must sell the stock to X for the greater of its fair market value at such time or $100, the amount G paid for the stock. On July 4, 1971 the X stock has a fair market value of $100. Therefore, G does not incur the risk of a beneficial owner that the value of the stock at the time of transfer ($100) will decline substantially. Under these facts and circumstances, no transfer has occurred.
(b) Substantially vested and substantially nonvested property. For purposes of section 83 and the regulations thereunder, property is substantially nonvested when it is subject to a substantial risk of forfeiture, within the meaning of paragraph (c) of this section, and is nontransferable, within the meaning of paragraph (d) of this section. Property is substantially vested for such purposes when it is either transferable or not subject to a substantial risk of forfeiture.
(c) Substantial risk of forfeiture—(1) In general. For purposes of section 83 and these regulations, whether a risk of forfeiture is substantial or not depends upon the facts and circumstances. Except as set forth in paragraphs (j) and (k) of this section, a substantial risk of forfeiture exists only if rights in property that are transferred are conditioned, directly or indirectly, upon the future performance (or refraining from performance) of substantial services by any person, or upon the occurrence of a condition related to a purpose of the transfer if the possibility of forfeiture is substantial. Property is not transferred subject to a substantial risk of forfeiture if at the time of transfer the facts and circumstances demonstrate that the forfeiture condition is unlikely to be enforced. Further, property is not transferred subject to a substantial risk of forfeiture to the extent that the employer is required to pay the fair market value of a portion of such property to the employee upon the return of such property. The risk that the value of property will decline during a certain period of time does not constitute a substantial risk of forfeiture. A nonlapse restriction, standing by itself, will not result in a substantial risk of forfeiture. A restriction on the transfer of property, whether contractual or by operation of applicable law, will result in a substantial risk of forfeiture only if and to the extent that the restriction is described in paragraph (j) or (k) of this section. For this purpose, transfer restrictions that will not result in a substantial risk of forfeiture include, but are not limited to, restrictions that if violated, whether by transfer or attempted transfer of the property, would result in the forfeiture of some or all of the property, or liability by the employee for any damages, penalties, fees, or other amount.
(2) Illustrations of substantial risks of forfeiture. The regularity of the performance of services and the time spent in performing such services tend to indicate whether services required by a condition are substantial. The fact that the person performing services has the right to decline to perform such services without forfeiture may tend to establish that services are insubstantial. Where stock is transferred to an underwriter prior to a public offering and the full enjoyment of such stock is expressly or impliedly conditioned upon the successful completion of the underwriting, the stock is subject to a substantial risk of forfeiture. Where an employee receives property from an employer subject to a requirement that it be returned if the total earnings of the employer do not increase, such property is subject to a substantial risk of forfeiture. On the other hand, requirements that the property be returned to the employer if the employee is discharged for cause or for committing a crime will not be considered to result in a substantial risk of forfeiture. An enforceable requirement that the property be returned to the employer if the employee accepts a job with a competing firm will not ordinarily be considered to result in a substantial risk of forfeiture unless the particular facts and circumstances indicate to the contrary. Factors which may be taken into account in determining whether a convenant not to compete constitutes a substantial risk of forfeiture are the age of the employee, the availability of alternative employment opportunities, the likelihood of the employee's obtaining such other employment, the degree of skill possessed by the employee, the employee's health, and the practice (if any) of the employer to enforce such covenants. Similarly, rights in property transferred to a retiring employee subject to the sole requirement that it be returned unless he renders consulting services upon the request of his former employer will not be considered subject to a substantial risk of forfeiture unless he is in fact expected to perform substantial services.
(3) Enforcement of forfeiture condition. In determining whether the possibility of forfeiture is substantial in the case of rights in property transferred to an employee of a corporation who owns a significant amount of the total combined voting power or value of all classes of stock of the employer corporation or of its parent corporation, there will be taken into account (i) the employee's relationship to other stockholders and the extent of their control, potential control and possible loss of control of the corporation, (ii) the position of the employee in the corporation and the extent to which he is subordinate to other employees, (iii) the employee's relationship to the officers and directors of the corporation, (iv) the person or persons who must approve the employee's discharge, and (v) past actions of the employer in enforcing the provisions of the restrictions. For example, if an employee would be considered as having received rights in property subject to a substantial risk of forfeiture, but for the fact that the employee owns 20 percent of the single class of stock in the transferor corporation, and if the remaining 80 percent of the class of stock is owned by an unrelated individual (or members of such an individual's family) so that the possibility of the corporation enforcing a restriction on such rights is substantial, then such rights are subject to a substantial risk of forfeiture. On the other hand, if 4 percent of the voting power of all the stock of a corporation is owned by the president of such corporation and the remaining stock is so diversely held by the public that the president, in effect, controls the corporation, then the possibility of the corporation enforcing a restriction on rights in property transferred to the president is not substantial, and such rights are not subject to a substantial risk of forfeiture.
(4) Examples. The rules contained in paragraph (c)(1) of this section may be illustrated by the following examples. In each example it is assumed that, if the conditions on transfer are not satisfied, the forfeiture provision will be enforced.
Example 1.On November 1, 1971, corporation X transfers in connection with the performance of services to E, an employee, 100 shares of corporation X stock for $90 per share. Under the terms of the transfer, E will be subject to a binding commitment to resell the stock to corporation X at $90 per share if he leaves the employment of corporation X for any reason prior to the expiration of a 2-year period from the date of such transfer. Since E must perform substantial services for corporation X and will not be paid more than $90 for the stock, regardless of its value, if he fails to perform such services during such 2-year period, E's rights in the stock are subject to a substantial risk of forfeiture during such period.
Example 2.On November 10, 1971, corporation X transfers in connection with the performance of services to a trust for the benefit of employees, $100x. Under the terms of the trust any child of an employee who is an enrolled full-time student at an accredited educational institution as a candidate for a degree will receive an annual grant of cash for each academic year the student completes as a student in good standing, up to a maximum of four years. E, an employee, has a child who is enrolled as a full-time student at an accredited college as a candidate for a degree. Therefore, E has a beneficial interest in the assets of the trust equalling the value of four cash grants. Since E's child must complete one year of college in order to receive a cash grant, E's interest in the trust assets are subject to a substantial risk of forfeiture to the extent E's child has not become entitled to any grants.
Example 3.On November 25, 1971, corporation X gives to E, an employee, in connection with his performance of services to corporation X, a bonus of 100 shares of corporation X stock. Under the terms of the bonus arrangement E is obligated to return the corporation X stock to corporation X if he terminates his employment for any reason. However, for each year occurring after November 25, 1971, during which E remains employed with corporation X, E ceases to be obligated to return 10 shares of the corporation X stock. Since in each year occurring after November 25, 1971, for which E remains employed he is not required to return 10 shares of corporation X's stock, E's rights in 10 shares each year for 10 years cease to be subject to a substantial risk of forfeiture for each year he remains so employed.
Example 4. (a) Assume the same facts as in example (3) except that for each year occurring after November 25, 1971, for which E remains employed with corporation X, X agrees to pay, in redemption of the bonus shares given to E if he terminates employment for any reason, 10 percent of the fair market value of each share of stock on the date of such termination of employment. Since corporation X will pay E 10 percent of the value of his bonus stock for each of the 10 years after November 25, 1971, in which he remains employed by X, and the risk of a decline in value is not a substantial risk of forfeiture, E's interest in 10 percent of such bonus stock becomes substantially vested in each of those years.
(b) The following chart illustrates the fair market value of the bonus stock and the fair market value of the portion of bonus stock that becomes substantially vested on November 25, for the following years:
Year | Fair market value of
All stock | Portion of stock that becomes vested
1972 | $200 | $20
1973 | 300 | 30
1974 | 150 | 15
1975 | 150 | 15
1976 | 100 | 10
If E terminates his employment on July 1, 1977, when the fair market value of the bonus stock is $100, E must return the bonus stock to X, and X must pay, in redemption of the bonus stock, $50 (50 percent of the value of the bonus stock on the date of termination of employment). E has recognized income under section 83(a) and § 1.83-1(a) with respect to 50 percent of the bonus stock, and E's basis in that portion of the stock equals the amount of income recognized, $90. Under § 1.83-1(e), the $40 loss E incurred upon forfeiture ($90 basis less $50 redemption payment) is an ordinary loss.
Example 5.On January 7, 1971, corporation X, a computer service company, transfers to E, 100 shares of corporation X stock for $50. E is a highly compensated salesman who sold X's products in a three-state area since 1960. At the time of transfer each share of X stock has a fair market value of $100. The stock is transferred to E in connection with his termination of employment with X. Each share of X stock is subject to the sole condition that E can keep such share only if he does not engage in competition with X for a 5-year period in the three-state area where E had previously sold X's products. E, who is 45 years old, has no intention of retiring from the work force. In order to earn a salary comparable to his current compensation, while preventing the risk of forfeiture from arising, E will have to expend a substantial amount of time and effort in another industry or market to establish the necessary business contacts. Thus, under these facts and circumstances E's rights in the stock are subject to a substantial risk of forfeiture.
Example 6.On April 3, 2013, Y corporation grants to Q, an officer of Y, a nonstatutory option to purchase Y common stock. Although the option is immediately exercisable, it has no readily ascertainable fair market value when it is granted. Under the option, Q has the right to purchase 100 shares of Y common stock for $10 per share, which is the fair market value of a Y share on the date of grant of the option. On August 1, 2013, Y sells its common stock in an initial public offering. Pursuant to an underwriting agreement entered into in connection with the initial public offering, Q agrees not to sell, otherwise dispose of, or hedge any Y common stock from August 1 through February 1 of 2014 (“the lock-up period”). Q exercises the option and Y shares are transferred to Q on November 15, 2013, during the lock-up period. The underwriting agreement does not impose a substantial risk of forfeiture on the Y shares acquired by Q because the provisions of the agreement do not condition Q's rights in the shares upon anyone's future performance (or refraining from performance) of substantial services or on the occurrence of a condition related to the purpose of the transfer of shares to Q. Accordingly, neither section 83(c)(3) nor the imposition of the lock-up period by the underwriting agreement precludes taxation under section 83 when the shares resulting from exercise of the option are transferred to Q.
Example 7.Assume the same facts as in Example 6, except that on August 1, 2013, Y also adopts an insider trading compliance program, under which, as applied to 2013, insiders (such as Q) may trade Y shares only during a limited number of days following each quarterly earnings release (“a trading window”). Under the program, if Q trades Y shares outside a trading window without Y's permission, Y has the right to terminate Q's employment. However, the exercise of the nonstatutory options outside a trading window for Y shares is not prohibited under the insider trading compliance program. Q fully exercises the option, and Y shares are transferred to Q, on November 15, 2013. The exercise of the option occurs outside a trading window, and, on the date of exercise, Q is in possession of material nonpublic information concerning Y that would subject him to liability under Rule 10b-5 under the Securities Exchange Act of 1934 if Q sold the Y shares while in possession of such information. Neither the insider trading compliance program nor the potential liability under Rule 10b-5 impose a substantial risk of forfeiture on the Y shares acquired by Q because the provisions of the program and Rule 10b-5 do not condition Q's rights in the shares upon anyone's future performance (or refraining from performance) of substantial services or on the occurrence of a condition related to the purpose of the transfer of shares to Q. Accordingly, none of section 83(c)(3), the imposition of the trading windows by the insider trading compliance program, and the potential liability under Rule 10b-5 preclude taxation under section 83 when the shares resulting from exercise of the option are transferred to Q.
(d) Transferability of property. For purposes of section 83 and the regulations thereunder, the rights of a person in property are transferable if such person can transfer any interest in the property to any person other than the transferor of the property, but only if the rights in such property of such transferee are not subject to a substantial risk of forfeiture. Accordingly, property is transferable if the person performing the services or receiving the property can sell, assign, or pledge (as collateral for a loan, or as security for the performance of an obligation, or for any other purpose) his interest in the property to any person other than the transferor of such property and if the transferee is not required to give up the property or its value in the event the substantial risk of forfeiture materializes. On the other hand, property is not considered to be transferable merely because the person performing the services or receiving the property may designate a beneficiary to receive the property in the event of his death.
(e) Property. For purposes of section 83 and the regulations thereunder, the term “property” includes real and personal property other than either money or an unfunded and unsecured promise to pay money or property in the future. The term also includes a beneficial interest in assets (including money) which are transferred or set aside from the claims of creditors of the transferor, for example, in a trust or escrow account. See, however, § 1.83-8(a) with respect to employee trusts and annuity plans subject to section 402(b) and section 403(c). In the case of a transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, or any undivided interest therein, the policy cash value and all other rights under such contract (including any supplemental agreements thereto and whether or not guaranteed), other than current life insurance protection, are treated as property for purposes of this section. However, in the case of the transfer of a life insurance contract, retirement income contract, endowment contract, or other contract providing life insurance protection, which was part of a split-dollar arrangement (as defined in § 1.61-22(b)) entered into (as defined in § 1.61-22(j)) on or before September 17, 2003, and which is not materially modified (as defined in § 1.61-22(j)(2)) after September 17, 2003, only the cash surrender value of the contract is considered to be property. Where rights in a contract providing life insurance protection are substantially nonvested, see § 1.83-1(a)(2) for rules relating to taxation of the cost of life insurance protection.
(f) Property transferred in connection with the performance of services. Property transferred to an employee or an independent contractor (or beneficiary thereof) in recognition of the performance of, or the refraining from performance of, services is considered transferred in connection with the performance of services within the meaning of section 83. The existence of other persons entitled to buy stock on the same terms and conditions as an employee, whether pursuant to a public or private offering may, however, indicate that in such circumstances a transfer to the employee is not in recognition of the performance of, or the refraining from performance of, services. The transfer of property is subject to section 83 whether such transfer is in respect of past, present, or future services.
(g) Amount paid. For purposes of section 83 and the regulations thereunder, the term “amount paid” refers to the value of any money or property paid for the transfer of property to which section 83 applies, and does not refer to any amount paid for the right to use such property or to receive the income therefrom. Such value does not include any stated or unstated interest payments. For rules regarding the calculation of the amount of unstated interest payments, see § 1.483-1(c). When section 83 applies to the transfer of property pursuant to the exercise of an option, the term “amount paid” refers to any amount paid for the grant of the option plus any amount paid as the exercise price of the option. For rules regarding the forgiveness of indebtedness treated as an amount paid, see § 1.83-4(c).
(h) Nonlapse restriction. For purposes of section 83 and the regulations thereunder, a restriction which by its terms will never lapse (also referred to as a “nonlapse restriction”) is a permanent limitation on the transferability of property—
(1) Which will require the transferee of the property to sell, or offer to sell, such property at a price determined under a formula, and
(2) Which will continue to apply to and be enforced against the transferee or any subsequent holder (other than the transferor).
A limitation subjecting the property to a permanent right of first refusal in a particular person at a price determined under a formula is a permanent nonlapse restriction. Limitations imposed by registration requirements of State or Federal security laws or similar laws imposed with respect to sales or other dispositions of stock or securities are not nonlapse restrictions. An obligation to resell or to offer to sell property transferred in connection with the performance of services to a specific person or persons at its fair market value at the time of such sale is not a nonlapse restriction. See § 1.83-5(c) for examples of nonlapse restrictions.
(i) Lapse restriction. For purposes of section 83 and the regulations thereunder, the term “lapse restriction” means a restriction other than a nonlapse restriction as defined in paragraph (h) of this section, and includes (but is not limited to) a restriction that carries a substantial risk of forfeiture.
(j) Sales which may give rise to suit under section 16(b) of the Securities Exchange Act of 1934—(1) In general. For purposes of section 83 and the regulations thereunder if the sale of property at a profit within six months after the purchase of the property could subject a person to suit under section 16(b) of the Securities Exchange Act of 1934, the person's rights in the property are treated as subject to a substantial risk of forfeiture and as not transferable until the earlier of (i) the expiration of such six-month period, or (ii) the first day on which the sale of such property at a profit will not subject the person to suit under section 16(b) of the Securities Exchange Act of 1934. However, whether an option is “transferable by the optionee” for purposes of § 1.83-7(b)(2)(i) is determined without regard to section 83(c)(3) and this paragraph (j).
(2) Examples. The provisions of this paragraph may be illustrated by the following examples:
Example 1.On January 1, 1983, X corporation sells to P, a beneficial owner of 12% of X corporation stock, in connection with P's performance of services, 100 shares of X corporation stock at $10 per share. At the time of the sale the fair market value of the X corporation stock is $100 per share. P, as a beneficial owner of more 10% of X corporation stock, is liable to suit under section 16(b) of the Securities Exchange Act of 1934 for recovery of any profit from any sale and purchase or purchase and sale of X corporation stock within a six-month period, but no other restrictions apply to the stock. Because the section 16(b) restriction is applicable to P, P's rights in the 100 shares of stock purchased on January 1, 1983, are treated as subject to a substantial risk of forfeiture and as not transferable through June 29, 1983. P chooses not to make an election under section 83 (b) and therefore does not include any amount with respect to the stock purchase in gross income as compensation on the date of purchase. On June 30, 1983, the fair market value of X corporation stock is $250 per share. P must include $24,000 (100 shares of X corporation stock × $240 ($250 fair market value per share less $10 price paid by P for each share)) in gross income as compensation on June 30, 1983. If, in this example, restrictions other than section 16(b) applied to the stock, such other restrictions (but not section 16(b)) would be taken into account in determining whether the stock is subject to a substantial risk of foreiture and is nontransferable for periods after June 29, 1983.
Example 2.Assume the same facts as in example (1) except that P is not an insider on or after May 1, 1983, and the section 16(b) restriction does not apply beginning on that date. On May 1, 1983, P must include in gross income as compensation the difference between the fair market value of the stock on that date and the amount paid for the stock.
Example 3.Assume the same facts as in example (1) except that on June 1, 1983, X corporation sells to P an additional 100 shares of X corporation stock at $20 per share. At the time of the sale the fair market value of the X corporation stock is $150 per share. On June 30, 1983, P must include $24,000 in gross income as compensation with respect to the January 1, 1983 purchase. On November 30, 1983, the fair market value of X corporation stock is $200 per share. Accordingly, on that date P must include $18,000 (100 shares of X corporation stock × $180 ($200 fair market value per share less $20 price paid by P for each share)) in gross income as compensation with respect to the June 1, 1983 purchase.
Example 4. (i) On June 3, 2013, Y corporation grants to Q, an officer of Y, a nonstatutory option to purchase Y common stock. Y stock is traded on an established securities market. Although the option is immediately exercisable, it has no readily ascertainable fair market value when it is granted. Under the option, Q has the right to purchase 100 shares of Y common stock for $10 per share, which is the fair market value of a Y share on the date of grant of the option. The grant of the option is not one that satisfies the requirements for a transaction that is exempt from section 16(b) of the Securities Exchange Act of 1934. On December 15, 2013, Y stock is trading at more than $10 per share. On that date, Q fully exercises the option, paying the exercise price in cash, and receives 100 Y shares. Q's rights in the shares received as a result of the exercise are not conditioned upon the future performance of substantial services. Because no exemption from section 16(b) was available for the June 3, 2013 grant of the option, the section 16(b) liability period expires on December 1, 2013. Accordingly, the section 16(b) liability period expires before the date that Q exercises the option and the Y common stock is transferred to Q. Thus, the shares acquired by Q pursuant to the exercise of the option are not subject to a substantial risk of forfeiture under section 83(c)(3) as a result of section 16(b). As a result, section 83(c)(3) does not preclude taxation under section 83 when the shares acquired pursuant to the December 15, 2013 exercise of the option are transferred to Q.
(ii) Assume the same facts as in paragraph (i) of this Example 4 except that Q exercises the nonstatutory option on October 30, 2013 when Y stock is trading at more than $10 per share. The shares acquired are subject to a substantial risk of forfeiture under section 83(c)(3) as a result of section 16(b) through December 1, 2013.
(iii) Assume the same facts as in paragraph (i) of this Example 4 except that on November 5, 2013, Q also purchases 100 shares of Y common stock on the public market. The purchase of the shares is not a transaction exempt from section 16(b) of the Securities Exchange Act of 1934. Because no exemption from section 16(b) was available for the November 5, 2013 purchase of shares, the section 16(b) liability period with respect to such shares will last for a period of six months after the November 5, 2013 purchase of shares. Notwithstanding the non-exempt purchase of Y common stock on November 5, 2013, the shares acquired by Q pursuant to the December 15, 2013 exercise of the option are not subject to a substantial risk of forfeiture under section 83(c)(3) as a result of section 16(b). As a result, section 83(c)(3) does not preclude taxation under section 83 when the shares acquired pursuant to the December 15, 2013 exercise of the option are transferred to Q.
(k) For purposes of section 83 and the regulations thereunder, property is subject to substantial risk of forfeiture and is not transferable so long as the property is subject to a restriction on transfer to comply with the “Pooling-of-Interests Accounting” rules set forth in Accounting Series Release Numbered 130 ((10/5/72) 37 FR 20937; 17 CFR 211.130) and Accounting Series Release Numbered 135 ((1/18/73) 38 FR 1734; 17 CFR 211.135).
(l) Effective/applicability date. This section applies to property transferred on or after January 1, 2013. For rules relating to property transferred before that date, see § 1.83-3 as contained in 26 CFR part 1 (as of April 1, 2012).
[T.D. 7554, 43 FR 31916, July 24, 1978, as amended by T.D. 8042, 50 FR 31713, Aug. 6, 1985; 50 FR 39664, Sept. 30, 1985; T.D. 9092, 68 FR 54351, Sept. 17, 2003; T.D. 9223, 70 FR 50971, Aug. 29, 2005; T.D. 9659, 79 FR 10664, Feb. 26, 2014]
§ 1.83-4 Special rules.
(a) Holding period. Under section 83(f), the holding period of transferred property to which section 83(a) applies shall begin just after such property is substantially vested. However, if the person who has performed the services in connection with which property is transferred has made an election under section 83(b), the holding period of such property shall begin just after the date such property is transferred. If property to which section 83 and the regulations thereunder apply is transferred at arm's length, the holding period of such property in the hands of the transferee shall be determined in accordance with the rules provided in section 1223.
(b) Basis. (1) Except as provided in paragraph (b)(2) of this section, if property to which section 83 and the regulations thereunder apply is acquired by any person (including a person who acquires such property in a subsequent transfer which is not at arm's length), while such property is still substantially nonvested, such person's basis for the property shall reflect any amount paid for such property and any amount includible in the gross income of the person who performed the services (including any amount so includible as a result of a disposition by the person who acquired such property.) Such basis shall also reflect any adjustments to basis provided under sections 1015, 1016, and 1022.
(2) If property to which § 1.83-1 applies is transferred at arm's length, the basis of the property in the hands of the transferee shall be determined under section 1012 and the regulations thereunder.
(c) Forgiveness of indebtedness treated as an amount paid. If an indebtedness that has been treated as an amount paid under § 1.83-1(a)(1)(ii) is subsequently cancelled, forgiven or satisfied for an amount less than the amount of such indebtedness, the amount that is not, in fact, paid shall be includible in the gross income of the service provider in the taxable year in which such cancellation, forgiveness or satisfaction occurs.
(d) Effective/applicability date. The provisions in this section are applicable for taxable years beginning on or after July 21, 1978. The provisions of paragraph (b)(1) of this section relating to section 1022 are effective on and after January 19, 2017.
[T.D. 7554, 43 FR 31918, July 24, 1978, as amended by T.D. 9811, 82 FR 6236, Jan. 19, 2017]
§ 1.83-5 Restrictions that will never lapse.
(a) Valuation. For purposes of section 83 and the regulations thereunder, in the case of property subject to a nonlapse restriction (as defined in § 1.83-3(h)), the price determined under the formula price will be considered to be the fair market value of the property unless established to the contrary by the Commissioner, and the burden of proof shall be on the commissioner with respect to such value. If stock in a corporation is subject to a nonlapse restriction which requires the transferee to sell such stock only at a formula price based on book value, a reasonable multiple of earnings or a reasonable combination thereof, the price so determined will ordinarily be regarded as determinative of the fair market value of such property for purposes of section 83. However, in certain circumstances the formula price will not be considered to be the fair market value of property subject to such a formula price restriction, even though the formula price restriction is a substantial factor in determining such value. For example, where the formula price is the current book value of stock, the book value of the stock at some time in the future may be a more accurate measure of the value of the stock than the current book value of the stock for purposes of determining the fair market value of the stock at the time the stock becomes substantially vested.
(b) Cancellation—(1) In general. Under section 83(d)(2), if a nonlapse restriction imposed on property that is subject to section 83 is cancelled, then, unless the taxpayer establishes—
(i) That such cancellation was not compensatory, and
(ii) That the person who would be allowed a deduction, if any, if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as provided in paragraph (c)(2) of this section, the excess of the fair market value of such property (computed without regard to such restriction) at the time of cancellation, over the sum of—
(iii) The fair market value of such property (computed by taking the restriction into account) immediately before the cancellation, and
(iv) The amount, if any, paid for the cancellation, shall be treated as compensation for the taxable year in which such cancellation occurs. Whether there has been a noncompensatory cancellation of a nonlapse restriction under section 83(d)(2) depends upon the particular facts and circumstances. Ordinarily the fact that the employee or independent contractor is required to perform additional services or that the salary or payment of such a person is adjusted to take the cancellation into account indicates that such cancellation has a compensatory purpose. On the other hand, the fact that the original purpose of a restriction no longer exists may indicate that the purpose of such cancellation is noncompensatory. Thus, for example, if a so-called “buy-sell” restriction was imposed on a corporation's stock to limit ownership of such stock and is being cancelled in connection with a public offering of the stock, such cancellation will generally be regarded as noncompensatory. However, the mere fact that the employer is willing to forego a deduction under section 83(h) is insufficient evidence to establish a noncompensatory cancellation of a nonlapse restriction. The refusal by a corporation or shareholder to repurchase stock of the corporation which is subject to a permanent right of first refusal will generally be treated as a cancellation of a nonlapse restriction. The preceding sentence shall not apply where there is no nonlapse restriction, for example, where the price to be paid for the stock subject to the right of first refusal is the fair market value of the stock. Section 83(d)(2) and this (1) do not apply where immediately after the cancellation of a nonlapse restriction the property is still substantially nonvested and no section 83(b) election has been made with respect to such property. In such a case the rules of section 83(a) and § 1.83-1 shall apply to such property.
(2) Evidence of noncompensatory cancellation. In addition to the information necessary to establish the factors described in paragraph (b)(1) of this section, the taxpayer shall request the employer to furnish the taxpayer with a written statement indicating that the employer will not treat the cancellation of the nonlapse restriction as a compensatory event, and that no deduction will be taken with respect to such cancellation. The taxpayer shall file such written statement with his income tax return for the taxable year in which or with which such cancellation occurs.
(c) Examples. The provisions of this section may be illustrated by the following examples:
Example 1.On November 1, 1971, X corporation whose shares are closely held and not regularly traded, transfers to E, an employee, 100 shares of X corporation stock subject to the condition that, if he desires to dispose of such stock during the period of his employment, he must resell the stock to his employer at its then existing book value. In addition, E or E's estate is obligated to offer to sell the stock at his retirement or death to his employer at its then existing book value. Under these facts and circumstances, the restriction to which the shares of X corporation stock are subject is a nonlapse restriction. Consequently, the fair market value of the X stock is includible in E's gross income as compensation for taxable year 1971. However, in determining the fair market value of the X stock, the book value formula price will ordinarily be regarded as being determinative of such value.
Example 2.Assume the facts are the same as in example (1), except that the X stock is subject to the condition that if E desires to dispose of the stock during the period of his employment he must resell the stock to his employer at a multiple of earnings per share that is in this case a reasonable approximation of value at the time of transfer to E. In addition, E or E's estate is obligated to offer to sell the stock at his retirement or death to his employer at the same multiple of earnings. Under these facts and circumstances, the restriction to which the X corporation stock is subject is a nonlapse restriction. Consequently, the fair market value of the X stock is includible in E's gross income for taxable year 1971. However, in determining the fair market value of the X stock, the multiple-of-earnings formula price will ordinarily be regarded as determinative of such value.
Example 3.On January 4, 1971, X corporation transfers to E, an employee, 100 shares of stock in X corporation. Each such share of stock is subject to an agreement between X and E whereby E agrees that such shares are to be held solely for investment purposes and not for resale (a so-called investment letter restriction). E's rights in such stock are substantially vested upon transfer, causing the fair market value of each share of X corporation stock to be includible in E's gross income as compensation for taxable year 1971. Since such an investment letter restriction does not constitute a nonlapse restriction, in determining the fair market value of each share, the investment letter restriction is disregarded.
Example 4.On September 1, 1971, X corporation transfers to B, an independent contractor, 500 shares of common stock in X corporation in exchange for B's agreement to provide services in the construction of an office building on property owned by X corporation. X corporation has 100 shares of preferred stock outstanding and an additional 500 shares of common stock outstanding. The preferred stock has a liquidation value of $1,000x, which is equal to the value of all assets owned by X. Therefore, the book value of the common stock in X corporation is $0. Under the terms of the transfer, if B wishes to dispose of the stock, B must offer to sell the stock to X for 150 percent of the then existing book value of B's common stock. The stock is also subject to a substantial risk of forfeiture until B performs the agreed-upon services. B makes a timely election under section 83(b) to include the value of the stock in gross income in 1971. Under these facts and circumstances, the restriction to which the shares of X corporation common stock are subject is a nonlapse restriction. In determining the fair market value of the X common stock at the time of transfer, the book value formula price would ordinarily be regarded as determinative of such value. However, the fair market value of X common stock at the time of transfer, subject to the book value restriction, is greater than $0 since B was willing to agree to provide valuable personal services in exchange for the stock. In determining the fair market value of the stock, the expected book value after construction of the office building would be given great weight. The likelihood of completion of construction would be a factor in determining the expected book value after completion of construction.
[T.D. 7554, 43 FR 31918, July 24, 1978]
§ 1.83-6 Deduction by employer.
(a) Allowance of deduction—(1) General rule. In the case of a transfer of property in connection with the performance of services, or a compensatory cancellation of a nonlapse restriction described in section 83(d) and § 1.83-5, a deduction is allowable under section 162 or 212 to the person for whom the services were performed. The amount of the deduction is equal to the amount included as compensation in the gross income of the service provider under section 83 (a), (b), or (d)(2), but only to the extent the amount meets the requirements of section 162 or 212 and the regulations thereunder. The deduction is allowed only for the taxable year of that person in which or with which ends the taxable year of the service provider in which the amount is included as compensation. For purposes of this paragraph, any amount excluded from gross income under section 79 or section 101(b) or subchapter N is considered to have been included in gross income.
(2) Special Rule. For purposes of paragraph (a)(1) of this section, the service provider is deemed to have included the amount as compensation in gross income if the person for whom the services were performed satisfies in a timely manner all requirements of section 6041 or section 6041A, and the regulations thereunder, with respect to that amount of compensation. For purposes of the preceding sentence, whether a person for whom services were performed satisfies all requirements of section 6041 or section 6041A, and the regulations thereunder, is determined without regard to § 1.6041-3(c) (exception for payments to corporations). In the case of a disqualifying disposition of stock described in section 421(b), an employer that otherwise satisfies all requirements of section 6041 and the regulations thereunder will be considered to have done so timely for purposes of this paragraph (a)(2) if Form W-2 or Form W-2c, as appropriate, is furnished to the employee or former employee, and is filed with the federal government, on or before the date on which the employer files the tax return claiming the deduction relating to the disqualifying disposition.
(3) Exceptions. Where property is substantially vested upon transfer, the deduction shall be allowed to such person in accordance with his method of accounting (in conformity with sections 446 and 461). In the case of a transfer to an employee benefit plan described in § 1.162-10(a) or a transfer to an employees' trust or annuity plan described in section 404(a)(5) and the regulations thereunder, section 83(h) and this section do not apply.
(4) Capital expenditure, etc. No deduction is allowed under section 83(h) to the extent that the transfer of property constitutes a capital expenditure, an item of deferred expense, or an amount properly includible in the value of inventory items. In the case of a capital expenditure, for example, the basis of the property to which such capital expenditure relates shall be increased at the same time and to the same extent as any amount includible in the employee's gross income in respect of such transfer. Thus, for example, no deduction is allowed to a corporation in respect of a transfer of its stock to a promoter upon its organization, notwithstanding that such promoter must include the value of such stock in his gross income in accordance with the rules under section 83.
(5) Transfer of life insurance contract (or an undivided interest therein)—(i) General rule. In the case of a transfer of a life insurance contract (or an undivided interest therein) described in § 1.61-22(c)(3) in connection with the performance of services, a deduction is allowable under paragraph (a)(1) of this section to the person for whom the services were performed. The amount of the deduction, if allowable, is equal to the sum of the amount included as compensation in the gross income of the service provider under § 1.61-22(g)(1) and the amount determined under § 1.61-22(g)(1)(ii).
(ii) Effective date—(A) General rule. Paragraph (a)(5)(i) of this section applies to any split-dollar life insurance arrangement (as defined in § 1.61-22(b)(1) or (2)) entered into after September 17, 2003. For purposes of this paragraph (a)(5), an arrangement is entered into as determined under § 1.61-22(j)(1)(ii).
(B) Modified arrangements treated as new arrangements. If an arrangement entered into on or before September 17, 2003 is materially modified (within the meaning of § 1.61-22(j)(2)) after September 17, 2003, the arrangement is treated as a new arrangement entered into on the date of the modification.
(6) Effective date. Paragraphs (a)(1) and (2) of this section apply to deductions for taxable years beginning on or after January 1, 1995. However, taxpayers may also apply paragraphs (a)(1) and (2) of this section when claiming deductions for taxable years beginning before that date if the claims are not barred by the statute of limitations. Paragraphs (a) (3) and (4) of this section are effective as set forth in § 1.83-8(b).
(b) Recognition of gain or loss. Except as provided in section 1032, at the time of a transfer of property in connection with the performance of services the transferor recognizes gain to the extent that the transferor receives an amount that exceeds the transferor's basis in the property. In addition, at the time a deduction is allowed under section 83(h) and paragraph (a) of this section, gain or loss is recognized to the extent of the difference between (1) the sum of the amount paid plus the amount allowed as a deduction under section 83(h), and (2) the sum of the taxpayer's basis in the property plus any amount recognized pursuant to the previous sentence.
(c) Forfeitures. If, under section 83(h) and paragraph (a) of this section, a deduction, an increase in basis, or a reduction of gross income was allowable (disregarding the reasonableness of the amount of compensation) in respect of a transfer of property and such property is subsequently forfeited, the amount of such deduction, increase in basis or reduction of gross income shall be includible in the gross income of the person to whom it was allowable for the taxable year of forfeiture. The basis of such property in the hands of the person to whom it is forfeited shall include any such amount includible in the gross income of such person, as well as any amount such person pays upon forfeiture.
(d) Special rules for transfers by shareholders—(1) Transfers. If a shareholder of a corporation transfers property to an employee of such corporation or to an independent contractor (or to a beneficiary thereof), in consideration of services performed for the corporation, the transaction shall be considered to be a contribution of such property to the capital of such corporation by the shareholder, and immediately thereafter a transfer of such property by the corporation to the employee or independent contractor under paragraphs (a) and (b) of this section. For purposes of this (1), such a transfer will be considered to be in consideration for services performed for the corporation if either the property transferred is substantially nonvested at the time of transfer or an amount is includible in the gross income of the employee or independent contractor at the time of transfer under § 1.83-1(a)(1) or § 1.83-2(a). In the case of such a transfer, any money or other property paid to the shareholder for such stock shall be considered to be paid to the corporation and transferred immediately thereafter by the corporation to the shareholder as a distribution to which section 302 applies. For special rules that may applyto a corporation's transfer of its own stock to any person in consideration of services performed for another corporation or partnership, see § 1.1032-3. The preceding sentence applies to transfers of stock and amounts paid for such stock occurring on or after May 16, 2000.
(2) Forfeiture. If, following a transaction described in paragraph (d)(1) of this section, the transferred property is forfeited to the shareholder, paragraph (c) of this section shall apply both with respect to the shareholder and with respect to the corporation. In addition, the corporation shall in the taxable year of forfeiture be allowed a loss (or realize a gain) to offset any gain (or loss) realized under paragraph (b) of this section. For example, if a shareholder transfers property to an employee of the corporation as compensation, and as a result the shareholder's basis of $200x in such property is allocated to his stock in such corporation and such corporation recognizes a short-term capital gain of $800x, and is allowed a deduction of $1,000x on such transfer, upon a subsequent forfeiture of the property to the shareholder, the shareholder shall take $200x into gross income, and the corporation shall take $1,000x into gross income and be allowed a short-term capital loss of $800x.
(e) Options. [Reserved]
(f) Reporting requirements. [Reserved]
[T.D. 7554, 43 FR 31919, July 24, 1978, as amended by T.D. 8599, July 19, 1995; T.D. 8883, 65 FR 31076, May 16, 2000; T.D. 9092, 68 FR 54352, Sept. 17, 2003]
§ 1.83-7 Taxation of nonqualified stock options.
(a) In general. If there is granted to an employee or independent contractor (or beneficiary thereof) in connection with the performance of services, an option to which section 421 (relating generally to certain qualified and other options) does not apply, section 83(a) shall apply to such grant if the option has a readily ascertainable fair market value (determined in accordance with paragraph (b) of this section) at the time the option is granted. The person who performed such services realizes compensation upon such grant at the time and in the amount determined under section 83(a). If section 83(a) does not apply to the grant of such an option because the option does not have a readily ascertainable fair market value at the time of grant, sections 83(a) and 83(b) shall apply at the time the option is exercised or otherwise disposed of, even though the fair market value of such option may have become readily ascertainable before such time. If the option is exercised, sections 83(a) and 83(b) apply to the transfer of property pursuant to such exercise, and the employee or independent contractor realizes compensation upon such transfer at the time and in the amount determined under section 83(a) or 83(b). If the option is sold or otherwise disposed of in an arm's length transaction, sections 83(a) and 83(b) apply to the transfer of money or other property received in the same manner as sections 83(a) and 83(b) would have applied to the transfer of property pursuant to an exercise of the option. The preceding sentence does not apply to a sale or other disposition of the option to a person related to the service provider that occurs on or after July 2, 2003. For this purpose, a person is related to the service provider if—
(1) The person and the service provider bear a relationship to each other that is specified in section 267(b) or 707(b)(1), subject to the modifications that the language “20 percent” is used instead of “50 percent” each place it appears in sections 267(b) and 707(b)(1), and section 267(c)(4) is applied as if the family of an individual includes the spouse of any member of the family; or
(2) The person and the service provider are engaged in trades or businesses under common control (within the meaning of section 52(a) and (b)); provided that a person is not related to the service provider if the person is the service recipient with respect to the option or the grantor of the option.
(b) Readily ascertainable defined—(1) Actively traded on an established market. Options have a value at the time they are granted, but that value is ordinarily not readily ascertainable unless the option is actively traded on an established market. If an option is actively traded on an established market, the fair market value of such option is readily ascertainable for purposes of this section by applying the rules of valuation set forth in § 20.2031-2.
(2) Not actively traded on an established market. When an option is not actively traded on an established market, it does not have a readily ascertainable fair market value unless its fair market value can otherwise be measured with reasonable accuracy. For purposes of this section, if an option is not actively traded on an established market, the option does not have a readily ascertainable fair market value when granted unless the taxpayer can show that all of the following conditions exist:
(i) The option is transferable by the optionee;
(ii) The option is exerciseable immediately in full by the optionee;
(iii) The option or the property subject to the option is not subject to any restriction or condition (other than a lien or other condition to secure the payment of the purchase price) which has a significant effect upon the fair market value of the option; and
(iv) The fair market value of the option privilege is readily ascertainable in accordance with paragraph (b)(3) of this section.
(3) Option privilege. The option privilege in the case of an option to buy is the opportunity to benefit during the option's exercise period from any increase in the value of property subject to the option during such period, without risking any capital. Similarly, the option privilege in the case of an option to sell is the opportunity to benefit during the exercise period from a decrease in the value of property subject to the option. For example, if at some time during the exercise period of an option to buy, the fair market value of the property subject to the option is greater than the option's exercise price, a profit may be realized by exercising the option and immediately selling the property so acquired for its higher fair market value. Irrespective of whether any such gain may be realized immediately at the time an option is granted, the fair market value of an option to buy includes the value of the right to benefit from any future increase in the value of the property subject to the option (relative to the option exercise price), without risking any capital. Therefore, the fair market value of an option is not merely the difference that may exist at a particular time between the option's exercise price and the value of the property subject to the option, but also includes the value of the option privilege for the remainder of the exercise period. Accordingly, for purposes of this section, in determining whether the fair market value of an option is readily ascertainable, it is necessary to consider whether the value of the entire option privilege can be measured with reasonable accuracy. In determining whether the value of the option privilege is readily ascertainable, and in determining the amount of such value when such value is readily ascertainable, it is necessary to consider—
(i) Whether the value of the property subject to the option can be ascertained;
(ii) The probability of any ascertainable value of such property increasing or decreasing; and
(iii) The length of the period during which the option can be exercised.
(c) Reporting requirements. [Reserved]
(d) This section applies on and after July 2, 2003. For transactions prior to that date, see § 1.83-7 as published in 26 CFR part 1 (revised as of April 1, 2003).
[T.D. 7554, 43 FR 31920, July 24, 1978, as amended by T.D. 9067, 68 FR 39454, July 2, 2003; T.D. 9148, 69 FR 48392, Aug. 10, 2004]
§ 1.83-8 Applicability of section and transitional rules.
(a) Scope of section 83. Section 83 is not applicable to—
(1) A transaction concerning an option to which section 421 applies;
(2) A transfer to or from a trust described in section 401(a) for the benefit of employees or their beneficiaries, or a transfer under an annuity plan that meets the requirements of section 404(a)(2) for the benefit of employees or their beneficiaries;
(3) The transfer of an option without a readily ascertainable fair market value (as defined in § 1.83-7(b)(1)); or
(4) The transfer of property pursuant to the exercise of an option with a readily ascertainable fair market value at the date of grant. Section 83 applies to a transfer to or from a trust or under an annuity plan for the benefit of employees, independent contractors, or their beneficiaries (except as provided in paragraph (a)(2) of this section), but to the extent a transfer is subject to section 402(b) or 403(c), section 83 applies to such a transfer only as provided for in section 402(b) or 403(c).
(b) Transitional rules—(1) In general. Except as otherwise provided in this paragraph, section 83 and the regulations thereunder shall apply to property transferred after June 30, 1969.
(2) Binding written contracts. Section 83 and the regulations thereunder shall not apply to property transferred pursuant to a binding written contract entered into before April 22, 1969. For purposes of this paragraph, a binding written contract means only a written contract under which the employee or independent contractor has an enforceable right to compel the transfer of property or to obtain damages upon the breach of such contract. A contract which provides that a person's right to such property is contingent upon the happening of an event (including the passage of time) may satisfy the requirements of this paragraph. However, if the event itself, or the determination of whether the event has occurred, rests with the board of directors or any other individual or group acting on behalf of the employer (other than an arbitrator), the contract will not be treated as giving the person an enforceable right for purposes of this paragraph.
The fact that the board of directors has the power (either expressly or impliedly) to terminate employment of an officer pursuant to a contract that contemplates the completion of services over a fixed or ascertainable period does not negate the existence of a binding written contract. Nor will the binding nature of the contract be negated by a provision in such contract which allows the employee or independent contractor to terminate the contract for any year and receive cash instead of property if such election would cause a substantial penalty, such as a forfeiture of part or all of the property received in connection with the performance of services in an earlier year.
(3) Options granted before April 22, 1969. Section 83 shall not apply to property received upon the exercise of an option granted before April 22, 1969.
(4) Certain written plans. Section 83 shall not apply to property transferred (whether or not by the exercise of an option) before May 1, 1970, pursuant to a written plan adopted and approved before July 1, 1969. A plan is to be considered as having been adopted and approved before July 1, 1969, only if prior to such date the transferor of the property undertook an ascertainable course of conduct which under applicable State law does not require further approval by the board of directors or the stockholders of any corporation. For example, if a corporation transfers property to an employee in connection with the performance of services pursuant to a plan adopted and approved before July 1, 1969, by the board of directors of such corporation, it is not necessary that the stockholders have adopted or approved such plan if State law does not require such approval. However, such approval is necessary if required by the articles of incorporation or the bylaws or if, by its terms, such plan will not become effective without such approval.
(5) Certain options granted pursuant to a binding written contract. Section 83 shall not apply to property transferred before January 1, 1973, upon the exercise of an option granted pursuant to a binding written contract (as defined in paragraph (b)(2) of this section) entered into before April 22, 1969, between a corporation and the transferor of such property requiring the transferor to grant options to employees of such corporation (or a subsidiary of such corporation) to purchase a determinable number of shares of stock of such corporation, but only if the transferee was an employee of such corporation (or a subsidiary of such corporation) on or before April 22, 1969.
(6) Certain tax free exchanges. Section 83 shall not apply to property transferred in exchange for (or pursuant to the exercise of a conversion privilege contained in) property transferred before July 1, 1969, or in exchange for property to which section 83 does not apply (by reason of paragraphs (1), (2), (3), or (4) of section 83(i)), if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, or if gain or loss is not otherwise required to be recognized upon the exercise of such conversion privilege, and if the property received in such exchange is subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject.
[T.D. 7554, 43 FR 31921, July 24, 1978]
§ 1.84-1 Transfer of appreciated property to political organizations.
(a) Transfer defined. A transfer after May 7, 1974, of property to a political organization (as defined in section 527(e)(1), and including a newsletter fund to the extent provided under section 527(g)) is treated as a sale of the property to the political organization if the fair market value of the property exceeds its adjusted basis. The transferor is treated as having realized an amount equal to the fair market value of the property on the date of the transfer. For purposes of this section, a transfer is any assignment, conveyance, or delivery of property other than a bona fide sale for an adequate and full consideration in money or money's worth, whether the transfer is in trust or otherwise, whether the transfer is direct or indirect and whether the property is real or personal, tangible or intangible. Thus, for example, a sale at less than fair market value (other than an ordinary trade discount), or a receipt of property by a political organization under an agency agreement entitling the organization to sell the property and retain all or a portion of the proceeds of the sale, is a transfer within the meaning, of this section. The term “transfer” also includes an illegal contribution of property.
(b) Amount realized. A transferor to whom this section applies realizes an amount equal to the fair market value of the property on the date of the transfer. For purposes of this section, the definition of fair market value set forth in § 1.170A-1(c) (2) and (3) is incorporated by reference.
(c) Amount recognized. A transferor to whom this section applies is treated as having sold the property to the political organization on the date of the transfer. Therefore, the rules of chapter 1 of subtitle A (relating to income tax) apply to the gain realized under this section as if this gain were an amount realized upon the sale of the property. These rules include those of section 55 and section 56 (relating to minimum tax for tax preference), section 306 (relating to disposition of certain stock), section 1201 (relating to the alternative tax on certain capital gains), section 1245 (relating to gain from dispositions of certain depreciable property), and section 1250 (relating to gain from dispositions of certain depreciable realty).
(d) Holding period. The holding period of property transferred to a political organization to which this section applies begins on the day after the date of acquisition of the property by the political organization.
[T.D. 7671, 45 FR 8003, Feb. 6, 1980]
§ 1.85-1 Unemployment compensation.
(a) Introduction. Section 85 prescribes rules relating to the inclusion in gross income of unemployment compensation (as defined in paragraph (b)(1) of this section) paid in taxable years beginning after December 31, 1978, pursuant to governmental programs. In general, these rules provide that unemployment compensation paid pursuant to governmental programs is includible in the gross income of a taxpayer if the taxpayer's modified adjusted gross income (as defined in paragraph (b)(2) of this section) exceeds a statutory base amount (as defined in paragraph (b)(3) of this section). If there is such an excess, however, the amount included in gross income is limited under paragraph (c)(1) of this section to the lesser of one-half of such excess or the amount of the unemployment compensation. If such taxpayer's modified adjusted gross income does not exceed the applicable statutory base amount, none of the unemployment compensation is included in the taxpayer's gross income.
(b) Definitions—(1) Unemployment compensation—(i) General rule. Except as provided in paragraph (b)(1)(iii) of this section, the term “unemployment compensation” means any amount received under a law of the United States, or of a State, which is in the nature of unemployment compensation. Thus, section 85 applies only to unemployment compensation paid pursuant to governmental programs and does not apply to amounts paid pursuant to private nongovernmental unemployment compensation plans (which are includible in income without regard to section 85). Generally, unemployment compensation programs are those designed to protect taxpayers against the loss of income caused by involuntary layoff. Ordinarily, unemployment compensation is paid in cash and on a periodic basis. The amount of the payments is usually computed in accordance with formula based on the taxpayer's length of prior employment and wages. Such payments, however, may be made in a lump sum or other than in cash or on some other basis.
(ii) Disability and worker's compensation payments. Amounts in the nature of unemployment compensation also include cash disability payments made pursuant to a governmental program as a substitute for case unemployment payments to an unemployed taxpayer who is ineligible for such payments solely because of the disability. Usually these disability payments are paid in the same weekly amount and for the same period as the unemployment compensation benefits to which the unemployed taxpayer otherwise would have been entitled. Amounts received under workmen's compensation acts as compensation for personal injuries or sickness are not amounts in the nature of unemployment compensation. See section 104(a)(1) relating to the exclusion from gross income of such amounts.
(iii) Employee contributions to a governmental plan. If a governmental unemployment compensation program is funded in part by an employee's contribution which is not deductible by the employee, an amount paid to such employee under the program is not to be considered unemployment compensation until an amount equal to the total nondeductible contributions paid by the employee to such program has been paid to such employee.
(iv) Examples of governmental unemployment compensation programs. Governmental unemployment compensation programs include (but are not limited to) programs established under:
(A) A State law approved by the Secretary of Labor pursuant to section 3304 of the Internal Revenue Code of 1954.
(B) Chapter 85 of title 5, United States Code, relating to unemployment compensation for Federal employees generally and for ex-servicemen.
(C) Trade Act of 1974, sections 231 and 232 (19 U.S.C. 2291 and 2292).
(D) Disaster Relief Act of 1974, section 407 (42 U.S.C. 5177).
(E) The Airline Deregulation Act of 1978 (49 U.S.C. 1552(b)).
(F) The Railroad Unemployment Insurance Act, section 2 (45 U.S.C. 352).
(2) Modified adjusted gross income. The term “modified adjusted gross income” means the sum of the following amounts:
(i) Adjusted gross income (as defined in section 62);
(ii) All disability payments of the type that are eligible for exclusion from gross income under section 105(d); and
(iii) All amounts of unemployment compensation (as defined in paragraph (b)(1) of this section).
(3) Base amount. The term “base amount” means—
(i) $25,000 in the case of a joint return under section 6013.
(ii) Zero in the case of a taxpayer who—
(A) Is married (within the meaning of section 143) at the close of the taxable year,
(B) Does not file a joint return for such taxable year, and
(C) Does not live apart (as defined in paragraph (b)(4) of this section) from his or her spouse at all times during the taxable year.
(iii) $20,000 in the case of all other taxpayers.
(4) Living apart. A taxpayer does not “live apart” from his or her spouse at all times during a taxable year if for any period during the taxable year the taxpayer is a member of the same household as such taxpayer's spouse. A taxpayer is a member of a household for any period, including temporary absences due to special circumstances, during which the household is the taxpayer's place of abode. A temporary absence due to special circumstances includes a nonpermanent absence caused by illness, education, business, vacation, or military service.
(c) Limitations—(1) General rule. If for a taxable year, a taxpayer's modified adjusted gross income does not exceed the applicable statutory base amount, no amount of unemployment compensation is included in gross income for the taxable year. If there is such an excess, the taxpayer includes in gross income for the taxable year the lesser of the following:
(i) One-half of the excess of the taxpayer's modified adjusted gross income over such taxpayer's base amount, or
(ii) The amount of unemployment compensation.
(2) Exception for fraudulently received unemployment compensation. If a taxpayer fraudulently receives unemployment compensation under any governmental unemployment compensation program, then the entire amount of such fraudulently received unemployment compensation must be included in the taxpayer's gross income for the taxable year in which the benefits were received. Thus, the limitation in section 85 and in paragraph (c)(1) of this section, does not apply to such amounts.
(3) Examples. The application of this paragraph may be illustrated by the following examples:
Example 1.H and W are married taxpayers who for calendar year 1979 file a joint income tax return. During 1979 H receives $4,500 of disability income that is eligible for an exclusion under section 105(d). W works for part of 1979 and receives $20,000 as compensation and also receives $5,000 of unemployment compensation in 1979. Assume that H and W's adjusted gross income is $20,000. The modified adjusted gross income of H and W is $29,500 ($4,500 + $20,000 + $5,000). Since their modified adjusted gross income ($29,500) is greater than their base amount ($25,000), some of the unemployment compensation received by W must be included in their gross income on their 1979 joint income tax return. Under paragraph (c)(1) of this section, of the $5,000 which is unemployment compensation, the lesser of $2,250 (($29,500—$25,000) ÷ 2) or $5,000 must be included in their gross income. Thus, $2,250 of the $5,000 received by W in 1979 is included in the gross income of H and W on their joint income tax return for 1979.
Example 2.Assume the same facts in example (1) except H received $5,000 of disability income that is eligible for an exclusion under section 105(d) and W receives $28,000 as compensation, and $4,000 which is unemployment compensation. Assume that H and W's adjusted gross income is $28,000. The modified adjusted gross income of H and W is $37,000 ($4,000 + $28,000 + $5,000). Since their modified adjusted gross income ($37,000) is greater than their base amount ($25,000), all of the unemployment compensation received by W must be included in their gross income on their 1979 joint income tax return. Under paragraph (c)(1) of this section, of the $4,000 which is unemployment compensation, the lesser of $6,000 (($37,000—$25,000) ÷ 2) or $4,000 must be included in their gross income. Thus, all of the $4,000 unemployment compensation received by W is included in the gross income of H and W on their joint income tax return for 1979.
(d) Cross reference. See section 6050B, relating to the requirement that every person who makes payments of unemployment compensation aggregating $10 or more to any individual during any calendar year file an information return with the Internal Revenue Service.
[T.D. 7705, 45 FR 46069, July 9, 1980]
§ 1.88-1 Nuclear decommissioning costs.
(a) In general. Section 88 provides that the amount of nuclear decommissioning costs directly or indirectly charged to the customers of a taxpayer that is engaged in the furnishing or sale of electric energy generated by a nuclear power plant must be included in the gross income of such taxpayer in the same manner as amounts charged for electric energy. For this purpose, decommissioning costs directly or indirectly charged to the customers of a taxpayer include all decommissioning costs that consumers are liable to pay by reason of electric energy furnished by the taxpayer during the taxable year, whether payable to the taxpayer, a trust, State government, or other entity, and even though the taxpayer may not control the investment or current expenditure of the amount and the amount may not be paid to the taxpayer at the time decommissioning costs are incurred. However, decommissioning costs payable to a taxpayer holding a qualified leasehold interest (as described in paragraph (b)(2)(ii) of § 1.468A-1) are included in the gross income of such taxpayer, and not in the gross income of the lessor.
(b) Examples. The following examples illustrate the application of the principles of paragraph (a) of this section:
Example 1.X corporation, an accrual method taxpayer engaged in the sale of electric energy generated by a nuclear power plant owned by X, is authorized by the public utility commission of State A to collect nuclear decommissioning costs from ratepayers residing in State A. With respect to the sale of electric energy, X includes in income amounts that have been billed to customers as well as estimated unbilled amounts that relate to energy provided by X after the previous billing but before the end of the taxable year (“accrued unbilled amounts”). The decommissioning costs are included in the monthly bills provided by X to its ratepayers and the entire amount billed is remitted directly to X. Under paragraph (a) of this section, the decommissioning costs must be included in the gross income of X in the same manner as amounts charged for electric energy (i.e., by including in income decommissioning costs that relate to amounts billed as well as decommissioning costs that relate to accrued unbilled amounts). The same rule would apply if the decommissioning costs charged to ratepayers were separately billed and the amounts billed were remitted to State A to be held in trust for the purpose of decommissioning the nuclear power plant owned by X. In that case, X must include in gross income decommissioning costs that relate to amounts billed as well as decommissioning costs that relate to accrued unbilled amounts.
Example 2.Assume the same facts as in Example (1), except that X and M, a municipality located in State A, have entered into a life-of-unit contract pursuant to which (i) M is entitled to 20 percent of the electric energy generated by the nuclear power plant owned by X, and (ii) M is obligated to pay 20 percent of the plant operating costs, including decommissioning costs, incurred by X. Under paragraph (a) of this section, the decommissioning costs that relate to electric energy consumed or distributed by M during any taxable year must be included in the gross income of X for such taxable year. The result contained in this example would be the same if M was a State or an agency or instrumentality of a State or a political subdivision thereof.
(c) Cross reference. For special rules relating to the deduction for amounts paid to a nuclear decommissioning fund, see § 1.468A-1 through § 1.468A-5, 1.468A-7, 1.468A-8.
(d) Effective date. (1) Section 88 and this section apply to nuclear decommissioning costs directly or indirectly charged to the customers of a taxpayer on or after July 18, 1984, and with respect to taxable years ending on or after such date.
(2) If the amount of nuclear decommissioning costs directly or indirectly charged to the customers of a taxpayer before July 18, 1984, was includible in gross income in a different manner than amounts charged for electric energy, such amount must be included in gross income for the taxable year in which includible in gross income under the method of accounting of the taxpayer that was in effect when such amount was charged to customers.
[T.D. 8184, 53 FR 6804, Mar. 3, 1988]
4 Items Specifically Excluded From Gross Income
§ 1.101-1 Exclusion from gross income of proceeds of life insurance contracts payable by reason of death.
(a) Exclusion from gross income—(1) In general. Section 101(a)(1) states the general rule that the proceeds of life insurance policies, if paid by reason of the death of the insured, are excluded from the gross income of the recipient. Death benefit payments having the characteristics of life insurance proceeds payable by reason of death under contracts, such as workmen's compensation insurance contracts, endowment contracts, or accident and health insurance contracts, issued on or before December 31, 1984, are covered by this provision. The exclusion from gross income allowed by section 101(a) applies whether payment is made to the estate of the insured or to any beneficiary (individual, corporation, or partnership) and whether it is made directly or in trust. The extent to which this exclusion applies in cases where life insurance policies have been transferred for a valuable consideration is stated in section 101(a)(2) and in paragraph (b) of this section. The extent to which this exclusion applies in cases in which life insurance policies have been gratuitously transferred or issued in an exchange to which section 1035(a) or section 1031 (to the extent it relates to section 1035(a)) applies (section 1035 exchange) is stated in paragraph (b)(2) of this section. In cases where the proceeds of a life insurance policy, payable by reason of the death of the insured, are paid other than in a single sum at the time of such death, the amounts to be excluded from gross income may be affected by the provisions of section 101 (c) (relating to amounts held under agreements to pay interest) or section 101(d) (relating to amounts payable at a date later than death). See §§ 1.101-3 and 1.101-4. However, neither section 101(c) nor section 101(d) applies to a single sum payment which does not exceed the amount payable at the time of death even though such amount is actually paid at a date later than death. If the life insurance contract is an employer-owned life insurance contract within the definition of section 101(j)(3), the amount to be excluded from gross income may be affected by the provisions of section 101(j).
(2) Cross references. For rules governing the taxability of insurance proceeds constituting benefits payable on the death of an employee—
(i) Under pension, profit-sharing, or stock bonus plans described in section 401(a) and exempt from tax under section 501(a), or under annuity plans described in section 403(a), see section 72 (m)(3) and paragraph (c) of § 1.72-16;
(ii) Under annuity contracts to which § 1.403(b)-3 applies, see § 1.403(b)-7; or
(iii) Under eligible State deferred compensation plans described in section 457(b), see paragraph (c) of § 1.457-1.
For the definition of a life insurance company, see section 801.
(b) Transfers and exchanges of life insurance policies—(1) Transfer of an interest in a life insurance contract for valuable consideration—(i) In general. In the case of a transfer of an interest in a life insurance contract for valuable consideration, including a reportable policy sale for valuable consideration, the amount of the proceeds attributable to the interest that is excludable from gross income under section 101(a)(1) is limited under section 101(a)(2) to the sum of the actual value of the consideration for the transfer paid by the transferee and the premiums and other amounts subsequently paid by the transferee with respect to the interest. For exceptions to this general rule for certain transfers for valuable consideration that are not reportable policy sales, see paragraph (b)(1)(ii) of this section. The application of section 101(d), (f) or (j), which is not addressed in paragraph (b) of this section, may further limit the amount of the proceeds excludable from gross income.
(ii) Exceptions—(A) Exception for carryover basis transfers. The limitation described in paragraph (b)(1)(i) of this section does not apply to the transfer of an interest in a life insurance contract for valuable consideration if each of the following requirements are satisfied. First, the transfer is not a reportable policy sale. Second, the basis of the interest, for the purpose of determining gain or loss with respect to the transferee, is determinable in whole or in part by reference to the basis of the interest in the hands of the transferor (see section 101(a)(2)(A)). Third, paragraph (b)(1)(ii)(B) of this section does not apply. In the case of a transfer described in this paragraph (b)(1)(ii)(A), the amount of the proceeds attributable to the interest that is excludable from gross income under section 101(a)(1) is limited to the sum of the amount that would have been excludable by the transferor if the transfer had not occurred and the premiums and other amounts subsequently paid by the transferee with respect to the interest. The preceding sentence applies without regard to whether the interest previously has been transferred and the nature of any prior transfer of the interest.
(B) Exception for transfers to certain persons—(1) In general. The limitation described in paragraph (b)(1)(i) of this section does not apply to the transfer of an interest in a life insurance contract for valuable consideration if both of the following requirements are satisfied. First, the transfer is not a reportable policy sale and the interest was not previously transferred for valuable consideration in a reportable policy sale. Second, the interest is transferred to the insured, a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer (see section 101(a)(2)(B)).
(2) Transfers to certain persons subsequent to a reportable policy sale. Except as provided in paragraph (b)(1)(ii)(B)(3) of this section, if a transfer of an interest in a life insurance contract would be described in paragraph (b)(1)(ii)(B)(1) of this section, but for the fact that the interest previously was transferred for valuable consideration in a reportable policy sale (whether in the immediately preceding transfer or an earlier transfer), then the amount of the proceeds attributable to the interest that is excludable from gross income under section 101(a)(1) is limited to the sum of—
(i) The higher of the amount that would have been excludable by the transferor if the transfer had not occurred or the actual value of the consideration for the transfer paid by the transferee; and
(ii) The premiums and other amounts subsequently paid by the transferee with respect to the interest.
(3) Transfers to the insured subsequent to a reportable policy sale—(i) Except as provided in paragraph (b)(1)(ii)(B)(3)(ii) of this section, to the extent that an interest (or portion of an interest) in a life insurance contract that was transferred for valuable consideration in a reportable policy sale subsequently is transferred to the insured for valuable consideration, the limitations described in paragraph (b)(1)(i) of this section and paragraph (b)(1)(ii)(B)(2) of this section do not apply. To the extent that fair market value is not paid by the insured for the transferred interest, the transfer of the portion of the interest with a value in excess of the consideration paid will be treated as a gift under the bargain sale rule in paragraph (b)(2)(iii) of this section.
(ii) This paragraph (b)(1)(ii)(B)(3)(ii) applies with respect to an interest described in paragraph (b)(1)(ii)(B)(3)(i) of this section (or portion of such an interest) that subsequently is transferred by the insured to any other person. If all subsequent transfers of the interest (or portion of the interest) are gratuitous transfers that are not reportable policy sales, the amount of the proceeds excluded from gross income is determined under paragraph (b)(2)(i) of this section, taking into account the application of paragraph (b)(1)(ii)(B)(3)(i) of this section to the insured's acquisition of the interest. If any subsequent transfer of the interest (or portion of the interest) is for valuable consideration or is a reportable policy sale, the amount of the policy proceeds excludable from gross income is determined in accordance with paragraph (b) of this section; if the amount that would have been excludable from gross income by the insured following the transaction described in paragraph (b)(1)(ii)(B)(3)(i) of this section if no subsequent transfer had occurred is relevant, that amount is determined under paragraph (b)(1)(ii)(B)(2) of this section. Paragraph (g)(8) (Example 8) of this section and paragraph (g)(9) (Example 9) of this section illustrate the application of this paragraph (b)(1)(ii)(B)(3)(ii).
(2) Other transfers and exchanges—(i) Gratuitous transfer of an interest in a life insurance contract. To the extent that a transfer of an interest in a life insurance contract is gratuitous, including a reportable policy sale that is not for valuable consideration, the amount of the proceeds attributable to the interest that is excludable from gross income under section 101(a)(1) is limited to the sum of the amount of the proceeds attributable to the gratuitously transferred interest that would have been excludable by the transferor if the transfer had not occurred and the premiums and other amounts subsequently paid by the transferee with respect to the interest. However, if an interest in a life insurance contract is transferred gratuitously to the insured, and that interest has not previously been transferred for value in a reportable policy sale, the entire amount of the proceeds attributable to the interest transferred to the insured is excludable from gross income.
(ii) Partial transfers. When only part of an interest in a life insurance contract is transferred, the transferor's exclusion is ratably apportioned between or among the several parts. If multiple parts of an interest are transferred, the transfer of each part is treated as a separate transaction, with each transaction subject to the rule under paragraph (b) of this section that is applicable to the type of transfer involved.
(iii) Bargain sales. When the transfer of an interest in a life insurance contract is in part a transfer for valuable consideration and in part a gratuitous transfer, the transfer of each part is treated as a separate transaction for purposes of determining the amount of the proceeds attributable to the interest that is excludable from gross income under section 101(a)(1). Each separate transaction is subject to the rule under paragraph (b) of this section that is applicable to the type of transfer involved.
(iv) Section 1035 exchanges. When an interest in a life insurance contract (old interest) is exchanged in a section 1035 exchange for an interest in a newly issued life insurance contract (new interest), except as otherwise provided by this section with respect to any portion of the new interest that is transferred or exchanged subsequent to the section 1035 exchange, the amount of the proceeds attributable to the new interest that is excludable from gross income under section 101(a) is determined under either paragraph (b)(2)(iv)(A) or paragraph (b)(2)(iv)(B) of this section.
(A) If, at the time of the exchange, the entire amount of the proceeds attributable to the old interest would have been excludable from gross income under section 101(a), the entire amount of the proceeds attributable to the new interest is excludable from gross income.
(B) If, at the time of the exchange, less than the entire amount of the proceeds attributable to the old interest would have been excludable from gross income under section 101(a), the amount of the proceeds attributable to the new interest that is excludable from gross income is limited to the sum of the amount of the proceeds attributable to the old interest that would have been excludable at the time of the exchange and the premiums and other amounts paid with respect to the new interest by the policyholder, reduced (but not below zero) by amounts received by the policyholder under the new life insurance contract that are not received as an annuity, to the extent excludable from gross income under section 72(e). For purposes of this paragraph (b)(2)(iv)(B), the amount of the proceeds attributable to the old interest that would have been excludable at the time of the exchange is decreased by the amount of any money and the fair market value of any other property received by the policyholder in the exchange and increased by the amount of gain to the policyholder that was recognized on such exchange.
(3) Determination of amounts paid by the transferee. For purposes of paragraphs (b)(1) and (2) of this section, in determining the amounts, if any, of consideration paid by the transferee for the transfer of an interest in a life insurance contract and premiums and other amounts subsequently paid by the transferee with respect to that interest, the amounts paid by the transferee are reduced, but not below zero, by amounts received by the transferee under the life insurance contract that are not received as an annuity, to the extent excludable from gross income under section 72(e).
(c) Reportable policy sale—(1) In general. Except as provided in paragraph (c)(2) of this section, a reportable policy sale for purposes of this section and section 6050Y is any direct or indirect acquisition of an interest in a life insurance contract if the acquirer has, at the time of the acquisition, no substantial family, business, or financial relationship with the insured apart from the acquirer's interest in the life insurance contract. See paragraph (c)(3) of this section for special rules applicable to section 1035 exchanges.
(2) Exceptions. None of the following transactions is a reportable policy sale:
(i) A transfer of an interest in a life insurance contract between entities with the same beneficial owners, if the ownership interest of each beneficial owner in the transferor entity does not vary by more than a 20 percent ownership interest from that beneficial owner's ownership interest in the transferee entity. In a series of transfers, the prior sentence is applied by comparing the beneficial owners' ownership interest in the first transferor entity and the last transferee entity. For purposes of this paragraph (c)(2)(i), each beneficial owner of a trust is deemed to have an ownership interest determined by the broadest possible exercise of a trustee's discretion in that beneficial owner's favor. Paragraph (g)(13) (Example 13) of this section provides an illustration of the application of this paragraph (c)(2)(i).
(ii) A transfer between corporations that are members of an affiliated group (as defined in section 1504(a)) that files a consolidated U.S. income tax return for the taxable year in which the transfer occurs.
(iii) The indirect acquisition of an interest in a life insurance contract by a person if—
(A) A partnership, trust, or other entity in which an ownership interest is being acquired directly or indirectly holds the interest in the life insurance contract and acquired that interest before January 1, 2019, or acquired that interest in a reportable policy sale reported in compliance with section 6050Y(a) and § 1.6050Y-2; or
(B) Immediately before the acquisition, no more than 50 percent of the gross value of the assets (as determined under paragraph (f)(4) of this section) of the partnership, trust, or other entity that directly or indirectly holds the interest in the life insurance contract, and in which an ownership interest is being directly acquired, consists of life insurance contracts, provided that, after the acquisition, with respect to that partnership, trust, or other entity, the person indirectly acquiring the interest in the life insurance contract and his or her family members own, in the aggregate—
(1) With respect to an S corporation, stock possessing 5 percent or less of the total combined voting power of all classes of stock entitled to vote and 5 percent or less of the total value of shares of all classes of stock of the S corporation;
(2) With respect to a trust or decedent's estate, 5 percent or less of the corpus and 5 percent or less of the annual income (taking into account, for the purpose of determining any person's ownership interest, the maximum amount of income and corpus that could be distributed to or held for the benefit of that person); or
(3) With respect to a partnership or other entity that is not a corporation or a trust, 5 percent or less of the capital interest and 5 percent or less of the profits interest.
(iv) The acquisition of a life insurance contract by an insurance company that issues a life insurance contract in an exchange pursuant to section 1035.
(v) The direct acquisition of an interest in a life insurance contract by a C corporation if:
(A) Immediately before the acquisition, the interest is held by another C corporation (target C corporation) that actively conducts a trade or business within the meaning of § 1.367(a)-2(d)(2) and (3);
(B) Immediately before the acquisition, the target C corporation does not engage in a trade or business of investing in interests in life insurance contracts;
(C) Immediately before the acquisition, no more than 5 percent of the gross value of the assets (as determined under paragraph (f)(4) of this section) of the target C corporation consists of life insurance contracts;
(D) The acquisition results from a transaction that qualifies as a reorganization under section 368(a) with respect to which the target C corporation and the acquiring C corporation each is a party to the reorganization (within the meaning of section 368(b));
(E) Immediately after the acquisition, the acquiring C corporation does not engage in a trade or business of investing in interests in life insurance contracts; and
(F) Immediately after the acquisition, no more than 5 percent of the gross value of the assets (as determined under paragraph (f)(4) of this section) of the acquiring C corporation consists of life insurance contracts.
(3) Section 1035 exchanges. This paragraph (c)(3) applies if an interest in a life insurance contract (old interest) is exchanged in a section 1035 exchange for an interest in a newly issued life insurance contract (new interest), and the old interest previously was transferred for valuable consideration in a reportable policy sale under paragraph (c)(1) of this section or is treated as an interest in a life insurance contract that previously was transferred for valuable consideration in a reportable policy sale under this paragraph (c)(3). For purposes of this section, the new interest is treated as an interest in a life insurance contract that previously was transferred for valuable consideration in a reportable policy sale. For purposes of §§ 1.6050Y-3(h) and 1.6050Y-4, the section 1035 exchange is treated as the transfer of an interest in the life insurance contract in a reportable policy sale.
(d) Substantial relationship—(1) Substantial family relationship. For purposes of this section, a substantial family relationship means the relationship between an individual and any family member of that individual as defined in paragraph (f)(3) of this section. In addition, a substantial family relationship exists between an individual and his or her former spouse with regard to the transfer of an interest in a life insurance contract to (or in trust for the benefit of) that former spouse incident to divorce.
(2) Substantial business relationship. For purposes of this section, a substantial business relationship between the insured and the acquirer exists in each of the following situations:
(i) The insured is a key person (as defined in section 264) of, or materially participates (within the meaning of section 469) in, an active trade or business as an owner, employee, or contractor, and at least 80 percent of that trade or business is owned (directly or indirectly, through one or more partnerships, trusts, or other entities) by the acquirer or the beneficial owners of the acquirer.
(ii) The acquirer acquires an active trade or business and acquires the interest in the life insurance contract either as part of that acquisition or from a person owning significant property leased to the acquired trade or business or life insurance policies held to facilitate the succession of the ownership of the business if—
(A) The insured—
(1) Is an employee within the meaning of section 101(j)(5)(A) of the acquired trade or business immediately preceding the acquisition (for purposes of this paragraph (d)(2)(ii)(A)(1), however, the reference in section 101(j)(5)(A) to highly compensated employee within the meaning of section 414(q) does not include a former employee); or
(2) Was a director, highly compensated employee, or highly compensated individual within the meaning of section 101(j)(2)(A)(ii) of the acquired trade or business, and the acquirer, immediately after the acquisition, has ongoing financial obligations to the insured with respect to the insured's employment by the trade or business (for example, the life insurance contract is maintained by the acquirer to fund current or future retirement, pension, or survivorship obligations based on the insured's relationship with the entity or to fund a buy-out of the insured's interest in the acquired trade or business); and
(B) The acquirer either carries on the acquired trade or business or uses a significant portion of the acquired business assets in an active trade or business that does not include investing in interests in life insurance contracts.
(3) Substantial financial relationship. For purposes of this section, a substantial financial relationship between the insured and the acquirer exists in each of the following situations:
(i) The acquirer (directly or indirectly, through one or more partnerships, trusts, or other entities of which it is a beneficial owner) has, or the beneficial owners of the acquirer have, a common investment (other than the interest in the life insurance contract) with the insured and a buy-out of the insured's interest in the common investment by the co-investor(s) after the insured's death is reasonably foreseeable.
(ii) The acquirer maintains the life insurance contract on the life of the insured to provide funds to purchase assets of or to satisfy liabilities of the insured or the insured's estate, heirs, legatees, or other successors in interest, or to satisfy other liabilities arising upon or by reason of the death of the insured.
(iii) The acquirer is an organization described in sections 170(c), 2055(a), and 2522(a) that previously received from the insured either financial support in a substantial amount or significant volunteer support or that meets other requirements prescribed in guidance published in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter) for establishing that a substantial financial relationship exists between the insured and the organization.
(4) Special rules. Paragraphs (d)(4)(i), (ii), and (iii) of this section apply for purposes of determining whether a substantial relationship (whether family, business, or financial) exists under paragraph (d)(1), (2), or (3) of this section, respectively.
(i) Indirect acquisitions. The acquirer of an interest in a life insurance contract in an indirect acquisition is deemed to have a substantial business or financial relationship with the insured if the direct holder of the interest in the life insurance contract has a substantial business or financial relationship with the insured immediately before and after the date the acquirer acquires its interest.
(ii) Acquisitions by certain persons. The sole fact that an acquirer is a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer, is not sufficient to establish a substantial business or financial relationship with the insured. In addition, an acquirer need not be a partner of the insured, a partnership in which the insured is a partner, or a corporation in which the insured is a shareholder or officer to have a substantial business or financial relationship with the insured.
(iii) Acquisitions by those with differing types of substantial relationships. A substantial family, business, or financial relationship exists between the insured and a partnership, trust, or other entity if each beneficial owner of that partnership, trust, or other entity has a substantial family, business, or financial relationship with the insured. For example, a substantial family, business, or financial relationship exists between the insured and a trust if each trust beneficiary is a family member of the insured or an organization described in paragraph (d)(3)(iii) of this section.
(e) Interest in a life insurance contract—(1) Definition. For purposes of this section and section 6050Y, the term interest in a life insurance contract means the interest held by any person that has taken title to or possession of the life insurance contract (also referred to as a life insurance policy), in whole or part, for state law purposes, including any person that has taken title or possession as nominee for another person, and the interest held by any person that has an enforceable right to receive all or a part of the proceeds of a life insurance contract or to any other economic benefits of the policy as described in § 20.2042-1(c)(2) of this chapter, such as the enforceable right to designate a contract beneficiary. Any person named as the owner in the life insurance contract generally is the owner (or an owner) of the contract and holds an interest in the contract.
(2) Transfer of an interest in a life insurance contract. For purposes of this section and section 6050Y, the term transfer of an interest in a life insurance contract means the transfer of any interest in the life insurance contract, including any transfer of title to, possession of, or legal or beneficial ownership of the life insurance contract itself. The creation of an enforceable right to receive all or a part of the proceeds of a life insurance contract constitutes the transfer of an interest in the life insurance contract. The following events are not a transfer of an interest in a life insurance contract: The revocable designation of a beneficiary of the policy proceeds (until the designation becomes irrevocable other than by reason of the death of the insured); the pledging or assignment of a policy as collateral security; and the issuance of a life insurance contract to a policyholder.
(3) Acquisition of an interest in a life insurance contract. For purposes of this section and section 6050Y, the acquisition of an interest in a life insurance contract may be direct or indirect.
(i) Direct acquisition of an interest in a life insurance contract. For purposes of this section and section 6050Y, the transfer of an interest in a life insurance contract results in the direct acquisition of the interest by the transferee (acquirer).
(ii) Indirect acquisition of an interest in a life insurance contract. For purposes of this section and section 6050Y, an indirect acquisition of an interest in a life insurance contract occurs when a person (acquirer) becomes a beneficial owner of a partnership, trust, or other entity that holds (whether directly or indirectly) the interest (whether legal or beneficial) in the life insurance contract. For purposes of this paragraph (e)(3)(ii), the term other entity does not include a C corporation, unless more than 50 percent of the gross value of the assets of the C corporation consists of life insurance contracts (as determined under paragraph (f)(4) of this section) immediately before the indirect acquisition.
(f) Definitions. The following definitions apply for purposes of this section:
(1) Beneficial owner. A beneficial owner of a partnership, trust, or other entity is an individual or C corporation with an ownership interest in that entity. The interest may be held directly or indirectly, through one or more other partnerships, trusts, or other entities. For instance, an individual that directly owns an interest in a partnership (P1), which directly owns an interest in another partnership (P2), is an indirect beneficial owner of P2 and any assets or other entities owned by P2 directly or indirectly. For purposes of this paragraph (f)(1), the beneficial owners of a trust include those who may receive current distributions of trust income or corpus and those who could receive distributions if the trust were to terminate currently.
(2) C corporation. The term C corporation has the meaning given to it in section 1361(a)(2).
(3) Family member. With respect to any individual, the term family member refers to any person described in paragraphs (f)(3)(i) through (vi) of this section. For purposes of this paragraph (f)(3), full effect is given to a legal adoption, and a step-child is deemed to be a descendant. The family members of an individual include:
(i) The individual;
(ii) The individual's spouse or a person with whom the individual is in a registered domestic partnership, civil union, or other similar relationship established under state law;
(iii) Any parent, grandparent, or great-grandparent of the individual or of the person described in paragraph (f)(3)(ii) of this section and any spouse of such parent, grandparent, or great-grandparent, or person with whom the parent, grandparent, or great-grandparent is in a registered domestic partnership, civil union, or other similar relationship established under state law;
(iv) Any lineal descendant of the individual or of any person described in paragraph (f)(3)(ii) or (iii) of this section;
(v) Any spouse of a lineal descendant described in paragraph (f)(3)(iv) of this section and any person with whom such a lineal descendant is in a registered domestic partnership, civil union, or other similar relationship established under state law; and
(vi) Any lineal descendant of a person described in paragraph (f)(3)(v) of this section.
(4) Gross value of assets—(i) Determination of gross value of assets. Except as provided in paragraph (f)(4)(ii) or (iii) of this section, for purposes of paragraphs (c)(2)(iii)(B) and (e)(3)(ii) of this section, the term gross value of assets means, with respect to any entity, the fair market value of the entity's assets, including assets beneficially owned by the entity under paragraph (f)(1) of this section as a beneficial owner of a partnership, trust, or other entity.
(ii) Determination of gross value of assets of publicly traded entity. For purposes of determining the gross value of assets of an entity that is publicly traded, if the entity's annual Form 10-K filed with the United States Securities and Exchange Commission (or equivalent annual filing if the entity is publicly traded in a non-U.S. jurisdiction) for the period immediately preceding a person's acquisition of an ownership interest in the entity does not contain information demonstrating that more than 50 percent of the gross value of the entity's assets consists of life insurance contracts, that person may assume that no more than 50 percent of the gross value of the entity's assets consists of life insurance contracts, unless that person has actual knowledge or reason to know that more than 50 percent of the gross value of the entity's assets consists of life insurance contracts.
(iii) Safe harbor definition of gross value of assets. An entity may choose to determine the gross value of all the entity's assets for purposes of this section using the following alternative definition of gross value of assets:
(A) In the case of assets that are life insurance policies or annuity or endowment contracts that have cash values, the cash surrender value as defined in section 7702(f)(2)(A); and
(B) In the case of assets not described in paragraph (f)(4)(iii)(A) of this section, the adjusted bases (within the meaning of section 1016) of such assets.
(5) Transfer for valuable consideration. A transfer for valuable consideration means any transfer of an interest in a life insurance contract for cash or other consideration reducible to a money value.
(g) Examples. The application of this section is illustrated by the following examples. Each example assumes that the transferee did not receive any amounts under the life insurance contract other than the amounts described in the examples. With the exception of paragraph (g)(7) (Example 7) of this section, the bargain sale rules set forth in paragraph (b)(2)(iii) of this section do not apply in the examples because the consideration paid for the policy transferred is fair market value:
(1) Example 1. A is the initial policyholder of a $100,000 insurance policy on A's life. A sells the policy to B, A's child, for $6,000, its fair market value. B is not a partner in a partnership in which A is a partner. B receives the proceeds of $100,000 upon the death of A. Because the transfer to B was for valuable consideration, and none of the exceptions in paragraph (b)(1)(ii) of this section applies, the amount of the proceeds B may exclude from B's gross income under this section is limited under paragraph (b)(1)(i) of this section to $6,000 plus any premiums and other amounts paid by B with respect to the policy subsequent to the transfer.
(2) Example 2. The facts are the same as in Example 1 in paragraph (g)(1) of this section except that, before A's death, B gratuitously transfers the policy back to A. A's estate receives the proceeds of $100,000 on A's death. Because the transfer from B to A is a gratuitous transfer to the insured, and the preceding transfer from A to B was not a reportable policy sale, the amount of the proceeds A's estate may exclude from gross income under this section is not limited by paragraph (b)(2)(i) of this section.
(3) Example 3. The facts are the same as in Example 1 in paragraph (g)(1) of this section except that, before A's death, B sells the policy back to A for its fair market value. A's estate receives the proceeds of $100,000 on A's death. The transfer from A to B is not a reportable policy sale because the acquirer B has a substantial family relationship with the insured, A. The transfer from B to A also is not a reportable policy sale because the acquirer A has a substantial family relationship with the insured, A. Accordingly, paragraph (b)(1)(ii)(B)(1) of this section applies to the transfer to A, and the amount of the proceeds A's estate may exclude from gross income is not limited by paragraph (b) of this section.
(4) Example 4. A is the initial policyholder of a $100,000 insurance policy on A's life. A transfers the policy for $6,000, its fair market value, to an individual, C, who does not have a substantial family, business, or financial relationship with A. The transfer from A to C is a reportable policy sale. C receives the proceeds of $100,000 on A's death. The amount of the proceeds C may exclude from C's gross income under this section is limited under paragraph (b)(1)(i) of this section to $6,000 plus any premiums and other amounts paid by C with respect to the policy subsequent to the transfer.
(5) Example 5. The facts are the same as in Example 4 in paragraph (g)(4) of this section, except that before A's death, C transfers the policy to D, a partner of A who co-owns real property with A, for $8,000, the policy's fair market value. D receives the proceeds of $100,000 on A's death. The transfer from C to D is not a reportable policy sale because the acquirer D has a substantial financial relationship with the insured, A. However, because that transfer follows a reportable policy sale (the transfer from A to C), the amount of the proceeds that D may exclude from gross income under this section is limited by paragraph (b)(1)(ii)(B)(2) of this section to the sum of—
(i) The higher of the amount C could have excluded had the transfer to D not occurred ($6,000 plus any premiums and other amounts paid by C with respect to the policy subsequent to the transfer to C, as described in Example 4 in paragraph (g)(4) of this section) or the actual value of the consideration for that transfer paid by D ($8,000); and
(ii) Any premiums and other amounts paid by D with respect to the policy subsequent to the transfer to D.
(6) Example 6. The facts are the same as in Example 4 in paragraph (g)(4) of this section, except that before A's death, C transfers the policy back to A for $8,000, its fair market value. A's estate receives the proceeds of $100,000 on A's death. The transfer from C to A is not a reportable policy sale because the acquirer A has a substantial family relationship with the insured, A. Although the transfer follows a reportable policy sale (the initial transfer from A to C), A's estate may exclude all of the policy proceeds from gross income because paragraph (b)(1)(ii)(B)(3)(i) of this section applies and, therefore, the amount of the proceeds that A may exclude from gross income is not limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) of this section.
(7) Example 7. The facts are the same as in Example 6 in paragraph (g)(6) of this section, except that C transfers the policy back to A for $4,000, rather than its fair market value of $8,000. A's estate receives the proceeds of $100,000 on A's death. Because A did not pay fair market value for the policy, the transfer is bifurcated and treated as a bargain sale under paragraph (b)(2)(iii) of this section. A therefore is treated as having purchased 50% of the policy interest for valuable consideration equal to fair market value and as having received 50% of the policy interest in a gratuitous transfer. The transfer from C to A is not a reportable policy sale because the acquirer, A, has a substantial family relationship with the insured, A, but the transfer from C to A follows a reportable policy sale (the transfer from A to C).
(i) Treatment of policy interest purchased by A. A's estate may exclude from income all of the policy proceeds related to the 50% policy interest transferred for valuable consideration ($50,000) because, under paragraph (b)(1)(ii)(B)(3)(i) of this section, the amount of the proceeds that may be excluded from gross income is not limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) of this section.
(ii) Treatment of policy interest gratuitously transferred to A. The amount of the policy proceeds related to the 50% policy interest transferred gratuitously that A's estate may exclude from income is limited under paragraph (b)(2)(i) of this section to the sum of the amount C could have excluded with respect to 50% of the policy had the transfer back to A not occurred (that is, 50% of the $6,000 that C paid A for the policy, plus 50% of any premiums and other amounts paid by C with respect to the policy subsequent to the transfer to C), plus 50% of any premiums and other amounts paid by A with respect to the policy subsequent to the transfer to A.
(8) Example 8. The facts are the same as in Example 6 in paragraph (g)(6) of this section, except that, before A's death, A gratuitously transfers 50% of the policy interest to B, A's child, and sells 50% of the policy interest for its fair market value to an individual, E, who does not have a substantial family, business, or financial relationship with A. B and E each receive $50,000 of the proceeds on A's death. Paragraph (b)(1)(ii)(B)(3)(ii) of this section applies to determine the amount of the proceeds that B and E may exclude from gross income because the policy interests transferred to B and E were first transferred for valuable consideration in a reportable policy sale (the transfer by A to C) and then transferred to the insured, A, for fair market value.
(i) Treatment of policy interest transferred to B. With respect to the portion of the policy interest transferred to B, because the transfer to B was the only transfer subsequent to the transfer to A and the transfer to B was gratuitous and not a reportable policy sale, under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the amount of the policy proceeds excludable from gross income by B is determined under paragraph (b)(2)(i) of this section, taking into account the application of paragraph (b)(1)(ii)(B)(3)(i) of this section to A's acquisition of the interest. Under paragraph (b)(2)(i) of this section, the amount of the proceeds B may exclude is limited to the sum of the amount A could have excluded had the transfer to B not occurred, and any premiums and other amounts paid by B with respect to the policy subsequent to the transfer to B. As described in Example 6 in paragraph (g)(6) of this section, under paragraph (b)(1)(ii)(B)(3)(i) of this section, the amount of the proceeds that A may exclude from gross income is not limited by paragraph (b)(1)(i) of this section or (b)(1)(ii)(B)(2) of this section. Accordingly, the amount of the proceeds that B may exclude from gross income is not limited by paragraph (b) of this section.
(ii) Treatment of policy interest transferred to E. With respect to the portion of the policy interest transferred to E, because the transfer to E was not gratuitous and was a reportable policy sale, under paragraph (b)(1)(ii)(B)(3)(ii) of this section, the amount of the policy proceeds excludable from gross income by E is determined in accordance with paragraph (b) of this section. Accordingly, because the transfer to E was for valuable consideration, the amount excludable from gross income by E is limited by paragraph (b)(1)(i) of this section unless an exception in paragraph (b)(1)(ii) of this section applies. Because the transfer from A to E is a reportable policy sale, none of the exceptions in paragraph (b)(1)(ii) of this section apply. Therefore, the amount of the proceeds E may exclude from gross income under this section is limited by paragraph (b)(1)(i) of this section to the sum of the consideration paid by E and the premiums and other amounts paid by E with respect to the policy subsequent to the transfer to E.
(9) Example 9. The facts are the same as in Example 8 in paragraph (g)(8) of this section, except that, before A's death, B transfers B's policy interest to Partnership F, whose partners are A and other family members of A, in exchange for a partnership interest in Partnership F. Partnership F receives $50,000 of the proceeds on A's death. With respect to the policy interest transferred to Partnership F, paragraph (b)(1)(ii)(B)(3)(ii) of this section applies to determine the amount of the proceeds that Partnership F may exclude from gross income for the reasons described in Example 8 in paragraph (g)(8) of this section.
(i) Treatment of policy interest transferred to Partnership F. The transfer to Partnership F was not a reportable policy sale. However, because the transfer to Partnership F was not gratuitous, the amount of the policy proceeds excludable from gross income by Partnership F is determined in accordance with paragraph (b) of this section as if the amount that would have been excludable from gross income by A following the transfer to A, if no subsequent transfer had occurred, was determined under paragraph (b)(1)(ii)(B)(2) of this section. Because B's transfer to Partnership F was a transfer for valuable consideration to a partnership in which the insured is a partner that was preceded by a reportable policy sale (the transfer to C), the amount of the proceeds Partnership F may exclude from gross income under this section is limited under paragraph (b)(1)(ii)(B)(2) of this section to the higher of the amount that would have been excludable by B if the transfer to Partnership F had not occurred or the actual value of the consideration for the policy paid by Partnership F, plus any premiums and other amounts paid by Partnership F with respect to the policy subsequent to the transfer to Partnership F.
(ii) Amount that B could have excluded. Because the transfer from A to B was a gratuitous transfer, the amount of the proceeds B could have excluded from gross income under this section if the transfer to Partnership F had not occurred is limited under paragraph (b)(2)(i) of this section to the sum of the amount A could have excluded had the transfer to B not occurred, and any premiums and other amounts paid by B with respect to the policy subsequent to the transfer to B.
(iii) Amount that A could have excluded. As described in paragraph (g)(9)(i) of this section, the amount of the proceeds A could have excluded under this section if the transfer to B had not occurred must be determined under paragraph (b)(1)(ii)(B)(2) of this section in accordance with paragraph (b)(1)(ii)(B)(3)(ii) of this section. Under paragraph (b)(1)(ii)(B)(2) of this section, the amount that would have been excludable by A is limited to the higher of the amount that would have been excludable by C if the transfer to A had not occurred ($6,000 plus premiums and other amounts subsequently paid by C) or the actual value of the consideration for the policy paid by A ($8,000), plus any premiums and other amounts paid by A with respect to the policy subsequent to the transfer to A.
(10) Example 10. A is the initial policyholder of a $100,000 insurance policy on A's life. A contributes the policy to Corporation X in exchange for stock. Corporation X's basis in the policy is determinable in whole or in part by reference to A's basis in the policy. Corporation X conducts an active trade or business that it wholly owns, and A materially participates in that active trade or business as an employee of Corporation X. Corporation X receives the proceeds of $100,000 on A's death. A's contribution of the policy to Corporation X is not a reportable policy sale because Corporation X has a substantial business relationship with A under paragraph (d)(2)(i) of this section. Although Corporation X's basis in the policy is determinable in whole or in part by reference to A's basis in the policy, paragraph (b)(1)(ii)(A) of this section does not apply because the insured, A, is a shareholder of Corporation X and the other requirements under paragraph (b)(1)(ii)(B) of this section are satisfied. Accordingly, paragraph (b)(1)(ii)(B) of this section applies, and paragraph (b)(1)(ii)(A) of this section is inapplicable. Under paragraph (b)(1)(ii)(B)(1) of this section, Corporation X's exclusion is not limited by paragraph (b) of this section.
(11) Example 11. The facts are the same as in Example 10 in paragraph (g)(10) of this section, except that Corporation X transfers its active trade or business and the policy on A's life to Corporation Y in a tax-free reorganization at a time when A is still employed by Corporation X, but is no longer a shareholder of Corporation X. Corporation Y's basis in the policy is determinable in whole or in part by reference to Corporation X's basis in the policy, and Corporation Y carries on the trade or business acquired from Corporation X. Corporation Y receives the proceeds of $100,000 on A's death. The transfer from Corporation X to Corporation Y is not a reportable policy sale because Corporation Y has a substantial business relationship with A under paragraph (d)(2)(ii) of this section. Also, the exception in paragraph (c)(2)(v) of this section applies, provided Corporation X satisfies the requirements of paragraphs (c)(2)(v)(A) through (C) of this section immediately before the acquisition by Corporation Y, and Corporation Y satisfies the requirements of paragraphs (c)(2)(v)(E) and (F) of this section immediately after the acquisition. This would be the case even if A were no longer employed by Corporation X at the time of the transfer. The amount of the proceeds that Corporation Y may exclude from gross income is limited under paragraph (b)(1)(ii)(A) of this section to the sum of the amount that would have been excludable by Corporation X had the transfer to Corporation Y not occurred, plus any premiums and other amounts paid by Corporation Y with respect to the policy subsequent to the transfer. Accordingly, because Corporation X's exclusion is not limited by paragraph (b) of this section, as described in Example 10 in paragraph (g)(10) of this section, Corporation Y's exclusion is not limited by paragraph (b) of this section.
(12) Example 12. A is the initial policyholder of a $100,000 insurance policy on A's life. A contributes the policy to a C corporation, Corporation W, in exchange for stock. After the acquisition, A owns less than 20% of the outstanding stock of Corporation W and owns stock possessing less than 20% of the total combined voting power of all stock of Corporation W and is therefore not a key person with respect to Corporation W under section 264(e)(3). Corporation W's basis in the policy is determinable in whole or in part by reference to A's basis in the policy. However, no substantial family, business, or financial relationship exists between A and Corporation W, so A's contribution of the policy to Corporation W is a reportable policy sale. Corporation W receives the proceeds of $100,000 on A's death. Under paragraph (b)(1)(i) of this section, the amount of the proceeds Corporation W may exclude from gross income is limited to the actual value of the stock exchanged for the policy, plus any premiums and other amounts paid by Corporation W with respect to the policy subsequent to the transfer. The exceptions in paragraph (b)(1)(ii) of this section do not apply because the transfer to Corporation W is a reportable policy sale.
(13) Example 13. Partnership X and Partnership Y are owned by individuals A, B, and C. A holds 40% of the capital and profits interest of Partnership X and 20% of the capital and profits interest of Partnership Y. B holds 35% of the capital and profits interest of Partnership X and 40% of the capital and profits interest of Partnership Y. C holds 25% of the capital and profits interest of Partnership X and 40% of the capital and profits interest of Partnership Y. Partnership X is the initial policyholder of a $100,000 insurance policy on the life of A. Partnership Y purchases the policy from Partnership X. Under paragraph (c)(2)(i) of this section, this transfer is not a reportable policy sale because the ownership interest of each beneficial owner in Partnership X does not vary from that owner's interest in Partnership Y by more than a 20% ownership interest. A's ownership varies by a 20% interest, B's ownership varies by a 5% interest, and C's ownership varies by a 15% interest.
(14) Example 14. Partnership X conducts an active trade or business and is the initial policyholder of a $100,000 insurance policy on the life of its full-time employee, A. A materially participates in Partnership X's active trade or business in A's capacity as an employee. Individual B acquires a 10% profits interest in Partnership X in exchange for a cash payment of $1,000,000. Under paragraphs (d)(1) through (3) of this section, B does not have a substantial family, business, or financial relationship with A. Under paragraph (d)(4)(i) of this section, however, B is deemed to have a substantial business relationship with A because, under paragraph (d)(2)(i) of this section, Partnership X (the direct policyholder) has a substantial business relationship with A. Accordingly, although the acquisition of the 10% partnership interest by B is an indirect acquisition of a 10% interest in the insurance policy covering A's life, the acquisition is not a reportable policy sale.
(15) Example 15. The facts are the same as in Example 14 in paragraph (g)(14) of this section, except that A is no longer an employee of Partnership X, and Partnership X has no substantial family, business, or financial relationship with A, when B acquires the profits interest in Partnership X. Also, B acquires only a 5% profits interest in exchange for a cash payment of $500,000. Partnership X does not own an interest in any other life insurance policies, and the gross value of its assets is $10 million. Although neither Partnership X nor B has a substantial family, business, or financial relationship with A at the time of B's indirect acquisition of an interest in the policy covering A's life, because B's profits interest in Partnership X does not exceed 5%, and because no more than 50% of Partnership X's asset value consists of life insurance contracts, the exception in paragraph (c)(2)(iii)(B) of this section applies, and B's indirect acquisition of an interest in the policy covering A's life is not a reportable policy sale.
(16) Example 16. A is the initial policyholder of a $100,000 insurance policy on A's life. A sells the policy for its fair market value. As a result of the sale, Bank X holds legal title to the life insurance contract as the nominee of Partnership B, and Partnership B has the enforceable right to designate the contract beneficiary. Under paragraphs (d)(1) through (4) of this section, neither Bank X nor Partnership B has a substantial family, business, or financial relationship with the insured, A, at the time of the sale. Accordingly, the transfer of legal title to the policy to Bank X is a reportable policy sale under paragraph (c)(1) of this section, unless an exception set forth in paragraph (c)(2) of this section applies. The same is true of the transfer of the economic benefits of the policy to Partnership B. At a later date, Partnership B sells its economic interest in the policy to Partnership C for fair market value. Bank X continues to hold legal title to the life insurance contract, but now holds it as Partnership C's nominee. Partnership C has no substantial family, business, or financial relationship with the insured, A, under paragraphs (d)(1) through (4) of this section at the time of the transfer. Accordingly, Partnership C's acquisition of the economic interest in the policy from Partnership B is a reportable policy sale under paragraph (c)(1) of this section, unless an exception set forth in paragraph (c)(2) of this section applies.
(17) Example 17. The facts are the same as in paragraph (g)(4) of this section (Example 4), except that, before A's death, C exchanges the policy on A's life for a new policy on A's life in a section 1035 exchange. The amount of the proceeds C may exclude from C's gross income under this section is limited under paragraph (b)(2)(iv)(B) of this section to $6,000 plus any premiums and other amounts paid by C with respect to the original policy subsequent to the transfer and any premiums and other amounts paid by C with respect to the new policy.
(18) Example 18. The facts are the same as in paragraph (g)(17) of this section (Example 17), except that, before A's death, C sells the new policy to A for fair market value. A's estate receives the proceeds of $100,000 on A's death. Under paragraph (b)(1)(ii)(B)(3)(i) of this section, the amount of the proceeds A's estate may exclude from gross income is not limited by paragraph (b) of this section.
(19) Example 19. A is the initial policyholder of a $100,000 insurance policy on A's life. A transfers the policy for $6,000, its fair market value, to an individual, C, who does not have a substantial family, business, or financial relationship with A at the time of the transfer. The transfer from A to C is a reportable policy sale. C also is the initial policyholder of a $200,000 insurance policy on A's life. Before A's death, C exchanges the two policies on A's life for a single new policy on A's life in a section 1035 exchange. C receives the proceeds from the new policy on A's death. The entire amount of the proceeds attributable to the interest in the new policy that was issued in exchange for the policy originally issued to C is excludable from gross income under paragraph (b)(2)(iv)(A) of this section. The amount of the proceeds attributable to the interest in the new policy that was issued in exchange for the policy originally issued to A that is excludable from gross income is limited under paragraph (b)(2)(iv)(B) of this section to $6,000 plus any premiums and other amounts paid by C with respect to the policy originally issued to A subsequent to the transfer and any premiums and other amounts paid by C with respect to the interest in the new policy that was issued in exchange for the policy originally issued to A.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6783, 29 FR 18356, Dec. 24, 1964; T.D. 7836, 47 FR 42337, Sept. 27, 1982; T.D. 9340, 72 FR 41159, July 26, 2007; T.D. 9879, 84 FR 58478, Oct. 31, 2019; T.D. 9879, 84 FR 68043, Dec. 13, 2019; T.D. 10052, 91 FR 42351, July 9, 2026]
§ 1.101-2 Employees' death benefits.
(a) In general. (1) Section 101(b) states the general rule that amounts up to $5,000 which are paid to the beneficiaries or the estate of an employee, or former employee, by or on behalf of an employer and by reason of the death of the employee shall be excluded from the gross income of the recipient. This exclusion from gross income applies whether payment is made to the estate of the employee or to any beneficiary (individual, corporation, or partnership), whether it is made directly or in trust, and whether or not it is made pursuant to a contractual obligation of the employer. The exclusion applies whether payment is made in a single sum or otherwise, subject to the provisions of section 101 (c), relating to amounts held under an agreement to pay interest thereon (see § 1.101-3). The exclusion from gross income also applies to any amount not actually paid which is otherwise taxable to a beneficiary of an employee because it was made available as a distribution from an employee's trust.
(2) The exclusion does not apply to amounts constituting income payable to the employee during his life as compensation for his services, such as bonuses or payments for unused leave or uncollected salary, nor to certain other amounts with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living (see section 101(b)(2)(B) and paragraph (d) of this section). Further, the exclusion does not apply to amounts received as an annuity under a joint and survivor annuity obligation where the employee was the primary annuitant and the annuity starting date occurred before the death of the employee (see section 101 (b)(2)(C) and paragraph (e)(1)(ii) of this section). In the case of amounts received by a beneficiary as an annuity (but not as a survivor under a joint and survivor annuity with respect to which the employee was the primary annuitant), the exclusion is applied indirectly by means of the provisions of section 72 and the regulations thereunder (see section 101(b)(2)(D) and paragraph (e)(1) (iii) and (iv) of this section). Thus, for example, the exclusion applies to amounts which are received by a survivor of an employee retired on disability under the provisions of the Civil Service retirement law (5 U.S.C. 8301 or any former corresponding provisions of law) or the Retired Serviceman's Family Protection Plan or Survivor Benefit Plan (10 U.S.C. 1431 et seq.), provided such employee dies before attaining mandatory retirement age (as defined in § 1.105-4 (a)(3)(i)(B)).
(3) The total amount excludable with respect to any employee may not exceed $5,000, regardless of the number of employers or the number of beneficiaries. For allocation of the exclusion among beneficiaries, see paragraph (c) of this section. For rules governing the taxability of benefits payable on the death of an employee under pension, profitsharing, or stock bonus plans described in section 401(a) and exempt under section 501(a), under annuity plans described in section 403(a), or under annuity contracts to which paragraph (a) or (b) of § 1.403(b)-1 applies, see sections 72(m)(3), 402(a), and 403 and the regulations thereunder.
(b) Payments under certain employee benefit plans—(1) In general. Where a payment is made by reason of the death of an employee by an employer-provided welfare fund or a trust, including a stock bonus, pension, or profitsharing trust described in section 401 (a), or by an insurance company (if such payment does not constitute “life insurance” within the purview of section 101(a), the payment shall be considered to have been made by or on behalf of the employer to the extent that it exceeds amounts contributed by, or deemed contributed by, the deceased employee.
(2) Cross references. For provisions governing the taxability of distributions payable on the death of an employee participant—
(i) Under a trust described in section 401(a) and exempt from tax under section 501(a), see paragraph (c) of § 1.72-16 and paragraph (a)(5) of § 1.402 (a)-1;
(ii) Under an annuity plan described in section 403(a), see paragraph (c) of § 1.72-16 and paragraph (c) of § 1.403 (a)-1;
(iii) Under annuity contracts to which paragraph (a) or (b) of § 1.403 (b)-1 applies, see paragraph (c) (2) and (3) of § 1.403(b)-1;
(iv) Under eligible State deferred compensation plans described in section 457 (b), see paragraph (c) of § 1.457-1.
(c) Allocation of the exclusion. (1) Where the aggregate payments by or on behalf of an employer or employers as death benefits to the beneficiaries or the estate of a deceased employee exceed $5,000, the $5,000 exclusion shall be apportioned among them in the same proportion as the amount received by or the present value of the amount payable to each bears to the total death benefits paid or payable by or on behalf of the employer or employers.
(2) The application of the rule in subparagraph (1) of this paragraph may be illustrated by the following example:
Example.The M Corporation, the employer of A, a deceased employee who died November 30, 1954, makes payments in 1955 to the beneficiaries of A as follows: $5,000 to W, A's widow, $2,000 to B, the son of A, and $3,000 to C, the daughter of A. No other amounts are paid by any other employer of A to his estate or beneficiaries. By application of the apportionment rule stated above, W, the widow, will exclude $2,500 ($5,000/$10,000, or one-half, of $5,000); B, the son, will exclude $1,000 ($2,000/$10,000, or one-fifth, of $5,000); and C, the daughter, will exclude $1,500 ($3,000/$10,000, or three-tenths, of $5,000).
(d) Nonforfeitable rights. (1) Except as provided in subparagraphs (3) and (4) of this paragraph, the exclusion provided by section 101(b) does not apply to amounts with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living. Section 101(b)(2)(B). For the purpose of section 101(b) and this paragraph, an employee shall be considered to have had a nonforfeitable right with respect to—
(i) Any amount to which he would have been entitled—
(a) If he had made an appropriate election or demand, or
(b) Upon termination of his employment (see examples (5) and (6) of subparagraph (2) of this paragraph); or
(ii) The present value (immediately before his death) of—
(a) Amounts payable as an annuity (as defined in paragraph (b) of § 1.72-2, whether immediate or deferred) by or on behalf of the employer (see example (1) of subparagraph (2) of this paragraph), or
(b) Amounts which would have been so payable if the employee had terminated his employment and continued to live;
or
(iii) Any amount to the extent it is paid in lieu of amounts described in either subdivision (i) or (ii) of this subparagraph. See examples (2), (3), and (4) of subparagraph (2) of this paragraph.
For purposes of subdivision (iii) of this subparagraph, any amount paid in discharge of an obligation which arose solely because of the existence of a particular fact or circumstance subsequent to the employee's death shall not be considered an amount paid in lieu of amounts described in subdivision (i) or (ii) of this subparagraph. Subdivision (iii) of this subparagraph shall apply, however, to the extent indicated therein, to amounts payable without regard to any such contingency (to the extent that such amounts are equal to or less than those described in subdivision (i) and (ii) of this subparagraph which are not paid). See paragraph (e)(1)(iii)(b) of this section for rules with respect to finding the present value of an annuity immediately before the employee's death.
(2) The application of paragraph (d)(1) of this section may be illustrated by the following examples, in which it is assumed that the plans are not “qualified plans” and that no employer is an organization referred to in section 170(b)(1)(A) (ii) or (vi) or a religious organization (other than a trust) which is exempt from tax under section 501(a):
Example 1.A, who was a participant under the X Company pension plan, retired on December 31, 1953. He had made no contributions to the plan. Upon his retirement, he became entitled to monthly payments of $100 payable for life, or 120 months certain. A died on October 31, 1954, having received 10 monthly payments of $100 each. After his death, the monthly payments became payable to his estate for the remaining 110 months certain. No exclusion from gross income is allowed to A's estate (or any beneficiary who receives the right to such payments from the estate), since the employee's right to the monthly payments was nonforfeitable at the date of his death. It will be noted that in this example it is unnecessary to consider the present value of the annuity to A just before his death since the payments to be made include only those certain to be made in any event under the plan whether or not A continued to live.
Example 2.C, a participant under the Y Company pension plan, died on December 15, 1954, while actively in the employment of the company, survived by a widow and minor children. Because of his years of service, he would have been entitled to an annuity for life, his own contributions to the plan and interest thereon being guaranteed, if he had retired or terminated his employment at a time immediately before his death. The plan further provides that—(a) if, but only if, an employee is survived by a widow and minor children, his widow is to receive an annuity for her life without regard to whether or not the employee had begun his annuity; (b) any payments made with respect to his widow's annuity are to reduce the guaranteed amount to an equal extent; and (c) if the employee is not so survived, the guaranteed amount is payable to his beneficiary or estate, but no amount is payable to anyone with respect to what would have been the widow's annuity. In view of these provisions, that portion of the present value of the annuity payable to C's widow which exceeds the guaranteed amount shall be considered paid neither as an amount, nor in lieu of an amount, which C had a nonforfeitable right to receive while living. The reason for this result is that the payment of such excess is contingent upon C's being survived by a widow and minor children, a circumstance existing subsequent to his death. Conversely, to the extent that the present value of the annuity payable to C's widow does not exceed the guaranteed amount, annuity payments attributable to such present value shall be considered paid in lieu of an amount which C had a nonforfeitable right to receive while living.
Example 3.D, a participant under the Y Company pension plan, died on January 1, 1955, while actively in the employment of the company. The Y Company plan provides that where an employee dies in service, the present value of the accumulated credits which he could have obtained at that time if he had instead separated from the service shall be paid in a single sum to his surviving spouse or to his estate if no widow survives him. The present value of D's accumulated credits, at the time of his death, was $10,000. However, the plan also provides that a surviving spouse may elect to take, in lieu of a single sum, an annuity the present value of which exceeds such sum by $2,500. D's widow elects to receive an annuity (the present value of which is $12,500). Therefore, $2,500 is an amount to which the exclusion of section 101(b) and this section shall apply.
Example 4.A, an employee of the X Company, continues to work after reaching the normal retirement age of 60 years, although he could have retired at that age and obtained an annuity of $3,000 per year for his life. A is not entitled to any part of the annuity while he is employed and receiving compensation. A dies at the age of 67 while still in active employment. Since he had passed normal retirement age, his additional years of service did not entitle him to a larger annuity at age 67 than that which he could have obtained at age 60. However, the plan of the X Company provides that in the event of an employee's death prior to separation from the service, his widow is to be paid an annuity for her life in the same amount per year as that which the employee could have obtained if he had instead retired; but if no widow survives him, the present value of the annuity which the employee could have obtained at a time just before his death is to be paid to a named beneficiary or the estate of the employee. Assuming that the present value of the annuity to A's widow, whose age is 61, is $36,000 and the present value of the annuity which would have been payable to A at age 67 if he had then retired is $23,500, the present value of the widow's annuity, to the extent of $23,500, is an amount which is payable in lieu of amounts which the employee had a nonforfeitable right to receive while living because it does not exceed the value of his nonforfeitable rights and is not otherwise paid. On the other hand, the $12,500 excess of the value of the widow's annuity ($36,000) over the value of the employee's annuity ($23,500) is an amount to which section 101(b) applies since the employee had no right to any part of it. If no other death benefits are payable, a $5,000 exclusion is available (see section 101(b)(2)(D) and paragraph (e) of this section).
Example 5.The trustee of the X Corporation noncontributory profit-sharing plan is required under the provisions of the plan to pay to the beneficiary of B, an employee of the X Corporation who died on July 1, 1955, the benefit due on account of the death of B. The provisions of the profit-sharing plan give each participating employee in case of termination of employment a 10-percent vested interest in the amount accumulated in his account for each year of participation in the plan. In case of death, the entire credit in the participant's account is to be paid to his beneficiary. At the time of B's death, he had been a participant for three years and the accumulation in his account was $8,000. After his death this amount is paid to his beneficiary. At the time of B's death, the amount distributable to him on account of termination of employment would have been $2,400 (30 percent of $8,000). The difference of $5,600 ($8,000 minus $2,400), payable to the beneficiary of B, is an amount payable solely by reason of B's death. Accordingly, $5,000 of the $5,600 may be excluded from the gross income of the beneficiary receiving such payment (assuming no other death benefits are involved). However, if it is assumed that the facts are the same as above, except that at the time of his death B has been a participant for 6 years, the amount distributable to him on account of termination of employment would have been $4,800 (60 percent of $8,000). The difference of $3,200 ($8,000 minus $4,800), payable to B's beneficiary, is an amount payable solely by reason of B's death. Accordingly, only $3,200 may be excluded from the gross income of the beneficiary receiving such payment (assuming no other death benefits are involved).
Example 6.The X Corporation instituted a trust, forming part of a pension plan, for its employees, the cost thereof being borne entirely by the corporation. The plan provides, in part, that after 10 or more years of service and attaining the age of 55, an employee can elect to retire and receive benefits before the normal retirement date contingent upon the employer's approval. If he retires without the employer's consent, or voluntarily leaves the company, no benefits are or will be payable. The plan further provides that if the employee is involuntarily separated or dies before retirement, he or his beneficiary, respectively, will receive a percentage of the reserve provided for the employee in the trust fund on the following basis: 10 to 15 years of service, 25 percent; 15 to 20 years of service, 50 percent; 20 to 25 years of service, 75 percent; 25 or more years of service, 100 percent. A, an employee of the X Corporation for 17 years, died at the age of 56 while in the employ of the corporation. At the time of his death, $15,000 was the reserve provided for him in the trust. His beneficiary receives $7,500, an amount equal to 50 percent of the reserve provided for A's retirement; accordingly, $5,000 of the $7,500 may be excluded from the gross income of the beneficiary receiving such payment (assuming no other death benefits are involved) since A, prior to his death, had only a forfeitable right to receive $7,500.
(3)(i) Notwithstanding the rule stated in subparagraph (1) of this paragraph and illustrated in subparagraph (2) of this paragraph, the exclusion from gross income provided by section 101(b) applies to the receipt of certain amounts, paid under “qualified” plans, with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living (see section 101(b)(2)(B) (i) and (ii)). The payments to which this exclusion applies are—
(a) “Total distributions payable” by a stock bonus, pension, or profit-sharing trust described in section 401(a) which is exempt from tax under section 501(a), and
(b) “Total amounts” paid under an annuity contract under a plan described in section 403(a), provided such distributions or amounts are paid in full within one taxable year of the distributee (see example (3) of subdivision (ii) of this subparagraph). For the purposes of applying section 101(b), “Total distributions payable” means the balance to the credit of an employee which becomes payable to a distributee on account of the employee's death, either before or after separation from the service (see section 402(a)(3)(C), the regulations thereunder, and examples (2) and (4) of subdivision (ii) of this subparagraph); and “total amounts” means the balance to the credit of an employee which becomes payable to the payee by reason of the employee's death, either before or after separation from the service (see section 403(a)(2)(B), the regulations thereunder, and example (1) of subdivision (ii) of this subparagraph). See subparagraph (4) of this paragraph relating to the exclusion of amounts which are received under annuity contracts purchased by certain exempt organizations and with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living.
(ii) The application of the provisions of subdivision (i) of this subparagraph may be illustrated by the following examples:
Example 1.The widow of an employee elects, under a noncontributory “qualified” plan, to receive in a lump sum the present value of the annuity which C, the deceased employee, could have obtained at a time just before his death if he had retired at that time. Such present value is $6,000. Of this amount, $5,000 is excludable from the widow's gross income despite the fact that C had a nonforfeitable right to the amount in lieu of which the payment is made, since such payment is an amount to which subdivision (i) of this subparagraph applies (assuming no other death benefits are involved).
Example 2.The trustee of the X Corporation noncontributory, “qualified”, profit- sharing plan is required under the provisions of the plan to pay to the beneficiary of B, an employee of the X Corporation who died on July 1, 1955, the benefit due on account of the death of B. The provisions of the profit-sharing plan give each participating employee, in case of termination of employment, a 10 percent vested interest in the amount accumulated in his account for each year of participation in the plan, but, in case of death, the entire credit to the participant's account is to be paid to his beneficiary. At the time of B's death, he had been a participant for five years. The accumulation in his account was $8,000, and the amount which would have been distributable to him in the event of termination of employment was $4,000 (50 percent of $8,000). After his death, $8,000 is paid to his beneficiary in a lump sum. (It may be noted that these are the same facts as in example (5) of subparagraph (2) of this paragraph except that the employee has been a participant for five years instead of three and the plan is a “qualified” plan.) It is immaterial that the employee had a nonforfeitable right to $4,000, because the payment of the $8,000 to the beneficiary is the payment of the “total distributions payable” within one taxable year of the distributee to which subdivision (i) of this subparagraph applies. Assuming no other death benefits are involved, the beneficiary may exclude $5,000 of the $8,000 payment from gross income.
Example 3.The facts are the same as in example (2) except that the beneficiary is entitled to receive only the $4,000 to which the employee had a nonforfeitable right and elects, 30 days after B's death, to receive it over a period of ten years. Since the “total distributions payable” are not paid within one taxable year of the distributee, no exclusion from gross income is allowable with respect to the $4,000.
Example 4.The X Corporation instituted a trust, forming part of a “qualified” profit-sharing plan for its employees, the cost thereof being borne entirely by the corporation. The plan provides, in part, that if, after 10 or more years of service, an employee leaves the employ of the corporation, either voluntarily or involuntarily, before retirement, a percentage of the reserve provided for the employee in the trust fund will be paid to the employee as follows: 10 to 15 years of service, 25 percent; 15 to 20 years of service, 50 percent; 20 to 25 years of service, 75 percent; 25 or more years of service, 100 percent. The plan further provides that if an employee dies before reaching retirement age, his beneficiary will receive a percentage of the reserve provided for the employee in the trust fund, on the same basis as shown in the preceding sentence. A, an employee of the X Corporation for 17 years, died before attaining retirement age while in the employ of the corporation. At the time of his death, $15,000 was the reserve provided for him in the trust fund. His beneficiary receives $7,500 in a lump sum, an amount equal to 50 percent of the reserve provided for A's retirement. The beneficiary may exclude from gross income (assuming no other death benefits are involved) $5,000 of the $7,500, since the latter amount constitutes “total distributions payable” paid within one taxable year of the distributee, to which subdivision (i) of this subparagraph applies.
(4)(i) Notwithstanding the rule stated in subparagraph (1) of this paragraph and illustrated in subparagraph (2) of this paragraph, the exclusion from gross income under section 101(b) also applies (but only to the extent provided in the next sentence) to amounts with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living—
(a) If such amounts are paid under an annuity contract purchased by an employer which is an organization referred to in section 170(b)(1)(A) (ii) or (vi) or which is a religious organization (other than a trust) and which is exempt from tax under section 501(a).
(b) If such amounts are paid as part of a “total payment” with respect to the deceased employee; and
(c) If such “total payment” is paid in full within one taxable year of the payee beginning after December 31, 1957.
However, the amount that is excludable under section 101(b) by reason of this subparagraph shall not exceed an amount which bears the same ratio to the amount which would be includible in the payee's gross income if it were not for the second sentence of section 101(b)(2)(B) and this subparagraph, as the amount contributed by the employer for the annuity contract that was excludable from the deceased employee's gross income under paragraph (b) of § 1.403(b)-1 bears to the total amount contributed by the employer for the annuity contract. See section 101(b)(2)(B)(iii). For purposes of this subparagraph, a “total payment” means a payment of the balance to the credit of an employee with respect to all “section 403(b) annuities” purchased by the employer which becomes payable to the payee by reason of the employee's death, either before or after separation from the service. An annuity contract will be regarded as a “section 403(b) annuity” if any amount contributed (or considered as contributed under paragraph (b)(2) of § 1.403(b)-1) by the employer for such contract was excludable from the employee's gross income under paragraph (b) of § 1.403(b)-1. Under this definition, therefore, an annuity contract may be regarded as a “section 403(b) annuity” even though some of the employer's contributions for the contract were not excludable from the employee's gross income under paragraph (b) of § 1.403(b)-1 because, for example, the employer was not an exempt organization when such contributions were paid. For purposes of computing the ratio described in this subdivision in such a case, the total amount contributed by the employer for the contract includes the amounts contributed by the employer when it was not an exempt organization.
(ii) This subparagraph does not relate to any amounts with respect to which the deceased employee did not possess, immediately before his death, a nonforfeitable right to receive the amounts while living. Such amounts are excludable under the provisions of section 101(b) without regard to section 101(b)(2)(B) and this subparagraph. Thus, if a “total payment” received by a beneficiary of a deceased employee under an annuity contract purchased by an organization described in subdivision (i)(a) of this subparagraph consists both of amounts with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living and of amounts with respect to which the deceased employee did not possess such a nonforfeitable right, only those amounts with respect to which the deceased employee possessed such a nonforfeitable right are amounts to which this subparagraph applies. Therefore, for purposes of computing the ratio described in subdivision (i) of this subparagraph in such a case, there shall be taken into account only the employer contributions attributable to those amounts with respect to which the deceased employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living. See example (3) of subdivision (v) of this subparagraph. In no event, however, may the total amount excludable under section 101(b) with respect to any employee exceed $5,000 (See paragraph (a)(3) of this section).
(iii)(a) In any case when the deceased employee's interest in the employer's contributions for an annuity contract was forfeitable at the time the contributions were made but, at a subsequent date prior to his death, such interest changed to a nonforfeitable interest, then, for purposes of computing the ratio described in subdivision (i) of this subparagraph, the cash surrender value of the contract on the date of the change (except to the extent attributable to employee contributions) shall be considered as the amount contributed by the employer for the contract. In such a case, if only part of the deceased employee's interest in the annuity changed from a forfeitable to a nonforfeitable interest, then only the corresponding part of the cash surrender value of the contract on the date of the change shall be considered as the amount contributed by the employer for the contract. Similarly, if part of the deceased employee's interest in the annuity contract changed from a forfeitable to a nonforfeitable interest on a particular date and another part of his interest so changed on a subsequent date, it is necessary, in order to compute the amount contributed by the employer for the contract, to first determine (under the rules in the preceding sentence) the amount that is considered as the amount contributed by the employer with respect to each change, and then to add these amounts together. For purposes of computing the ratio described in subdivision (i) of this subparagraph in all of the above cases, the amount contributed by the employer that was excludable from the employee's gross income under paragraph (b) of § 1.403(b)-1 is that amount which, under paragraph (b)(2) of such section, was considered as employer contributions and which, under such paragraph (b) of § 1.403(b)-1, was excludable from the deceased employee's gross income for the taxable year in which the change occurred.
(b) This subdivision (iii) may be illustrated by the following examples:
Example 1.X Organization contributed $4,000 toward the purchase of an annuity contract for A, an employee who died in 1970. At the time they were made, A's interest in such contributions was forfeitable. A made no contributions toward the purchase of the annuity contract. On January 1, 1960, A's entire interest in the annuity contract changed to a nonforfeitable interest. At the time of such change, the cash surrender value of the contract was $5,000. For purposes of the ratio described in subdivision (i) of this subparagraph, the total amount contributed by X Organization for the annuity contract is $5,000. If any part of such $5,000 was excludable under paragraph (b) of § 1.403(b)-1 from A's gross income for his taxable year in which the change occurred, the amount so excludable shall be considered as the amount contributed for the contract by the employer that was excludable from the employee's gross income under paragraph (b) of § 1.403(b)-1.
Example 2.Assume the same facts as in example (1) except that only one-half of A's interest in the annuity contract changed to a nonforfeitable interest on January 1, 1960, and that no other part of his interest so changed during his lifetime. For purposes of the ratio described in subdivision (i) of this subparagraph, the total amount contributed by X Organization for the annuity contract is $2,500 ( 1/2 of the cash surrender value of the annuity contract on the date of the change). To the extent such $2,500 was, under paragraph (b) of § 1.403(b)-1, excludable from A's gross income for the taxable year of the change, it is considered as the amount contributed by the employer that was excludable under paragraph (b) of § 1.403(b)-1.
Example 3.Assume the same facts as in example (1) except that one-half of A's interest in the annuity contract changed to a nonforfeitable interest on January 1, 1960, and the other half of his interest changed to a nonforfeitable interest on January 1, 1965. On January 1, 1965, the cash surrender value of the annuity contract was $6,000. For purposes of the ratio described in subdivision (i) of this subparagraph, the total amount contributed by X organization for the annuity contract is $5,500 (i.e., 1/2 × $5,000 plus 1/2 × $6,000). The amount contributed by the employer that was excludable from A's gross income under paragraph (b) of § 1.403(b)-1 is an amount equal to the sum of the amount that was, under such paragraph, excludable from A's gross income for the taxable year during which the first change occurred and the amount that was, under such paragraph, excludable from A's gross income for the taxable year in which the second change occurred.
(iv) For purposes of this subparagraph, an annuity contract will be considered to have been purchased by an employer which is an organization referred to in section 170(b)(1)(A) (ii) or (vi) or which is a religious organization (other than a trust) and which is exempt from tax under section 501(a), if any of the contributions paid toward the purchase price of such contract by the employer were paid at a time when the employer was such an organization. Thus an annuity contract may be regarded as purchased by such an organization even though part of the organization's contributions for such annuity contract were paid at a time when the organization was not such an exempt organization.
(v) The application of this subparagraph may be illustrated by the following examples:
Example 1. The widow of A, a deceased employee, elects, under an annuity contract purchased for A by X Organization, to receive in a lump sum the present value of such annuity contract as of the date of A's death. Such present value is $6,000 and is received by the widow in a taxable year beginning after December 31, 1957. X Organization contributed $3,000 toward the purchase of the annuity contract and A contributed $2,000 toward such purchase. A's interest in X Organization's contributions was nonforfeitable at the time such contributions were made. Thus, just before his death, A's entire interest in the annuity contract was a nonforfeitable interest and, if he had retired at that time, he could have received the present value of $6,000. The whole amount of the $3,000 contributed by X Organization for the annuity contract was excludable from A's gross income under paragraph (b) of § 1.403(b)-1. This annuity contract was the only annuity contract purchased by X Organization for A and was not purchased as part of a qualified plan. However, all the contributions paid by X Organization were paid at a time when X Organization was an organization referred to in section 170(b)(1)(A)(ii) and exempt from tax under section 501(a). The amount that A's widow may exclude from gross income (assuming no other death benefits) is computed in the following manner:
(a) Amount includible in gross income without regard to second sentence of section 101(b)(2)(B) ($6,000 minus $2,000 contributed for contract by A) | $4,000
(b) Total employer contributions for the contract | $3,000
(c) Amount of employer contributions for the contract that was excludable under paragraph (b) of § 1.403(b)-1 | $3,000
(d) Percent of total employer contributions for the contract that were excludable under paragraph (b) of § 1.403(b)-1 ((c) ÷ (b)) | 100%
(e) Amount to which section 101(b) exclusion applies ((d) × (a)) | $4,000
Example 2. The facts are the same as in example (1) except that only $2,000 of X Organization's contributions for the annuity contract was excludable from A's gross income under paragraph (b) of § 1.403(b)-1 and that the remaining $1,000 was includible in A's gross income for the taxable years during which such amounts were contributed by X Organization. The amount that A's widow may exclude from gross income (assuming no other death benefits) is computed in the following manner:
(a) Amount includible in gross income without regard to second sentence of section 101(b)(2)(B) ($6,000 minus $2,000 contributed for contract by A and $1,000 of X Organization's contributions includible in A's gross income) | $3,000
(b) Total employer contributions for the contract | $3,000
(c) Amount of employer contributions for the contract that was excludable under paragraph (b) of § 1.403(b)-1 | $2,000
(d) Percent of total employer contributions for the contract that were excludable under paragraph (b) of § 1.403(b)-1 ((c) ÷ (b)) | 67%
(e) Amount to which section 101(b) exclusion applies ((d) × (a)) | $2,000
Example 3. The widow of B, a deceased employee, elects, under an annuity contract purchased for B by Y Organization, to receive in a lump sum the present value of such annuity contract as of the date of B's death. Such present value is $6,000 and is received by the widow in a taxable year beginning after December 31, 1957. Y Organization contributed $4,000 toward the purchase of the contract; whereas B made no contributions toward the purchase of the contract. This annuity contract was the only annuity contract purchased by Y Organization for B and was not purchased as part of a “qualified” plan. However, all the contributions paid by Y Organization were paid at a time when it was an organization referred to in section 170(b)(1)(A)(ii) and exempt from tax under section 501(a). B's interest in Y Organization's contributions was, at the time they were paid, forfeitable. However, prior to his death, one-half of B's interest in the annuity contract changed from a forfeitable to a nonforfeitable interest. Therefore, just before his death, B could have obtained $3,000 under the annuity contract if he had retired at that time. On the date of the change, the cash surrender value of the annuity contract was $5,000. As a result of the change, $1,500 was, under paragraph (b) of § 1.403(b)-1, excludable from B's gross income, and $600 was includible in his gross income for the taxable year in which the change occurred. Part of the value of the annuity contract on the date of the change was attributable to contributions made by Y Organization prior to January 1, 1958, and, consequently, was neither excludable from B's gross income under paragraph (b) of § 1.403(b)-1 nor includible in B's gross income (see paragraph (b) of § 1.403(d)-1). The amount that B's widow may exclude from gross income (assuming no other death benefits) is computed in the following manner:
(a) Amount of “total payment” with respect to which A had a forfeitable right at time of death. ( 1/2 × $6,000) | $3,000
(b) Amount includible in gross income without regard to second sentence of section 101(b)(2)(B) ( 1/2 × $6,000 less $600 includible in B's gross income for year when his rights changed to nonforfeitable rights) | $2,400
(c) Total employer contributions for the contract ( 1/2 of cash surrender value of contract on date B's rights changed to nonforfeitable rights) | $2,500
(d) Amount of employer contributions for the contract that was excludable under paragraph (b) of § 1.403(b)-1 | $1,500
(e) Percent of total employer contributions for the contract that were excludable under paragraph (b) of § 1.403(b)-1 ((d) ÷ (c)) | 60%
(f) Amount to which section 101(b) exclusion applies by reason of the second sentence of section 101(b)(2)(B) ((e) × (b)) | $1,440
(g) Total amount to which section 101(b) exclusion applies ((a) + (f)) | $4,440
(e) Annuity payments. (1) Where death benefits are paid in the form of annuity payments, the following rules shall govern for purposes of the exclusion provided in section 101(b):
(i) The exclusion from gross income provided by section 101(b) does not apply to amounts, paid as an annuity, with respect to which the employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living, or to amounts paid as an annuity in lieu thereof. See paragraph (d) of this section.
(ii) Under section 101(b)(2)(C), no exclusion is allowable for amounts received by a surviving annuitant under a joint and survivor's annuity contract if the annuity starting date (as defined in section 72(c)(4) and paragraph (b) of § 1.72-4) occurs before the death of the employee. If the annuity starting date occurs after the death of the employee, the joint and survivor's annuity contract shall be treated as an annuity to which section 101(b)(2)(D) applies. See subdivision (iii) of this subparagraph.
(iii)(a) Subject to the other limitations stated in section 101(b) and in this section (see section 101(b)(2)(D)), the amount to which the exclusion of section 101(b) shall apply, with respect to “amounts received as an annuity” (as defined in paragraph (b) of § 1.72-2) shall be the amount by which the present value of the annuity to be paid to the beneficiary, computed as of the date of the employee's death, exceeds the value (if any) of whichever of the following is the larger:
(1) Amounts contributed by the employee (determined in accordance with the provisions of section 72 and the regulations thereunder), or
(2) Amounts with respect to which the employee possessed, immediately before his death, a nonforfeitable right to receive the amounts while living, or amounts paid in lieu thereof (see paragraph (d) of this section).
(b) The present value of an annuity (immediately before the death of the employee), to the employee, or (immediately after the death of the employee), to his estate or beneficiary, shall be determined as follows:
(1) In the case of an annuity paid by an insurance company or by an organization (other than an insurance company) regularly engaged in issuing annuity contracts with an insurance company as the coinsurer or reinsurer of the obligations under the contract, by use of the discount interest rates and mortality tables used by the insurance company involved to determine the installment benefits; and
(2) In the case of an annuity issued after November 23, 1984, to which paragraph (e)(1)(iii)(b)(1) of this section is not applicable, by use of the appropriate tables in § 20.2031-7 of this chapter (Estate Tax Regulations).
(iv) Any amount subject to section 101(b)(2)(D) which is excludable under section 101(b) (see subdivision (iii) of this subparagraph) shall, for purposes of section 72, be treated as additional consideration paid by the employee. See paragraph (b) of § 1.72-8.
(v) Where more than one beneficiary, or more than one death benefit, is involved, the exclusion provided by section 101(b) shall be apportioned to the various beneficiaries and benefits in accordance with the proportion that the present value of each benefit bears to the total present value of all the benefits.
(2) The application of the principles of this paragraph may be illustrated by the following examples:
Example 1. (i) A died on January 1, 1969. Under the plan of the X Corporation, W, who is the widow of employee A, and who is 55 years old at the time of A's death, is entitled to an immediate annuity of $2,000 per year during her life and C, the minor child of A, is entitled to receive $1,000 per year for 15 years. A made no contributions under the plan and died while still employed by the X Corporation. At the time of A's death, the amount in his account is $18,000. Under the terms of the plan, this amount would have been distributable to him on account of voluntary termination of employment, but would not have been payable after his death except in the form of the annuities just described. This amount, accordingly, constitutes a nonforfeitable interest in lieu of which the annuities are paid. The exclusion does not apply, except to the extent that the present value of the annuities exceeds $18,000, whether or not the plan is “qualified”, since the total of the amount in A's account will not be paid within one taxable year of the distributees. See subparagraph (1)(i) of this paragraph.
(ii) The computation of the exclusion applicable to the interests of W and C (assuming that the payments will not be made by an insurance company or some other organization regularly engaged in issuing annuity contracts) is, by application of the tables in § 20.2031-7 of this chapter (Estate Tax Regulations), as follows: The present value of W's interest is $26,243.60, determined by multiplying the annual payment of $2,000 by 13.1218 (the factor in Table I for a person aged 55); the present value of C's interest is $11,517.40, determined by multiplying the yearly payment of $1,000 by 11.5174 (the factor in Table II for payments for a term certain of 15 years). The present value of both annuities is $37,761 and (assuming no other death benefits are involved), the total amount excludable is $5,000, because the total present value of the annuities exceeds the employee's nonforfeitable interest by more than $5,000 ($37,761 minus $18,000 equal $19,761). The exclusion allocable to W's interest is $26,243.60/$37,761 times $5,000, or $3,474.96; the exclusion allocable to C's interest is $11,517.40/$37,761 times $5,000, or $1,525.04. That portion of the death benefit exclusion as so determined for each beneficiary is to be treated as consideration paid by the employee for purposes of section 72.
Example 2.The facts are the same as in example (1), except that the nonforfeitable interest of A, at the time of his death, amounted to $33,761. Since the present value of both annuities ($37,761) exceeds the value of such nonforfeitable interest by only $4,000, the latter amount is the total amount excludable from the gross income of the beneficiaries. This $4,000 exclusion is to be divided in the same proportions as those indicated in example (1). Thus, the exclusion allocable to W's interest is $26,243.60/$37,761 times $4,000, or $2,779.97; and the exclusion allocable to the interest of C is $11,517.40/$37,761 times $4,000, or $1,220.03. That portion of the death benefit exclusion as so determined for each beneficiary is to be treated as consideration paid by the employee for purposes of section 72.
(f) Distributions on behalf of a self- employed individual. (1) Under sections 401(c)(1) and 403(a)(3), certain self-employed individuals may be covered by a pension or profit-sharing plan described in section 401(a) and exempt under section 501(a) or under an annuity plan described in section 403(a). However, a payment pursuant to the provisions of any such plan by reason of the death of an individual who participated in such a plan as a self-employed individual immediately before his retirement or death to the beneficiary or estate of such individual does not qualify for the exclusion provided by section 101(b).
(2) The application of this paragraph may be illustrated by the following examples:
Example 1.From 1950 to 1965, A was an employee of B, a sole proprietor. In 1963, B established a qualified pension plan covering A and all other persons who had been employed by B for more than 3 years. In 1965, A acquired from B a 40-percent interest in the capital and profits of the business. A continued to participate in the pension plan as a self-employed individual. In 1970, A died and his widow, in compliance with one of the provisions of the pension plan, elected to receive all of the benefits accrued to A prior to his death in a lump-sum distribution. As A participated in the plan as a self-employed individual immediately prior to his death, A's widow may not exclude any portion of such distribution from her gross income under section 101(b).
Example 2.A, an attorney, is employed by the X Company in their legal department. He is covered by the pension plan that X has established for its employees. Under the terms of A's contract of employment with X, A is permitted to carry on the private practice of law in his off-duty hours. A establishes his own pension plan with respect to his earnings from his private practice. On A's death, his widow elected to receive a lump-sum distribution with respect to any benefits accrued to A under both X's pension plan and A's own pension plan. To the extent that such payment otherwise complies with the requirements of section 101(b), up to $5,000 of the amount paid by X may be excluded from her gross income. No part of the distribution from A's own pension plan may be excluded from her gross income under section 101(b) because A participated in the plan as a self-employed individual immediately before his death.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 5070, Apr. 14, 1964; T.D. 6783, 29 FR 18357, Dec. 24, 1964; T.D. 7352, 40 FR 16666, Apr. 14, 1975; T.D. 7428, 41 FR 34619, Aug. 16, 1976; T.D. 7836, 47 FR 42337, Sept. 27, 1982; T.D. 7955, 49 FR 19975, May 11, 1984; T.D. 8540, 59 FR 30102, 30103, June 10, 1994]
§ 1.101-3 Interest payments.
(a) Applicability of section 101(c). Section 101(c) provides that if any amount excluded from gross income by section 101(a) (relating to life insurance proceeds) or section 101(b) (relating to employees' death benefits) is held under an agreement to pay interest thereon, the interest payments shall be included in gross income. This provision applies to payments made (either by an insurer or by or on behalf of an employer) of interest earned on any amount so excluded from gross income which is held without substantial diminution of the principal amount during the period when such interest payments are being made or credited to the beneficiaries or estate of the insured or the employee. For example, if a monthly payment is $100, of which $99 represents interests and $1 represents diminution of the principal amount, the principal amount shall be considered held under an agreement to pay interest thereon and the interest payment shall be included in the gross income of the recipient. Section 101(c) applies whether the election to have an amount held under an agreement to pay interest thereon is made by the insured or employee or by his beneficiaries or estate, and whether or not an interest rate is explicitly stated in the agreement. Section 101(d), relating to the payment of life insurance proceeds at a date later than death, shall not apply to any amount to which section 101(c) applies. See section 101(d)(4). However, both section 101(c) and section 101(d) may apply to payments received under a single life insurance contract. For provisions relating to the application of this rule to payments received under a permanent life insurance policy with a family income rider attached, see paragraph (h) of § 1.101-4.
(b) Determination of “present value”. For the purpose of determining whether section 101(c) or section 101(d) applies, the present value (at the time of the insured's death) of any amount which is to be paid at a date later than death shall be determined by the use of the interest rate and mortality tables used by the insurer in determining the size of the payments to be made.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR 10127, Oct. 28, 1961]
§ 1.101-4 Payment of life insurance proceeds at a date later than death.
(a) In general. (1)(i) Section 101(d) states the provisions governing the exclusion from gross income of amounts (other than those to which section 101(c) applies) received under a life insurance contract and paid by reason of the death of the insured which are paid to a beneficiary on a date or dates later than the death of the insured. However, if the amounts payable as proceeds of life insurance to which section 101(a)(1) applies cannot in any event exceed the amount payable at the time of the insured's death, such amounts are fully excludable from the gross income of the recipient (or recipients) without regard to the actual time of payment and no further determination need be made under this section. Section 101(d)(1)(A) provides an exclusion from gross income of any amount determined by a proration, under applicable regulations, of “an amount held by an insurer with respect to any beneficiary”. The quoted phrase is defined in section 101(d)(2). For the regulations governing the method of computation of this proration, see paragraphs (c) through (f) of this section. The prorated amounts are to be excluded from the gross income of the beneficiary regardless of the taxable year in which they are actually received (see example (2) of subparagraph (2) of this paragraph).
(ii) Section 101(d)(1)(B) provides an additional exclusion where life insurance proceeds are paid to the surviving spouse of an insured. For purposes of this exclusion, the term “surviving spouse” means the spouse of the insured as of the date of death, including a spouse legally separated, but not under a decree of absolute divorce (section 101(d)(3)). To the extent that the total payments, under one or more agreements, made in excess of the amounts determined by proration under section 101(d)(1)(A) do not exceed $1,000 in the taxable year of receipt, they shall be excluded from the gross income of the surviving spouse (whether or not payment of any part of such amounts is guaranteed by the insurer). Amounts excludable under section 101(d)(1)(B) are not “prorated” amounts.
(2) The principles of this paragraph may be illustrated by the following examples:
Example 1. A surviving spouse elects to receive all of the life insurance proceeds with respect to one insured, amounting to $150,000, in ten annual installments of $16,500 each, based on a certain guaranteed interest rate. The prorated amount is $15,000 ($150,000 ÷ 10). As the second payment, the insurer pays $17,850, which exceeds the guaranteed payment by $1,350 as the result of earnings of the insurer in excess of those required to pay the guaranteed installments. The surviving spouse shall include $1,850 in gross income and exclude $16,000—determined in the following manner:
Fixed payment (including guaranteed interest) | $16,500
Excess interest | 1,350
Total payment | 17,850
Prorated amount | 15,000
Excess over prorated amount | 2,850
Annual excess over prorated amount excludable under section 101(d)(1)(B) | 1,000
Amount includible in gross income | 1,850
Example 2.Assume the same facts as in example (1), except that the third and fourth annual installments, totalling $33,000 (2 × $16,500), are received in a single subsequent taxable year of the surviving spouse. The prorated amount of $15,000 of each annual installment, totalling $30,000, shall be excluded even though the spouse receives more than one annual installment in the single subsequent taxable year. However, the surviving spouse is entitled to only one exclusion of $1,000 under section 101(d)(1)(B) for each taxable year of receipt. The surviving spouse shall include $2,000 in her gross income for the taxable year with respect to the above installment payments ($33,000 less the sum of $30,000 plus $1,000).
Example 3.Assume the same facts as in example (1), except that the surviving spouse dies before receiving all ten annual installments and the remaining installments are paid to her estate or beneficiary. In such a case, $15,000 of each installment would continue to be excludable from the gross income of the recipient, but any amounts received in excess thereof would be fully includible.
(b) Amount held by an insurer. (1) For the purpose of the proration referred to in section 101(d)(1), an “amount held by an insurer with respect to any beneficiary” means an amount equal to the present value to such beneficiary (as of the date of death of the insured) of an agreement by the insurer under a life insurance policy (whether as an option or otherwise) to pay such beneficiary an amount or amounts at a date or dates later than the death of the insured (section 101(d)(2)). The present value of such agreement is to be computed as if the agreement under the life insurance policy had been entered into on the date of death of the insured, except that such value shall be determined by the use of the mortality table and interest rate used by the insurer in calculating payments to be made to the beneficiary under such agreement. Where an insurance policy provides an option for the payment of a specific amount upon the death of the insured in full discharge of the contract, such lump sum is the amount held by the insurer with respect to all beneficiaries (or their beneficiaries) under the contract. See, however, paragraph (e) of this section.
(2) In the case of two or more beneficiaries, the “amount held by the insurer” with respect to each beneficiary depends on the relationship of the different benefits payable to such beneficiaries. Where the amounts payable to two or more beneficiaries are independent of each other, the “amount held by the insurer with respect to each beneficiary” shall be determined and prorated over the periods involved independently. Thus, if a certain amount per month is to be paid to A for his life, and, concurrently, another amount per month is to be paid to B for his life, the “amount held by the insurer” shall be determined and prorated for both A and B independently, but the aggregate shall not exceed the total present value of such payments to both. On the other hand, if the obligation to pay B was contingent on his surviving A, the “amount held by the insurer” shall be considered an amount held with respect to both beneficiaries simultaneously. Furthermore, it is immaterial whether B is a named beneficiary or merely the ultimate recipient of payments for a term of years. For the special rules governing the computation of the proration of the “amount held by an insurer” in determining amounts excludable under the provisions of section 101(d), see paragraphs (c) to (f), inclusive, of this section.
(3) Notwithstanding any other provision of this section, if the policy was transferred for a valuable consideration, the total “amount held by an insurer” cannot exceed the sum of the consideration paid plus any premiums or other consideration paid subsequent to the transfer if the provisions of section 101(a)(2) and paragraph (b) of § 1.101-1 limit the excludability of the proceeds to such total.
(c) Treatment of payments for life to a sole beneficiary. If the contract provides for the payment of a specified lump sum, but, pursuant to an agreement between the beneficiary and the insurer, payments are to be made during the life of the beneficiary in lieu of such lump sum, the lump sum shall be divided by the life expectancy of the beneficiary determined in accordance with the mortality table used by the insurer in determining the benefits to be paid. However, if payments are to be made to the estate or beneficiary of the primary beneficiary in the event that the primary beneficiary dies before receiving a certain number of payments or a specified total amount, such lump sum shall be reduced by the present value (at the time of the insured's death) of amounts which may be paid by reason of the guarantee, in accordance with the provisions of paragraph (e) of this section, before making this calculation. To the extent that payments received in each taxable year do not exceed the amount found from the above calculation, they are “prorated amounts” of the “amount held by an insurer” and are excludable from the gross income of the beneficiary without regard to whether he lives beyond the life expectancy used in making the calculation. If the contract in question does not provide for the payment of a specific lump sum upon the death of the insured as one of the alternative methods of payment, the present value (at the time of the death of the insured) of the payments to be made the beneficiary, determined in accordance with the interest rate and mortality table used by the insurer in determining the benefits to be paid, shall be used in the above calculation in lieu of a lump sum.
(d) Treatment of payments to two or more beneficiaries—(1) Unrelated payments. If payments are to be made to two or more beneficiaries, but the payments to be made to each are to be made without regard to whether or not payments are made or continue to be made to the other beneficiaries, the present value (at the time of the insured's death) of such payments to each beneficiary shall be determined independently for each such beneficiary. The present value so determined shall then be divided by the term for which the payments are to be made. If the payments are to be made for the life of the beneficiary, the divisor shall be the life expectancy of the beneficiary. To the extent that payments received by a beneficiary do not exceed the amount found from the above calculation, they are “prorated amounts” of the “amount held by an insurer” with respect to such beneficiary and are excludable from the gross income of the beneficiary without regard to whether he lives beyond any life expectancy used in making the calculation. For the purpose of the calculation described above, both the “present value” of the payments to be made periodically and the “life expectancy” of the beneficiary shall be determined in accordance with the interest rate and mortality table used by the insurer in determining the benefits to be paid. If payments are to be made to the estate or beneficiary of a primary beneficiary in the event that such beneficiary dies before receiving a certain number of payments or a specified total amount, the “present value” of payments to such beneficiary shall not include the present value (at the time of the insured's death) of amounts which may be paid by reason of such a guarantee. See paragraph (e) of this section.
(2) Related payments. If payments to be made to two or more beneficiaries are in the nature of a joint and survivor annuity (as described in paragraph (b) of § 1.72-5), the present value (at the time of the insured's death) of the payments to be made to all such beneficiaries shall be divided by the life expectancy of such beneficiaries as a group. To the extent that the payments received by a beneficiary do not exceed the amount found from the above calculation, they are “prorated amounts” of the “amount held by an insurer” with respect to such beneficiary and are excludable from the gross income of the beneficiary without regard to whether all the beneficiaries involved live beyond the life expectancy used in making the calculation. For the purpose of the calculation described above, both the “present value” of the payments to be made periodically and the “life expectancy” of all the beneficiaries as a group shall be determined in accordance with the interest rate and mortality table used by the insurer in determining the benefits to be paid. If the contract provides that certain payments are to be made in the event that all the beneficiaries of the group die before a specified number of payments or a specified total amount is received by them, the present value of payments to be made to the group shall not include the present value (at the time of the insured's death) of amounts which may be paid by reason of such a guarantee. See paragraph (e) of this section.
(3) Payments to secondary beneficiaries. Payments made by reason of the death of a beneficiary (or beneficiaries) under a contract providing that such payments shall be made in the event that the beneficiary (or beneficiaries) die before receiving a specified number of payments or a specified total amount shall be excluded from the gross income of the recipient to the extent that such payments are made solely by reason of such guarantee.
(e) Treatment of present value of guaranteed payments. In the case of payments which are to be made for a life or lives under a contract providing that further amounts shall be paid upon the death of the primary beneficiary (or beneficiaries) in the event that such beneficiary (or beneficiaries) die before receiving a specified number of payments or a specified total amount, the present value (at the time of the insured's death) of all payments to be made under the contract shall not include, for purposes of prorating the amount held by the insurer, the present value of the payments which may be made to the estate or beneficiary of the primary beneficiary. In such a case, any lump sum amount used to measure the value of the amount held by an insurer with respect to the primary beneficiary must be reduced by the value at the time of the insured's death of any amounts which may be paid by reason of the guarantee provided for a secondary beneficiary or the estate of the primary beneficiary before prorating such lump sum over the life or lives of the primary beneficiaries. Such present value (of the guaranteed payment) shall be determined by the use of the interest rate and mortality tables used by the insurer in determining the benefits to be paid.
(f) Treatment of payments not paid periodically. Payments made to beneficiaries other than periodically shall be included in the gross income of the recipients, but only to the extent that they exceed amounts payable at the time of the death of the insured to each such beneficiary or, where no such amounts are specified, the present value of such payments at that time.
(g) Examples. The principles of this section may be illustrated by the following examples:
Example 1.A life insurance policy provides for the payment of $20,000 in a lump sum to the beneficiary at the death of the insured. Upon the death of the insured, the beneficiary elects an option to leave the proceeds with the company for five years and then receive payment of $24,000, having no claim of right to any part of such sum before the entire five years have passed. Upon the payment of the larger sum, $24,000, the beneficiary shall include $4,000 in gross income and exclude $20,000 therefrom. If it is assumed that the same insurer has determined the benefits to be paid, the same result would obtain if no lump sum amount were provided for at the death of the insured and the beneficiary were to be paid $24,000 five years later. In neither of these cases would the surviving spouse be able to exclude any additional amount from gross income since both cases involve an amount held by an insurer under an agreement to pay interest thereon to which section 101(c) applies, rather than an amount to be paid periodically after the death of the insured to which section 101(d) applies.
Example 2.A life insurance policy provides that $1,200 per year shall be paid the sole beneficiary (other than a surviving spouse) until a fund of $20,000 and interest which accrues on the remaining balance is exhausted. A guaranteed rate of interest is specified, but excess interest may be credited according to the earnings of the insurer. Assuming that the fund will be exhausted in 20 years if only the guaranteed interest is actually credited, the beneficiary shall exclude $1,000 of each installment received ($20,000 divided by 20) and any installments received, whether by the beneficiary or his estate or beneficiary, in excess of 20 shall be fully included in the gross income of the recipient. If, instead, the excess interest were to be paid each year, any portion of each installment representing an excess over $1,000 would be fully includible in the recipient's gross income. Thus, if an installment of $1,350 were received, $350 of it would be included in gross income.
Example 3.Assume that the sole life insurance policy of a decedent provides only for the payment of $5,000 per year for the life of his surviving spouse, beginning with the insured's death. If the present value of the proceeds, determined by reference to the interest rate and the mortality table used by the insurance company, is $60,000, and such beneficiary's life expectancy is 20 years, $3,000 of each $5,000 payment ($60,000 divided by 20) is excludable as the prorated portion of the “amount held by an insurer”. For each taxable year in which a payment is made, an additional $1,000 is excludable from the gross income of the surviving spouse. Hence, if she receives only one $5,000 payment in her taxable year, only $1,000 is includible in her gross income in that year with respect to such payment ($5,000 less the total amount excludable, $4,000). Assuming that the policy also provides for payments of $2,000 per year for 10 years to the daughter of the insured, the present value of the payments to the daughter is to be computed separately for the purpose of determining the excludable portion of each payment to her. Assuming that such present value is $15,000, $1,500 of each payment of $2,000 received by the daughter is excludable from her gross income ($15,000 divided by 10). The remaining $500 shall be included in the gross income of the daughter.
Example 4.Beneficiaries A and B, neither of whom is the surviving spouse of the insured, are each to receive annual payments of $1,800 for each of their respective lives upon the death of the insured. The contract does not provide for payments to be made in any other manner. Assuming that the present value of the payments to be made to A, whose life expectancy according to the insurer's mortality table is 30 years, is $36,000, A shall exclude $1,200 of each payment received ($36,000 divided by 30). Assuming that the present value of the payments to be made to B, whose life expectancy according to the insurer's mortality table is 20 years, is $27,000, B shall exclude $1,350 of each payment received ($27,000 divided by 20).
Example 5.A life insurance policy provides for the payment of $76,500 in a lump sum to the beneficiary, A, at the death of the insured. Upon the insured's death, however, A selects an option for the payment of $2,000 per year for her life and for the same amount to be paid after her death to B, her daughter, for her life. Assuming that since A is 51 years of age and her daughter is 28 years of age, the insurer determined the amount of the payments by reference to a mortality table under which the life expectancy for the lives of both A and B, joint and survivor, is 51 years, $1,500 of each $2,000 payment to either A or B ($76,500 divided by 51, or $1,500) shall be excluded from the gross income of the recipient. However, if A is the surviving spouse of the insured and no other contracts of insurance whose proceeds are to be paid to her at a date later than death are involved, A shall exclude the entire payment of $2,000 in any taxable year in which she receives but one such payment because of the additional exclusion under section 101(d)(1)(B).
Example 6.Beneficiaries A and B, neither of whom is the surviving spouse of the insured, are each to receive annual payments of $1,800 for each of their respective lives upon the death of the insured, but after the death of either, the survivor is to receive the payments formerly made to the deceased beneficiary until the survivor dies. Assuming that the life expectancy, joint and survivor, of A and B in accordance with the mortality table used by the insurer is 32 years and assuming that the total present value of the benefits to both (determined in accordance with the interest rate used by the insurer) is $80,000, A and B shall each exclude $1,250 of each installment of $1,800 ($80,000 divided by the life expectancy, 32, multiplied by the fraction of the annual payment payable to each, one-half) until the death of either. Thereafter, the survivor shall exclude $2,500 of each installment of $3,600 ($80,000 divided by 32).
Example 7.A life insurance policy provides for the payment of $75,000 in a lump sum to the beneficiary, A, at the death of the insured. A, upon the insured's death, however, selects an option for the payment of $4,000 per year for life, with a guarantee that any part of the $75,000 lump sum not paid to A before his death shall be paid to B (or his estate). A's beneficiary. Assuming that, under the criteria used by the insurer in determining the benefits to be paid, the present value of the guaranteed amount to B is $13,500 and that A's life expectancy is 25 years, the lump sum shall be reduced by the present value of the guarantee to B ($75,000 less $13,500, or $61,500) and divided by A's life expectancy ($61,500 divided by 25, or $2,460). Hence, $2,460 of each $4,000 payment is excludable from A's gross income. If A is the surviving spouse of the insured and no other contracts of insurance whose proceeds are to be paid to her at a date later than death are involved, A shall exclude $3,460 of each $4,000 payment from gross income in any taxable year in which but one such payment is received. Under these facts, if any amount is paid to B by reason of the fact that A dies before receiving a total of $75,000, the residue of the lump sum paid to B shall be excluded from B's gross income since it is wholly in lieu of the present value of such guarantee plus the present value of the payments to be made to the first beneficiary, and is therefore entirely an “amount held by an insurer” paid at a date later than death (see paragraph (d)(3) of this section).
Example 8.Assume that an insurance policy does not provide for the payment of a lump sum, but provides for the payment of $1,200 per year for a beneficiary's life upon the death of the insured, and also provides that if ten payments are not made to the beneficiary before death a secondary beneficiary (whether named by the insured or by the first beneficiary) shall receive the remainder of the ten payments in similar installments. If, according to the criteria used by the insurance company in determining the benefits, the present value of the payments to the first beneficiary is $12,000 and the life expectancy of such beneficiary is 15 years, $800 of each payment received by the first beneficiary is excludable from gross income. Assuming that the same figures obtain even though the payments are to be made at the rate of $100 per month, the yearly exclusion remains the same unless more or less than twelve months' installments are received by the beneficiary in a particular taxable year. In such a case two-thirds of the total received in the particular taxable year with respect to such beneficiary shall be excluded from gross income. Under either of the above alternatives, any amount received by the second beneficiary by reason of the guarantee of ten payments is fully excludable from the beneficiary's gross income since it is wholly in lieu of the present value of such guarantee plus the present value of the payments to be made to the first beneficiary and is therefore entirely an “amount held by an insurer” paid at a date later than death (see paragraph (d)(3) of this section).
(h) Applicability of both section 101(c) and 101(d) to payments under a single life insurance contract—(1) In general. Section 101(d) shall not apply to interest payments on any amount held by an insurer under an agreement to pay interest thereon (see sections 101(c) and 101(d)(4) and § 1.101-3). On the other hand, both section 101(c) and section 101(d) may be applicable to payments received under a single life insurance contract, if such payments consist both of interest on an amount held by an insurer under an agreement to pay interest thereon and of amounts held by the insurer and paid on a date or dates later than the death of the insured. One instance when both section 101(c) and section 101(d) may be applicable to payments received under a single life insurance contract is in the case of a permanent life insurance policy with a family income rider attached. A typical family income rider is one which provides additional term insurance coverage for a specified number of years from the register date of the basic policy. Under the policy with such a rider, if the insured dies at any time during the term period, the beneficiary is entitled to receive (i) monthly payments of a specified amount commencing as of the date of death and continuing for the balance of the term period, and (ii) a lump sum payment of the proceeds under the basic policy to be paid at the end of the term period. If the insured dies after the expiration of the term period, the beneficiary receives only the proceeds under the basic policy. If the insured dies before the expiration of the term period, part of each monthly payment received by the beneficiary during the term period consists of interest on the proceeds of the basic policy (such proceeds being retained by the insurer until the end of the term period). The remaining part consists of an installment (principal plus interest) of the proceeds of the terms insurance purchased under the family income rider. The amount of term insurance which is provided under the family income rider is, therefore, that amount which, at the date of the insured's death, will provide proceeds sufficient to fund such remaining part of each monthly payment. Since the proceeds under the basic policy are held by the insurer until the end of the term period, that portion of each monthly payment which consists of interest on such proceeds is interest on an amount held by an insurer under an agreement to pay interest thereon and is includible in gross income under section 101(c). On the other hand, since the remaining portion of each monthly payment consists of an installment payment (principal plus interest) of the proceeds of the term insurance, it is a payment of an amount held by the insurer and paid on a date later than the death of the insured to which section 101(d) and this section applies (including the $1,000 exclusion allowed the surviving spouse under section 101(d)(1)(B)). The proceeds of the basic policy, when received in a lump sum at the end of the term period, are excludable from gross income under section 101(a).
(2) Example of tax treatment of amounts received under a family income rider. The following example illustrates the application of the principles contained in subparagraph (1) of this paragraph to payments received under a permanent life insurance policy with a family income rider attached:
Example. The sole life insurance policy of the insured provides for the payment of $100,000 to the beneficiary (the insured's spouse) on his death. In addition, there is attached to the policy a family income rider which provides that, if the insured dies before the 20th anniversary of the basic policy, the beneficiary shall receive (i) monthly payments of $1,000 commencing on the date of the insured's death and ending with the payment prior to the 20th anniversary of the basic policy, and (ii) a single payment of $100,000 payable on the 20th anniversary of the basic policy. On the date of the insured's death, the beneficiary (surviving spouse of the insured) is entitled to 36 monthly payments of $1,000 and to the single payment of $100,000 on the 20th anniversary of the basic policy. The value of the proceeds of the term insurance at the date of the insured's death is $28,409.00 (the present value of the portion of the monthly payments to which section 101(d) applies computed on the basis that the interest rate used by the insurer in determining the benefits to be paid under the contract is 2 1/4 percent). The amount of each monthly payment of $1,000 which is includible in the beneficiary's gross income is determined in the following manner:
(a) Total amount of monthly payment | $1,000.00
(b) Amount includible in gross income under section 101(c) as interest on the $100,000 proceeds under the basic policy held by the insurer until 20th anniversary of the basic policy (computed on the basis that the interest rate used by the insurer in determining the benefits to be paid under the contract is 2 1/4 percent) | 185.00
(c) Amount to which section 101(d) applies ((a) minus (b)) | 815.00
(d) Amount excludable from gross income under section 101(d) ($28,409 ÷ 36) | 789.14
(e) Amount includible in gross income under section 101(d) without taking into account the $1,000 exclusion allowed the beneficiary as the surviving spouse ((c) minus (d)) | 25.86
The beneficiary, as the surviving spouse of the insured, is entitled to exclude the amounts otherwise includible in gross income under section 101(d) (item (e)) to the extent such amounts do not exceed $1,000 in the taxable year of receipt. This exclusion is not applicable, however, with respect to the amount of each payment which is includible in gross income under section 101(c) (item (b)). In this example, therefore, the beneficiary must include $185 of each monthly payment in gross income (amount includible under section 101(c)), but may exclude the $25.86 which is otherwise includible under section 101(d). The payment of $100,000 which is payable to the beneficiary on the 20th anniversary of the basic policy will be entirely excludable from gross income under section 101(a).
(3) Limitation on amount considered to be an “amount held by an insurer”. See paragraph (b)(3) of this section for a limitation on the amount which shall be considered an “amount held by an insurer” in the case of proceeds of life insurance which are paid subsequent to the transfer of the policy for a valuable consideration.
(4) Effective date. The provisions of this paragraph are applicable only with respect to amounts received during taxable years beginning after October 28, 1961, irrespective of the date of the death of the insured.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR 10127, Oct. 28, 1961; 26 FR 10275, Nov. 2, 1961]
§ 1.101-5 [Reserved]
§ 1.101-6 Applicability date.
(a) Except as otherwise provided in paragraph (h)(4) of § 1.101-4, the provisions of section 101 of the Internal Revenue Code of 1954 and §§ 1.101-1, 1.101-2, 1.101-3, and 1.101-4 are applicable only with respect to amounts received by reason of the death of an insured or an employee occurring after August 16, 1954. In the case of such amounts, these sections are applicable even though the receipt of such amounts occurred in a taxable year beginning before January 1, 1954, to which the Internal Revenue Code of 1939 applies.
(b) Notwithstanding paragraph (a) of this section, for purposes of determining whether a transfer of an interest in a life insurance contract is a reportable policy sale or a payment of death benefits is a payment of reportable death benefits subject to the reporting requirements of section 6050Y and §§ 1.6050Y-1 through 1.6050Y-4, § 1.101-1(b) through (g) apply to reportable policy sales made after December 31, 2018, and to reportable death benefits paid after December 31, 2018. For any other purpose, including for purposes of determining the amount of the proceeds of life insurance contracts payable by reason of death excluded from gross income under section 101, § 1.101-1(b) through (g) apply to amounts paid by reason of the death of the insured under a life insurance contract, or interest therein, transferred after October 31, 2019. However, under section 7805(b)(7), a taxpayer may apply the rules set forth in § 1.101-1(b) through (g) of the final regulations, in their entirety, with respect to all amounts paid by reason of the death of the insured under a life insurance contract, or interest therein, transferred after December 31, 2017, and on or before October 31, 2019.
(c) Notwithstanding paragraphs (a) and (b) of this section, § 1.101-1(b)(2)(iv) and (c)(3) apply to any interest in a life insurance contract issued in a section 1035 exchange occurring on or after July 9, 2026, and § 1.101-1(c)(2)(v) applies to any acquisition of an interest in a life insurance contract occurring on or after July 9, 2026. Taxpayers may also choose to apply the rules in § 1.101-1(b)(2)(iv), (c)(2)(v), and (c)(3) to all exchanges and acquisitions occurring after December 31, 2017.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6577, 26 FR 10128, Oct. 28, 1961; T.D. 9849, 84 FR 9233, Mar. 14, 2019; T.D. 9879, 84 FR 58484, Oct. 31, 2019; T.D. 10052, 91 FR 42352, July 9, 2026]
§ 1.101-7 Mortality table used to determine exclusion for deferred payments of life insurance proceeds.
(a) Mortality table. Notwithstanding any provision of § 1.101-4 that otherwise would permit the use of a mortality table not described in this section, the mortality table set forth in § 1.72-7(c)(1) must be used to determine—
(1) The amount held by an insurer with respect to a beneficiary for purposes of section 101(d)(2) and § 1.101-4; and
(2) The period or periods with respect to which payments are to be made for purposes of section 101(d)(1) and § 1.101-4.
(b) Examples. The principles of this section may be illustrated by the following examples:
Example 1.A life insurance policy provides only for the payment of $5,000 per year for the life of the beneficiary, A, beginning with the insured's death. If A is 59 years of age at the time of the insured's death, the period with respect to which the payments are to be made is 25 years. This period is determined by using the mortality table set forth in § 1.72-7(c)(1), and is shown in Table V of § 1.72-9 (which contains life expectancy tables determined using this mortality table). If the present value of the proceeds, determined by reference to the interest rate used by the insurance company and the mortality table set forth in § 1.72-7(c)(1), is $75,000, $3,000 of each $5,000 payment ($75,000 divided by 25) is excluded from the gross income of A.
Example 2.A life insurance policy provides for the payment of $82,500 in a lump sum to the beneficiary, A, at the death of the insured. Upon the insured's death, however, A selects an option for the payment of $2,000 per year for life and for the same amount to be paid after A's death to B for B's life. If A is 51 years of age and B is 28 years of age at the death of the insured, the period with respect to which the payments are to be made is 55 years. This period is determined by using the mortality table set forth in § 1.72-7(c)(1), and is shown in Table VI of § 1.72-9 (which contains life expectancy tables determined using this mortality table). Accordingly $1,500 of each $2,000 payment ($82,500 divided by 55) is excluded from the gross income of the recipient.
(c) Effective date. This section applies to amounts received with respect to deaths occurring after October 22, 1986, in taxable years ending after October 22, 1986.
[T.D. 8161, 52 FR 35415, Sept. 21, 1987. Redesignated and amended by T.D. 8272, 54 FR 47980, Nov. 20, 1989]
§ 1.102-1 Gifts and inheritances.
(a) General rule. Property received as a gift, or received under a will or under statutes of descent and distribution, is not includible in gross income, although the income from such property is includible in gross income. An amount of principal paid under a marriage settlement is a gift. However, see section 71 and the regulations thereunder for rules relating to alimony or allowances paid upon divorce or separation. Section 102 does not apply to prizes and awards (see section 74 and § 1.74-1) nor to scholarships and fellowship grants (see section 117 and the regulations thereunder).
(b) Income from gifts and inheritances. The income from any property received as a gift, or under a will or statute of descent and distribution shall not be excluded from gross income under paragraph (a) of this section.
(c) Gifts and inheritances of income. If the gift, bequest, devise, or inheritance is of income from property, it shall not be excluded from gross income under paragraph (a) of this section. Section 102 provides a special rule for the treatment of certain gifts, bequests, devises, or inheritances which by their terms are to be paid, credited, or distributed at intervals. Except as provided in section 663(a)(1) and paragraph (d) of this section, to the extent any such gift, bequest, devise, or inheritance is paid, credited, or to be distributed out of income from property, it shall be considered a gift, bequest, devise, or inheritance of income from property. Section 102 provides the same treatment for amounts of income from property which is paid, credited, or to be distributed under a gift or bequest whether the gift or bequest is in terms of a right to payments at intervals (regardless of income) or is in terms of a right to income. To the extent the amounts in either case are paid, credited, or to be distributed at intervals out of income, they are not to be excluded under section 102 from the taxpayer's gross income.
(d) Effect of Subchapter J. Any amount required to be included in the gross income of a beneficiary under sections 652, 662, or 668 shall be treated for purposes of this section as a gift, bequest, devise, or inheritance of income from property. On the other hand, any amount excluded from the gross income of a beneficiary under section 663(a)(1) shall be treated for purposes of this section as property acquired by gift, bequest, devise, or inheritance.
(e) Income taxed to grantor or assignor. Section 102 is not intended to tax a donee upon the same income which is taxed to the grantor of a trust or assignor of income under section 61 or sections 671 through 677, inclusive.
§ 1.103-1 Interest upon obligations of a State, territory, etc.
(a) Interest upon obligations of a State, territory, a possession of the United States, the District of Columbia, or any political subdivision thereof (hereinafter collectively or individually referred to as “State or local governmental unit”) is not includable in gross income, except as provided under section 103 (c) and (d) and the regulations thereunder.
(b) Obligations issued by or on behalf of any State or local governmental unit by constituted authorities empowered to issue such obligations are the obligations of such a unit. However, section 103(a)(1) and this section do not apply to industrial development bonds except as otherwise provided in section 103(c). See section 103(c) and §§ 1.103-7 through 1.103-12 for the rules concerning interest paid on industrial development bonds. See section 103(d) for rules concerning interest paid on arbitrage bonds. Certificates issued by a political subdivision for public improvements (such as sewers, sidewalks, streets, etc.) which are evidence of special assessments against specific property, which assessments become a lien against such property and which the political subdivision is required to enforce, are, for purposes of this section, obligations of the political subdivision even though the obligations are to be satisfied out of special funds and not out of general funds or taxes. The term “political subdivision”, for purposes of this section denotes any division of any State or local governmental unit which is a municipal corporation or which has been delegated the right to exercise part of the sovereign power of the unit. As thus defined, a political subdivision of any State or local governmental unit may or may not, for purposes of this section, include special assessment districts so created, such as road, water, sewer, gas, light, reclamation, drainage, irrigation, levee, school, harbor, port improvement, and similar districts and divisions of any such unit.
[T.D. 7199, 37 FR 15486, Aug. 3, 1972]
§§ 1.103-2--1.103-6 [Reserved]
§ 1.103-7 Industrial development bonds.
(a) In general. Under section 103(c)(1) and this section, an industrial development bond issued after April 30, 1968, shall be treated as an obligation not described in section 103(a)(1) and § 1.103-1. Accordingly, interest paid on such a bond is includable in gross income unless the bond was issued by a State, or local governmental unit to finance certain exempt facilities (see section 103(c)(4) and § 1.103-8), to finance an industrial park (see section 103(c)(5) and § 1.103-9), or as part of an exempt small issue (see section 103(c)(6) and § 1.103-10). For applicable rules when an industrial development bond is held by a substantial user (or a person related to a substantial user) of such an exempt facility, or an industrial park, or a facility financed with the proceeds of such an exempt small issue, see section 103(c)(7) and § 1.103-11. See also § 1.103-12 for the transitional provisions concerning the interest paid on certain industrial development bonds issued before January 1, 1969, and certain other industrial development bonds. Even if section 103(c) does not prevent a bond from being treated as an obligation described in section 103(a)(1) and § 1.103-1, such bond shall nevertheless be treated as an obligation which is not described in section 103(a)(1) and § 1.103-1 if under section 103(d) it is an arbitrage bond. For purposes of section 103(c), the term “issue” includes a single obligation such as a single note issued in connection with a bank loan as well as a series of notes or bonds.
(b) Industrial development bonds—(1) Definition. For purposes of this section, the term “industrial development bond” means any obligation—
(i) Which is issued as part of an issue all or a major portion of the proceeds of which are to be used directly or indirectly in any trade or business carried on by any person who is not an exempt person (as defined in subparagraph (2) of this paragraph), and
(ii) The payment of the principal or interest on which, under the terms of such obligation or any underlying arrangement (as described in subparagraph (4) of this paragraph), is in whole or in major part (i.e., major portion)—
(a) Secured by any interest in property used or to be used in a trade or business,
(b) Secured by any interest in payments in respect of property used or to be used in a trade or business, or
(c) To be derived from payments in respect of property, or borrowed money, used or to be used in a trade or business.
See subparagraphs (3) and (4) of this paragraph for the trade or business test and the security interest test respectively. See § 1.103-8(a)(6) to determine the amount of proceeds of an issue for which the amount payable during each annual period over the term of the issue is less than the amount of interest accruing thereon in such period, e.g., in the case of an issue sold by the issuer for less than its face amount.
(2) Exempt person. The term “exempt person” means a governmental unit as defined in this subparagraph, or an organization which is described in section 501(c)(3) and this subparagraph and is exempt from taxation under section 501(a). For purposes of this subparagraph, the term “governmental unit” means a State or local governmental unit (as defined in § 1.103-1). For purposes of this subparagraph, the term “governmental unit” also includes the United States of America (or an agency or instrumentality of the United States of America), but only in the case of obligations (i) issued on or before August 3, 1972, or (ii) issued after August 3, 1972, with respect to which a bond resolution or any other official action was taken and in reliance on such action either (a) construction of such facility to be financed with such obligations commenced or (b) a binding contract was entered into, or an irrevocable bid was submitted, prior to August 3, 1972, or (iii) issued after August 3, 1972, with respect to a program approved by Congress prior to such date but only if (a) a portion of such program has been financed by obligations issued prior to such date, to which section 103(a) applied pursuant to a ruling issued by the Commissioner or his delegate prior to such date and (b) construction of one or more facilities comprising a part of such program commenced prior to such date. For purposes of this subparagraph, a tax-exempt organization is an exempt person only with respect to a trade or business it carries on which is not an unrelated trade or business. Whether a particular trade or business carried on by a tax-exempt organization is an unrelated trade or business is determined by applying the rules of section 513(a) (relating to general rule for unrelated trade or business) and the regulations thereunder to the tax-exempt organization without regard to whether the organization is an organization subject to the tax imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc., organizations).
(3) Trade or business test. (i) The trade or business test relates to the use of the proceeds of a bond issue. The test is met if all or a major portion of the proceeds of a bond issue is used in a trade or business carried on by a nonexempt person. For example, if all or a major portion of the proceeds of a bond issue is to be loaned to one or more private business users, or is to be used to acquire, construct, or reconstruct facilities to be leased or sold to such private business users, and such proceeds or facilities are to be used in trades or businesses carried on by them, such proceeds are to be used in a trade or business carried on by persons who are not exempt persons, and the debt obligations comprising the bond issue satisfy the trade or business test. If, however, less than a major portion of the proceeds of an issue is to be loaned to nonexempt persons or is to be used to acquire or construct facilities which will be used in a trade or business carried on by a nonexempt person, the debt obligations will not be industrial development bonds. Also, when publicly-owned facilities which are intended for general public use, such as toll roads or bridges, are constructed with the proceeds of a bond issue and used by nonexempt persons in their trades or businesses on the same basis as other members of the public, such use does not constitute a use in the trade or business of a nonexempt person for purposes of the trade or business test.
(ii) In determining whether a debt obligation meets the trade or business test, the indirect, as well as the direct, use of the proceeds is to be taken into account. For example, the debt obligations comprising a bond issue do not fail to satisfy the trade or business test merely because the State or local governmental unit uses the proceeds to engage in a series of financing transactions for property to be used by private business users in trades or businesses carried on by them. Similarly, if such proceeds are to be used to construct facilities to be leased or sold to any nonexempt person for use in a trade or business it carries on, such proceeds are to be used in a trade or business carried on by a nonexempt person and the debt obligations comprising such issue satisfy the trade or business test. If such proceeds are to be used to construct facilities to be leased or sold to an exempt person who will, in turn, lease or sell the facilities to a nonexempt person for use in a trade or business, such proceeds are to be used in a trade or business carried on by a nonexempt person and the debt obligations comprising such issue satisfy the trade or business test. In addition, proceeds will be treated as being used in the trade or business of a nonexempt person in situations involving other arrangements, whether in a single transaction or in a series of transactions, whereby a nonexempt person uses property acquired with the proceeds of a bond issue in its trade or business.
(iii) The use of more than 25 percent of the proceeds of an issue of obligations in the trades or businesses of nonexempt persons will constitute the use of a major portion of such proceeds in such manner. In the case of the direct or indirect use of the proceeds of an issue of obligations or the direct or indirect use of a facility constructed, reconstructed, or acquired with such proceeds, the use by all nonexempt persons in their trades or businesses must be aggregated to determine whether the trade or business test is satisfied. If more than 25 percent of the proceeds of a bond issue is used in the trades or businesses of nonexempt persons, the trade or business test is satisfied. For special rules with respect to the acquisition of the output of facilities, see subparagraph (5) of this paragraph.
(4) Security interest test. The security interest test relates to the nature of the security for, and the source of, the payment of either the principal or interest on a bond issue. The nature of the security for, and the source of, the payment may be determined from the terms of the bond indenture or on the basis of an underlying arrangement. An underlying arrangement to provide security for, or the source of, the payment of the principal or interest on an obligation may result from separate agreements between the parties or may be determined on the basis of all the facts and circumstances surrounding the issuance of the bonds. The property which is the security for, or the source of, the payment of either the principal or interest on a debt obligation need not be property acquired with bond proceeds. The security interest test is satisfied if, for example, a debt obligation is secured by unimproved land or investment securities used, directly or indirectly, in any trade or business carried on by any private business user. A pledge of the full faith and credit of a State or local governmental unit will not prevent a debt obligation from otherwise satisfying the security interest test. For example, if the payment of either the principal or interest on a bond issue is secured by both a pledge of the full faith and credit of a State or local governmental unit and any interest in property used or to be used in a trade or business, the bond issue satisfies the security interest test. For rules with respect to the acquisition of the output of facilities see subparagraph (5) of this paragraph.
(5) Trade or business test and security interest test with respect to certain output contracts. (i) The use by one or more nonexempt persons of a major portion of the subparagraph (5) output of facilities such as electric energy, gas, or water facilities constructed, reconstructed, or acquired with the proceeds of an issue satisfies the trade or business test and the security interest test if such use has the effect of transferring to nonexempt persons the benefits of ownership of such facilities, and the burdens of paying the debt service on governmental obligations used directly or indirectly to finance such facilities, so as to constitute the indirect use by them of a major portion of such proceeds. Such benefits and burdens are transferred and a major portion of the proceeds of an issue is used indirectly by the users of the subparagraph (5) output of such a facility which is owned and operated by an exempt person where—
(a)(1) One nonexempt person agrees pursuant to a contract to take, or to take or pay for, a major portion (more than 25 percent) of the subparagraph (5) output (within the meaning of subdivision (ii) of this subparagraph) of such a facility (whether or not conditional upon the production of such output) or (2) two or more nonexempt persons, each of which pays annually a guaranteed minimum payment exceeding 3 percent of the average annual debt service with respect to the obligations in question, agree, pursuant to contracts, to take, or to take or pay for, a major portion (more than 25 percent) of the subparagraph (5) output of such a facility (whether or not conditioned upon the production of such output), and
(b) Payment made or to be made with respect to such contract or contracts by such nonexempt person or persons exceeds a major part (more than 25 percent) of the total debt service with respect to such issue of obligations.
(ii) For purposes of this subparagraph—
(a) Where a contract described in subdivision (i) of this subparagraph may be extended by the issuer of obligations described therein, the term of the contract shall be considered to include the period for which such contract may be so extended.
(b) The subparagraph (5) output of a facility shall be determined by multiplying the number of units produced or to be produced by the facility in 1 year by the number of years in the contract term of the issue of obligations issued to provide such facility. The number of units produced or to be produced by a facility in 1 year shall be determined by reference to its nameplate capacity (or where there is no nameplate capacity, its maximum capacity) without any reduction for reserves or other unutilized capacity. The contract term of an issue begins on the date the output of a facility is first taken, pursuant to a take or a take or pay contract, by a nonexempt person and ends on the latest maturity date of any obligation of the issue (determined without regard to any optional redemption dates). If, however, on or before the date of issue of a prior issue of governmental obligations issued to provide a facility, the issuer makes a commitment in the bond indenture or related document to refinance such prior issue with one or more subsequent issues of governmental obligations, then the contract term of the issue shall be determined with regard to the latest redemption date of any obligation of the last such refinancing issue with respect to such facility (determined without regard to any optional redemption dates). Where it appears that the term of an issue (or the terms of two or more issues) is extended for purposes of extending the contract term of an issue and thereby increasing the subparagraph (5) output of the facility provided by such issue, the subparagraph (5) output of such facility shall be determined by the Commissioner without regard to the provisions of this subdivision (b).
(c) The total debt service with respect to an issue of obligations shall be the total dollar amount (excluding any penalties) payable with respect to such issue over its entire term. The entire term of an issue begins on its date of issue and ends on the latest maturity date of any obligation of the issue (determined without regard to any optional redemption dates). If, however, on or before the date of issue of a prior issue of governmental obligations the issuer makes a commitment in the bond indenture or related document to refinance such prior issue with one or more subsequent issues of governmental obligations, the entire term of the issue shall be determined with regard to the latest redemption date of any obligation of the last such refinancing issue (determined without regard to any optional redemption dates).
(d) Two or more nonexempt persons who are related persons (within the meaning of section 103(c)(6)(C)) shall be treated as one nonexempt person.
(c) Examples. The application of the rules contained in section 103(c) (2) and (3) and paragraph (b) of this section are illustrated by the following examples:
Example 1.State A and corporation X enter into an arrangement under which A is to provide a factory which X will lease for 20 years. The arrangement provides (1) that A will issue $10 million of bonds, (2) that the proceeds of the bond issue will be used to purchase land and to construct and equip a factory in accordance with X's specifications, (3) that X will rent the facility (land, factory, and equipment) for 20 years at an annual rental equal to the amount necessary to amortize the principal and pay the interest on the outstanding bonds, and (4) that such payments by X and the facility itself will be the security for the bonds. The bonds are industrial development bonds since they are part of an issue of obligations (1) all of the proceeds of which are to be used (by purchasing land and constructing and equipping the factory) in a trade or business by a nonexempt person, and (2) the payment of the principal and interest on which is secured by the facility and payments to be made with respect thereto.
Example 2.The facts are the same as in example (1) except that (1) X will purchase the facility, and (2) annual payments equal to the amount necessary to amortize the principal and pay the interest on the outstanding bonds will be made by X. The bonds are industrial development bonds for the reasons set forth in example (1).
Example 3.State B and corporation X enter into an arrangement under which B is to loan $10 million to X. The arrangement provides (1) that B will issue $10 million of bonds, (2) that the proceeds of the bond issue will be loaned to X to provide additional working capital and to finance the acquisition of certain new machinery, (3) that X will repay the loan in annual installments equal to the amount necessary to amortize the principal and pay the interest on the outstanding bonds, and (4) that the payments on the loan and the machinery will be the security for only the payment of the principal on the bonds. The bonds are industrial development bonds since they are part of an issue of obligations (1) all of the proceeds of which are to be used in a trade or business by a nonexempt person, and (2) the payment of the principal on which is secured by payments to be made in respect of property to be used in a trade or business. The result would be the same if only the payment of the interest on the bonds were secured by payments on the loan and machinery.
Example 4.The facts are the same as in example (1), (2), or (3) except that the annual payments required to be made by corporation X exceed the amount necessary to amortize the principal and pay the interest on the outstanding bonds. The bonds are industrial development bonds for the reasons set forth in such examples. The fact that corporation X is required to pay an amount in excess of the amount necessary to pay the principal and interest on the bonds does not affect their status as industrial development bonds. Similarly, if the annual payments required to be made by corporation X were sufficient to pay only a major portion of either the principal or the interest on the outstanding bonds, the bonds would be industrial development bonds for the reasons set forth in such examples.
Example 5.The facts are the same as in example (1), (2), (3), or (4) except that the issuer is a political subdivision which has taxing power and the bonds are general obligation bonds. Since both the trade or business and the security interest tests are met, the bonds are industrial development bonds notwithstanding the fact that they constitute an unconditional obligation of the issuer payable from its general revenues.
Example 6. (a) State C issues its general obligation bonds to purchase land and construct a hotel for use by the general public (i.e., tourists, visitors, travelers on business, etc.). The bond indenture provides (1) that C will own and operate the project for the period required to redeem the bonds, and (2) that the project itself and the revenues derived therefrom are the security for the bonds. The bonds are not industrial development bonds since (1) the proceeds are to be used by an exempt person in a trade or business carried on by such person, and (2) a major portion of such proceeds is not to be used, directly or indirectly, in a trade or business carried on by a nonexempt person. Use of the hotel by hotel guests who are travelling in connection with trades or businesses of nonexempt persons is not an indirect use of the hotel by such nonexempt persons for purposes of section 103(c).
(b) The facts are the same as in paragraph (a) of this example except that corporation Y enters into a long-term agreement with C that Y will rent more than one-fourth of the rooms on an annual basis for a period approximately equal to one half of the term of the bonds. The bonds are industrial development bonds because (1) a major portion of the proceeds used to construct the hotel is to be used in the trade or business of corporation Y (a nonexempt person) and (2) a major portion of the principal and interest on such issue will be derived from payments in respect of the property used in the trade or business of Y.
Example 7. (a) State D and corporation Y enter into an agreement under which Y will lease for 20 years three floors of a 12- story office building to be constructed by D on land which it will acquire. D will occupy the grade floor and the remaining eight floors of the building. The portion of the costs of acquiring the land and constructing the building which are allocated to the space to be leased by Y is not in excess of 25 percent of the total costs of acquiring the land and constructing the building. Such costs, whether attributable to the acquisition of land or the construction of the building, were allocated to leased space in the same proportion that the reasonable rental value of such leased space bears to the reasonable rental value of the entire building. From the facts and circumstances presented, it is determined that such allocation was reasonable. The arrangement between D and Y provides that D will issue $10 million of bonds, that the proceeds of the bond issue will be used to purchase land and construct an office building, that Y will lease the designated floor space for 20 years at its reasonable rental value, and that such rental payments and the building itself shall be security for the bonds. The bonds are not industrial development bonds since a major portion of the proceeds is not to be used, directly or indirectly, in the trade or business of a nonexempt person.
(b) The facts are the same as in paragraph (a) of this example except that corporation Y will lease four floors, and the costs allocated to these floors are in excess of 25 percent of D's investment in the land and building. The bonds are industrial development bonds because (1) a major portion of the building is to be used in the trade or business of a nonexempt person, and (2) a major portion of the principal and interest on such issue is secured by the rental payments on the building.
Example 8.The facts are the same as in paragraph (b) of example (7) except that, instead of leasing any space to corporation Y, State D will lease the four floors to numerous unrelated private business users to be used in their trades or businesses. No lease will have a term exceeding 2 years. A major portion of the principal and interest will be paid from the revenues that D will derive from such leases. The fact that the activities of D, an exempt person, may amount to a trade or business of leasing property is not material, and the bonds are industrial development bonds for the reasons set forth in paragraph (b) of example (7). The result would be the same in the case of long-term leases.
Example 9.State E issues its obligations to finance the construction of dormitories for educational institution Z which is an organization described in section 501(c)(3) and exempt from tax under section 501(a). The dormitories are to be owned and operated by Z and their operation does not constitute an unrelated trade or business. The bonds are not industrial development bonds since the proceeds are to be used by an exempt person in a trade or business carried on by such person which is not an unrelated trade or business, as determined by applying section 513(a) to Z.
Example 10.State F issues its obligations to finance the construction of a toll road and the cost of erecting related facilities such as gasoline service stations and restaurants. Such related facilities represent less than 25 percent of the total cost of the project and are to be leased or sold to nonexempt persons. The toll road is to be owned and operated by F. The revenues from the toll road and from the rental of related facilities are the security for the bonds. The bonds are not industrial development bonds since a major portion of the proceeds is not to be used, directly or indirectly, in the trades or businesses of nonexempt persons. The fact that vehicles owned by nonexempt persons engaged in their trades or businesses may use the road in common with, or as a part of, the general public is not material.
Example 11.City G issues its obligations to finance the construction of a municipal auditorium which it will own and operate. The use of the auditorium will be open to anyone who wishes to use it for a short period of time on a rate-scale basis. The rights of such a user are only those of a transient occupant rather than the full legal possessory interests of a lessee. It is anticipated that the auditorium will be used by schools, church groups, and fraternities, and numerous commercial organizations. The revenues from the rentals of the auditorium and the auditorium building itself will be the security for the bonds. The bonds are not industrial development bonds because such use is not a use in the trade or business of a nonexempt person.
Example 12.The facts are the same as in example (11) except that one nonexempt person will have a 20-year rental agreement providing for exclusive use of the entire auditorium for more than 3 months of each year at a rental comparable to that charged short-term users. The bonds are industrial development bonds since such use is a use in the trade or business of a nonexempt person and, therefore, a major portion of the proceeds of the issue will be used in the trade or business of a nonexempt person and a major portion of the principal or interest on such issue will be secured by a facility used in such trade or business and by payments with respect to such facility.
Example 13.In order to construct an electric generating facility of a size sufficient to take advantage of the economies of scale: (1) City H will issue $50 million of its 25-year bonds and Z (a privately owned electric utility) will use $100 million of its funds for construction of a facility they will jointly own as tenants in common. (2) Each of the participants will share in the ownership, output, and operating expenses of the facility in proportion to its contribution to the cost of the facility, that is, one-third by H and two-thirds by Z. (3) H's bonds will be secured by H's ownership in the facility and by revenues to be derived from the sale of H's share of the annual output of the facility. (4) Because H will need only 50 percent of its share of the annual output of the facility, it agrees to sell to Z 25 percent of its share of such annual output for a period of 20 years pursuant to a contract under which Z agrees to take or pay for such power in all events. The facility will begin operation, and Z will begin to receive power, 4 years after the City H obligations are issued. The contract term of the issue will, therefore, be 21 years. (5) H also agrees to sell the remaining 25 percent of its share of the annual output to numerous other private utilities under a prevailing rate schedule including demand charges. (6) No contracts will be executed obligating any person other than Z to purchase any specified amount of the power for any specified period of time and no one such person (other than Z) will pay a demand charge or other minimum payment under conditions which, under paragraph (b)(5) of this section, result in a transfer of the benefits of ownership and the burdens of paying the debt service on obligations used directly or indirectly to provide such facilities. The bonds are not industrial development bonds because H's one-third interest in the facility (financed with bond proceeds) shall be treated as a separate property interest and, although 25 percent of H's interest in the annual output of the facility will be used directly or indirectly in the trade or business of Z, a nonexempt person, under the rule of paragraph (b)(5) of this section, such portion constitutes less than a major portion of the subparagraph (5) output of the facility. If more than 25 percent of the subparagraph (5) output of the facility were to be sold to Z pursuant to the take or pay contract, the bonds would be industrial development bonds since they would be secured by H's ownership in the facility and revenues therefrom, and under the rules of paragraph (b)(5) of this section a major portion of the proceeds of the bond issue would be used in the trade or business of Z, a nonexempt person.
Example 14.J, a political subdivision of a State, will issue several series of bonds from time to time and will use the proceeds to rehabilitate urban areas. More than 25 percent of the proceeds of each issue will be used for the rehabilitation and construction of buildings which will be leased or sold to nonexempt persons for use in their trades or businesses. There is no limitation either on the number of issues or the aggregate amount of bonds which may be outstanding. No group of bondholders has any legal claim prior to any other bondholders or creditors with respect to specific revenues of J, and there is no arrangement whereby revenues from a particular project are paid into a trust or constructive trust, or sinking fund, or are otherwise segregated or restricted for the benefit of any group of bondholders. There is, however, an unconditional obligation by J to pay the principal and interest on each issue of bonds. Further, it is apparent that J requires the revenues from the lease or sale of buildings to nonexempt persons in order to pay in full the principal and interest on the bonds in question. The bonds are industrial development bonds because a major portion of the proceeds will be used in the trades or businesses of nonexempt persons and, pursuant to an underlying arrangement, payment of the principal and interest is, in major part, to be derived from payments in respect of property or borrowed money used in the trades or businesses of nonexempt persons.
Example 15.Power Authority K, a political subdivision created by the legislature in State X to own and operate certain power generating facilities, sells all of the power from its existing facilities to four private utility systems under contracts executed in 1970, whereby such four systems are required to take or pay for specified portions of the total power output until the year 2000. Currently, existing facilities supply all of the present needs of the four utility systems but their future power requirements are expected to increase substantially. K issues 20-year general obligation bonds to construct a large nuclear generating facility. A fifth private utility system contracts with K to take or pay for 30 percent of the subparagraph (5) output of the new facility. The balance of the power output of the new facility will be available for sale as required, but initially it is not anticipated there will be any need for such power. The revenues from the contract with the fifth private utility system will be sufficient to pay less than 25 percent of the principal or interest on the bonds. The balance, which will exceed 25 percent of the principal or interest on such bonds, will be paid from revenues from the contracts with the four systems from sale of power produced by the old facilities. The bonds will be industrial development bonds because a major portion of the proceeds will be used in the trade or business of a nonexempt person, and payment of the principal and interest, pursuant to an underlying arrangement, will be derived in major part from payments in respect of property used in the trades or businesses of nonexempt persons.
(d) Certain refunding issues—(1) General rule. In the case of an issue of obligations issued to refund the outstanding face amount of an issue of obligations, the proceeds of the refunding issue will be considered to be used for the purpose for which the proceeds of the issue to be refunded were used. The rules of this subparagraph shall apply regardless of the date of issuance of the issue to be refunded and shall apply to refunding issues to be issued to refund prior refunding issues.
(2) Obligations issued prior to effective date. In the case of an issue of obligations issued to refund the outstanding face amount of an issue of obligations issued on or before April 30, 1968 (or before January 1, 1969, if the transitional rules of § 1.103-12 are applicable) which would have been industrial development bonds within the meaning of section 103(c)(2) had they been issued after such date, the refunding issue shall not be considered to be an issue of industrial development bonds if it does not make funds available for any purpose other than the debt service on the obligations. For rules as to arbitrage bonds, see section 103(d).
(3) Examples. The provisions of this paragraph may be illustrated by the following examples:
Example 1.In 1969, State A issued $20 million of 20-year revenue bonds the proceeds of which were used to contruct a sports facility which qualifies as an exempt facility described in section 103(c)(4)(B) and paragraph (c) of § 1.103-8. The sports facility will be owned and operated by X, a nonexempt person, for the use of the general public. In 1975, A issues $15 million of revenue bonds in order to refund the outstanding face amount of the 1969 issue. Since the proceeds of the 1969 issue were used for an exempt facility, the proceeds of the 1975 refunding issue will be considered to be used for the same purposes and section 103(c)(1) shall not apply to the 1975 refunding issue. The result would have been the same if the original issue had been issued in 1965. For rules as to a refunding obligation held by substantial users of facilities constructed with the proceeds of the issue refunded, see section 103(c)(7) and § 1.103-11.
Example 2.In 1967, prior to the effective date of section 103(c), city B issued $10 million of revenue bonds the proceeds of which were used to construct a manufacturing facility for corporation Y, a nonexempt person. Lease payments by Y were security for the bonds. In 1975, B issue $7 million of revenue bonds in order to retire the outstanding face amount of the 1967 issue. The interest rate of the 1975 issue is one and one-half percentage points lower than the interest rate on the 1967 issue. Both issues sold at par. All of the terms of the 1975 issue are the same as the terms of the 1967 issue with the exception of the interest rate. The 1975 refunding issue will not be considered to be an issue of industrial development bonds since the refunding issue will not make funds available for any purpose other than the debt service on the outstanding obligations.
Example 3.The facts are the same as in example (2) except that the interest rate on the refunding issue is the same as the interest rate on the issue to be refunded. Assume further that city B issued the 1975 refunding issue in order to extend the term of the obligations issued in 1967 as the result of its inability to pay such obligations due to insufficient revenues. The results will be the same as in example (2) for the reasons stated therein.
[T.D. 7199, 37 FR 15486, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972, as amended by T.D. 7869, 48 FR 1708, Jan. 14, 1983]
§ 1.103-8 Interest on bonds to finance certain exempt facilities.
(a) In general—(1) General rule. (i) Under section 103(b)(4), interest paid on an issue of obligations issued by a State or local governmental unit (as defined in § 1.103-1) is not includable in gross income if substantially all of the proceeds of such issue is to be used to provide one or more of the exempt facilities listed in subparagraphs (A) through (J) of section 103(b)(4) and in this section. However, interest on an obligation of such issue is includable in gross income if the obligation is held by a substantial user or a related person (as described in section 103(b)(13) and § 1.103-11). If substantially all of the proceeds of a bond issue is to be used to provide such exempt facilities, the debt obligations are treated as obligations described in section 103(a)(1) and § 1.103-1 even though such obligations are industrial development bonds as defined in section 103(b)(2) and § 1.103-7. Substantially all of the proceeds of an issue of governmental obligations are used to provide an exempt facility if 90 percent or more of such proceeds are so used. For purposes of this “substantially all” test, two rules apply. First, proceeds are reduced by amounts properly allocable on a pro rata basis between providing the exempt facility and other uses of the proceeds. Second, amounts used to provide an exempt facility include amounts paid or incurred which are chargeable to the facility's capital account or would be so chargeable either with a proper election by a taxpayer (for example, under section 266) or but for a proper election by a taxpayer to deduct such amounts. In the event the amount payable with respect to an issue during each annual period over its term is less than the amount of interest accruing thereon in such period, e.g., in the case of an issue sold by the issuer for less than its face amount, see paragraph (a)(6) of this section to determine the amount of proceeds of the issue.
(ii) The provisions of subdivision (i) of this subparagraph shall also apply to an issue of obligations substantially all of the proceeds of which is to be used to provide exempt facilities described in this section and for either or both of the following purposes: (a) To acquire or develop land as the site for an industrial park described in section 103(b)(5) and § 1.103-9, (b) to provide facilities to be used by an exempt person.
(iii) Section 103(b)(4) only becomes applicable where the bond issue meets both the trade or business and the security interest tests so that obligations are industrial development bonds within the meaning of section 103(b)(2). For rules as to exempt facilities including property functionally related and subordinate to such facilities, see subparagraph (3) of this paragraph. For rules with respect to the ultimate use of proceeds of obligations, see subparagraph (4) of this paragraph. For rules which limit the application of the provisions of this section see subparagraph (5) of this paragraph. For the interrelationship of the rules provided in this section and the exemption for certain small issues provided in section 103(b)(6), see § 1.103-10.
(2) Public use requirement. To qualify under section 103(b)(4) and this section as an exempt facility, a facility must serve or be available on a regular basis for general public use, or be a part of a facility so used, as contrasted with similar types of facilities which are constructed for the exclusive use of a limited number of nonexempt persons in their trades or businesses. For example, a private dock or wharf owned by or leased to, and serving only a single manufacturing plant would not qualify as a facility for general public use, but a hangar or repair facility at a municipal airport, or a dock or a wharf, would qualify even if it is owned by, or leased or permanently assigned to, a nonexempt person provided that such nonexempt person directly serves the general public, such as a common passenger carrier or freight carrier. Similarly, an airport owned or operated by a nonexempt person for general public use is a facility for public use, as is a dock or wharf which is a part of a public port. However, a landing strip which, by reason of a formal or informal agreement or by reason of geographic location, will not be available for general public use does not satisfy the public use requirement. Sewage or solid waste disposal facilities and air or water pollution control facilities, described in sections 103(b)(4) (E) and (F) and paragraphs (f) and (g) of this section, will be treated in all events as serving a general public use although they may be part of a nonpublic facility such as a manufacturing facility used in the trade or business of a nonexempt user.
(3) Functionally related and subordinate. An exempt facility includes any land, building, or other property functionally related and subordinate to such facility. Property is not functionally related and subordinate to a facility if it is not of a character and size commensurate with the character and size of such facility. Since substantially all of the proceeds of a bond issue must be used for the exempt facility (or for any combination of exempt facilities, industrial parks, and facilities to be used by exempt persons), including property functionally related and subordinate thereto, an insubstantial amount of the proceeds of a bond issue may be used for facilities which are neither exempt facilities (or a combination of exempt facilities, industrial parks and facilities to be used by exempt persons) nor functionally related and subordinate to exempt facilities. Thus, for example, where substantially all of the proceeds of an urban redevelopment bond issue are to be used by a State urban redevelopment agency for residential real property for family units within the meaning of section 103(b)(4)(A) and paragraph (b) of this section, an insubstantial amount may be used for an industrial or commercial project or for any other purpose that is not functionally related and subordinate to the residential real property for family units.
(4) Ultimate use of proceeds. The question whether substantially all of the proceeds of an issue of obligations are to be used to provide one or more of the exempt facilities listed in subparagraphs (A) through (J) of section 103(b)(4) and in this section is to be resolved by reference to the ultimate use of such proceeds. For example, such proceeds will be treated as used to provide residential rental property whether the State or local governmental unit (i) constructs such property and leases or sells it to any person who is not an exempt person for use in such person's trade or business of leasing such property; (ii) lends the proceeds to any such person for such purpose; or (iii) lends the proceeds to banks or other financial institutions in order to increase the supply of funds for mortgage lending under conditions requiring such banks or other financial institutions to use such proceeds only for further lending for residential rental property.
(5) Limitation. (i) A facility qualifies under this section only to the extent that there is a valid reimbursement allocation under § 1.150-2 with respect to expenditures that are incurred before the issue date of the bonds to provide the facility and that are to be paid with the proceeds of the issue. In addition, if the original use of the facility begins before the issue date of the bonds, the facility does not qualify under this section if any person that was a substantial user of the facility at any time during the 5-year period before the issue date or any related person to that user receives (directly or indirectly) 5 percent or more of the proceeds of the issue for the user's interest in the facility and is a substantial user of the facility at any time during the 5-year period after the issue date, unless—
(A) An official intent for the facility is adopted under § 1.150-2 within 60 days after the date on which acquisition, construction, or reconstruction of that facility commenced; and
(B) For an acquisition, no person that is a substantial user or related person after the acquisition date was also a substantial user more than 60 days before the date on which the official intent was adopted.
(ii) A facility, the original use of which commences (or the acquisition of which occurs) on or after the issue date of bonds to provide that facility, qualifies under this section only to the extent that an official intent for the facility is adopted under § 1.150-2 by the issuer of the bonds within 60 days after the commencement of the construction, reconstruction, or acquisition of that facility. Temporary construction or other financing of a facility prior to the issuance of the bonds to provide that facility will not cause that facility to be one that does not qualify under this paragraph (a)(5)(ii).
(iii) For purposes of paragraph (a)(5)(i) of this section, substantial user has the meaning used in section 147(a)(1), related person has the meaning used in section 144(a)(3), and a user that is a governmental unit within the meaning of § 1.103-1 is disregarded.
(iv) Except to the extent provided in §§ 1.142-4(d), 1.148-11A(i), and 1.150-2(j), this paragraph (a)(5) applies to bonds issued after June 30, 1993, and sold before July 8, 1997. See § 1.142-4(d) for rules relating to bonds sold on or after July 8, 1997.
(6) Deep discount obligations. (i) Except as otherwise provided in paragraph (a)(7) of this section, the proceeds of any issue of obligations sold by the issuer after June 4, 1982, shall include any imputed proceeds of the issue. The imputed proceeds of an issue equal the sum of the amounts of imputed proceeds for each annual period (hereinafter, bond year) over the term of the issue.
(ii) The amount of imputed proceeds for a bond year equals—
(a) The sum of the amounts of interest that will accrue with respect to each obligation that is part of the issue in such year, reduced (but not below zero) by
(b) The sum of the amounts of principal and interest that become payable with respect to the issue in that bond year.
(iii) Interest will be deemed to accrue with respect to an obligation on an amount that, as of the commencement of that year, is equal to the sum of—
(a) The purchase price (as defined in § 1.103-13(d)(2)) allocable to the obligation and
(b) The aggregate of the amounts of interest accruing in each prior bond year with respect to the obligation, reduced by all amounts that became payable with respect to the obligation in prior bond years. Any amount that becomes payable during the 30 day period following any bond year will be deemed to have become payable in such bond year. Thus, to the extent interest on an obligation accruing during a bond year does not become payable within 30 days from the end of such year, it is treated as reinvested under the same terms as the obligation. For purposes of this subparagraph (6), the rate at which such interest accrues is equal to the yield of the obligation. Yield is computed in the same manner as set forth in § 1.103-13(c)(1)(ii) for computing yield on governmental obligations (assuming annual compounding of interest). Such computations shall be made without regard to optional call dates.
(7) Deep discount obligations; special rules. (i) There are no imputed proceeds with respect to an obligation if—
(a) The obligation does not have a stated interest rate (determinable at the date of issue) that increases over the term of the obligation, and
(b) The purchase price of the obligation is at least 95 percent of its face amount.
At the option of the issuer, any obligation described in the preceding sentence may be disregarded in computing the imputed proceeds of the issue. Payments with respect to such obligations are also disregarded in determining the amount payable with respect to the issue in that bond year. If each obligation which is part of an issue is described in this subdivision (i), there are no imputed proceeds with respect to the issue.
(ii) If the actual rate at which interest is to accrue over the term of an obligation is indeterminable at the date of issue then, in computing the yield of the obligation for purposes of this paragraph, such rate shall be determined as if the conditions as of the date of issue will not change over the term of the obligation. Thus, for example, if interest on an obligation is to be paid semiannually at a rate equal to 80 percent of the yield on six month Treasury bills at the most recent public sale immediately prior to the corresponding interest payment date and the yield on six month Treasury bills sold immediately preceding the issue date is 10 percent, then the six month Treasury bill rate is deemed to be a constant 10 percent for purposes of determining the amount of imputed proceeds of the issue. Therefore, all interest payments on the obligation would be deemed to be made at a rate of 8 percent.
(8) Examples. The principles of this paragraph may be illustrated by the following examples:
Example 1.State A issues its bonds and plans to use substantially all of the proceeds from such bond issue to purchase land and build a facility which will be used for one of the purposes described in section 103(b)(4) and this section. The arrangement provides that (1) A will issue bonds with a face amount of $21 million and with all accrued interest payable annually, the proceeds of which (after deducting bond election costs, costs of publishing notices, attorneys' fees, printing costs, trustees' fees for fiscal agents, and similar expenses) will be $20 million; (2) $18 million of the proceeds of the bond issue will be used to purchase land and to construct such facility; (3) $2 million of the proceeds will be used for an unrelated facility which will be used by X, a nonexempt person, in a separate trade or business and for a purpose not described in section 103(b) (4) or (5); (4) X will rent both facilities for 20 years at an annual rental equal to the amount necessary to amortize the principal and pay the interest annually on the outstanding bonds; and (5) such payments by X and the facilities will be the security for the bonds. On these facts, substantially all of the proceeds will be used in connection with an exempt facility described in section 103(b)(4) and this section. Accordingly, section 103(b)(1) does not apply to the bonds unless such bonds are thereafter held by a person who is a substantial user of the facilities or a related person within the meaning of section 103(b)(13) and § 1.103-11.
Example 2. On July 1, 1982, State B sells an issue of its obligations to an underwriter in anticipation of a public offering. The initial offering price is $18,627,639.69 of which $17,000,000 is to be used to construct a pollution control facility described in section 103(b)(4)(F). X Corporation, a nonexempt person, is to use the facility and, in exchange, is obligated to pay an amount equal to the face amount of the issue when it becomes due. The obligations are issued on August 1, 1982. The face amount of the issue is $30,000,000. The issue is a term issue with all obligations maturing on August 1, 1987. The issue bears no stated rate of interest; there are no interest coupons on the obligations. The bonds are industrial development bonds with a yield (based upon annual compounding) of ten percent. Based on these facts, the amount of imputed proceeds with respect to the issue is determined as follows:
Date | Purchase price plus accumulated interest | Interest | Imputed proceeds
Aug. 1, 1983 | $18,627,639.69 | $1,862,763.97 | $1,862,763.97
Aug. 1, 1984 | 20,490,403.68 | 2,049,040.37 | 2,049,040.37
Aug. 1, 1985 | 22,539,444.03 | 2,253,944.40 | 2,253,944.40
Aug. 1, 1986 | 24,793,388.43 | 2,479,338.84 | 2,479,338.84
Aug. 1, 1987 | 27,272,727.27 | 2,727,272.73 | 0
Total imputed proceeds | 8,645,087.58
Therefore, proceeds of the issue equal $27,272,727.27 less issuance costs. Substantially all of the bond proceeds are not used to provide an exempt facility, and section 103(b)(1) applies to the issue.
Example 3.The facts are the same as example (2) except that the issue has a face amount and purchase price of $18,500,000. The issue also provides for one payment in addition to the redemption payment, in the amount of $10,267,668 payable on or after August 1, 1986, one year before maturity. Section 103(b)(1) applies to the issue.
Example 4. On July 1, 1982, City E sells an issue of industrial development bonds to provide for a convention facility, as described in section 103(b)(4)(C). Assume that the bonds are issued on that date as well. The issue has a face amount of $15,240,000 and a purchase price of $11,929,382.53. The estimated cost of the facility is $11,000,000. The bonds are “zero coupon” bonds, i.e., there are no interest coupons. Each series is initially offered for less than 95 percent of its face amount. The issue matures serially over a five year period, with each series being allocated a part of the purchase price of the issue. The following chart indicates the purchase price and yield for each series and debt service for the issue:
[Amount allocable to each series]
Date | 1983 series at 8 percent | 1984 series at 8.5 percent | 1985 series at 8.75 percent | 1986 series at 9.25 percent | 1987 series at 9.75 percent | Interest accruing on issue* | Amount due | Imputed proceeds
July 1, 1983 | 2,939,814.82 | 2,697,020.54 | 2,468,629.60 | 2,228,732.51 | 1,595,185.06 | 0
235,185.18 | 229,246.75 | 216,005.09 | 206,157.76 | 155,530.54 | 1,042,125.32 | 3,175,000
July 1, 1984 | 2,926,267.29 | 2,684,634.69 | 2,434,890.27 | 1,750,715.60 | 0
248,732.71 | 234,905.54 | 225,227.35 | 170,694.77 | 879,560.37 | 3,175,000
July 1, 1985 | 2,919,540.23 | 2,660,117.62 | 1,921,410.37 | 0
255,459.77 | 246,060.88 | 187,337.51 | 688,858.16 | 3,175,000
July 1, 1986 | 2,906,178.50 | 2,108,747.88 | 0
268,821.50 | 205,602.92 | 474,424.42 | 3,175,000
July 1, 1987 | 2,314,350.80 | 0
225,649.20 | 225,649.20 | 2,540,000
Total | 15,240,000
*This column (interest accruing on the issue) contains the sums of the interest that accrues on each series in each bond year. The amount of interest accruing on the issue is computed by adding the amount of interest accruing on each series outstanding for that bond year (the bottom number in the line for each bond year). The amount of interest annually accruing on each series also is added to the purchase price of the series to determine the amount of interest accruing in subsequent years, inasmuch as there are no payments with respect to the outstanding series prior to maturity. Thus, the “principal” amount, of the top of the two numbers given in such line for each bond year, is the purchase price allocable to that series plus the amount of interest that accrued on that series in prior years.
There are no imputed proceeds because the amount payable on the issue in each bond year exceeds the total amount of interest accruing on the issue during such bond year. Section 103(b)(1) does not apply to the bonds unless such bonds are held by a person who is a substantial user of the facility or a related person within the meaning of section 103(b)(13) and § 1.103-11.
Example 5.On July 1, 1982, City C issues industrial development bonds in the face amount of $30 million to construct a sports facility described in section 103(b)(4)(B) to be leased to D, a nonexempt person, with payments on the bonds secured by the lease. C receives $30 million in exchange for the bonds which will be used to provide the facility. The bonds mature on July 1, 2002. Each bond provides for an annual interest payment equal to ten percent of the face amount of the bond, with the last payment thereon (on July 1, 2002) including a return of the principal amount of the bond. The proceeds of the issue are $30 million. Section 103(b)(1) does not apply to the bonds unless such bonds are held by a person who is a substantial user of the facility or a related person within the meaning of section 103(b)(13) and § 1.103-11.
Example 6.The facts are the same as example (5) except that each bond provides for an annual interest payment equal to nine percent of its face amount and is sold with the option to tender the bond to D for purchase at par 5 years after the sale date of July 1, 1982 (i.e., the bonds are sold with a “put” option). Such bonds also provide a put option annually thereafter. There are no imputed proceeds (without regard to § 1.103-8(a)(7)), and the result is the same as example (5).
Example 7. On July 1, 1982, City F sells an issue of industrial development bonds in the face amount of $20 million to acquire a parking facility as described in section 103(b)(4)(D). The estimated cost of the facility is $17,800,000. The issue is issued on the same date and will mature serially over the following ten years. Each bond that is part of the issue bears annual interest coupons, each of which is in an amount equal to ten percent of the face amount of the bond. Each maturity has a face amount of $2,000,000. The issue is initially offered to the public for $19,700,000, allocable to each maturity as follows:
Maturity | Purchase price
July 1, 1983 | $1,990,000
July 1, 1984 | $1,980,000
July 1, 1985 | $1,980,000
July 1, 1986 | $1,970,000
July 1, 1987 | $1,970,000
July 1, 1988 | $1,970,000
July 1, 1989 | $1,960,000
July 1, 1990 | $1,960,000
July 1, 1991 | $1,960,000
July 1, 1992 | $1,960,000
Based on the foregoing issue proceeds equal $19,700,000 less issuance costs. There are no imputed proceeds with respect to this issue inasmuch as each bond pays interest at a constant rate in each bond year and the purchase price of each bond is at least 95 percent of its face amount. Substantially all of the proceeds are to be used to provide the exempt facility. Accordingly, section 103(b)(1) does not apply to the bonds unless such bonds are thereafter held by a person who is a substantial user of the facility or a related person within the meaning of section 103(b)(13) and § 1.103-11.
(b) Residential rental property—(1) General rule for obligations issued after April 24, 1979. Section 103(b)(1) shall not apply to any obligation which is issued after April 24, 1979, and is part of an issue substantially all of the proceeds of which are to be used to provide a residential rental project in which 20 percent or more of the units are to be occupied by individuals or families of low or moderate income (as defined in paragraph (b)(8)(v) of this section). In the case of a targeted area project, the minimum percentage of units which are to be occupied by individuals of low or moderate income is 15 percent. See generally § 1.103-7 for rules relating to refunding issues.
(2) Registration requirement. Any obligation (including any refunding obligation) issued after December 31, 1981, to provide a residential rental project must be issued as part of an issue, each obligation of which is in registered form (as defined in paragraph (b)(8)(ii) of this section).
(3) Transitional rule. For purposes of this section, obligations issued after April 24, 1979, may be treated as issued before April 25, 1979, if the transitional requirements of section 1104 of the Mortgage Subsidy Bond Tax Act of 1980 (94 Stat. 2670) are satisfied.
(4) Residential rental project. (i) In general. A residential rental project is a building or structure, together with any functionally related and subordinate facilities, containing one or more similarly constructed units—
(a) Which are used on other than a transient basis, and
(b) Which satisfy the requirements of paragraph (b)(5)(i) of this section and are available to members of the general public in accordance with the requirement of paragraph (a)(2) of this section.
Substantially all of each project must contain such units and functionally related and subordinate facilities. Hotels, motels, dormitories, fraternity and sorority houses, rooming houses, hospitals, nursing homes, sanitariums, rest homes, and trailer parks and courts for use on a transient basis are not residential rental projects.
(ii) Multiple buildings. (a) Proximate buildings or structures (hereinafter “buildings”) which have similarly constructed units are treated as part of the same project if they are owned for Federal tax purposes by the same person and if the buildings are financed pursuant to a common plan.
(b) Buildings are proximate if they are located on a single tract of land. The term “tract” means any parcel or parcels of land which are contiguous except for the interposition of a road, street, stream or similar property. Otherwise, parcels are contiguous if their boundaries meet at one or more points.
(c) A common plan of financing exists if, for example, all such buildings are provided by the same issue or several issues subject to a common indenture.
(iii) Functionally related and subordinate facilities. Under paragraph (a)(3) of this section, facilities that are functionally related and subordinate to residential rental projects include facilities for use by the tenants, for example, swimming pools, other recreational facilities, parking areas, and other facilities which are reasonably required for the project, for example, heating and cooling equipment, trash disposal equipment or units for resident managers or maintenance personnel.
(iv) Owner-occupied residences. For purposes of section 103 (b)(4)(A) and this paragraph (b), the term “residential rental project” does not include any building or structure which contains fewer than five units, one unit of which is occupied by an owner of the units.
(5) Requirement must be continuously satisfied—(i) Rental requirement. Once available for occupancy, each unit (as defined in paragraph (b)(8)(i) of this section) in a residential rental project must be rented or available for rental on a continuous basis during the longer of—
(a) The remaining term of the obligation, or
(b) The qualified project period (as defined in paragraph (b)(7) of this section).
(ii) Low or moderate income occupancy requirement. Individuals or families of low or moderate income must occupy that percentage of completed units in such project applicable to the project under paragraph (b)(1) of this section continuously during the qualified project period. For this purpose, a unit occupied by an individual or family who at the commencement of the occupancy is of low or moderate income is treated as occupied by such an individual or family during their tenancy in such unit, even though they subsequently cease to be of low or moderate income. Moreover, such unit is treated as occupied by an individual or family of low or moderate income until reoccupied, other than for a temporary period, at which time the character of the unit shall be redetermined. In no event shall such temporary period exceed 31 days.
(6) Effect of post-issuance noncompliance—(i) In general. Unless corrected within a reasonable period, noncompliance with the requirements of this paragraph (b) shall cause the project to be treated as other than a project described in section 103 (b)(4)(A) and this paragraph (b) as of the date of issue. After an issue to provide such project ceases to qualify, subsequent conformity with the requirements will not alter the taxable status of such issue.
(ii) Correction of noncompliance. If the issuer corrects any noncompliance arising from events occurring after the issuance of the obligation within a reasonable period, such noncompliance (e.g., an unauthorized sublease) shall not cause the project to be a project not described in this paragraph (b). A reasonable period is at least 60 days after such error is first discovered or would have been discovered by the exercise of reasonable diligence.
(iii) Involuntary loss. (a) The requirements of paragraph (b) shall cease to apply to a project in the event of involuntary noncompliance caused by fire, seizure, requisition, foreclosure, transfer of title by deed in lieu of foreclosure, change in a Federal law or an action of a Federal agency after the date of issue which prevents an issuer from enforcing the requirements of this paragraph, or condemnation or similar event but only if, within a reasonable period, either the obligation used to provide such project is retired or amounts received as a consequence of such event are used to provide a project which meets the requirement of section 103 (b)(4)(A) and this paragraph (b).
(b) The provisions of paragraph (b)(6)(iii)(a) of this section shall cease to apply to a project subject to foreclosure, transfer of title by deed in lieu of foreclosure or similar event if, at anytime during that part of the qualified project period subsequent to such event, the obligor on the acquired purpose obligation (as defined in § 1.103-13(b)(4)(iv)(a)) or a related person (as defined in § 1.103-10(e)) obtains an ownership interest in such project for tax purposes.
(7) Qualified project period. The term “qualified project period” means—
(i) For obligations issued after April 24, 1979, and prior to September 4, 1982, a period of 20 years commencing on the later of the date that the project becomes available for occupancy or the date of issue of the obligations. The requirement of paragraph (b)(5)(ii) of this section shall be deemed met if the owner of the project contracts with a Federal or state agency to maintain at least 20 percent (or 15 percent in the case of targeted areas) of the units for low or moderate income individuals or families (as defined in paragraph (b)(8)(v) of this section) for 20 years in consideration for rent subsidies for such individuals or families for such period.
(ii) For obligations issued after September 3, 1982, a period beginning on the later of the first day on which at least 10 percent of the units in the project are first occupied or the date of issue of an obligation described in section 103(b)(4)(A) and this paragraph and ending on the later of the date—
(a) Which is 10 years after the date on which at least 50 percent of the units in the project are first occupied,
(b) Which is a qualified number of days after the date on which any of the units in the project is first occupied, or
(c) On which any assistance provided with respect to the project under section 8 of the United States Housing Act of 1937 terminates.
For purposes of this paragraph (b)(7)(ii), the term “qualified number of days” means 50 percent of the total number of days comprising the term of the obligation with the longest maturity in the issue used to provide the project. In the case of a refunding of such an issue, the longest maturity is equal to the sum of the period the prior issue was outstanding and the longest term of any refunding obligations.
(8) Other definitions. For purposes of this paragraph—
(i) Unit. The term “unit” means any accommodation containing separate and complete facilities for living, sleeping, eating, cooking, and sanitation. Such accommodations may be served by centrally located equipment, such as air conditioning or heating. Thus, for example, an apartment containing a living area, a sleeping area, bathing and sanitation facilities, and cooking facilities equipped with a cooking range, refrigerator, and sink, all of which are separate and distinct from other apartments, would constitute a unit.
(ii) In registered form. The term “in registered form” has the same meaning as in section 6049. With respect to obligations issued after December 31, 1982, such term shall have the same meaning as prescribed in section 103(j) (including the regulations thereunder).
(iii) Targeted area project. The term “targeted area project” means a project located in a qualified census tract (as defined in § 6a.103A-2(b)(4)) or an area of chronic economic distress (as defined in § 6a.103A-2(b)(5)).
(iv) Building or structure. The term “building or structure” generally means a discrete edifice or other man-made construction consisting of an independent foundation, outer walls, and roof. A single unit which is not an entire building but is merely a part of a building is not a building or structure within the meaning of this section. As such, while single townhouses are not buildings if their foundation, outer walls, and roof are not independent, detached houses and rowhouses are buildings.
(v) Low or moderate income. Individuals and families of low or moderate income shall be determined in a manner consistent with determinations of lower income families under section 8 of the United States Housing Act of 1937, as amended, except that the percentage of median gross income which qualifies as low or moderate income shall be 80 percent. Therefore, occupants of a unit are considered individuals or families of low or moderate income only if their adjusted income (computed in the manner prescribed with § 1.167(k)-3(b)(3)) does not exceed 80 percent of the median gross income for the area. Notwithstanding the foregoing, the occupants of a unit shall not be considered to be of low or moderate income if all the occupants are students (as defined in section 151(e)(4)), no one of whom is entitled to file a joint return under section 6013. The method of determining low or moderate income in effect on the date of issue will be determinative for such issue, even if such method is subsequently changed. In the event programs under section 8(f) of the Housing Act of 1937, as amended, are terminated prior to the date of issue, the applicable method shall be that in effect immediately prior to the date of such termination.
(9) Examples. The following examples illustrate the application of this paragraph (b).
Example 1.In August 1982, City X issues $10 million of registered bonds with a term of 20 years to be used to finance the construction of an apartment building to be available to members of the general public. X loans the proceeds of the bonds to Corporation M, the tax owner of the project. The loan is secured by a promissory note from M and a mortgage on the project. The mortgage requires annual payments sufficient to amortize the principal and interest on the bonds. Corporation M maintains 20 percent of the units in the project for low or moderate income individuals and meets all of the requirements of this section until 2002, at which time M converts the project to offices. The bonds are industrial development bonds, but because the proceeds are used for construction of residential rental property, which is an exempt facility under section 103(b)(4)(A) and paragraph (b) of this section, section 103(b)(1) does not apply.
Example 2.The facts are the same as in example (1), except that the building is constructed adjacent to a factory, and the factory employees are to be given preference in selecting tenants. The bonds are industrial development bonds and the facility is not an exempt facility under section 103(b)(4)(A) and paragraph (b) of this section because it is not a facility constructed for use by the general public.
Example 3.The facts are the same as in example (1), except that the proceeds of the obligation are provided to N, a cooperative housing corporation, to finance the construction of a cooperative housing project. N sells stock in such cooperative to shareholders, some of whom occupy the units in the cooperative and some of whom rent the units to other persons. Such project is not a residential rental project within the meaning of section 103(b)(4)(A) and § 1.103-8(b) because less than all of the units in the building are used for rental. Further, the bonds are mortgage subsidy bonds under section 103A because more than a significant portion of the proceeds are used to provide financing for residences, some of which are owner-occupied and some of which are used in the trade or business of rental.
Example 4.On February 1, 1984, County Z issues registered obligations with a term of 3 years and loans the proceeds to Corporation V to construct a garden apartment project for tenants who are 65 years or older. The mortgage on the project secures the loan. At the end of 3 years, V obtains permanent financing for the project from a commercial lender. The project is not a targeted area project. V has not contracted with any Federal or State agency to provide rental assistance under section 8 of the United States Housing Act of 1937. As a condition for providing financing for construction, Z requires that the deed to the project contain a covenant that requires the project be used for elderly tenants and restricts occupancy of 20 percent of the units in the project to individuals or families of low or moderate income. Further, the deed provides that “Such covenant shall run with and bind the land, from the date that ten percent of the units in the project are first occupied until ten years after the date that at least half the units are first occupied. The right to enforce these restrictions is vested in County Z.” In 1990, however, less than 20 percent of the units are occupied by families or individuals of low or moderate incomes, and three months after learning of this condition County Z had not commenced enforcement of the covenant. Although on the date of issue the proceeds of the obligation were used to provide a residential rental project, the obligation will not be treated as providing a residential rental project within the meaning of section 103(b)(4)(A) as of February 1, 1984, because the project did not meet the requirements of this paragraph for at least 10 years after at least 50 percent of the units are first occupied.
Example 5.On January 15, 1983, State X issues registered obligations with a term of 15 years, the proceeds of which are loaned to Corporation P to construct an apartment building. The project will be a “targeted area project”, within the meaning of § 1.103-8(b)(8)(iii). Corporation P intends to rent all the units to individuals for their residences, maintaining 15 percent of the units in the project for individuals having low or moderate incomes, for 15 years. In 1988, however, Corporation P converts 80 percent of the units to condominiums. Corporation P repays the loan to State X which, in turn, redeems the obligations. The obligations are not used to provide a residential rental project within the meaning of section 103(b)(4)(A), and all the interest paid or to be paid on such obligations will be includable in gross income.
Example 6.On January 15, 1984, State Z issues registered obligations with a term of 15 years the proceeds of which will be used to acquire and renovate a residential apartment building. Z sells the project to Corporation U and receives a 30-year mortgage. On June 1, 1985, the first occupants of the project commence their tenancies. At least 50 percent of the units in the project are occupied on July 1, 1985. On January 15, 1988, Z issues 35-year refunding bonds the proceeds of which are used to retire the obligations issued in 1984. The prior issue will be discharged by March 15, 1988. In order to meet the requirement of § 1.103-8(b)(5)(ii), at least 20 percent of such units must be occupied by individuals of low or moderate income until January 1, 2005.
Example 7.The facts are the same as in example (6) except that in 1987, the apartment building is substantially destroyed by fire. The building was insured at its fair market value. U does not intend to reconstruct the building but uses a portion of the insurance proceeds to repay the unpaid balance of the mortgage. Z uses this amount to redeem the outstanding bonds at the first available call date. Since the project was substantially destroyed by fire and the outstanding bonds are retired at the first available call date, the requirements of section 103(b)(4)(A) and this paragraph (b) are satisfied with respect to the obligations.
Example 8.The facts are the same as in example (6) except that in 1987 U defaults on the mortgage, and Z obtains title to the project without instituting foreclosure proceedings. Z sells the project to S and uses the proceeds to retire the outstanding bonds. Since S did not obtain the project with obligations described in section 103(b)(4), S is not required to meet the requirements of section 103(b)(4)(A) and this paragraph. Further, the 1984 obligations are obligations described in section 103(b)(4)(A).
Example 9.In September 1983, State W issues $10 million of registered bonds with a term of 3 years, the proceeds of which are to be loaned to Corporation V to finance the construction of an apartment building in a rural community. At the end of 3 years, V obtains permanent financing from Federal Agency T. Agency T will not allow the deed to contain any restrictive covenant relating to the use of the project. Under Federal law, however, T requires that V maintain all of the units in the project for rental to low-income farmworkers for the term of the mortgage, which is 20 years. Further, the mortgage between T and V provides that if T determines that low-income housing is no longer required in the community in which the project is constructed then the repayment of the mortgage may be accelerated. T determines as of the date of issue that low-income housing will be needed in the community for at least 20 years. In 1987, the project fails to meet the requirements of section 1.103-8(b)(5)(ii), relating to occupancy by individuals or families of low or moderate income. Further, T does not require V to correct the failure. Based on the foregoing, the bonds issued by W will be treated as described in section 103(b)(4)(A).
Example 10.The facts are the same as in example (9) except that in 1987, the Federal law is amended to provide that Agency T may not enforce its low-income occupancy requirement. The result is the same.
Example 11.The facts are the same as in example (9) except that in 1987 Agency T determines that due to a change in circumstances in the community in which the project is located low-income rental housing is no longer required. As such, T requires V to repay the mortgage. Since the obligations have been repaid, W has no legal right to enforce the requirements of paragraph (b) with respect to the project. Subsequent nonconformity of the project with the requirements of § 1.103-8(b) under these circumstances will not cause the obligations issued by W to be industrial development bonds within the meaning of section 103(b)(1).
(10) Obligations issued before April 25, 1979—(i) General rules. Section 103(b)(1) shall not apply to obligations issued before April 25, 1979, which are part of an issue substantially all of the proceeds of which are to be used to provide residential real property for family units. In order to qualify under this paragraph (b) as an exempt facility, the facility must satisfy the public use requirement of paragraph (a)(2) of this section by being available for use by members of the general public.
(ii) Family units defined. For purposes of this paragraph (b) the term “family unit” means a building or any portion thereof which contains complete living facilities which are to be used on other than a transient basis by one or more persons, and facilities functionally related and subordinate thereto. Thus, an apartment which is to be used on other than a transient basis as a residence by a single person or by a family and which contains complete facilities for living, sleeping, eating, cooking, and sanitation, constitutes a family unit. Such a unit may be served by centrally located machinery and equipment as in a typical apartment building. To qualify as a family unit, the living facilities must be a separate, self-contained building or constitute one unit in a building substantially all of which consists of similar units, together with functionally related and subordinate facilities and areas. Hotels, motels, dormitories, fraternity and sorority houses, rooming houses, hospitals, sanitariums, rest homes, and trailer parks and courts for use on a transient basis do not constitute residential real property for family units.
(iii) Functionally related and subordinate facilities. Under paragraph (a)(3) of this section, facilities which are functionally related and subordinate to residential real property actually used for family units include, for example, facilities for use by the occupants such as a swimming pool, a parking area, and recreational facilities.
(c) Sports facilities—(1) General rule. Section 103(b)(4)(B) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are part of an issue substantially all of the proceeds of which are to be used to provide sports facilities. In order to qualify as an exempt facility under section 103(b)(4)(B) and this paragraph, the facility must satisfy the public use requirement of paragraph (a)(2) of this section by being available for use by members of the general public either as participants or as spectators.
(2) Sports facility defined. (i) For purposes of section 103(b)(4)(B) and this paragraph, the term “sports facilities” includes both outdoor and indoor facilities. The facility may be designed either as a spectator or as a participation facility. For example, the term includes both indoor and outdoor stadiums for baseball, football, ice hockey, or other sports events, as well as facilities for the participation of the general public in sports activities, such as golf courses, ski slopes, swimming pools, tennis courts, and gymnasiums. The term does not include, however, facilities such as a golf course, swimming pool, or tennis court, which are constructed for use by members of a private club or as integral or subordinate parts of a hotel or motel, or the use of which will be restricted to a special class or group or to guests of a particular hotel or motel, since they are not facilities for the use of the general public as required by paragraph (a)(2) of this section.
(ii) Under paragraph (a)(3) of this section, facilities which are functionally related and subordinate to a sports facility, such as a parking lot, clubhouse, ski slope warming house, bath house, or ski tow, are considered to be part of a sports facility. A ski lodge which consists primarily of overnight accommodations is not functionally related and subordinate to a sports facility.
(d) Convention or trade show facilities—(1) General rule. Section 103(b)(4)(C) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are a part of an issue substantially all of the proceeds of which are to be used to provide convention or trade show facilities. In order to qualify under section 103(b)(4)(C) and this paragraph as an exempt facility, the facility must satisfy the public use requirement of paragraph (a)(2) of this section by being available for an appropriate charge or rental, on a rate scale basis, for use by members of the general public. The public use requirement is not satisfied if the use of a convention or trade show facility is limited by long-term leases to a single user or group of users.
(2) Convention or trade show facilities defined. For purposes of section 103(b)(4)(C) and this paragraph, the term “convention or trade show facilities” means special-purpose buildings or structures, such as meeting halls and display areas, which are generally used to house a convention or trade show, including, under paragraph (a)(3) of this section, facilities functionally related and subordinate to such facilities such as parking lots or railroad sidings. A hotel or motel which is available to the general public, whether or not it is intended primarily to house persons attending or participating in a convention or trade show, is neither a convention or trade show facility nor functionally related and subordinate thereto.
(e) Certain transportation facilities—(1) General rule. Section 103(b)(4)(D) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are part of an issue substantially all of the proceeds of which are to be used to provide (i) airports, docks, wharves, mass commuting facilities, or public parking facilities, or (ii) storage or training facilities directly related to any such facility. In order to qualify under section 103(b)(4)(D) and this paragraph as an exempt facility, the facility must satisfy the public use requirement of paragraph (a)(2) of this section by being available for use by members of the general public or for use by common carriers or charter carriers which serve members of the general public. A dock or wharf which is part of a public port (or a public port to be constructed in accordance with a plan which has been finally adopted on the date the obligations in question are issued) satisfies the public use test. A parking lot will be available for use by the general public unless more than an insubstantial portion thereof will be used exclusively by or for the benefit of a nonexempt person by reason of a formal or informal agreement or by reason of the remote geographic location of the facility.
(2) Definitions. For purposes of section 103(b)(4)(D) and this paragraph—
(i) With respect to bonds sold at or before 5:00 p.m. EST on December 29, 1978, an airport includes service accommodations for the public such as terminals, retail stores in such terminals, runways, hangars, loading facilities, repair shops, parking areas, and facilities which, under paragraph (a)(3) of this section, are functionally related and subordinate to the airport, such as facilities for the preparation of in-flight meals, restaurants, and accommodations for temporary or overnight use by passengers, and other facilities functionally related to the needs or convenience of passengers, shipping companies, and airlines. The term “airport” does not include a landing strip which, by reason of a formal or informal agreement, or by reason of geographic location, will not be available for general public use.
(ii) With respect to bonds sold after 5:00 p.m. EST on December 29, 1978—
(a) An airport includes facilities which are directly related and essential to—
(1) Servicing aircraft or enabling aircraft to take off and land, or
(2) Transferring passengers or cargo to or from aircraft.
A facility does not satisfy either of the foregoing requirements if the facility need not be located at, or in close proximity to, the take-off and landing area in order to perform its function. Examples of facilities which satisfy those requirements are terminals, runways, hangars, loading facilities, repair shops, and land-based navigation aids such as radar installation.
(b) Under paragraph (a)(3) of this section, an airport includes facilities other than those described in paragraph (e)(2)(ii)(a) only if they are functionally related and subordinate to an airport (as defined in paragraph (e)(2)(ii)(a)). A facility (or part thereof) is not functionally related and subordinate to an airport if the facility (or part thereof)—
(1) Is not of a character and size commensurate with the character and size of the airport at or adjacent to which the facility is located, or
(2) Is not located at or adjacent to that airport.
A facility may satisfy the character and size requirement although it provides minimal benefits to other airports. For example, a facility for the preparation of in-flight meals which has capacity sufficient to prepare all in-flight meals for aircraft departing the airport where the facility is located qualifies although some meals may be consumed in transit between other airports. Other examples of facilities functionally related and subordinate to an airport are restaurants and retail stores located in terminals, ground transportation parking areas, and accommodations for temporary or overnight use by passengers. Unimproved land (including agricultural land) that is adjacent to an airport and that is impaired by a significant level of airport noise is functionally related and subordinate to the airport if after its acquisition that land will not be converted to a use that is incompatible with the level of airport noise. Adjacent land with existing improvements also may be functionally related and subordinate to an airport by reason of impairment by a significant level of airport noise but only if the use of such land before its acquisition is incompatible with the airport noise level, its use after acquisition is to be compatible, and the post-acquisition use will be essentially different from the pre-acquisition use. Notwithstanding the foregoing, an interest in such improved land acquired solely to mitigate damages attributable to airport noise is treated as functionally related and subordinate to the airport. Thus, for example, amounts allocated to imposing a servitude on improved land adjacent to an airport restricting its future use to uses compatible with airport noise are treated as amounts allocated to property functionally related and subordinate to an airport. For the purpose of determining whether land is impaired by a significant level of airport noise, any generally accepted noise estimating methodology may be used. For example, a Noise Exposure Forecast (NEF), a method for composite noise rating recommended by the Federal Aviation Administration to measure the impact of airport noise, may be used for this purpose. Compatibility may be determined by reference to regulations or general guidelines published by the Federal Aviation Administration under section 102 of the Aviation Safety and Noise Abatement Act of 1979 (49 U.S.C. 2102), or sections 11(3)(C) and 18(a)(4) of the Airport and Airway Development Act of 1970, as amended (49 U.S.C. 1711(3)(C) and 1718(a)(4)), concerning uses of land impaired by a significant level of airport noise, or, where available, by reference to the airport compatibility plan specifically addressing what constitutes a compatible use of that land.
(c) As an illustration of the rules of this paragraph (e)(2)(ii), an office building (or office space within a building) or a computer facility, either of which serves a system-wide or regional function of an airline, is not considered part of an airport since that facility is not described in either paragraph (e)(2)(ii)(a) or (b). However, a maintenance or overhaul facility which services aircraft is considered part of an airport under paragraph (e)(2)(ii)(a) since that facility is directly related and essential to servicing aircraft and must be located where aircraft take off and land in order to perform its function.
(d) A hotel located at or adjacent to an airport satisfies the requirements of paragraph (e)(2)(ii)(b), that is, it is of a character and size commensurate with the character and size of the airport at or adjacent to which it is located, if the number of guest rooms in the hotel is reasonable for the size of the airport, taking into account the current and projected passenger usage of the terminal facility. If the hotel contains meeting rooms, the number and size of these rooms must be in reasonable proportion to the number of guest rooms in the hotel. Limited recreational facilities will not prevent the hotel from being of a character and size commensurate with the character and size of the airport.
(iii) A dock or wharf includes property which, under paragraph (a)(3) of this section, is functionally related and subordinate to a dock or wharf such as the structure alongside which a vessel docks, the equipment needed to receive and to discharge cargo and passengers from the vessel, such as cranes and conveyors, related storage, handling, office, and passenger areas, and similar facilities.
(iv) A mass commuting facility includes real property together with improvements and personal property used therein, such as machinery, equipment, and furniture, serving the general public commuting on a day-to-day basis by bus, subway, rail, ferry, or other conveyance which moves over prescribed routes. Such property also includes terminals and facilities which, under paragraph (a)(3) of this section, are functionally related and subordinate to the mass commuting facility, such as parking garages, car barns, and repair shops. Use of mass commuting facilities by noncommuters in common with commuters is immaterial. Thus, a terminal leased to a common carrier bus line which serves both commuters and long distance travelers would qualify as an exempt facility.
(3) Related storage or training facility. Section 103 (b)(4)(D) includes only those storage and training facilities which are both (i) directly related to a facility to which subparagraph (1)(i) or (ii) of this paragraph applies and (ii) physically located on or adjacent to such a facility. For example, a storage facility would include a grain elevator, silo, warehouse, or oil and gas storage tank used in connection with a dock or wharf and located on or adjacent to such dock or wharf. Similarly, a training facility would include a building located at or adjacent to an airport for the training of flight personnel or a paved area immediately adjoining a bus garage used to train bus drivers.
(4) Examples. The principles of this paragraph may be illustrated by the following examples:
Example 1.B Airport Authority, a political subdivision of State A, owns and operates B Airport. B Airport Authority adds several runways. In view of the expanded area impaired by significant levels of airport noise, the Authority proposes to issue bonds the proceeds of which are to be used to acquire a hospital located adjacent to the airport. The noise level on the acquired property is 40 NEF. By reference to a noise exposure map setting forth noncompatible land uses and by reference to guidelines published by the Federal Aviation Administration, it is established that continued use of the land for a hospital is not compatible with the noise level. Prior to issuing the bonds, B contracts to lease the property to Corporation C to be used for warehouse space. Within 18 months of the bonds' issuance C will remodel the hospital (previously owned by D, who is unrelated to C) with its own funds and rent the facility as a warehouse. Use as a warehouse is determined to be compatible with the level of airport noise impairing the land. The improved land and prospective revenues from the facility's rental are security for the proposed issuance. Based on the foregoing, the acquired land satisfies the public use test. Furthermore, it is functionally related and subordinate to the airport because the improvements are to be used in an essentially different manner than prior to the land's acquisition. The bonds are industrial development bonds. However, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) and § 1.103-11 apply.
Example 2.The facts are the same as in Example (1) except that a substantial portion of the proceeds of the bond issue is allocated to the acquisition of a limited interest in an additional tract of land (also impaired by airport noise measured at 40 NEF) on which an office building stands. The limited interest holds B harmless for damages caused by airport noise and restricts uses of the tract after the building is retired to those compatible with noise levels caused by the airport. Based on the foregoing, such interest satisfies the public use test. Furthermore, the interest is functionally related and subordinate to the airport because it is solely to mitigate damage attributable to airport noise, in part by restricting future land uses. The bonds are industrial development bonds. However, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) or § 1.103-11 apply.
Example 3.On June 1, 1982, M Airport Authority, a political subdivision of State O, issues obligations, the proceeds of which are loaned to X Corporation, a nonexempt person. X uses the proceeds to construct a hotel adjacent to the main terminal building at M Airport. X will be unconditionally liable for repayment of the proposed obligations. The hotel will be used to provide temporary and overnight accommodations for airline passengers using M Airport. The number of rooms in the hotel is reasonable for an airport of M's size, taking into account the current and projected passenger usage of the terminal facility. In addition to guest rooms, the hotel will contain a restaurant, small retail stores (such as a gift shop and newstand), and limited recreation facilities (such as a swimming pool). The hotel will also contain several multipurpose rooms suitable for use as meeting rooms. The number and size of these rooms will be in reasonable proportion to the number and size of the guest rooms in the hotel. Use of the guest rooms, restaurant and stores, recreational facilities, and meeting rooms by air passengers arriving at or departing from M Airport will be incidental to the use of the hotel by air passengers for temporary and overnight accommodations. The hotel is of a character and size commensurate with the character and size of M Airport. Consequently, applying the provisions of § 1.103-8(e)(2), the hotel is functionally related and subordinate to M Airport. The obligations are industrial development bonds. Section 103(b)(1) does not apply to the obligations, however, unless the provisions of section 103(b)(10) and § 1.103-11 apply.
Example 4.On June 1, 1982, N Airport Authority, a political subdivision of State P, issues obligations the proceeds of which are loaned to Y Corporation, a nonexempt person. Y uses the proceeds to construct a hotel adjacent to the main terminal building at N Airport. Y Corporation will be unconditionally liable for repayment of the proposed obligations. The hotel will contain extensive recreational facilities, including a large roof-top swimming pool, tennis courts, and a health club. In addition, facilities for conferences consisting of a ballroom-sized meeting room capable of being partitioned by movable panels and several smaller meeting rooms will be constructed. The number of rooms in the hotel will substantially exceed the number which is reasonably based on the current and projected passenger usage of the terminal facility. Because of the presence of extensive recreational and conference facilities, as well as the presence of on excessive number of rooms at the hotel, the hotel fails to be of a character and size commensurate with the character and size of N Airport. The result would be the same if the hotel did not have extensive recreational facilities. Consequently, the hotel is not functionally related and subordinate to N Airport under § 1.103-8(e)(2). The obligations are industrial development bonds and interest thereon is not excluded from gross income by reason of subsection (a)(1) or (b)(4) of section 103.
(f) Certain public utility facilities—(1) General rule. (i) Section 103(b)(4)(E) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are part of an issue substantially all of the proceeds of which are to be used to provide sewage disposal facilities, solid waste disposal facilities, or facilities for the local furnishing of electric energy or gas. In order to qualify under section 103(b)(4)(E) as an exempt facility, the facility must satisfy the public use requirement of paragraph (a)(2) of this section. A public utility facility described in this subparagraph (with the exception of sewage and solid waste disposal facilities which will be treated in all events as serving the general public) will satisfy the public use requirement only if such facility, or the output thereof, is available for use by members of the general public.
(ii) A facility for the local furnishing of electric energy or gas is, for purposes of applying the public use test in paragraph (a)(2) of this section, available for use by members of the general public if (a) the owner or operator of the facility is obligated, by a legislative enactment, local ordinance, regulation, or the equivalent thereof, to furnish electric energy or gas to all persons who desire such services and who are within the service area of the owner or operator of such facility, and (b) it is reasonably expected that such facility will serve or be available to a large segment of the general public in such service area. For rules with respect to facilities for the furnishing of water, see paragraph (h) of this section.
(2) Definitions. For purposes of section 103(b)(4)(E) and this paragraph—
(i) The term “sewage disposal facilities” means any property used for the collection, storage, treatment, utilization, processing, or final disposal of sewage.
(ii) The term “facilities for the local furnishing of electric energy or gas” means property which—
(a) Is either property of a character subject to the allowance for depreciation provided in section 167 or land,
(b) Is used to produce, collect, generate, transmit, store, distribute, or convey electric energy or gas.
(c) Is used in the trade or business of furnishing electric energy or gas, and
(d) Is a part of a system providing service to the general populace of one or more communities or municipalities, but in no event more than 2 contiguous counties (or a political equivalent) whether or not such counties are located in one State.
For purposes of this subdivision, a city which is not within, or does not consist of, one or more counties (or a political equivalent) shall be treated as a county (or a political equivalent). A facility for the generation of electric energy otherwise qualifying under this subdivision will not be disqualified because it is connected to a system for interconnection with other public utility systems for the emergency transfer of electric energy. The facilities need not be located in the area served by them. Also, the term “facilities for the local furnishing of electric energy or gas” does not include coal, oil, gas, nuclear cores, or other materials performing a similar function.
(g) Air or water pollution control facilities—(1) General rule. Section 103(b)(4)(F) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are part of an issue substantially all of the proceeds of which are to be used to provide air or water pollution control facilities. Such facilities are in all events treated as serving the general public and, thus, satisfy the public use requirement of paragraph (a)(2) of this section.
(2) Definitions. (i) For purposes of section 103(b)(4)(F) and this paragraph, property is a pollution control facility to the extent that the test of either subdivision (iii) or (iv) of this subparagraph is satisfied, but only if—
(a) It is property which is described in subdivision (ii) of this subparagraph and is either of a character subject to the allowance for depreciation provided in section 167 or land, and
(b) Either (1) a Federal, State, or local agency exercising jurisdiction has certified that the facility, as designed, is in furtherance of the purpose of abating or controlling atmospheric pollutants or contaminants, or water pollution, as the case may be, or (2) the facility is designed to meet or exceed applicable Federal, State, and local requirements for the control of atmospheric pollutants or contaminants, or water pollution, as the case may be, in effect at the time the obligations, the proceeds of which are to be used to provide such facilities, are issued.
(ii) Property is described in this subdivision if it is property to be used, in whole or in part, to abate or control water or atmospheric pollution or contamination by removing, altering, disposing, or storing pollutants, contaminants, wastes, or heat. In the case of property to be used to control water pollution, such property includes the necessary intercepting sewers, pumping, power, and other equipment, and their appurtenances. For rules relating to facilities which remove pollutants from fuel or certain other items, see subdivision (vi) of this subparagraph.
(iii) In the case of an expenditure for property which is designed for no significant purpose other than the control of pollution, the total expenditure for such property satisfies the test of this subdivision. Thus, where property which is to serve no function other than the control of pollution is to be added to an existing manufacturing or production facility, the total expenditure for such property satisfies the test of this subdivision. Also, if an expenditure for property would not be made but for the purpose of controlling pollution, and if the expenditure has no significant purpose other than the purpose of pollution control, the total expenditure for such property satisfies the test of this subdivision even though such property serves one or more functions in addition to its function as a pollution control facility.
(iv) In the case of property to be placed in service for the purpose of controlling pollution and for a significant purpose other than controlling pollution, only the incremental cost of such facility satisfies the test of this subdivision. The “incremental cost” of property is the excess of its total cost over that portion of its cost expended for a purpose other than the control of pollution.
(v) An expenditure has a significant purpose other than the control of pollution if it results in an increase in production or capacity, or in a material extension of the useful life of a manufacturing or production facility or a part thereof.
(h) Water facilities—(1) General rule. Section 103(b)(4)(G) provides that section 103(b)(1) shall not apply to obligations issued by a State or local governmental unit which are part of an issue substantially all of the proceeds of which are to be used to provide facilities for the furnishing of water which are available, on reasonable demand, to members of the general public. A water facility will satisfy the public use test of paragraph (a)(2) of this section if it will provide water, on reasonable demand, to any member of the general public within the service area of the water system of which such facility is a part.
(2) Definition. For purposes of section 103(b)(4)(G) and this paragraph, the “water facilities” include artesian wells, reservoirs, dams, related equipment and pipelines, and other facilities used to furnish water for domestic, industrial, irrigation, or other purposes.
(3) Effective date. The provisions of this paragraph apply in the case of facilities provided by obligations issued after January 1, 1969. In the case of facilities provided by obligations issued on or before such date to which section 103(b) is applicable, the provisions of paragraph (f) of this section shall apply. For such purposes, wherever the term “local furnishing of electric energy or gas” appears in paragraph (f) of this section, such term shall be deemed to read “local furnishing of electric energy, gas, or water.”
(i) Examples. The application of section 103(b)(4) and this section are illustrated by the following examples:
Example 1.City B plans to issue $10 million of bonds to be used to construct a sports stadium. The revenues from the facility and the facility itself will be the security for the bonds. A professional football team rents the facility on a long-term leasee for part of the year and a professional baseball team rents the sports facility for the remainder of the year. Tickets are sold by the teams to the general public. The bonds are industrial development bonds, but since the proceeds are used for a spectator facility for general public use, which is an exempt facility under section 103(b)(4)(B) and paragraph (c) of this section, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) and § 1.103-11 apply.
Example 2.City C plans to issue $10 million of bonds to be used to construct a convention hall which it will own. City C plans to lease the convention hall for 25 years to corporation Y, a nonexempt person, which will operate and maintain it. The terms of the lease obligate Y to make the convention hall generally available for civic, business, and recreational shows, meetings, performances, and similar activities serving or benefiting the community. Lease payments from Y and the facility will be security for the bonds. The bonds are industrial development bonds, but since the proceeds are to be used for a facility for general public use, which is an exempt facility under section 103(b)(4)(C) and paragraph (d) of this section, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) and § 1.103-11 apply.
Example 3.City D issues $100 million of its bonds and uses the proceeds to finance construction of an airport for the use of the general public. D will own and operate the airport. A major portion of the rentable space in the terminal building is leased on a long-term basis to common carrier and non-scheduled airlines. The bonds will be secured by the airport landing and runway charges and by payments with respect to such long-term leases from such commercial airlines. Such commercial airline payments are expected to constitute more than 50 percent of the total revenues from the airport. The bonds are industrial development bonds, but since the proceeds are to be used for an airport for use by the general public and by carriers serving the general public, which is an exempt facility under section 103(b)(4)(D) and paragraph (e) of this section, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) and § 1.103-11 apply. The result would be the same if D hired an airport management firm to operate the airport.
Example 4.City E issues $6 million of its bonds and uses the proceeds to finance construction of a landing strip for airplanes to be located adjacent to the factories of corporations Y and Z. The landing strip will be used in the trades or businesses of Y and Z and by any member of the general public wishing to use it. However, due to its location, general public use will be negligible. The lease payments by Y and Z for the use of the facility are the security for the bonds. The bonds are industrial development bonds and the facility is not an exempt facility under section 103(b)(4)(D) and paragraph (c) of this section because it is not a facility constructed for general public use.
Example 5.State F and corporation Z enter into an arrangement which provides that F will issue $10 million of its bonds and use the proceeds to construct a facility for Z the only purpose of which is to control air and water pollution at Z's plant. The principal and interest on the bonds will be secured by the charges which F will impose on Z. The bonds are industrial development bonds, but since the proceeds are to be used for air and water pollution facilities designed to abate pollution by private persons, such facilities are for the benefit of the general public and are exempt facilities under section 103(b)(4)(F) and paragraph (g) of this section. Accordingly, section 103(b)(1) does not apply unless the provisions of section 103(b)(13) and § 1.103-11 apply.
Example 6.City G issues $20 million of its bonds and will use $6 million to finance residential rental property which qualifies as an exempt facility under section 103(b)(4)(A) and paragraph (b) of this section, $9 million to finance construction of a stadium which qualifies as an exempt facility under section 103(b)(4)(B) and paragraph (c) of this section, and $5 million for convention facilities which qualify as exempt facilities under section 103(b)(4)(C) and paragraph (d) of this section. The facilities will be used in the trades or businesses of nonexempt persons and rental payments with respect to such facilities and the facilities themselves will be the security for the bonds. The bonds are industrial development bonds, but since all the proceeds are to be used for facilities which are exempt facilities under section 103(b)(4), section 103(b)(1) does not apply unless the provisions of section 103(b)(10) and § 1.103-11 apply. The result would be the same, if; instead of using $9 million to finance construction of a stadium, the $9 million were used to finance construction of a capitol building. [Reg. § 1.103-8].
[T.D. 7199, 37 FR 15490, Aug. 3, 1972]
Editorial Note:For Federal Register citations affecting § 1.103-8, see the List of CFR Sections Affected, which appears in the Finding Aids section of the printed volume and at www.govinfo.gov.
§ 1.103-9 Interest on bonds to finance industrial parks.
(a) General rule. (1) Under section 103(c)(5), interest paid on an issue of obligations issued by a State or local governmental unit (as defined in § 1.103-1) is not includable in gross income if substantially all of the proceeds of such issue is to be used to finance the acquisition or development of land as the site for an industrial park (referred to in this section as “industrial park bonds”). However, interest on an obligation of such an issue is includable in gross income if the obligation is held by a substantial user or a related person (as described in section 103(c)(7) and § 1.103-11). If substantially all of the proceeds of a bond issue is to be so used to finance an industrial park, the debt obligations are treated as obligations described in section 103(a)(1) and § 1.103-1 even though such obligations are industrial development bonds within the meaning of section 103(c)(2) and § 1.103-7. Whether substantially all of the proceeds of an issue of governmental obligations are used to finance an industrial park is determined consistently with the rules for exempt facilities in § 1.103-8(a)(1)(i).
(2) The provisions of subparagraph (1) of this paragraph shall also apply to an issue of obligations substantially all of the proceeds of which is to be used to acquire or develop land as the site for an industrial park described in section 103(c)(5) and this section and for either or both of the following purposes: (i) To finance exempt facilities described in section 103(c)(4) and § 1.103-8, (ii) to finance facilities to be used by an exempt person.
(3) Section 103(c)(5) only becomes applicable where the bond issue meets both the trade or business and the security interest tests so that the obligations are industrial development bonds within the meaning of section 103(c)(2). For the interrelationship of the rules provided in this section and the exemption for certain small issues provided in section 103(c)(6), see § 1.103-10.
(b) Definition of an industrial park. For purposes of section 103(c)(5) and this section, the term “industrial park” means a tract of land, other than a tract of land intended for use by a single enterprise, suitable primarily for use as building sites by a group of enterprises engaged in industrial, distribution, or wholesale businesses if either—
(1) The control and administration of the tract is vested in an exempt person (within the meaning of paragraph (b)(2) of § 1.103-7), or
(2) The uses of the tract are normally (i) regulated by protective minimum restrictions, ordinarily including the size of individual sites, parking and loading regulations, and building setback lines, and (ii) designed to be compatible, under a comprehensive plan, with the community in which the industrial park is located and with the uses of the surrounding land.
(c) Development of land defined. For purposes of section 103(c)(5) and this section, the term “development of land” includes the provision of certain improvements to an industrial park site if such improvements are incidental to the use of the land as an industrial park. Such incidental improvements include the building or installation of incidental water, sewer, sewage and waste disposal, drainage, or similar facilities (whether surface, subsurface, or both). Such incidental improvements include the provision of incidental transportation facilities, such as hard-surface roads (including curbs and gutters) and railroad spurs and sidings; power distribution facilities, such as gas and electric lines; and communication facilities. The provision of structures or buildings of any kind is not included within the meaning of the term “development of land,” except for those structures or buildings which are necessary in connection with the incidental improvements encompassed by the term, such as, for example, a water pumphouse and storage tank needed in connection with the incidental provision of water facilities in an industrial park.
(d) Examples. The application of the rules contained in section 103(c)(5) and this section are illustrated by the following examples:
Example 1.City A and corporations X, Y, and Z (unrelated companies) enter into an arrangement under which A is to acquire a tract of land suitable for use as an industrial park. The arrangement provides that: (1) A will issue $10 million of bonds to be used for the acquisition and development of a suitable tract of land; (2) the tract will be controlled and administered by A, pursuant to a comprehensive zoning plan, for the use of a group of enterprises; (3) A will install necessary water, sewer, and drainage facilities on the tract; (4) A will sell substantial portions of the developed tract to X for use as a factory site and to Y for use as a warehouse site; (5) A will lease a sizeable portion of the tract to Z for 20 years as a distribution center site; and (6) the developed tract and the proceeds from the sale or lease of parts of the tract will be the security for the bonds. The bonds are industrial development bonds. Since, however, the proceeds of the issue are to be used for the acquisition and development of a tract of land as the site for an industrial park under section 103(c)(5), section 103(c)(1) does not apply unless the provisions of section 103(c)(7) and § 1.103-11 apply.
Example 2.The facts are the same as in example (1) except that $1 million of the proceeds of the $10 million issue are to be used for the construction of a factory by corporation W or X. The bonds are industrial development bonds. Under these circumstances, substantially all of the proceeds are treated as used or to be used for the acquisition and development of a tract of land as the site for an industrial park described in section 103(c)(5). Accordingly, section 103(c)(1) does not apply unless the provisions of section 103(c)(7) and § 1.103-11 apply.
[T.D. 7199, 37 FR 15494, Aug. 3, 1972, as amended by T.D. 7511, 42 FR 54285, Oct. 5, 1977]
§ 1.103-10 Exemption for certain small issues of industrial development bonds.
(a) In general. Section 103(b)(6) applies to certain industrial development bond issues (referred to in this section as “exempt small issues”) and bonds issued to refund certain issues (referred to in this section as “exempt small refunding issues”). If an issue is an exempt small issue or an exempt small refunding issue, then under the requirements of section 103(b)(6) and this section the interest paid on the debt obligations is not includable in gross income, and the obligations are treated as obligations described in section 103(a)(1) and § 1.103-1, even though such obligations are industrial development bonds as defined in section 103(b)(2) and § 1.103-7. However, interest on an obligation of such an issue is includable in gross income if the obligation is held by a substantial user of the financed facilities or a related person (as described in section 103(b)(7) and § 1.103-11). Section 103(b)(6) only becomes applicable where the bond issue meets both the trade or business and the security interest tests so that the obligations are industrial development bonds within the meaning of section 103(b)(2). For bonds issued before January 1, 1979, in taxable years ending before such date, and for capital expenditures made before January 1, 1979, with respect to such bonds, paragraphs (b), (c), and (d) of this section shall be applied by substituting $5 million for $10 million.
(b) Small issue exemption—(1) $1 million or less. Section 103(b)(6)(A) provides that section 103(b)(1) shall not apply to any debt obligation issued by a State or local governmental unit as part of an issue where—
(i) The aggregate authorized face amount of such issue (determined by aggregating the outstanding face amount of any prior exempt small issues described in paragraph (d) of this section and the face amount of the issue of obligations in question) is $1 million or less; and
(ii) Substantially all of the proceeds of such issue is to be used for the acquisition, construction, reconstruction, or improvement of land or property of a character subject to the allowance for depreciation under section 167. Proceeds which are loaned to a borrower for use as working capital or to finance inventory are not used in the manner described in the preceding sentence. Whether substantially all of the proceeds of an issue of governmental obligations are used in such manner is determined consistently with the rules for exempt facilities in § 1.103-8(a)(1)(i). Any obligation which is an industrial development bond within the meaning of section 103(b)(2) and which satisfies the $1 million small issue exemption requirements is an exempt small issue. See paragraph (c)(1) of this section for the treatment of refunding issues of $1 million or less.
(2) $10 million or less. (i) Under section 103(b)(6)(D), the issuing State or local governmental unit may elect to have an aggregate authorized face amount of $10 million or less, in lieu of the $1 million exemption otherwise provided for in section 103(b)(6)(A), with respect to issues of obligations that are industrial development bonds (within the meaning of section 103(b)(2)) issued after October 24, 1968. If the election is made in a timely manner, the bonds will be treated as obligations of a State or local governmental unit described in section 103(a)(1) and § 1.103-1 if the sum of—
(a) The aggregate face amount of the issue including the aggregate outstanding face amount of any prior $1 million or $10 million exempt small issues taken into account under section 103(b)(6)(B) and paragraph (d) of this section, and
(b) The aggregate amount of “section 103(b)(6)(D) capital expenditures” (within the meaning of paragraph (b)(2)(ii) of this section),
is $10 million or less. In the case of an issue of obligations that qualified for exemption under section 103(b)(6)(A) and this paragraph, if a section 103(b)(6)(D) capital expenditure made after the date of issue has the effect of making taxable the interest on the issue, under section 103(b)(6)(G) the loss of tax exemption for the interest shall begin only with the date on which the expenditure that caused the issue to cease to qualify under the $10 million limit was paid or incurred. See paragraph (b)(2)(vi) of this section for the time and manner in which the issuer may elect the $10 million exemption. See section 103(b)(6)(H) and paragraph (c)(2) of this section for the treatment of certain refinancing issues of $10 million of less.
(ii) The term “section 103(b)(6)(D) capital expenditure” is defined in this subdivision. Special rules for applying such definition in the case of certain expenditures paid or incurred by a State or local governmental unit are prescribed in subdivision (iii) of this subparagraph. Except as excluded by subdivision (iv) or (v) of this subparagraph, an expenditure (regardless of how paid, whether in cash, notes, or stock in a taxable or nontaxable transaction) is a section 103(b)(6)(D) capital expenditure if—
(a) The capital expenditure was financed other than out of the proceeds of issues to the extent such issues are taken into account under paragraph (b)(2)(i)(a) of this section.
(b) The capital expenditures were paid or incurred during the 6-year period which begins 3 years before the date of issuance of the issue in question and ends 3 years after such date,
(c) The principal user of the facility in connection with which the property resulting from the capital expenditures is used and the principal user of the facility financed by the proceeds of the issue in question is the same person or are two or more related persons (as defined in section 103(b)(6)(C) and paragraph (e) of this section),
(d) Both facilities referred to in (c) of this subdivision were (during the period described in (b) of this subdivision or a part thereof) located in the same incorporated municipality or in the same county outside of the incorporated municipalities in such county), and
(e) The capital expenditures were properly chargeable to the capital account of any person or State or local governmental unit (whether or not such person is the principal user of the facility or a related person) determined, for this purpose, without regard to any rule of the Code which permits expenditures properly chargeable to capital account to be treated as current expenses. With respect to obligations issued on or after August 8, 1972, determinations under the preceding sentence shall be made by including any expenditure which may, under any rule or election under the Code, be treated as a capital expenditure (whether or not such expenditure is so treated). With respect to obligations issued on or after August 8, 1972, for purposes of this subparagraph, capital expenditures made with respect to a contiguous or integrated facility which is located on both sides of a border between two or more political jurisdictions are made with respect to a facility located in all such jurisdictions and, therefore, shall be treated as if they were made in each such political jurisdiction.
(iii) Amounts properly chargeable to capital account under subdivision (ii) (e) of this subparagraph include capital expenditures made by a State or local governmental unit with respect to an exempt facility or an industrial park, within the 6-year period described in subdivision (ii)(b) of this subparagraph, out of the proceeds of bond issues to which section 103(b)(1) did not apply by reason of section 103(b) (4) or (5) (relating to certain exempt activities and industrial parks). Thus, for example, the cost to the lessor of a leased plantsite financed out of the proceeds of an issue for an exempt air pollution control facility under section 103(b)(4)(F) and paragraph (g) of § 1.103-8 would constitute a section 103(b)(6)(D) capital expenditure. However, in the case of an industrial park, only the land costs allocated on an area basis to the plantsite and the actual cost of any improvements made on the plantsite, or to be used principally in connection with the actual plantsite occupied by a principal user or a related person, shall be taken into account as capital expenditures. Where the actual amount of capital expenditures made with respect to a facility by a person (including a State or local governmental unit) other than the user of such facility (or a related person) cannot be ascertained, the fair market value of the property with respect to which the capital expenditures were made, at the time of such capital expenditures, shall be deemed to be the amount of such capital expenditures. In the case of a transaction which is not in form a purchase but which is treated as a purchase for Federal income tax purposes, the purchase price for Federal income tax purposes shall constitute a capital expenditure.
(iv) A section 103(b)(6)(D) capital expenditure shall not include any “excluded expenditure” described in (a) through (e) of this subdivision (iv).
(a) A capital expenditure is an excluded expenditure if either it is made by a public utility company which is not the principal user of the facility financed by the proceeds of the issue in question (or a related person) with respect to property of such company, or it is made by a State or local governmental unit with respect to property of such unit, and if in either case it meets all of the following three conditions: Such property of such company or unit (as the case may be) must be used to provide gas, water, sewage disposal services, electric energy, or telephone service. Such property must be installed in, or connected to, the facility but must not consist of property which is such an integral part of the facility that the cost of such property is ordinarily included as part of the acquisition, construction, or reconstruction cost of such facility. Such property must be of a type normally paid for by the user (or a related person) in the form of periodic fees based upon time or use.
(b) A capital expenditure is an excluded expenditure if it is made by a person other than the user, a related person, or a State or local governmental unit and if it is made with respect to tangible personal property (within the meaning of paragraph (c) of § 1.48-1), or intangible personal property, leased to the user (or a related person) of a facility. However, the preceding sentence shall apply only if such personal property is leased by the manufacturer of such tangible or intangible personal property, or by a person in the trade or business of leasing property the same as, or similar to, such personal property, and only if, pursuant to general business practice, property of such type is ordinarily the subject of a lease.
(c) A capital expenditure is an excluded expenditure if it is made to replace property damaged or destroyed by fire, storm, or other casualty, to the extent that these expenditures do not exceed in dollar amount the fair market value (determined immediately before the casualty) of the property replaced.
(d) A capital expenditure is an excluded expenditure if it is required by a change made after the date of issue in a Federal or State law, or a local ordinance which has general application, or if it is required by a change made after such date in rules and regulations of general application issued under such law or ordinance.
(e) A capital expenditure is an excluded expenditure if it is required by or arises out of circumstances which could not reasonably be foreseen on the date of issue or which arise out of a mistake of law or fact. However, the aggregate dollar amount taken into account under this subdivision (e) with respect to any issue may not exceed $1 million. With respect to expenditures incurred prior to December 11, 1971, the dollar amount specified in the preceding sentence shall be $250,000.
(v)(a) If the assets of a corporation are acquired by another corporation in a transaction to which section 381(a) (relating to carryovers in certain corporate acquisitions) applies, the exchange of consideration by the acquiring corporation for such assets is not a section 103(b)(6)(D) capital expenditure by such acquiring corporation.
(b) However, if an exchange referred to in (a) of this subdivision occurs during the 6-year period beginning 3 years before the date of issuance of an issue of obligations and ending 3 years after such date, the transferor and transferee shall be treated as having been related persons for the portion of such 6-year period preceding the date of the exchange for purposes of determining whether section 103(b)(6)(D) capital expenditures have been made. For purposes of this subdivision (b), the date of an exchange to which section 381 applies shall be the date of distribution or transfer within the meaning of paragraph (b) of § 1.381(b)-1.
(c) If section 351(a) applies to a transfer of property to a corporation solely in exchange for its stock or securities, the issuance of such stock or securities in such exchange is not a section 103(b)(6)(D) capital expenditure by such corporation.
(d) However, if such a transfer referred to in (c) of this subdivision occurs during the 6-year period beginning 3 years before the date of issuance of an issue of obligations and ending 3 years after such date, and if, with respect to the property transferred, expenditures made within such period would have been section 103(b)(6)(D) capital expenditures if the transferor and transferee had been related persons for such period, then such expenditures shall be considered to be section 103(b)(6)(D) capital expenditures made by the transferee. In addition, if a transferor and transferee are related persons immediately following such transfer, such transferor and transferee shall also be treated as having been related persons for the portion of such 6-year period preceding the date of such transfer.
(e) For purposes of this subdivision (v), the term “issue of obligations” means an issue being tested for purposes of qualifying or continuing to qualify under an election pursuant to section 103(b)(6)(D) as to which an amount which would be a section 103(b)(6)(D) capital expenditure solely by reason of (b) or (d) of this subdivision must be taken into account.
(f) If with respect to an issue of obligations an expenditure would not have been a section 103(b)(6)(D) capital expenditure but for the application of (b) or (d) of this subdivision, and if such section 103(b)(6)(D) capital expenditure has the effect of making taxable the interest on an issue of obligations which qualified for exemption under section 103(b)(6)(A) and this paragraph, the loss of tax exemption for such interest shall begin not earlier than the date of such exchange or transfer referred to in this subdivision (v).
(vi) The issuer may make the election provided by section 103(b)(6)(D) and this paragraph (b)(2) (assuming that the bonds otherwise qualify under section 103(b)(6) by noting the election affirmatively at or before the time of issuance of the issue in question on its books or records with respect to the issue. The term “books or records” includes the bond resolution or other similar legislation for the issue in question as well as the bond transcript or other compilation of bond and bond-related documents. If the issuer fails to make an election at the time and in the manner prescribed in this paragraph (b)(2), the issue will not be treated as described in section 103(b)(6)(D), and interest thereon will be includible in gross income.
(c) Refunding or refinancing issue exemption—(1) $1 million or less refunding issue. Section 103(b)(6)(A) also provides that section 103(b)(1) shall not apply to any debt obligation issued by a State or local governmental unit as part of an issue the aggregate authorized face amount of which is $1 million or less, if substantially all of the proceeds of such issue are to be used—
(i) To redeem part of all of a prior issue substantially all of the proceeds of which were used to acquire, construct, reconstruct, or improve land or property of a character subject to the allowance for depreciation, or
(ii) To redeem part or all of a prior exempt small refunding issue.
(2) 10 million or less refinancing issue. Section 103(b)(6)(H) provides that section 103(b)(1) shall not apply to any debt obligation issued by a governmental unit as part of an issue which is $10 million or less if the condition of section 103(b)(6)(H) is met and if substantially all of the proceeds are to be used—
(i) To redeem part or all of one or more prior exempt small issues, or
(ii) To redeem part or all of one or more prior exempt small refunding issues.
The condition of section 103(b)(6)(H) is that an election by the issuer of the $10 million exemption in lieu of the $1 million limit for a refunding issue may be made only if each prior issue being redeemed is an issue which qualified either for the $1 million exemption or, by reason of an election under section 103(b)(6)(D), for the $10 million exemption. In addition, in applying the capital expenditures test under section 103(b)(6)(D)(ii) and paragraph (b)(2)(i)(b) of this section to refinancing issues, section 103(b)(6)(D) capital expenditures are taken into account only for purposes of determining whether prior issues which were made under the section 103(b)(6)(D) election qualified under section 103(b)(6)(A) and would have continued to qualify under that section but for the redemption.
(d) Certain prior issues taken into account—(1) In general. Section 103(b)(6)(B) provides, in effect, that if (i) a prior issue specified in subparagraph (2) of this paragraph is an exempt small issue (including for this purpose an exempt small refunding issue) under section 103(b)(6)(A) and this section, and (ii) such prior issue is outstanding at the time of issuance of a subsequent issue, then in determining the aggregate face amount of such subsequent issue (for purposes of determining whether such issue is a $1 million or $10 million exempt small issue under section 103(b)(6)(A) and this section) there shall be taken into account the outstanding face amount of such prior exempt small issue. For purposes of this paragraph, the outstanding face amount of a prior exempt small issue does not include the face amount of any obligation which is to be redeemed from the proceeds of such subsequent issue.
(2) Prior issues specified. The face amount of an outstanding prior exempt small issue is taken into account under subparagraph (1) of this paragraph if—
(i) The proceeds of both the prior exempt small issue and of the subsequent issue (whether or not the State or local governmental unit issuing such obligation is the same unit for each such issue) are or will be used primarily with respect to facilities located or to be located in the same incorporated municipality or located or to be located in the same county outside of an incorporated municipality in such county (and, for purposes of this subdivision, on or after August 8, 1972, a contiguous or integrated facility which is located on both sides of a border between two or more political jurisdictions shall be treated as if it is entirely within each such political jurisdiction), and
(ii) The principal user of the financed facilities referred to in subdivision (i) of this subparagraph is or will be the same person or two or more related persons (as defined in section 103(b)(6)(C) and paragraph (e) of this section).
(3) Rules of application. The rules of this paragraph shall apply—
(i) Only in the case of outstanding prior exempt small issues which are industrial development bonds to which section 103(b)(1) would have applied but for the provisions of section 103(b)(6). Thus, for example, the provisions of this paragraph do not apply in respect of a prior issue of obligations issued on or before April 30, 1968. In addition, the provisions of this paragraph do not apply in respect of a prior issue for an exempt facility under section 103(b)(4) and § 1.103-8, or for an industrial park under section 103(b)(5) and § 1.103-9, whether or not the issue might also have qualified as an exempt small issue under section 103(b)(6)(A) and this section.
(ii) To all prior exempt small issues which meet the requirements of this paragraph. Thus, for example, in determining the aggregate face amount of an issue under section 103(b)(6)(A), the outstanding face amount of prior $1 million or $10 million exempt small issues which meet the requirements of this paragraph shall be taken into account in determining the aggregate face amount of a subsequent issue being tested for the $1 million small issue exemption. Similarly, in determining the aggregate face amount of an issue under section 103(b)(6)(A) and (D), the outstanding face amount of prior $1 million or $10 million exempt small issues which meet the requirements of this paragraph shall be taken into account in determining the aggregate face amount of a subsequent issue being tested for the $10 million small issue exemption.
(e) Related persons. For purposes of section 103(b) and §§ 1.103-7 through 1.103-11, the term “related person” means a person who is related to another person if, on the date of issue of an issue of obligations—
(1) The relationship between such persons would result in a disallowance of losses under section 267 (relating to disallowance of losses, etc., between related taxpayers) and section 707(b) (relating to losses disallowed, etc., between partners and controlled partnerships) and the regulations thereunder, or
(2) Such persons are members of the same controlled group of corporations, as defined in section 1563(a), relating to definition of controlled group of corporations (except that “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears in section 1563(a)) and the regulations thereunder.
(f) Disqualification of certain small issues. (1) Section 103(b)(6) shall not apply to any obligation issued after April 24, 1979, which is part of an issue, a significant portion of the proceeds of which are to be used directly or indirectly to provide residential real property for family units. For purposes of the preceding sentence, the term “residential real property for family units” means residential rental projects (within the meaning of § 1.103-8(b)) and owner-occupied residences (within the meaning of section 103A).
(2) For purposes of paragraph (f)(1), a significant portion of the proceeds of an issue are used to provide residential real property for family units if 5 percent or more of the proceeds are so used.
(g) Examples. The application of the rules contained in section 103(b)(6) and this section are illustrated by the following examples:
Example 1.County A and corporation X enter into an arrangement under which the county will provide a factory which X will lease for 25 years. The arrangement provides (1) that A will issue $1 million of bonds on March 1, 1970, (2) that the proceeds of the bond issue will be used to acquire land in County A (but not in an incorporated municipality) and to construct and equip a factory on such land in accordance with X's specifications, (3) that X will rent the facility for 25 years at an annual rental equal to the amount necessary to amortize the principal and pay the interest on the outstanding bonds, and (4) that such payments by X and the facility itself shall be the security for the bonds. Although the bonds issued are industrial development bonds, the bonds are an exempt small issue under section 103(b)(6)(A) and this section since the aggregate authorized face amount of the bond issue is $1 million or less and all of the proceeds of the bond issue are to be used to acquire and improve land and acquire and construct depreciable property. The result would be the same if the arrangement provided that X would purchase the facility from A.
Example 2.The facts are the same as in example (1) except that, instead of acquiring land and constructing a new factory, the arrangement provides that A will acquire a vacant existing factory building and rebuild and equip the building in accordance with X's specifications. The bonds are an exempt small issue for the same reasons as in example (1).
Example 3.The facts are the same as in example (1) or (2) except that the financed facilities are additions to facilities which were financed by an issue of bonds to which section 103(b)(1) does not apply because such bonds were issued prior to May 1, 1968, or were subject to the transitional provisions of § 1.103-12. The bonds are an exempt small issue since neither of the prior bond issues are taken into account under section 103(b)(6)(B) and this section in determining the status of industrial development bonds which are issued after April 30, 1968, and which are not subject to the transitional provisions of § 1.103-12.
Example 4.The facts are the same as in example (1) except that, subsequently, corporation X proposes to County A that A build a $400,000 warehouse located in Town M (an unincorporated town located in County A) for X under terms similar to the factory arrangement described in example (1). On the proposed issue date of the subsequent bond issue, $600,000 of the first exempt small issue will be outstanding. If A issues $400,000 of bonds for such purposes, the bonds will be an exempt small issue under section 103(b)(6) and this section since, under the rules of section 103(b)(6)(B) and paragraph (d) of this section, if the aggregate authorized face amount of the new issue and the outstanding prior exempt small issue will be $1 million or less, the new issue will be an exempt small issue. If, however, the aggregate authorized face amount of the prior issue outstanding on the date of the subsequent issue were in excess of $600,000, the subsequent issue would not qualify as an exempt small issue because (1) the combined aggregate face amount of the outstanding prior issue and the new issue would be in excess of $1 million, (2) the facilities financed by both issues are to be located in unincorporated areas in the same county, (3) the same taxpayer will be the principal user of both facilities, and (4) but for the rules of section 103(b)(6)(B) and paragraph (d) of this section the prior issue would be an exempt small issue.
Example 5.The facts are the same as in example (1) except that subsequently corporation X proposes to City P and City R (incorporated municipalities located in County A) that P and R each issue bonds and each build $1 million facilities to be located in Cities P and R for the use of X under terms similar to the arrangement in example (1). Each of the $1 million issues will be an exempt small issue because each proposed facility is located within a different incorporated municipality and the proceeds of the prior outstanding exempt small issue were used to construct facilities outside of an incorporated area.
Example 6.The facts are the same as in example (1) except that $95,000 of the $1 million will be used by the corporation as working capital. The bonds are an exempt small issue for the same reason as in example (1) since substantially all of the proceeds will be used for the acquisition of land and the construction of depreciable property.
Example 7.The facts are the same as in example (1) except that on November 1, 1969, County A issued $10 million of industrial development bonds, all of the proceeds of which were issued for the acquisition of land as the site for an industrial park within the meaning of section 103(b)(5) and § 1.103-9. The proceeds of the $1 million of bonds issued in 1970 will be used to construct a factory for corporation X to be located in the industrial park. The bonds issued in 1970 are industrial development bonds within the meaning of section 103(b)(2) and § 1.103-7. Since, however, the prior 1969 issue is not an issue to which section 103(b)(6)(A) applied (see paragraph (d)(3)(i) of this section), the bonds issued in 1970 are an exempt small issue for the reasons stated in example (1).
Example 8.County B enters into three separate arrangements with three unrelated corporations whereby the county will provide separate storage facilities for each corporation. The arrangement provides (1) that the county will issue bonds and loan to each corporation $250,000 of the proceeds which will be used to acquire land in the county and to construct the facilities, (2) that the rental payments by the corporations will be equal to the amount necessary to amortize the principal and pay the interest on any outstanding bonds issued by the county, and (3) that the payments by the corporations and the facilities themselves shall be the security for the industrial development bonds. For convenience, the county issues one series of bonds in the face amount of $750,000 rather than three separate series of bonds of $250,000 each. The issue is an exempt small issue under section 103(b)(6)(A) and paragraph (b)(1) of this section since the aggregate authorized face amount of the bond issue is $1 million or less, and all of the proceeds of the bond issue are to be used to acquire and improve land and acquire and construct depreciable property.
Example 9.City C and corporation Y enter into an arrangement under which C will provide a factory which Y will lease for 25 years. The arrangement provides (1) that C will issue $4 million of bonds on March 1, 1969, after making the election under section 103(b)(6)(D) and paragraph (b)(2) of this section, (2) that the proceeds of the bond issue will be used to acquire land in the city and to construct and equip a factory on such land in accordance with Y's specifications, (3) that Y will rent the facilities for 25 years at an annual rental equal to the amount necessary to amortize the principal and pay the interest on the outstanding bonds, (4) that such payments by Y and the facility itself shall be the security for the bonds, and (5) that, if corporation Y pays or incurs capital expenditures in excess of $1 million within 3 years from the date of issue which disqualify the bonds as an exempt small issue under section 103(b)(6)(D), it will either furnish funds to C to redeem such bonds at par or at a premium, or increase the rental payments to C in an amount sufficient to pay a premium interest rate. Although the bonds issued are industrial development bonds, they are an exempt small issue under section 103(b)(6)(A) by reason of the election under section 103(b)(6)(D) and paragraph (b)(2) of this section, since the aggregate authorized face amount of the bond issue is $5 million or less and all of the proceeds of the bond issue are to be used to acquire and improve land and acquire and construct depreciable property. The provisions for redemption of the bonds or an increase in rental if the bonds are disqualified as an exempt small issue under section 103(b)(6)(A) will not disqualify an otherwise valid election under section 103(b)(6)(D) and paragraph (b)(2) of this section.
Example 10.The facts are the same as in example (9) except that corporation Y subsequently proposed to the city that it build a $1 million warehouse next to the plant for the use of Y under terms similar to the factory arrangement. Assume further that the factory building was completed by March 1, 1970, and that on January 15, 1972, the proposed issue date of the subsequent bond issue, $2 million of the first exempt small issue will be outstanding. In determining the aggregate authorized face amount of the new issue, the original face amount of a prior outstanding issue must be reduced by that portion which is to be redeemed before it is added to the face amount of the new issue. Therefore, if the city issues $3 million of bonds to redeem the remaining $2 million of bonds and to construct the warehouse the bonds will be an exempt small issue under section 103(b)(6)(A) if an election is made under section 103(b)(6)(D) and paragraph (b)(2) of this section since (1) the face amount of the new issue ($3 million), plus (2) the face amount of the prior outstanding exempt small issue minus the amount of such issue to be refunded ($2 million minus $2 million), plus (3) capital expenditures during the preceding 3 years financed other than out of the proceeds of outstanding issues to which section 103(b)(6)(A) and paragraph (b) of this section applied ($2 million), do not exceed $5 million. If, however, the amount of the January 15, 1972, issue were $3 1/2 million, the issue would not qualify as an exempt small issue under section 103(b)(6)(A) and paragraph (b)(2) of this section.
Example 11.The facts are the same as in example (9), except that on June 15, 1971, Y purchases from an unrelated motor carrier business a warehouse terminal in the same city at a cost of $250,000 and tractor-trailers and other automotive equipment based at the terminal at a cost of $1 million. This subsequent expenditure by Y has the effect of making the interest on the city C bonds includable in the gross income of the holders of such bonds as of June 15, 1971, because the face amount of the March 1, 1969, issue ($4 million) plus the subsequent capital expenditures within 3 years of the date of issue ($1,250,000) exceed $5 million. (See section 103(b)(6)(D) and paragraph (b)(2)(i) of this section.)
Example 12.The facts are the same as in example (9), except that in March, 1970, Y will move $3 million of additional used machinery and equipment into the factory from its factory in another city. The expenditures for such machinery and equipment were incurred by Y more than 3 years prior to the date of issue of the bonds. The transfer of such used equipment into city C does not constitute a section 103(b)(6)(D) capital expenditure within the meaning of paragraph (b)(2)(ii) of this section since the expenditures with respect to such property were incurred more than 3 years prior to the date of issue of the bonds. Had the capital expenditures with respect to such property been incurred during the 6-year period beginning 3 years before the date of issue of the bonds and in the 3 years after such date, they would constitute section 103(b)(6)(D) capital expenditures.
Example 13.The facts are the same as in example (9), except that in March 1970, corporation Y enters into an arrangement with respect to machinery and equipment to be used in the facility. The arrangement is labeled by the parties as a lease but is treated as a sale for Federal income tax purposes. The amount treated as the purchase price of the machinery and equipment is a section 103(b)(6)(D) capital expenditure.
Example 14.On February 1, 1970, city D issues $5 million of its bonds to finance construction of an addition to the manufacturing plant of corporation Z. The bonds will be secured by the facility and lease payments to be made by Z which will be sufficient to pay the principal and interest on such bonds. Assume that the bonds qualify as an exempt small issue under section 103(b)(6)(A) pursuant to an election under section 103(b)(6)(D) and paragraph (b)(2) of this section. On February 1, 1971, D plans to issue $1 million of its bonds to construct a pollution control facility to be leased to Z for use at its manufacturing plant. The rental payments from the lease will be sufficient to pay the principal and interest on the bonds. The bonds will be secured by such facility and the lease payments. Capital expenditures for the pollution control facility will be paid or incurred beginning before February 1, 1973. Although the pollution control facility is an exempt facility under section 103(b)(4)(F) and paragraph (g) of § 1.103-8, amounts used for the pollution control facility shall be considered to be a section 103(b)(6)(D) capital expenditure and the interest on the February 1, 1970, issue will become taxable as of the date such capital expenditure began to be paid or incurred. See section 103(b)(6)(G) and paragraph (b)(2)(i) of this section.
Example 15.On February 1, 1970, City E issues $500,000 of its bonds to acquire and develop an industrial park within the meaning of section 103(b)(5) and paragraph (b) of § 1.103-9. The park consists of 100 acres and is divided into one 50 acre plantsite and 4 smaller sites. The aggregate acquisition cost of the undeveloped land is $150,000 or an average per acre cost of $1,500. Roads, sidewalks, sewers, utilities, sewage, and waste disposal facilities serving the entire industrial park cost $300,000. On September 1, 1970, E leases to corporation Y for 30 years the 50 acre plantsite (with an allocated cost of $75,000) and a railroad spur track from the railroad right of way to Y's plantsite for Y's exclusive use. The spur track was constructed using $50,000 of the proceeds of the industrial park bond issue. E also proposes to issue on September 1, 1970, $4,875,000 of its bonds to construct and equip a building on the leased plantsite to be leased to Y at an additional rental sufficient to pay the principal and interest on this issue of bonds. The September 1, 1970, issue will be an exempt small issue under section 103(b)(6)(A) pursuant to an election under section 103(b)(6)(D) and paragraph (b)(2) of this section since the sum of the amount of the second issue ($4,875,000) and the capital expenditures allocated to the plantsite ($75,000 for 50 acres of land plus $50,000 for the railroad spur tract, totaling $125,000) does not exceed $5 million. The sum of $300,000 which was spent in development of the industrial park provided facilities which will serve or benefit the users generally and hence under paragraph (b)(2)(iii) of this section is not considered to have provided facilities as to which Y will be the principal user.
Example 16.On June 1, 1970, corporation Z simultaneously enters into separate arrangements with City F and City G under which each city will issue a $5 million exempt small issue of bonds the proceeds of which will be used by Z to construct separate facilities in each city. By June 1, 1971, the facilities have been completed in the respective cities. On January 1, 1972, Cities F and G, through a valid legal proceeding, merge into a new City FG. Since in this case F and G were separate cities on June 1, 1970 (the date of the bond issues), the factories are not considered to be located in the same incorporated municipality. Accordingly, each $5 million issue by City F and G will continue to qualify as an exempt small issue.
Example 17.On June 1, 1973, City H issues an exempt small issue of $4.75 million to finance a facility of corporation S to be located in City H. On October 1, 1974, S and corporation T, previously unrelated to S, consummated a statutory merger which qualifies as a reorganization described in section 368(a)(1)(A) and thus as a transaction described in section 381(a). In the transaction, T transferred to S assets with a fair market value of $1.5 million in exchange for stock of S, $300,000 of securities of S, and $100,000 cash. On March 23, 1971, T made $400,000 of capital expenditures for an addition to its factory located in City H. For purposes of testing the H issue of June 1, 1973, such expenditures would have been section 103(b)(6)(D) capital expenditures if T and S had been related persons. Under the provisions of paragraph (b)(2)(v)(a) of this section, the exchange of $1.5 million of stock, securities, and cash by S does not constitute a section 103(b)(6)(D) capital expenditure. Since, however, S and T are treated as related persons starting 3 years prior to the date of issue of the obligations, the $400,000 of expenditures by T constitute section 103(b)(6)(D) capital expenditures. Thus, the interest on the June 1, 1973, issue of obligations would become taxable (since the $5 million limit would be exceeded) on the date of the merger.
Example 18.In 1965 City I issues $10 million of industrial development bonds to construct and equip a factory for corporation Z. In 1975 the remaining principal amount of the bonds outstanding is $4.1 million. If I issues $4.5 million of bonds to redeem the balance of the prior issue, and for other purposes, such issue cannot qualify as an exempt small issue under section 103(b)(6)(D) and paragraph (b)(2) of this section even though at the time of issue the interest on the 1965 bonds was tax-exempt since the prior issue must be one which qualified under section 103(b)(6)(A) and this section. Further, the 1975 issue will be an issue of industrial development bonds notwithstanding the provisions of paragraph (d)(2) of § 1.103-7 which provides that certain bonds issued to refund an issue of obligations issued on or before April 30, 1968 (or January 1, 1969, in certain cases) will not be so treated. Paragraph (d)(2) of § 1.103-7 is not applicable because the 1975 issue makes funds available for a purpose other than the debt service obligation on the 1965 bonds.
Example 19.In 1969 City J issues $4 million of industrial development bonds which qualify as an exempt small issue under section 103(b)(6)(A) pursuant to an election under section 103(b)(6)(D) and paragraph (b)(2) of this section. In 1971, by reason of a $2 million addition to the factory built with the proceeds of the issue, the 1969 exempt small issue loses its tax-exempt status. In 1972, the city issues a $5 million issue to redeem the prior 1969 issue. The redemption issue will not qualify as an exempt small issue since the prior 1969 issue did not continue to qualify under section 103(b)(6)(A) and this section.
[T.D. 7199, 37 FR 15494, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972; 37 FR 17826, Sept. 1, 1972, as amended by T.D. 7511, 42 FR 54285, Oct. 5, 1977; T.D. 7840, 47 FR 46084, Oct. 15, 1982; 51 FR 16299, May 2, 1986]
§ 1.103-11 Bonds held by substantial users.
(a) In general. Section 103(c) (4), (5), or (6) (relating respectively to interest on bonds to finance certain exempt facilities, interest on bonds to finance industrial parks, and the exemption for certain small issues of industrial development bonds) does not apply, as provided in section 103(c)(7), with respect to any obligation for any period during which such obligation is held either by a person who is a substantial user of the facilities with respect to which the proceeds of such obligation were used or by a related person (within the meaning of section 103(c)(6)(C) and paragraph (e) of § 1.103-10). Therefore, in such a case, interest paid on such an obligation is includable in the gross income of a substantial user (or related person) for any period during which such obligation is held by such user (or related person).
(b) Substantial user. In general, a substantial user of a facility includes any nonexempt person who regularly uses a part of such facility in his trade or business. However, unless a facility, or a part thereof, is constructed, reconstructed, or acquired specifically for a nonexempt person or persons, such a nonexempt person shall be considered to be a substantial user of a facility only if (1) the gross revenue derived by such user with respect to such facility is more than 5 percent of the total revenue derived by all users of such facility or (2) the amount of area of the facility occupied by such user is more than 5 percent of the entire usable area of the facility. Under certain facts and circumstances, where a nonexempt person has a contractual or preemptive right to the exclusive use of property or a portion of property, such person may be a substantial user of such property. A substantial user may also be a lessee or sublessee of all or any portion of the facility. A licensee or similar person may also be a substantial user where his use is regular and is not merely a casual, infrequent, or sporadic use of the facility. Absent special circumstances, individuals who are physically present on or in the facility as employees of a substantial user shall not be deemed to be substantial users.
(c) Examples. The application of section 103(c)(7) and this section are illustrated by the following examples:
Example 1.Pursuant to an arrangement with corporation X, County A issues $4 million of its bonds (an exempt small issue under section 103(c)(6)(A) pursuant to an election under section 103(c)(6)(D) and paragraph (b)(2) of § 1.103-10) and will use the proceeds to finance construction of a manufacturing facility which is to be leased to X for an annual rental of $500,000. X subleases space to a restaurant operator at an annual rental of $25,000 for the operation of a canteen and lunch counter for the convenience of X's employees. The canteen is required to be open at least 5 days each week (except holidays) from 8:30 a.m. to 5 p.m., and the lunch counter must be in operation during the noon hour. The canteen regularly sells cigarettes, candy, and soft drinks, and uses advertising displays and dispensers with product names. The space physically occupied and the amount of revenue derived by the restaurant operator are more than 5 percent of the respective amounts with respect to the entire facility. Both X and the restaurant operator are substantial users. However, absent special circumstances none of X's employees, the employees of the restaurant operator, or the customers or salesmen who regularly visit the premises to do business either with X or the restaurant operator are substantial users. Similarly, the manufacturers, distributors, and dealers of products sold in the canteen ordinarily are not substantial users.
Example 2.The facts are the same as in example (1) except that X rents food and beverage vending machines from a local dealer. The machines are regularly serviced by the local dealer under a contract with X. Title to and ownership of the machines are retained by the dealer. The local dealer is not deemed to be a substantial user if the revenue derived by such dealer from, and the space occupied by, such machines do not exceed 5 percent of the respective amounts with respect to the entire facility.
Example 3.City B proposes to issue $2 million of bonds which qualify as an exempt small issue under section 103(c)(6)(A) pursuant to an election under section 103(c)(6)(D) and paragraph (b)(2) of § 1.103-10 in order to construct a medical building for certain physicians and dentists. The facility will contain 30 offices to be leased on equal terms and for the same rental rates to each physician or dentist for use in his trade or business. Each physician or dentist will be a substantial user of the facility since the facility is being constructed specifically for such physicians and dentists. The result would be the same in the case of an office building for general commercial use.
Example 4.City C proposes to expand the airport it owns and operates with the proceeds of its bonds which qualify as bonds issued for an exempt facility under section 103(c)(4)(D) and paragraph (e) of § 1.103-8 and which are secured by a pledge of airport revenues. The airport is serviced by several commercial airlines which have long-term agreements with C for the use of runways, terminal space, and hangar and storage facilities. Each of the airlines either occupies more than 5 percent of the usable space of, or derives more than 5 percent of the revenue derived with respect to, the airport. C also leases counter and vehicle servicing and parking areas to car rental companies, space for restaurants, kiosks for the sale of newspapers and magazines, and space for the operations of a charter plane company. The latter operates its own planes, offers flying lessons and services, and stores private planes for local businesses and individuals. An airport limousine company has an exclusive franchise for passenger pickup at the terminal. Other taxi, transfer, freight, and express companies regularly deliver passengers and freight to the terminal but do not have space regularly assigned to them, nor do they have operating agreements with C. Various business concerns have advertising product displays in the terminal building. In addition to regular telephone service, coin-operated telephones, provided by the telephone company, are located throughout the terminal, at locations specified by C. None of the above exceed the 5-percent limitations of paragraph (b) of this section and the bond proceeds will not be specifically used for any of them. Only the commercial airlines, which violate the 5-percent limitations, are substantial users of the airport.
Example 5.City D issues $25 million of its revenue bonds and will use $10 million of the proceeds to finance construction of a sports facility which qualifies as an exempt facility under section 103(c)(4)(B) and paragraph (c) of § 1.103-8, $8 million to acquire and develop land as the site for an industrial park within the meaning of section 103(c)(5) and § 1.103-9, and $7 million to finance the construction of an office building to be used exclusively by the city, an exempt person. The revenues from the sports facility and the industrial park and all the facilities themselves will be the security for the bonds. The sports facility and the industrial park sites will be used in the trades of businesses of nonexempt persons. The bonds are industrial development bonds, but under the provisions of paragraph (a)(1) of § 1.103-8 and paragraph (a) of § 1.103-9, the interest on the $25 million issue will not be includable in gross income. However, the interest on bonds held shall be includable in the gross income of a substantial user of either the sports facility or the industrial park if such substantial user holds any of the obligations of the $25 million issue. The 5-percent limitations of paragraph (b) of this section are applied separately with respect to each facility.
Example 6.Authority E issues $4 million of bonds which qualify as an exempt small issue under section 103(c)(6)(A) pursuant to an election under section 103(c)(6)(D) and paragraph (b)(2) of § 1.103-10 in order to construct a bank building on the grounds of an airport. In addition, E issues $40 million to expand the airport. The bank will not derive revenue in excess of 5 percent of the revenue derived with respect to the airport nor will it occupy more than 5 percent of the usable area of such airport. The bank will be a substantial user of the bank building constructed with the proceeds of the $4 million issue since the facility was constructed specifically for the bank. However, the bank will not be a substantial user with respect to the airport because it does not exceed the 5-percent limitations of paragraph (b) of this section. Had E issued one issue of $44 million in order to expand the airport and construct a bank building, the bank would be a substantial user of the entire facility since the $44 million issue was being used to construct a facility a portion of which was specifically for the bank.
[T.D. 7199, 37 FR 15499, Aug. 3, 1972; 37 FR 16177, Aug. 11, 1972]
§ 1.103-16 Obligations of certain volunteer fire departments.
(a) General rule. An obligation of a volunteer fire department issued after December 31, 1980, shall be treated as an obligation of a political subdivision of a State for purposes of section 103(a)(1) if—
(1) The volunteer fire department is a qualified volunteer fire department within the meaning of paragraph (b) of this section, and
(2) Substantially all of the proceeds of the issue of which the obligation is a part are to be used for the acquisition, construction, reconstruction, or improvement of a fire house or fire truck used or to be used by the qualified volunteer fire department.
An obligation of a volunteer fire department shall not be treated as an obligation of a political subdivision of a State for purposes of section 103(a)(1) unless both conditions set forth in this paragraph (a) are satisfied. Thus, for example, if an obligation is issued by an ambulance and rescue squad that is a qualified volunteer fire department as required by paragraph (a)(1) of this section, but substantially all of the proceeds of the issue of which the obligation is a part are to be used for the furnishing of emergency medical services, rather than for the purposes specified in paragraph (a)(2) of this section, the obligation shall not be treated as an obligation of a political subdivision of a State for purposes of section 103(a)(1).
(b) Definition of qualified volunteer fire department. For purposes of this section, the term “qualified volunteer fire department” means an organization—
(1) That is organized and operated to provide firefighting services or emergency medical services in an area within the jurisdiction of a political subdivision, and
(2) That is required to furnish firefighting services by written agreement with the political subdivision, and
(3) That serves persons in an area within the jurisdiction of the political subdivision that is not provided with any other firefighting services.
The requirement of paragraph (b)(2) of this section that a qualified volunteer fire department be required to furnish firefighting services by written agreement with the political subdivision may be satisfied by an ordinance or statute of the political subdivision that establishes, regulates, or funds the volunteer fire department. A volunteer fire department does not fail to satisfy the requirement of pargraph (b)(3) of this section by furnishing or receiving firefighting services on an emergency basis, or by cooperative agreement with other fire departments, to or from areas outside of the area that the volunteer fire department is organized and operated to serve. The fact that tax revenues of a political subdivision served by a volunteer fire department contribute toward the support of the volunteer fire department in the form of salary, purchase of equipment, or other defrayment of expenses will not prevent the volunteer fire department from being a “qualified volunteer fire department” within the meaning of this paragraph (b). Moreover, an obligation of a volunteer fire department receiving such support may qualify as an obligation of a political subdivision within the meaning of section 103(a)(1) independently of section 103(i) and this section if the requirements of section 103(a)(1) are satisfied. See § 1.103-1(b) for rules relating to qualification under section 103(a)(1).
(c) “Substantially all” test. Substantially all of the proceeds of an issue are used for the purposes specified in paragraph (a)(2) of this section if 90 percent or more of the proceeds are so used. Thus, for example, if more than 10 percent of the proceeds of an obligation issued by a qualified volunteer fire department are used for the purchase of an ambulance or for rescue equipment not to be used in providing fire fighting services, interest on the obligation is not exempt from tax under section 103(i) and this section. In computing this percentage—
(1) Costs are allocated between providing a firehouse or firetruck and other uses of the proceeds on a pro rata basis; and
(2) The rules set forth in § 1.103-8(a)(1)(i), relating to amounts allocable to exempt and nonexempt uses and amounts chargeable to capital account, apply.
(d) Refunding issues. An obligation which is part of an issue issued by a qualified volunteer fire department after December 31, 1980, part or all of the proceeds of which issue are used directly or indirectly to pay principal, interest, call premium, or reasonable incidental costs of refunding a prior issue qualifies as an obligation of a political subdivision under section 103(i) and this section only if—
(1) The prior issue was issued by a qualified volunteer fire department;
(2) Substantially all of the proceeds of the prior issue were used for the purposes described in paragraph (a)(2) of this section;
(3) The prior issue was issued after December 31, 1980; and
(4) The refunding issue is issued not more than 180 days before the date on which the last obligation of the prior issue is discharged (within the meaning of § 1.103-13)(b)(11)).
(e) Examples. The provisions of this section may be illustrated by the following examples:
Example 1.The County M Volunteer Fire and Rescue Association provides firefighting, ambulance, and emergency medical services in County M. The board of county commissioners of County M contracts with the County M Volunteer Fire and Rescue Association for these services, and County M is not served by any other firefighting association. On August 1, 1981, the Association issues an obligation for funds to purchase a new fire truck, a new ambulance, and rescue equipment not to be used for fighting fires. Funds to be used for the purchase of the ambulance and rescue equipment constitute more than 10 percent of the proceeds of the obligation. Thus, substantially all of the proceeds of the obligations are not used for one of the purposes described in paragraph (a)(2) of this section. Although the County M Volunteer Fire and Rescue Association is a qualified volunteer fire department under paragraph (b) of this section because it provides firefighting and emergency medical services in an area within County M which is not provided with any other firefighting services and is required to provide these services by written agreement with County M, the August 1, 1981, obligation of County M Volunteer Fire and Rescue Association will not be treated as an obligation of a political subdivision of a State under section 103(i) and paragraph (a) of this section because substantially all of the proceeds of the obligation are not to be used for a purpose described in section 103(i)(l)(B) and paragraph (a)(2) of this section. Accordingly, interest on the August 1, 1981, obligation of County M Volunteer Fire and Rescue Association is not exempt from gross income under section 103(a)(1).
Example 2.County N Volunteer Fire Department provides firefighting services in County N by contract with the county, which is not served by any other firefighting association. On June 15, 1982, County N Volunteer Fire Department issues its obligation for funds to construct an addition to its firehouse to house a rescue squad, the rescue squad's vehicle, and rescue equipment not to be used in firefighting. Although the County N Volunteer Fire Department is a qualified volunteer fire department under paragraph (b) of this section, interest on its June 15, 1982, obligation will not be exempt from tax under section 103(i) and this section because the proceeds of this obligation will not be used for the purposes described in paragraph (a) of this section.
Example 3.The County O Volunteer Fire and Rescue Association provides firefighting, ambulance, and emergency medical services in County O. The board of county commissioners of County O contracts with the County O Volunteer Fire and Rescue Association for these services, and County O is not served by any other firefighting association. On September 1, 1983, the Association issues its obligations for funds to construct a new building to house its firefighting, ambulance, and rescue functions. Although the ambulance and rescue equipment will occupy space in the projected facility, the cost allocable on a pro rata basis to providing housing for the ambulance and rescue equipment represents less than 10 percent of the proceeds of the obligations. Thus, substantially all of the proceeds of the obligations are used for one of the purposes described in paragraph (a)(2) of this section. The County O Volunteer Fire and Rescue Association is a qualified volunteer fire department under paragraph (b) of this section because it provides firefighting and emergency medical services in an area within County O which is not provided with any other firefighting services and is required to provide these services by written agreement with County O. The obligations of County O Volunteer Fire and Rescue Association will be treated as obligations of a political subdivision of a State under section 103(i) and paragraph (a) of this section because the obligations are those of a qualified volunteer fire department and because substantially all of the proceeds of the obligations are to be used for a purpose described in section 103(i)(1)(B) and paragraph (a)(2) of this section. Accordingly, interest on the September 1, 1983, issue of obligations of County O Volunteer Fire and Rescue Association is exempt from gross income under section 103(a)(1).
[T.D. 7901, 48 FR 32981, July 20, 1983]
§ 1.103A-2 Qualified mortgage bond.
(a)-(j) [Reserved]
(k) Information reporting requirement—(1) In general. An issue meets the requirements of this paragraph only if the issuer in good faith attempted to meet the information reporting requirements of this paragraph. Except as otherwise provided in paragraph (k)(5)(iv) of this section, the requirements of this paragraph apply to qualified veterans' mortgage bonds issued after July 18, 1984, and to qualified mortgage bonds issued after December 31, 1984. With respect to bonds issued after December 31, 1986, see the regulations under section 149(e).
(2) Information required. (i) The issuer must, based on information and reasonable expectations determined as of the date of issue, submit on Form 8038 the information required therein; the issuer need not however, include the information required by Form 8038 that is relevant only to obligations described in section 103(l)(1) and the regulations thereunder. The information that must be submitted includes—
(A) The name, address, and employer identification number of the issuer,
(B) The date of issue,
(C) The face amount of each obligation which is part of the issue,
(D) The total purchase price of the issue,
(E) The amount allocated to a reasonably required reserve or replacement fund,
(F) The amount of lendable proceeds,
(G) The stated interest rate of each maturity,
(H) The term of each maturity,
(I) In the case of an issue of qualified mortgage bonds, whether the issuer has elected under § 6a.103A-2(i)(4)(v) to pay arbitrage to the United States,
(J) In the case of an issue of qualified mortgage bonds, the issuer's market limitation as of the date of issue (as defined in § 6a.103A-2(g)), the amount of qualified mortgage bonds that the issuer has elected not to issue under section 25(c)(2) and the regulations thereunder, and the aggregate amount of qualified mortgage bonds issued to date by the issuer during the calendar year, and
(K) In the case of an issue of qualified veterans' mortgage bonds, the issuer's State veterans limit (as defined in section 103A(o)(3)(B) and the regulations thereunder) and the aggregate amount of qualified veterans' mortgage bonds issued to date by the issuer during the calendar year and prior to the date of issue of the issue for which the Form 8038 is being submitted.
(ii) With respect to issues issued after December 31, 1984, the issuer must submit a report containing information on the borrowers of the original proceeds of such issues. The report must be filed for each reporting period in which the original proceeds of any of such issues are used to provide mortgages. The issuer is not responsible for false information provided by a borrower if the issuer did not know or have reason to know that the information was false. The report must be filed on the form prescribed by the Internal Revenue Service. If no form is prescribed, or if the form prescribed is not readily available, the issuer may use its own form provided that such form is in the format set forth in paragraph (k)(3) of this section and contains the information required by this paragraph (k)(2)(ii). The report must be titled “Qualified Mortgage Bond Information Report” or “Qualified Veterans' Mortgage Bond Information Report”, and must include the name, address, and TIN of the issuer, the reporting period for which the information is provided, and the following tables containing information concerning the borrowers of the original proceeds of the issues subject to the requirements of this paragraph (k)(2)(ii) with respect to mortgages provided during the reporting period for which the report is filed:
(A) A table titled “Number of Mortgage Loans by Income and Acquisition Cost” showing the number of mortgage loans (other than those issued in connection with qualified home improvement and rehabilitation loans) made during the reporting period according to the annualized gross income of the borrowers (categorized in the following intervals of income:
$0-$9,999 $10,000-$19,999 $20,000-$29,999 $30,000-$39,999 $40,000-$49,999 $50,000-$74,999 $75,000 or more)
and according to the acquisition cost of each residence being financed (categorized in the following intervals of acquisition cost:
$0-$19,999 $20,000-$39,999 $40,000-$59,999 $60,000-$79,999 $80,000-$99,999 $100,000-$119,999 $120,000-$149,999 $150,000-$199,999 $200,000 or more)
For each interval of income and acquisition cost the table must also be categorized according to the number of borrowers that—
(1) Did not have a present ownership interest in a principal residence at any time during the 3-year period ending on the date the mortgage is executed (i.e., satisfied the 3-year requirement) and purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not located in targeted areas,
(3) Did have a present ownership interest in a principal residence at any time during the 3-year period ending on the date the mortgage is executed (i.e., did not satisfy the 3-year requirement) and purchased residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences not located in targeted areas.
With respect to issues of qualified veterans' mortgage bonds, for each interval of income and acquisition cost the table need only be categorized according to the number of borrowers that satisfied the 3-year requirement and the number of borrowers that failed to satisfy the 3-year requirement.
(B) A table titled “Volume of Mortgage Loans by Income and Acquisition Cost” showing the total principal amount of the mortgage loans (other than qualified home improvement and rehabilitation loans) provided during the reporting period according to annualized gross income (categorized in the same intervals of income as the preceding table) and according to the acquisition cost of the residences acquired (categorized in the same acquisition cost intervals as the preceding table). For each interval of income and acquisition cost the table must also be categorized according to the total principal amount of the mortgage loans of borrowers that—
(1) Satisfied the 3-year requirement and purchased residences in targeted areas,
(2) Satisfied the 3-year requirement and purchased residences not located in targeted areas,
(3) Did not satisfy the 3-year requirement and purchased residences in targeted areas, and
(4) Did not satisfy the 3-year requirement and purchased residences not located in targeted areas.
With respect to issues of qualified verterans' mortgage bonds, for each interval of income and acquisition cost the table need only be categorized according to the total principal amount of the mortgage loans of borrowers that satisified the 3-year requirement and the total principal amount of the mortgage loans of borrowers that did not satisfy the 3-year requirement.
(C) For issues other than qualified veterans' mortgage bonds, a table titled “Mortgage Subsidy Bonds for Qualified Home Improvement and Rehabilitation Loans” showing the number of borrowers obtaining qualified home improvement loans and qualified rehabilitation loans and the total of the principal amounts of such loans; the information contained in the table must also be categorized according to whether the residences with respect to which the loans were provided are located in targeted areas.
(3) Format. (i) With respect to the report required by paragraph (k)(2)(ii) of this section, if no form is prescribed by the Internal Revenue Service, or if the prescribed form is not readily available, the issuer must submit the report in the format specified in this paragraph (k)(3).
(ii) With respect to issues of qualified mortgage bonds, the format of the report specified in this paragraph (k)(3) is the following:
Qualified Mortgage Bond Information Report Name of issuer: Address of issuer: TIN of issuer: Reporting period:
Number of Mortgage Loans by Income and Acquisition Cost
3-year requirement: Annualized gross monthly income of borrowers | Satisfied | Not Satisfied | Totals
Nontargeted area | Targeted area | Nontargeted area | Targeted area
$0 to $9,999
$10,000 to $19,999
$20,000 to $29,999
$30,000 to $39,999
$40,000 to $49,999
$50,000 to $74,999
$75,000 or more
Total
Acquisition Cost
$0 to $19,999
$20,000 to $39,999
$40,000 to $59,999
$60,000 to $79,999
$80,000 to $99,999
$100,000 to $119,999
$120,000 to $149,999
$150,000 to $199,999
$200,000 or more
Total
Volume of Mortgage Loans by Income and Acquisition Cost
3-year requirement: Annualized gross monthly income of borrowers | Satisfied | Not Satisfied | Totals
Nontargeted area | Targeted area | Nontargeted area | Targeted area
$0 to $9,999
$10,000 to $19,999
$20,000 to $29,999
$30,000 to $39,999
$40,000 to $49,999
$50,000 to $74,999
$75,000 or more
Total
Acquisition Cost
$0 to $19,999
$20,000 to $39,999
$40,000 to $59,999
$60,000 to $79,999
$80,000 to $99,999
$100,000 to $119,999
$120,000 to $149,999
$150,000 to $199,999
$200,000 or more
Total
Mortgage Subsidy Bonds for Qualified Home Improvement and Rehabilitation Loans
Nontargeted area | Targeted area | Totals
Number of qualified home improvement loans
Volume of qualified home improvement loans
Number of qualified rehabilitation loans
Volume of qualified rehabilitation loans
(iii) The format of the report specified in this paragraph (k)(3) for qualified veterans' mortgage bonds is the following:
Qualified Veterans' Mortgage Bond Information Report Name of issuer: Address of issuer: TIN of issuer: Reporting period:
Number of Mortgage Loans by Income and Acquisition Cost
3-year requirement: annualized gross monthly income of borrowers | Satisfied | Not satisfied | Totals
$0 to $9,999
$10,000 to $19,999
$20,000 to $29,999
$30,000 to $39,999
$40,000 to $49,999
$50,000 to $74,999
$75,000 or more
Total
Acquistion Cost
$0 to $19,999
$20,000 to $39,999
$40,000 to $59,999
$60,000 to $79,999
$80,000 to $99,999
$100,000 to $119,999
$120,000 to $149,999
$150,000 to $199,999
$200,000 or more
Total
Number of Mortgage Loans by Income and Acquisition Cost
3-year requirement: annualized gross monthly income of borrowers | Satisfied | Not satisfied | Totals
$0 to $9,999
$10,000 to $19,999
$20,000 to $29,999
$30,000 to $39,999
$40,000 to $49,999
$50,000 to $74,999
$75,000 or more
Total
Acquistion Cost
$0 to $19,999
$20,000 to $39,999
$40,000 to $59,999
$60,000 to $79,999
$80,000 to $99,999
$100,000 to $119,999
$120,000 to $149,999
$150,000 to $199,999
$200,000 or more
Total
(4) Definitions and special rules. (i) For purposes of this paragraph the term “annualized gross income” means the borrower's gross monthly income muliplied by 12. Gross monthly income is the sum of monthly gross pay, any additional income from investments, pensions, Veterans Administration (VA) compensation, part-time employment, bonuses, dividends, interest, current overtime pay, net rental income, etc., and other income (such as alimony and child support, if the borrower has chosen to disclose such income). Information with respect to gross monthly income may be obtained from available loan documents, e.g., the sum of lines 23D and 23E on the Application for VA or FmHA Home Loan Guaranty or for HUD/FHA Insured Mortgage (VA Form 26-1802a, HUD 92900, Jan. 1982), or the total line from the Gross Monthly Income section of FHLMC Residential Loan Application form (FHLMC 65 Rev. 8/78). With respect to obligations issued prior to October 1, 1985, issuers may submit data based on annualized gross income or, instead, based on the adjusted income (as defined in § 1.167(k)-3(b)(3)) of the mortgagor's family for the previous calendar year. If data is submitted based on adjusted income, the issuer must note this fact in the report.
(ii) For purposes of this paragraph, the term “reporting period” means the following periods:
(A) The period beginning January 1, 1985, and ending on September 30, 1985,
(B) The period beginning on October 1, 1985, and ending on June 30, 1986, and
(C) After June 30, 1986, each 1-year period beginning July 1 and ending June 30.
(iii) See the regulations under section 103(l) for the definitions of the terms “date of issue”, “maturity”, and “term of issue”.
(iv) For purposes of this paragraph, verification of information concernig a borrower's gross monthly income with other available information concerning the borrower's income (e.g., Federal income tax returns) is not required. In determining whether a borrower acquiring a residence in a targeted area satisfies the 3-year requirement, the issuer may rely on a statement signed by the borrower.
(5) Time for filing. (i) The report required by paragraph (k)(2)(i) of this section shall be filed not later than the 15th day of the second calendar month after the close of the calendar quarter in which the obligation is issued. The statement may be filed at any time before such date but must be complete based on facts and reasonable expectations as of the date of issue. The statement need not be amended to report information learned subsequent to the date of issue or to reflect changed circumstances with respect to the issuer.
(ii) The report required by paragraph (k)(2)(ii) of this section (relating to use of proceeds) shall be filed not later than the 15th day of the second calendar month after the close of the reporting period, except that the report for the reporting period ending September 30, 1985, is due not later than February 15, 1986. The report may be filed at any time before such date but must be complete based on facts and reasonable expectations as of the date the report is filed. The report need not be amended to reflect information learned subsequent to the date the report is filed or to reflect changed circumstances with respect to any borrower.
(iii) The Commissioner may grant an extension of time for the filing of a report required by paragraph (k)(2) (i) or (ii) of this section if there is reasonable cause for the failure to file such report in a timely fashion.
(iv) An issue of qualified veterans' mortgage bonds issued after July 18, 1984, and prior to January 1, 1985, will be treated as satisfying the information reporting requirement of this paragraph if a Form 8038 with respect to the issue is properly filed not later than February 15, 1985; the report described in paragraph (k)(2)(ii) of this section need not be filed with respect to such issues.
(6) Place for filing. The reports required by paragraph (k)(2) (i) and (ii) of this section are to be filed at the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255.
(l) Policy statement—(1) In general. (i) For obligations issued after December 31, 1984, an issue meets the requirements of this paragraph only if the applicable elected representative of the governmental unit which is the issuer (or on behalf of which the issuing authority is empowered to issue qualified mortgage bonds) has published (after a public hearing following reasonable public notice) the report described in paragraph (l)(3) of this section by the last day of the year preceding the year in which such issue is issued and a copy of such report has been submitted to the Commissioner on or before such last day. The Commissioner may grant an extension of time for publishing and filing the report if there is reasonable cause for the failure to publish or file such report in a timely fashion. The requirements of this paragraph will be treated as met if the issuer in good faith attempted to meet the policy statement requirements of this paragraph.
(ii) With respect to reports required by paragraph (l)(1)(i) of this section to be published and submitted to the Commissioner not later than December 31, 1984, the Commissioner has determined that there is reasonable cause for the failure to publish or file such reports in a timely fashion; such a report will be considered published and filed in a timely fashion if, not later than March 11, 1985, the report is published (after a public hearing following reasonable public notice) and a copy is submitted to the Commissioner. In addition, any report submitted not later than December 31, 1984, with respect to which an issuer in good faith attempted to satisfy the requirements of section 103A(j)(5) shall be treated as substantially satisfying the requirements of this paragraph. For example, with respect to a report submitted not later than December 31, 1984, an issuer shall not be treated as failing to satisfy the requirements of section 103A(j)(5) based on the fact that (A) the notice of public hearing failed to state the manner in which affected residents may obtain copies of the proposed report prior to the hearing, or (B) the proposed report was not available prior to or at the public hearing. With respect to reports required to be published and submitted to the Commissioner not later than December 31, 1986, the Commissioner has determined that there is a reasonable cause for the failure to publish and file such reports in a timely fashion; such reports will be considered published and filed in a timely fashion if, not later than December 31, 1987, the report is published (after having a public hearing following reasonable public notice) and a copy is submitted to the Commissioner.
(2) Definitions and special rules. (i) In the case of an issuer that issues qualified mortgage bonds on behalf of one or more governmental units, a single report may be filed provided that such report is signed (A) by the applicable elected representative of each governmental unit on whose behalf obligations have been issued during any preceding calendar year or (B) by the Governor of the State in which the issuer is located.
(ii) See notice 103(k)(2)(E) and the regulations thereunder for the definition of the term “applicable elected representative”.
(iii) In the case of qualified mortgage bonds issued by, or on behalf of, a governmental unit that did not reasonably expect during the preceding calendar year to issue (or have issued on its behalf by any other issuer) qualified mortgage bonds during the current calendar year, the requirements of this paragraph will be treated as met if the applicable governmental unit which is the issuer (or on behalf of which the issuing authority is empowered to issue qualified mortgage bonds) has published (after a public hearing following reasonable public notice) the report described in paragraph (l)(3) of this section prior to the issuance of any qualified mortgage bonds and a copy of such report has been submitted to the Commissioner prior to such issuance.
(iv) For purposes of this paragraph a report will be considered to be “published” when the applicable elected representative of the governmental unit has made copies of the report available for distribution to the public. Reasonable public notice of the manner in which copies of the report may be obtained must be provided; such notice may be included as part of the public notice required by paragraph (l)(4) of this section.
(3) Report. (i) A report is described in this paragraph (l)(3) if it contains the issuer's name, TIN, and the title “Policy Report Under Section 103A” stated on the cover page of the report and if it includes—
(A) A statement of the policies of the issuer with respect to housing, development, and low-income housing assistance which such issuer is to follow in issuing qualified mortgage bonds and mortgage credit certificates, and
(B) An assessment of the compliance of such issuer during the 1-year period preceding the date of the report with—
(1) The statement of policy on qualified mortgage bonds and mortgage credit certificates that was set forth in the previous report, if any, of the issuer, and
(2) The intent of Congress that State and local governments are expected to use their authority to issue qualified mortgage bonds and mortgage credit certificates to the greatest extent feasible (taking into account prevailing interest rates and conditions in the housing market) to assist lower income families to afford home ownership before assisting higher income families.
(ii) For example, a report described in this paragraph (l)(3) may (but is not required to) contain—
(A) A specific statement of the policies with respect to housing, development, and low-income housing assistance which the issuer is to follow in issuing qualified mortgage bonds and mortgage credit certificates, including, for example, a statement as to—
(1) With respect to housing policies, (i) whether the proceeds will be used to provide financing for the acquisition of residences, to provide qualified home improvement loans, or to provide qualified rehabilitation loans; (ii) whether all or a portion of the proceeds will be targeted to new, existing, or any other particular class or type of housing; (iii) how the existence of a need or absence of a need for such targeting has been determined; (iv) the method by which the proceeds will be targeted; (v) any other pertinent information relating to the issuer's housing policies; and (vi) how the housing policies relate to the issuer's development and low-income housing assistance policies;
(2) With respect to development policies, (i) whether all or a portion of the proceeds will be targeted to specific areas (including targeted areas as described in § 6a.103A-2(b)(3)); (ii) a description of the areas to which the proceeds will be targeted; (iii) the reasons for selecting such areas; (iv) whether proceeds targeted to each area are to be used to finance redevelopment of existing housing or new construction; (v) any other pertinent information relating to the issuer's development policies; and (vi) how the development policies relate to the issuer's low-income housing assistance policies; and
(3) With respect to low-income housing assistance policies, (i) whether all or a portion of the proceeds will be targeted to low-income (i.e., 80 percent of median income), moderate-income (i.e., 100 percent of median income), or any other class of borrowers; (ii) the method by which the proceeds will be targeted to such borrowers; and (iii) any other pertinent information relating to the issuer's low-income housing assistance policies;
(B) An assessment of the compliance of the governmental unit or issuing authority during the twelve-month period ending with the date of the report with the statement of housing, development, and low-income housing assistance policies with respect to qualified mortgage bonds and mortgage credit certificates that were set forth in the report, if any, published in the preceding year with respect to such governmental unit, including, for example, a statement as to whether the governmental unit or issuing authority successfully implemented its policies and, if not, an analysis of the reasons for such failure; and
(C) An assessment of the compliance of the governmental unit or issuing authority during the twelve-month period ending with the date of the report with the intent of Congress that State and local governments are expected to use their authority to issue qualified mortgage bonds and mortgage credit certificates to the greatest extent feasible (taking into account prevailing interest rates and conditions in the housing market) to assist lower income families to afford home ownership before assisting higher income families, including, for example, a description of (1) the method used by the governmental unit or issuing authority to distribute proceeds, (2) whether and how that method enabled the governmental unit or issuing authority to assist lower income families before higher income families, and (3) any income levels that have been defined and used by the governmental unit or issuing authority in connection with distribution of the proceeds (no specific definition of lower income and higher income is imposed on governmental units or issuing authorities).
(iii) For purposes of the assessments of compliance required by paragraph (l)(3)(i)(B) of this section to be included in the report, the “date of the report” means June 30. For purposes of the report required to be filed prior to January 1, 1986, an issuer need not perform these assessments of compliance with respect to any period prior to January 1, 1985.
(iv) An issuer that fails to establish policies with respect to the criteria provided in paragraph (l)(3)(i) of this section will not be treated as failing to satisfy the requirements of this paragraph. Thus, for example, an issuer may state in its report that none of the proceeds of the issue will be targeted to specific areas. Similarly, an issuer that fails to successfully implement its policies will not be treated as failing to satisfy the requirements of this paragraph.
(4) Public hearing. The public hearing required by paragraph (l)(1) of this section means a forum providing a reasonable opportunity for interested individuals to express their views, both orally and in writing, on the report that the applicable representative proposes to publish to satisfy the requirements of this paragraph (l). A public hearing held prior to January 1, 1985, will not fail to satisfy the requirements of this paragraph (l)(4) merely because the proposed policy statement was not available prior to the public hearing. In general, a governmental unit may select its own procedure for the hearing, provided that interested individuals have a reasonable opportunity to express their views. Thus, it may impose reasonable requirements on persons who wish to participate in the hearing, such as a requirement that persons desiring to speak at the hearing so request in writing at least 24 hours before the hearing or that they limit their oral remarks to 10 minutes. For purposes of this public hearing requirement, it is not necessary that the applicable elected representative who will publish the report be present at the hearing, that a report on the hearing be submitted to that official, or that State administrative procedural requirements for public hearings in general be observed. However, compliance with such State procedural requirements (except those at variance with a specific requirement set forth in this paragraph) will generally assure that the hearing satisfies the requirements of this paragraph. The hearing may be conducted by any individual appointed or employed to perform such function by the governmental unit, its agencies, or by the issuer. Thus, for example, for a report to be issued by an issuing authority that acts on behalf of a county, the hearing may be conducted by the issuing authority, the county, or an appointee or employee of either.
(5) Reasonable public notice. (i) The reasonable public notice required by paragraph (l)(1) of this section means published notice which is reasonably designed to inform residents of the geographical area within the jurisdiction of the governmental unit that will publish the report. The notice must state the time and place for the hearing and contain the information required by paragraph (l)(5)(ii) of this section. Notice is presumed reasonable if published no fewer than 14 days before the hearing. Notice is presumed reasonably designed to inform affected residents only if published in one or more newspapers of general circulation available to residents of that locality or if announced by radio or televison broadcast to those residents.
(ii) The notice of hearing described in this paragraph (l)(5) must state—
(A) The time and place for the hearing,
(B) Any applicable limitations regarding participation in the hearing,
(C) With respect to any notice of hearing published after December 31, 1984, the manner in which affected residents may obtain copies of the proposed report prior to the hearing, and
(D) With respect to any notice of hearing published after December 31, 1984, that the hearing will involve the issuer's policies with respect to housing, development, and low-income housing assistance which the issuer is to follow in issuing qualified mortgage bonds and mortgage credit certificates.
(6) Procedure for public hearings of multiple jurisdiction issuers. In the case of an issuer that issues qualified mortgage bonds on behalf of two or more governmental units (“multiple jurisdiction issuer”), each governmental unit on whose behalf the issuer reasonably expects to issue qualified mortgage bonds during the succeeding calendar year must hold a public hearing following reasonable public notice prior to the publication of the report required by this paragraph. A multiple jurisdiction issuer may hold a combined hearing as long as the combined hearing is a joint undertaking that provides all residents of the participating governmental units (i.e., each governmental unit on whose behalf qualified mortgage bonds were issued by the authority and each governmental unit on whose behalf the authority reasonably expects to issue qualified mortgage bonds during the succeeding calendar year) a reasonable opportunity to be heard. The location of any combined hearing is presumed to provide a reasonable opportunity for all affected residents to be heard if it is no farther than 100 miles from the seat of government of each participating governmental unit beyond whose geographic jurisdiction the hearing is conducted.
(7) Place for filing. The report is to be filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255.
(m) State certification requirements—(1) In general. An issue meets the requirements of this paragraph only if the issuer in good faith attempted to meet the State certification requirements of this paragraph. The requirements of this paragraph apply to obligations issued after December 31, 1984; see section 149(e) and the regulations thereunder with respect to obligations issued after December 31, 1986.
(2) Certification. (i) An issue satisfied the requirements of section 103A(j)(4) and this paragraph (m)(2) only if the State official designated by law (or, if there is no State official, the Governor) certifies on or before the later of the date of issue or October 3, 1985, following a request for such certification by the issuer, that, as of the date the certification is executed, the issue meets the requirements of section 103A(g) and the regulations thereunder (relating to volume limitation). In the case of any constitutional home rule city, the certification shall be made by the chief executive officer of the city. To the extent consistent with State and local law, the Governor (or the chief executive officer of any constitutional home rule city) may delegate the responsibility to execute the certification required by this paragraph.
(ii) The certifying official need not perform an independent investigation in order to determine whether the issue meets the requirements of section 103A(g). In determining the aggregate amount of qualified mortgage bonds previously issued by an issuer during a calendar year, the certifying official may rely on copies of the reports submitted, to date, by the issuer pursuant to section 103A(j)(3) for other issues of qualified mortgage bonds issued during that year and copies of any elections previously made pursuant to section 25(c)(2) not to issue qualified mortgage bonds, together with an affidavit executed by an officer of the issuer responsible for issuing the bonds stating that the issuer has not, to date during the calendar year, issued any other qualified mortgage bonds, the amount, if any, of the issuer's market limitation that it has, to date during the calendar year, surrendered to other issuing authorities, and that it has not, to date during the calendar year, made any other elections not to issue qualified mortgage bonds. If, based on such information, the certifying official determines that, as of the date the certification is executed, the issue will not exceed the issuer's market limitation for the year, the official may certify that the issue meets the requirements of section 103A(g).
(3) Special rule. If 15 days elapse after the issuer files a proper request for the certification described in paragraph (m)(2) of this section and the issuer has not received from the State official designated by law (or, if there is no State official, the Governor) certification that the issue meets the requirements of section 103A(g) and § 6a.103A-2(g) or, in the alternative, a statement that the issue does not meet such requirements, the issuer may, instead, submit an affidavit executed by an officer of the issuer responsible for issuing the bonds stating that—
(i) The issue meets the requirements of section 103(A)(g) and § 6a.103A-2(g),
(ii) At least 15 days before the execution of the affidavit the issuer filed a proper request for the certification described in paragraph (m)(2) of this section, and
(iii) The State official designated by law (or, if there is no State official, the Governor) has not provided the certification described in paragraph (m)(2) of this section.
In the case of obligations issued prior to October 4, 1985 the preceding sentence shall be applied by substituting “30 days” for “15 days”. For purposes of this paragraph, a request for certification is proper if the request includes the reports and affidavits described in paragraph (m)(2)(ii) of this section.
(4) Filing. The certification (or affidavit) required by this paragraph shall be filed with the Internal Revenue Service Center, Philadelphia, PA 19255. The certification (or affidavit) shall be submitted with the Form 8038 required to be filed by section 103A(j)(3) and paragraph (k) of this § 1.103A-2. The Commissioner may grant an extension of time for filing the certification (or affidavit) if there is a reasonable cause for the failure to file such statement in a timely fashion.
(5) Effect of certification. The fact that an issuer obtains the certification (or affidavit) described in this paragraph does not ensure that the requirements of paragraph (g) of § 6a.103A-2 are met. Obligations that do not meet the requirements of paragraph (g) of § 6a.103A-2 are not described in section 103(a).
[T.D. 8049, 50 FR 35542, Sept. 3, 1985, as amended by T.D. 8129, 52 FR 7410, Mar. 11, 1987]
§ 1.104-1 Compensation for injuries or sickness.
(a) In general. Section 104(a) provides an exclusion from gross income with respect to certain amounts described in paragraphs (b), (c), (d) and (e) of this section, which are received for personal injuries or sickness, except to the extent that such amounts are attributable to (but not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year. See section 213 and the regulations thereunder.
(b) Amounts received under workmen's compensation acts. Section 104(a)(1) excludes from gross income amounts which are received by an employee under a workmen's compensation act (such as the Longshoremen's and Harbor Workers' Compensation Act, 33 U.S.C., c. 18), or under a statute in the nature of a workmen's compensation act which provides compensation to employees for personal injuries or sickness incurred in the course of employment. Section 104(a)(1) also applies to compensation which is paid under a workmen's compensation act to the survivor or survivors of a deceased employee. However, section 104(a)(1) does not apply to a retirement pension or annuity to the extent that it is determined by reference to the employee's age or length of service, or the employee's prior contributions, even though the employee's retirement is occasioned by an occupational injury or sickness. Section 104(a)(1) also does not apply to amounts which are received as compensation for a nonoccupational injury or sickness nor to amounts received as compensation for an occupational injury or sickness to the extent that they are in excess of the amount provided in the applicable workmen's compensation act or acts. See, however, §§ 1.105-1 through 1.105-5 for rules relating to exclusion of such amounts from gross income.
(c) Damages received on account of personal physical injuries or physical sickness—(1) In general. Section 104(a)(2) excludes from gross income the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness. Emotional distress is not considered a physical injury or physical sickness. However, damages for emotional distress attributable to a physical injury or physical sickness are excluded from income under section 104(a)(2). Section 104(a)(2) also excludes damages not in excess of the amount paid for medical care (described in section 213(d)(1)(A) or (B)) for emotional distress. For purposes of this paragraph (c), the term damages means an amount received (other than workers' compensation) through prosecution of a legal suit or action, or through a settlement agreement entered into in lieu of prosecution.
(2) Cause of action and remedies. The section 104(a)(2) exclusion may apply to damages recovered for a personal physical injury or physical sickness under a statute, even if that statute does not provide for a broad range of remedies. The injury need not be defined as a tort under state or common law.
(3) Effective/applicability date. This paragraph (c) applies to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after January 23, 2012. Taxpayers also may apply these final regulations to damages paid pursuant to a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, and received after August 20, 1996. If applying these final regulations to damages received after August 20, 1996, results in an overpayment of tax, the taxpayer may file a claim for refund before the period of limitations under section 6511 expires. To qualify for a refund of tax on damages paid after August 20, 1996, under a written binding agreement, court decree, or mediation award entered into or issued after September 13, 1995, a taxpayer must meet the requirements of section 1605 of the Small Business Job Protection Act of 1996, Public Law 104-188 (110 Stat. 1838).
(d) Accident or health insurance. Section 104(a)(3) excludes from gross income amounts received through accident or health insurance for personal injuries or sickness (other than amounts received by an employee, to the extent that such amounts (1) are attributable to contributions of the employer which were not includible in the gross income of the employee, or (2) are paid by the employer). Similar treatment is also accorded to amounts received under accident or health plans and amounts received from sickness or disability funds. See section 105(e) and § 1.105-5. If, therefore, an individual purchases a policy accident or health insurance out of his own funds, amounts received thereunder for personal injuries or sickness are excludable from his gross income under section 104(a)(3). See, however, section 213 and the regulations thereunder as to the inclusion in gross income of amounts attributable to deductions allowed under section 213 for any prior taxable year. Section 104(a)(3) also applies to amounts received by an employee for personal injuries or sickness from a fund which is maintained exclusively by employee contributions. Conversely, if an employer is either the sole contributor to such a fund, or is the sole purchaser of a policy of accident or health insurance for his employees (on either a group or individual basis), the exclusion provided under section 104(a)(3) does not apply to any amounts received by his employees through such fund or insurance. If the employer and his employees contribute to a fund or purchase insurance which pays accident or health benefits to employees, section 104(a)(3) does not apply to amounts received thereunder by employees to the extent that such amounts are attributable to the employer's contributions. See § 1.105-1 for rules relating to the determination of the amount attributable to employer contributions. Although amounts paid by or on behalf of an employer to an employee for personal injuries or sickness are not excludable from the employee's gross income under section 104(a)(3), they may be excludable therefrom under section 105. See §§ 1.105-1 through 1.105-5, inclusive. For treatment of accident or health benefits paid to or on behalf of a self- employed individual by a trust described in section 401(a) which is exempt under section 501(a) or under a plan described in section 403(a), see paragraph (g) of § 1.72-15.
(e) Amounts received as pensions, etc., for certain personal injuries or sickness. (1) Section 104(a)(4) excludes from gross income amounts which are received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country, or in the Coast and Geodetic Survey, or the Public Health Service. For purposes of this section, that part of the retired pay of a member of an armed force, computed under formula No. 1 or 2 of 10 U.S.C. 1401, or under 10 U.S.C. 1402(d), on the basis of years of service, which exceeds the retired pay that he would receive if it were computed on the basis of percentage of disability is not considered as a pension, annuity, or similar allowance for personal injury or sickness, resulting from active service in the armed forces of any country, or in the Coast and Geodetic Survey, or the Public Health Service (see 10 U.S.C. 1403 (formerly 37 U.S.C. 272(h), section 402(h) of the Career Compensation Act of 1949)). See paragraph (a)(3)(i)(a) of § 1.105-4 for the treatment of retired pay in excess of the part computed on the basis of percentage of disability as amounts received through a wage continuation plan. For the rules relating to certain reduced uniformed services retirement pay, see paragraph (c)(2) of § 1.122-1. For rules relating to a waiver by a member or former member of the uniformed services of a portion of disability retired pay in favor of a pension or compensation receivable under the laws administered by the Veterans Administration (38 U.S.C. 3105), see § 1.122-1(c)(3). For rules relating to a reduction of the disability retired pay of a member or former member of the uniformed services under the Dual Compensation Act of 1964 (5 U.S.C. 5531) by reason of Federal employment, see § 1.122-1(c)(4).
(2) Section 104(a)(4) excludes from gross income amounts which are received by a participant in the Foreign Service Retirement and Disability System in a taxable year of such participant ending after September 8, 1960, as a disability annuity payable under the provisions of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C. 1081; 60 Stat. 1021). However, if any amount is received by a survivor of a disabled or incapacitated participant, such amount is not excluded from gross income by reason of the provisions of section 104(a)(4).
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 5070, Apr. 14, 1964; T.D. 7043, 35 FR 8477, June 2, 1970; T.D. 9573, 77 FR 3107, Jan. 23, 2012]
§ 1.105-1 Amounts attributable to employer contributions.
(a) In general. Under section 105(a), amounts received by an employee through accident or health insurance for personal injuries or sickness must be included in his gross income to the extent that such amounts (1) are attributable to contributions of the employer which were not includible in the gross income of the employee, or (2) are paid by the employer, unless such amounts are excluded therefrom under section 105(b), (c), or (d). For purposes of this section, the term “amounts received by an employee through an accident or health plan” refers to any amounts received through accident or health insurance, and also to any amounts which, under section 105(e), are treated as being so received. See § 1.105-5. In determining the extent to which amounts received for personal injuries or sickness by an employee through an accident or health plan are subject to the provisions of section 105(a), rather than section 104(a)(3), the provisions of paragraphs (b), (c), (d), and (e) of this section shall apply. A self-employed individual is not an employee for purposes of section 105 and §§ 1.105-1 through 1.105-5. See paragraph (g) of § 1.72-15. Thus, such an individual will not be treated as an employee with respect to benefits described in section 105 received from a plan in which he participates as an employee within the meaning of section 401(c)(1) at the time he, his spouse, or any of his dependents becomes entitled to receive such benefits.
(b) Noncontributory plans. All amounts received by employees through an accident or health plan which is financed solely by their employer, either by payment of premiums on an accident or health insurance policy (whether on a group or individual basis), by contributions to a fund which pays accident or health benefits, or by direct payment of the benefits under the plan, are subject to the provisions of section 105(a), except to the extent that they are excludable under section 105(b), (c), or (d). This rule may be illustrated by the following examples:
Example 1.Employer A maintains a plan for his employees which provides that he will continue to pay regular wages to employees who are absent from work due to sickness or personal injuries. Employees make no contributions to the plan and all benefits are paid by the employer. Amounts received by employees under the plan are subject to section 105(a), and must be included in gross income unless excluded therefrom under section 105(b), (c), or (d).
Example 2.Pursuant to a State nonoccupational disability benefits law, employer B maintains an accident and health plan for his employees. Although under the State law B is authorized to withhold from his employees' wages a specified amount for employee contributions to the State fund, in actual practice B does not so withhold and makes all contributions out of his own funds. All amounts received by B's employees from the State fund are subject to section 105(a), and must be included in gross income unless excluded therefrom under section 105 (b), (c), or (d).
(c) Contributory plans. (1) In the case of amounts received by an employee through an accident or health plan which is financed partially by his employer and partially by contributions of the employee, section 105(a) applies to the extent that such amounts are attributable to contributions of the employer which were not includible in the employee's gross income. The portion of such amounts which is attributable to such contributions of the employer shall be determined in accordance with paragraph (d) of this section in the case of an insured plan, or paragraph (e) of this section in the case of a noninsured plan. As used in this section, the phrase “contributions of the employer” means employer contributions which were not includible in the gross income of the employee. See section 106 for the exclusion from an employee's gross income of employer contributions to accident or health plans.
(2) A separate determination of the portion of the amounts received under the accident or health plan which is attributable to the contributions of the employer shall be made with respect to each class of employees in any case where the plan provides that some classes of covered employees contribute but others do not, or that the employer will make different contributions for different classes of employees, or that different classes of employees will make different contributions, and where in any such case both the contributions of the employer on account of each such class of employees and the contributions of such class of employees can be ascertained. For example, if employees contribute during the first year of employment but not thereafter, there will have to be a separate determination for first year employees, provided that the amount of the contributions of the employer on account of first-year employees and the contributions of such first-year employees can be ascertained for the required periods to apply the rules of paragraph (d) or (e) of this section. If in such a case the contributions of the employer to the plan on account of first-year employees are not distinguishable from his other contributions to the plan, then the determination shall be made for all employees under the plan, and such determination shall be used by all employees under the plan.
(3) Except as provided in paragraph (c)(2) of § 1.72-15, if the plan provides accident or health benefits as well as other benefits for the employees, and if the respective contributions made by the employer and the employees to provide the accident or health benefits cannot be ascertained, the determination of the portion of the accident or health benefits received under such plan which is attributable to the contributions of the employer shall be made in accordance with the rules of paragraph (d) or (e) of this section on the basis of the contributions of the employer and of the employees to the entire plan.
(4) A determination of the portion attributable to the contributions of the employer, once made in accordance with the rules of this section, shall as to such portion be used for all purposes. For example, if an employee receives amounts under a wage continuation plan during the month of January and terminates his services during February, the portion of such amounts which is attributable to the contributions of the employer may be determined in order to provide the employee with such information at the time he is provided his Form W-2. The determination made for such purpose will also be used by the employee to report his income for his taxable year in which such amounts are received, without regard to the experience under the plan for the rest of the year.
(d) Insured plans—(1) Individual policies. If an amount is received from an insurance company by an employee under an individual policy of accident or health insurance purchased by contributions of the employer and the employee, the portion of the amount received which is attributable to the employer's contributions shall be an amount which bears the same ratio to the amount received as the portion of the premiums paid by the employer for the current policy year bears to the total premiums paid by the employer and the employee for that year. This rule may be illustrated by the following example:
Example.Employer A maintains a plan whereby he pays two-thirds of the annual premium cost on individual policies of accident and health insurance for his employees. The remainder of each employee's premium is paid by a payroll deduction from the wages of the employee. The annual premium for employee X is $24, of which $16 is paid by the employer. Thus, 16/24 or two-thirds of all amounts received by X under such insurance policy are attributable to the contributions of the employer and are subject to section 105(a), and the remaining one-third of such amounts is excludable from X's gross income under section 104(a)(3).
(2) Group policies. If the accident or health coverage is provided under or is a part of a group insurance policy purchased by contributions of the employer and of the employees, and the net premiums for such coverage for a period of at least three policy years are known at the beginning of the calendar year, the portion of any amount received by an employee which is attributable to the contributions of the employer for such coverage shall be an amount which bears the same ratio to the amount received as the portion of the net premiums contributed by the employer for the last three policy years which are known at the beginning of the calendar year, bears to the total of the net premiums contributed by the employer and all employees for such policy years. If the net premiums for such coverage for a period of at least three policy years are not known at the beginning of the calendar year but are known for at least one policy year, such determination shall be made by using the net premiums for such coverage which are known at the beginning of the calendar year. If the net premiums for such coverage are not known at the beginning of the calendar year for even one policy year, such determination shall be made by using either (i) a reasonable estimate of the net premiums for the first policy year, or (ii) if the net premiums for a policy year are ascertained during the calendar year, by using such net premiums. These rules may be illustrated by the following example:
Example.An employer maintains a plan under which a portion of the cost of a group policy of accident and health insurance for his employees is paid through payroll deductions from wages of the employees. The remainder of the cost is borne by the employer. The policy year begins on November 1 and ends on October 31. The net premium for the policy year ended October 31, 1954, is not known on January 1, 1955, because certain retroactive premium adjustments, such as dividends and credits, are not determinable until after January 1. Therefore, for purposes of this computation the last three policy years are the policy years ended October 31, 1951, 1952, and 1953. The net premium for the policy year ended October 31, 1953, was $8,000, of which the employer contributed $3,000; the net premium for the policy year ended October 31, 1952, was $9,000, of which the employer contributed $3,500; and the net premium for the policy year ended October 31, 1951, was $7,000, of which the employer contributed $1,500. The portion of any amount received under the policy by an employee at any time during 1955 which is attributable to the contributions of the employer is to be determined by using the ratio of $8,000 ($3,000 plus $3,500 plus $1,500) to $24,000 ($8,000 plus $9,000 plus $7,000. Thus, $8,000 ÷ $24,000 or one-third, of the amounts received by an employee at any time during 1955 is attributable to contributions of the employer.
(e) Noninsured plans. If the accident or health benefits are a part of a noninsured plan to which the employer and the employees contribute, and such plan has been in effect for at least three years before the beginning of the calendar year, the portion of the amount received which is attributable to the employer's contributions shall be an amount which bears the same ratio to the amount received as the contributions of the employer for the period of three calendar years next preceding the year of receipt bear to the total contributions of the employer and all the employees for such period. If, at the beginning of the calendar year of receipt, such plan has not been in effect for three years but has been in effect for at least one year, such determination shall be based upon the contributions made during the 1-year or 2-year period during which the plan has been in effect. If such plan has not been in effect for one full year at the beginning of the calendar year of receipt, such determination may be based upon the portion of the year of receipt preceding the time when the determination is made, or such determination may be made periodically (such as monthly or quarterly) and used throughout the succeeding period. For example, if an employee terminates his services on April 15, 1955, and 1955 is the first year the plan has been in effect, such determination may be based upon the contributions of the employer and the employees during the period beginning with January 1 and ending with April 15, or during the month of March, or during the quarter consisting of January, February, and March.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6722, 29 FR 5071, Apr. 14, 1964]
§ 1.105-2 Amounts expended for medical care.
Section 105(b) provides an exclusion from gross income with respect to the amounts referred to in section 105(a) (see § 1.105-1) which are paid, directly or indirectly, to the taxpayer to reimburse him for expenses incurred for the medical care (as defined in section 213(e)) of the taxpayer, his spouse, and his dependents (as defined in section 152). However, the exclusion does not apply to amounts which are attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year. See section 213 and the regulations thereunder. Section 105(b) applies only to amounts which are paid specifically to reimburse the taxpayer for expenses incurred by him for the prescribed medical care. Thus, section 105(b) does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care. For example, if under a wage continuation plan the taxpayer is entitled to regular wages during a period of absence from work due to sickness or injury, amounts received under such plan are not excludable from his gross income under section 105(b) even though the taxpayer may have incurred medical expenses during the period of illness. Such amounts may, however, be excludable from his gross income under section 105(d). See § 1.105-4. If the amounts are paid to the taxpayer solely to reimburse him for expenses which he incurred for the prescribed medical care, section 105(b) is applicable even though such amounts are paid without proof of the amount of the actual expenses incurred by the taxpayer, but section 105(b) is not applicable to the extent that such amounts exceed the amount of the actual expenses for such medical care. If the taxpayer incurs an obligation for medical care, payment to the obligee in discharge of such obligation shall constitute indirect payment to the taxpayer as reimbursement for medical care. Similarly, payment to or on behalf of the taxpayer's spouse or dependents shall constitute indirect payment to the taxpayer.
§ 1.105-3 Payments unrelated to absence from work.
Section 105(c) provides an exclusion from gross income with respect to the amounts referred to in section 105(a) to the extent that such amounts (a) constitute payments for the permanent loss or permanent loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152), and (b) are computed with reference to the nature of the injury without regard to the period the employee is absent from work. Loss of use or disfigurement shall be considered permanent when it may reasonably be expected to continue for the life of the individual. For purposes of section 105(c), loss or loss of use of a member or function of the body includes the loss or loss of use of an appendage of the body, the loss of an eye, the loss of substantially all of the vision of an eye, and the loss of substantially all of the hearing in one or both ears. The term “disfigurement” shall be given a reasonable interpretation in the light of all the particular facts and circumstances. Section 105(c) does not apply if the amount of the benefits is determined by reference to the period the employee is absent from work. For example, if an employee is absent from work as a result of the loss of an arm, and under the accident and health plan established by his employer, he is to receive $125 a week so long as he is absent from work for a period not in excess of 52 weeks, section 105(c) is not applicable to such payments. See, however, section 105(d) and § 1.105-4. However, for purposes of section 105(c), it is immaterial whether an amount is paid in a lump sum or in installments. Section 105(c) does not apply to amounts which are treated as workmen's compensation under paragraph (b) of § 1.104-1, or to amounts paid by reason of the death of the employee (see section 101).
§ 1.105-5 Accident and health plans.
(a) In general. Sections 104(a)(3) and 105 (b), (c), and (d) exclude from gross income certain amounts received through accident or health insurance. Section 105(e) provides that for purposes of sections 104 and 105 amounts received through an accident or health plan for employees, and amounts received from a sickness and disability fund for employees maintained under the law of a State, a Territory, or the District of Columbia, shall be treated as amounts received through accident or health insurance. In general, an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness. A plan may cover one or more employees, and there may be different plans for different employees or classes of employees. An accident or health plan may be either insured or noninsured, and it is not necessary that the plan be in writing or that the employee's rights to benefits under the plan be enforceable. However, if the employee's rights are not enforceable, an amount will be deemed to be received under a plan only if, on the date the employee became sick or injured, the employee was covered by a plan (or a program, policy, or custom having the effect of a plan) providing for the payment of amounts to the employee in the event of personal injuries or sickness, and notice or knowledge of such plan was reasonably available to the employee. It is immaterial who makes payment of the benefits provided by the plan. For example, payment may be made by the employer, a welfare fund, a State sickness or disability benefits fund, an association of employers or employees, or by an insurance company.
(b) Self-employed individuals. Under section 105(g), a self-employed individual is not treated as an employee for purposes of section 105. Therefore, for example, benefits paid under an accident or health plan as referred to in section 105(e) to or on behalf of an individual who is self-employed in the business with respect to which the plan is established will not be treated as received through accident and health insurance for purposes of sections 104(a)(3) and 105.
[T.D. 6722, 29 FR 5071, Apr. 14, 1964]
§ 1.105-11 Self-insured medical reimbursement plan.
(a) In general. Under section 105(a), amounts received by an employee through a self-insured medical reimbursement plan which are attributable to contributions of the employer, or are paid by the employer, are included in the employee's gross income unless such amounts are excludable under section 105(b). For amounts reimbursed to a highly compensated individual to be fully excludable from such individual's gross income under section 105(b), the plan must satisfy the requirements of section 105(h) and this section. Section 105(h) is not satisfied if the plan discriminates in favor of highly compensated individuals as to eligibility to participate or benefits. All or a portion of the reimbursements or payments on behalf of such individuals under a discriminatory plan are not excludable from gross income under section 105(b). However, benefits paid to participants who are not highly compensated individuals may be excluded from gross income if the requirements of section 105(b) are satisfied, even if the plan is discriminatory.
(b) Self-insured medical reimbursement plan—(1) General rule—(i) Definition. A self-insured medical reimbursement plan is a separate written plan for the benefit of employees which provides for reimbursement of employee medical expenses referred to in section 105(b). A plan or arrangement is self-insured unless reimbursement is provided under an individual or group policy of accident or health insurance issued by a licensed insurance company or under an arrangement in the nature of a prepaid health care plan that is regulated under federal or state law in a manner similar to the regulation of insurance companies. Thus, for example, a plan of a health maintenance organization, established under the Health Maintenance Organization Act of 1973, would qualify as a prepaid health care plan. In addition, this section applies to a self-insured medical reimbursement plan, determined in accordance with the rules of this section, maintained by an employee organization described in section 501(c)(9).
(ii) Shifting of risk. A plan underwritten by a policy of insurance or a prepaid health care plan that does not involve the shifting of risk to an unrelated third party is considered self-insured for purposes of this section. Accordingly, a cost-plus policy or a policy which in effect merely provides administrative or bookkeeping services is considered self-insured for purposes of this section. However, a plan is not considered self-insured merely because one factor the insurer uses in determining the premium is the employer's prior claims experience.
(iii) Captive insurance company. A plan underwritten by a policy of insurance issued by a captive insurance company is not considered self-insured for purposes of this section if for the plan year the premiums paid by companies unrelated to the captive insurance company equal or exceed 50 percent of the total premiums received and the policy of insurance is similar to policies sold to such unrelated companies.
(2) Other rules. The rules of this section apply to a self-insured portion of an employer's medical plan or arrangement even if the plan is in part underwritten by insurance. For example, if an employer's medical plan reimburses employees for benefits not covered under the insured portion of an overall plan, or for deductible amounts under the insured portions, such reimbursement is subject to the rules of this section. However, a plan which reimburses employees for premiums paid under an insured plan is not subject to this section. In addition, medical expense reimbursements not described in the plan are not paid pursuant to a plan for the benefit of employees, and therefore are not excludable from gross income under section 105(b). Such reimbursements will not affect the determination of whether or not a plan is discriminatory.
(c) Prohibited discrimination—(1) In general. A self-insured medical reimbursement plan does not satisfy the requirements of section 105(h) and this paragraph for a plan year unless the plan satisfies subparagraphs (2) and (3) of this paragraph. However, a plan does not fail to satisfy the requirements of this paragraph merely because benefits under the plan are offset by benefits paid under a self-insured or insured plan of the employer or another employer, or by benefits paid under Medicare or other Federal or State law or similar foreign law. A self-insured plan may take into account the benefits provided under another plan only to the extent that the type of benefit subject to reimbursement is the same under both plans. For example, an amount reimbursed to an employee for a hospital expense under a medical plan maintained by the employer of the employee's spouse may be offset against the self-insured benefit where the self-insured plan covering the employee provides the same type of hospital benefit.
(2) Eligibility to participate—(i) Percentage test. A plan satisfies the requirements of this subparagraph if it benefits—
(A) Seventy percent or more of all employees, or
(B) Eighty percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan.
(ii) Classification test. A plan satisfies the requirements of this subparagraph if it benefits such employees as qualify under a classification of employees set up by the employer which is found by the Internal Revenue Service not to be discriminatory in favor of highly compensated individuals. In general, this determination will be made based upon the facts and circumstances of each case, applying the same standards as are applied under section 410(b)(1)(B) (relating to qualified pension, profit-sharing and stock bonus plans), without regard to the special rules in section 401(a)(5) concerning eligibility to participate.
(iii) Exclusion of certain employees. Under section 105(h)(3), for purposes of this subparagraph (2), there may be excluded from consideration:
(A) Employees who have not completed 3 years of service prior to the beginning of the plan year. For purposes of this section years of service may be determined by any method that is reasonable and consistent. A determination made in the same manner as (and not requiring service in excess of how) a year of service is determined under section 410(a)(3) shall be deemed to be reasonable. For purposes of the 3-year rule, all of an employee's years of service with the employer prior to a separation from service are not taken into account. For purposes of the 3-year rule, an employee's years of service prior to age 25, as a part-time or seasonal employee, as a member of a collective bargaining unit, or as a nonresident alien, as each is described in this subdivision, are not excluded by reason of being so described from counting towards satisfaction of the rule. In addition, if the employer is a predecessor employer (determined in a manner consistent with section 414(a)), service for such predecessor is treated as service for the employer.
(B) Employees who have not attained age 25 prior to the beginning of the plan year.
(C) Part-time employees whose customary weekly employment is less than 35 hours, if other employees in similar work with the same employer (or, if no employees of the employer are in similar work, in similar work in the same industry and location) have substantially more hours, and seasonal employees whose customary annual employment is less than 9 months, if other employees in similar work with the same employer (or, if no employees of the employer are in similar work, in similar work in the same industry and location) have substantially more months. Notwithstanding the preceding sentence, any employee whose customary weekly employment is less than 25 hours or any employee whose customary annual employment is less than 7 months may be considered as a part-time or seasonal employee.
(D) Employees who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Commissioner finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. For purposes of determining whether such bargaining occurred, it is not material that such employees are not covered by another medical plan or that the plan was not considered in such bargaining.
(E) Employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(b) and the regulations thereunder) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3) and the regulations thereunder).
(3) Nondiscriminatory benefits—(i) In general. In general, benefits subject to reimbursement under a plan must not discriminate in favor of highly compensated individuals. Plan benefits will not satisfy the requirements of this subparagraph unless all the benefits provided for participants who are highly compensated individuals are provided for all other participants. In addition, all the benefits available for the dependents of employees who are highly compensated individuals must also be available on the same basis for the dependents of all other employees who are participants. A plan that provides optional benefits to participants will be treated as providing a single benefit with respect to the benefits covered by the option provided that (A) all eligible participants may elect any of the benefits covered by the option and (B) there are either no required employee contributions or the required employee contributions are the same amount. This test is applied to the benefits subject to reimbursement under the plan rather than the actual benefit payments or claims under the plan. The presence or absence of such discrimination will be determined by considering the type of benefit subject to reimbursement provided highly compensated individuals, as well as the amount of the benefit subject to reimbursement. A plan may establish a maximum limit for the amount of reimbursement which may be paid a participant for any single benefit, or combination of benefits. However, any maximum limit attributable to employer contributions must be uniform for all participants and for all dependents of employees who are participants and may not be modified by reason of a participant's age or years of service. In addition, if a plan covers employees who are highly compensated individuals, and the type or the amount of benefits subject to reimbursement under the plan are in proportion to employee compensation, the plan discriminates as to benefits.
(ii) Discriminatory operation. Not only must a plan not discriminate on its face in providing benefits in favor of highly compensated individuals, the plan also must not discriminate in favor of such employees in actual operation. The determination of whether plan benefits discriminate in operation in favor of highly compensated individuals is made on the basis of the facts and circumstances of each case. A plan is not considered discriminatory merely because highly compensated individuals participating in the plan utilize a broad range of plan benefits to a greater extent than do other employees participating in the plan. In addition, if a plan (or a particular benefit provided by a plan) is terminated, the termination would cause the plan benefits to be discriminatory if the duration of the plan (or benefit) has the effect of discriminating in favor of highly compensated individuals. Accordingly, the prohibited discrimination may occur where the duration of a particular benefit coincides with the period during which a highly compensated individual utilizes the benefit.
(iii) Retired employees. To the extent that an employer provides benefits under a self-insured medical reimbursement plan to a retired employee that would otherwise be excludible from gross income under section 105(b), determined without regard to section 105(h), such benefits shall not be considered a discriminatory benefit under this paragraph (c). The preceding sentence shall not apply to a retired employee who was a highly compensated individual unless the type, and the dollar limitations, of benefits provided retired employees who were highly compensated individuals are the same for all other retired participants. If this subdivision applies to a retired participant, that individual is not considered an employee for purposes of determining the highest paid 25 percent of all employees under paragraph (d) of this section solely by reason of receiving such plan benefits.
(4) Multiple plans, etc.—(i) General rule. An employer may designate two or more plans as constituting a single plan that is intended to satisfy the requirements of section 105(h)(2) and paragraph (c) of this section, in which case all plans so designated shall be considered as a single plan in determining whether the requirements of such section are satisfied by each of the separate plans. A determination that the combination of plans so designated does not satisfy such requirements does not preclude a determination that one or more of such plans, considered separately, satisfies such requirements. A single plan document may be utilized by an employer for two or more separate plans provided that the employer designates the plans that are to be considered separately and the applicable provisions of each separate plan.
(ii) Other rules. If the designated combined plan discriminates as to eligibility to participate or benefits, the amount of excess reimbursement will be determined under the rules of section 105(h)(7) and paragraph (e) of this section by taking into account all reimbursements made under the combined plan.
(iii) H.M.O. participants. For purposes of section 105(h)(2)(A) and paragraph (c)(2) of this section, a self-insured plan will be deemed to benefit an employee who has enrolled in a health maintenance organization (HMO) that is offered on an optional basis by the employer in lieu of coverage under the self-insured plan if, with respect to that employee, the employer's contributions to the HMO plan equal or exceed those that would be made to the self-insured plan, and if the HMO plan is designated in accordance with subdivision (i) with the self-insured plan as a single plan. For purposes of section 105(h) and this section, except as provided in the preceding sentence, employees covered by, and benefits under, the HMO plan are not treated as part of the self-insured plan.
(d) Highly compensated individuals defined. For purposes of section 105(h) and this section, the term “highly compensated individual” means an individual who is—
(1) One of the 5 highest paid officers,
(2) A shareholder who owns (with the application of section 318) more than 10 percent in value of the stock of the employer, or
(3) Among the highest paid 25 percent of all employees (including the 5 highest paid officers, but not including employees excludable under paragraph (c)(2)(iii) of this section who are not participants in any self-insured medical reimbursement plan of the employer, whether or not designated as a single plan under paragraph (c)(4) of this section, or in a health maintenance organization plan).
The status of an employee as an officer or stockholder is determined with respect to a particular benefit on the basis of the employee's officer status or stock ownership at the time during the plan year at which the benefit is provided. In calculating the highest paid 25 percent of all employees, the number of employees included will be rounded to the next highest number. For example, if there are 5 employees, the top two are in the highest paid 25 percent. The level of an employee's compensation is determined on the basis of the employee's compensation for the plan year. For purposes of the preceding sentence, fiscal year plans may determine employee compensation on the basis of the calendar year ending within the plan year.
(e) Excess reimbursement of highly compensated individual—(1) In general. For purposes of section 105(h) and this section, a reimbursement paid to a highly compensated individual is an excess reimbursement if it is paid pursuant to a plan that fails to satisfy the requirements of paragraph (c)(2) or (c)(3) for the plan year. The amount reimbursed to a highly compensated individual which constitutes an excess reimbursement is not excludable from such individual's gross income under section 105(b).
(2) Discriminatory benefit. In the case of a benefit available to highly compensated individuals but not to all other participants (or which otherwise discriminates in favor of highly compensated individuals as opposed to other participants), the amount of excess reimbursement equals the total amount reimbursed to the highly compensated individual with respect to the benefit.
(3) Discriminatory coverage. In the case of benefits (other than discriminatory benefits described in subparagraph (2)) paid to a highly compensated individual under a plan which fails to satisfy the requirements of paragraph (c)(2) relating to nondiscrimination in eligibility to participate, the amount of excess reimbursement is determined by multiplying the total amount reimbursed to the individual by a fraction. The numerator of the fraction is the total amount reimbursed during that plan year to all highly compensated individuals. The denominator of the fraction is the total amount reimbursed during that plan year to all participants. In computing the fraction and the total amount reimbursed to the individual, discriminatory benefits described in subparagraph (2) are not taken into account. Accordingly, any amount which is included in income by reason of the benefit's not being available to all other participants will not be taken into account.
(4) Examples. The provisions of this paragraph are illustrated by the following examples:
Example 1.Corporation M maintains a self-insured medical reimbursement plan which covers all employees. The plan provides the following maximum limits on the amount of benefits subject to reimbursement: $5,000 for officers and $1,000 for all other participants. During a plan year Employee A, one of the 5 highest paid officers, received reimbursements in the amount of $4,000. Because the amount of benefits provided for highly compensated individuals is not provided for all other participants, the plan benefits are discriminatory. Accordingly, Employee A received an excess reimbursement of $3,000 ($4,000−$1,000) which constitutes a benefit available to highly compensated individuals, but not to all other participants.
Example 2.Corporation N maintains a self-insured medical reimbursement plan which covers all employees. The plan provides a broad range of medical benefits subject to reimbursement for all participants. However, only the 5 highest paid officers are entitled to dental benefits. During the plan year Employee B, one of the 5 highest paid officers, received dental payments under the plan in the amount of $300. Because dental benefits are provided for highly compensated individuals, and not for all other participants, the plan discriminates as to benefits. Accordingly, Employee B received an excess reimbursement in the amount of $300.
Example 3.Corporation O maintains a self-insured medical reimbursement plan which discriminates as to eligibility by covering only the highest paid 40% of all employees. Benefits subject to reimbursement under the plan are the same for all participants. During a plan year Employee C, a highly compensated individual, received benefits in the amount of $1,000. The amount of excess reimbursement paid Employee C during the plan year will be calculated by multiplying the $1,000 by a fraction determined under subparagraph (3).
Example 4.Corporation P maintains a self-insured medical reimbursement plan for its employees. Benefits subject to reimbursement under the plan are the same for all plan participants. However, the plan fails the eligibility tests of section 105(h)(3)(A) and thereby discriminates as to eligibility. During the 1980 plan year Employee D, a highly compensated individual, was hospitalized for surgery and incurred medical expenses of $4,500 which were reimbursed to D under the plan. During that plan year the Corporation P medical plan paid $50,000 in benefits under the plan, $30,000 of which constituted benefits paid to highly compensated individuals. The amount of excess reimbursement not excludable by D under section 105(b) is $2,700:
Example 5.Corporation Q maintains a self-insured medical reimbursement plan for its employees. The plan provides a broad range of medical benefits subject to reimbursement for participants. However, only the five highest paid officers are entitled to dental benefits. In addition, the plan fails the eligibility test of section 105(h)(3)(A) and thereby discriminates as to eligibility. During the calendar 1981 plan year, Employee E, a highly compensated individual, received dental benefits under the plan in the amount of $300, and no other employee received dental benefits. In addition, Employee E was hospitalized for surgery and incurred medical expenses, reimbursement for which was available to all participants, of $4,500 which were reimbursed to E under the plan. Because dental benefits are only provided for highly compensated individuals, Employee E received an excess reimbursement under paragraph (e)(2) above in the amount of $300. For the 1981 plan year, the Corporation Q medical plan paid $50,300 in total benefits under the plan, $30,300 of which constituted benefits paid to highly compensated individuals. In computing the fraction under paragraph (e)(3), discriminatory benefits described in paragraph (e)(2) are not taken into account. Therefore, the amount of excess reimbursement not excludable to Employee E with respect to the $4,500 of medical expenses incurred is $2,700: and the total amount of excess reimbursements includable in E's income for 1981 is $3,000.
Example 6. (i) Corporation R maintains a calendar year self-insured medical reimbursement plan which covers all employees. The type of benefits subject to reimbursement under the plan include all medical care expenses as defined in section 213(e). The amount of reimbursement available to any employee for any calendar year is limited to 5 percent of the compensation paid to each employee during the calendar year. The amount of compensation and reimbursement paid to Employees A-F for the calendar year is as follows:
Employee | Compensation | Reimbursable amount paid
A | $100,000 | $5,000
B | 25,000 | 1,250
C | 15,000 | 750
D | 10,000 | 500
E | 10,000 | 500
F | 8,000 | 400
8,400
(ii) Because the amount of benefits subject to reimbursement under the plan is in proportion to employee compensation the plan discriminates as to benefits. In addition, Employees A and B are highly compensated individuals. The amount of excess reimbursement paid Employees A and B during the plan year will be determined under paragraph (e)(2). Because benefits in excess of $400 (Employee F's maximum benefit) are provided for highly compensated individuals and not for all other participants, Employees A and B received, respectively, an excess reimbursement of $4,600 and $850.
(f) Certain controlled groups. For purposes of applying the provisions of section 105(h) and this section, all employees who are treated as employed by a single employer under section 414 (b) and (c), and the regulations thereunder (relating to special rules for qualified pension, profit-sharing and stock bonus plans), shall be treated as employed by a single employer.
(g) Exception for medical diagnostic procedures—(1) In general. For purposes of applying section 105(h) and this section, reimbursements paid under a plan for medical diagnostic procedures for an employee, but not a dependent, are not considered to be a part of a plan described in this section. The medical diagnostic procedures include routine medical examinations, blood tests, and X-rays. Such procedures do not include expenses incurred for the treatment, cure or testing of a known illness or disability, or treatment or testing for a physical injury, complaint or specific symptom of a bodily malfunction. For example, a routine dental examination with X-rays is a medical diagnostic procedure, but X-rays and treatment for a specific complaint are not. In addition, such procedures do not include any activity undertaken for exercise, fitness, nutrition, recreation, or the general improvement of health unless they are for medical care as defined in section 213(e). The diagnostic procedures must be performed at a facility which provides no services (directly or indirectly) other than medical, and ancillary, services. For purposes of the preceding sentence, physical proximity between a medical facility and nonmedical facilities will not for that reason alone cause the medical facility not to qualify. For example, an employee's annual physical examination conducted at the employee's personal physician's office is not considered a part of the medical reimbursement plan and therefore is not subject to the nondiscrimination requirements. Accordingly, the amount reimbursed may be excludable from the employee's income if the requirements of section 105(b) are satisfied.
(2) Transportation, etc. expenses. Transportation expenses primarily for an allowable diagnostic procedure are included within the exception described in this paragraph, but only to the extent they are ordinary and necessary. Transportation undertaken merely for the general improvement of health, or in connection with a vacation, is not within the scope of this exception, nor are any incidental expenses for food or lodging; therefore, amounts reimbursed for such expenses may be excess reimbursements under paragraph (e).
(h) Time of inclusion. Excess reimbursments (determined under paragraph (e)) paid to a highly compensated individual for a plan year will be considered as received in the taxable year of the individual in which (or with which) the plan year ends. The particular plan year to which reimbursements relate shall be determined under the plan provisions. In the absence of plan provisions reimbursements shall be attributed to the plan year in which payment is made. For example, under a calendar year plan an excess reimbursement paid to A in 1981 on account of an expense incurred and subject to reimbursement for the 1980 plan year under the terms of the plan will be considered as received in 1980 by A.
(i) Self-insured contributory plan. A medical plan subject to this section may provide for employer and employee contributions. See § 1.105-1(c). The tax treatment of reimbursements attributable to employee contributions is determined under section 104(a)(3). The tax treatment of reimbursements attributable to employer contributions is determined under section 105. The amount of reimbursements which are attributable to contributions of the employer shall be determined in accordance with § 1.105-1(e).
(j) Effective date. Section 105(h) and this section are effective for taxable years beginning after December 31, 1979 and for amounts reimbursed after December 31, 1979. In determining plan discrimination and the taxability of excess reimbursements made for a plan year beginning in 1979 and ending in 1980, a plan's eligibility and benefit requirements as well as actual reimbursements made in the plan year during 1979, will not be taken into account. In addition, this section does not apply to expenses which are incurred in 1979 and paid in 1980.
(k) Special rules—(1) Relation to cafeteria plans. If a self-insured medical reimbursement plan is included in a cafeteria plan as described in section 125, the rules of this section will determine the status of a benefit as a taxable or nontaxable benefit, and the rules of section 125 will determine whether an employee is taxed as though he elected all available taxable benefits (including taxable benefits under a discriminatory medical reimbursement plan). This rule is illustrated by the following example:
Example.Corporation M maintains a cafeteria plan described in section 125. Under the plan an officer of the corporation may elect to receive medical benefits provided by a self-insured medical reimbursement plan which is subject to the rules of this section. However, the self-insured medical reimbursement plan fails the nondiscrimination rules under paragraph (c) of this section. Accordingly, the amount of excess reimbursement is taxable to the officer participating in the medical reimbursement plan pursuant to section 105(h) and this section. Therefore, the self-insured medical reimbursement plan will be considered a taxable benefit under section 125 and the regulations thereunder.
(2) Benefit subject to reimbursement. For purposes of this section, a benefit subject to reimbursement is a benefit described in the plan under which a claim for reimbursement or for a payment directly to the health service provider may be filed by a plan participant. It does not refer to actual claims or benefit reimbursements paid under a plan.
[T.D. 7754, 46 FR 3505, Jan. 15, 1981]
§ 1.106-1 Contributions by employer to accident and health plans.
(a) The gross income of an employee does not include the contributions that the employer makes to an accident or health plan for compensation (through insurance or otherwise) to the employee for personal injuries or sickness incurred by the employee, the employee's spouse, the employee's dependents (as defined in section 152 determined without regard to section 152(b)(1), (b)(2), or (d)(1)(B)), or any child (as defined in section 152(f)(1)) of the employee who as of the end of the taxable year has not attained age 27. The employer may contribute to an accident or health plan either by paying the premium (or a portion of the premium) on a policy of accident or health insurance covering one or more of his employees, or by contributing to a separate trust or fund (including a fund referred to in section 105(e)) which provides accident or health benefits directly or through insurance to one or more of his employees. However, if such insurance policy, trust, or fund provides other benefits in addition to accident or health benefits, section 106 applies only to the portion of the employer's contribution which is allocable to accident or health benefits. See paragraph (d) of § 1.104-1 and §§ 1.105-1 through 1.105-5, inclusive, for regulations relating to exclusion from an employee's gross income of amounts received through accident or health insurance and through accident or health plans. For the treatment of the payment of premiums for accident or health insurance from a qualified trust under section 401(a), see §§ 1.72-15 and 1.402(a)-1(e).
(b) Effective/applicability date. The first and last sentences of paragraph (a) of this section apply for taxable years beginning on or after January 1, 2015.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 21, 1960, as amended by T.D. 9665, 79 FR 26841, May 12, 2014]
§ 1.107-1 Rental value of parsonages.
(a) In the case of a minister of the gospel, gross income does not include (1) the rental value of a home, including utilities, furnished to him as a part of his compensation, or (2) the rental allowance paid to him as part of his compensation to the extent such allowance is used by him to rent or otherwise provide a home. In order to qualify for the exclusion, the home or rental allowance must be provided as remuneration for services which are ordinarily the duties of a minister of the gospel. In general, the rules provided in § 1.1402(c)-5 will be applicable to such determination. Examples of specific services the performance of which will be considered duties of a minister for purposes of section 107 include the performance of sacerdotal functions, the conduct of religious worship, the administration and maintenance of religious organizations and their integral agencies, and the performance of teaching and administrative duties at theological seminaries. Also, the service performed by a qualified minister as an employee of the United States (other than as a chaplain in the Armed Forces, whose service is considered to be that of a commissioned officer in his capacity as such, and not as a minister in the exercise of his ministry), or a State, Territory, or possession of the United States, or a political subdivision of any of the foregoing, or the District of Columbia, is in the exercise of his ministry provided the service performed includes such services as are ordinarily the duties of a minister.
(b) For purposes of section 107, the term “home” means a dwelling place (including furnishings) and the appurtenances thereto, such as a garage. The term “rental allowance” means an amount paid to a minister to rent or otherwise provide a home if such amount is designated as rental allowance pursuant to official action taken prior to January 1, 1958, by the employing church or other qualified organization, or if such amount is designated as rental allowance pursuant to official action taken in advance of such payment by the employing church or other qualified organization when paid after December 31, 1957. The designation of an amount as rental allowance may be evidenced in an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action. The designation referred to in this paragraph is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.
(c) A rental allowance must be included in the minister's gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home. Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home. Expenses for food and servants are not considered for this purpose to be directly related to providing a home. Where the minister rents, purchases, or owns a farm or other business property in addition to a home, the portion of the rental allowance expended in connection with the farm or business property shall not be excluded from his gross income.
[T.D. 6500, 25 FR 11402, Nov. 26, 1960, as amended by T.D. 6691, 28 FR 12817, Dec. 3, 1963]
§ 1.108-1 [Reserved]
§ 1.108-2 Acquisition of indebtedness by a person related to the debtor.
(a) General rules. The acquisition of outstanding indebtedness by a person related to the debtor from a person who is not related to the debtor results in the realization by the debtor of income from discharge of indebtedness (to the extent required by section 61(a)(12) and section 108) in an amount determined under paragraph (f) of this section. Income realized pursuant to the preceding sentence is excludible from gross income to the extent provided in section 108(a). The rules of this paragraph apply if indebtedness is acquired directly by a person related to the debtor in a direct acquisition (as defined in paragraph (b) of this section) or if a holder of indebtedness becomes related to the debtor in an indirect acquisition (as defined in paragraph (c) of this section).
(b) Direct acquisition. An acquisition of outstanding indebtedness is a direct acquisition under this section if a person related to the debtor (or a person who becomes related to the debtor on the date the indebtedness is acquired) acquires the indebtedness from a person who is not related to the debtor. Notwithstanding the foregoing, the Commissioner may provide by Revenue Procedure or other published guidance that certain acquisitions of indebtedness described in the preceding sentence are not direct acquisitions for purposes of this section.
(c) Indirect acquisition—(1) In general. An indirect acquisition is a transaction in which a holder of outstanding indebtedness becomes related to the debtor, if the holder acquired the indebtedness in anticipation of becoming related to the debtor.
(2) Proof of anticipation of relationship. In determining whether indebtedness was acquired by a holder in anticipation of becoming related to the debtor, all relevant facts and circumstances will be considered. Such facts and circumstances include, but are not limited to, the intent of the parties at the time of the acquisition, the nature of any contacts between the parties (or their respective affiliates) before the acquisition, the period of time for which the holder held the indebtedness, and the significance of the indebtedness in proportion to the total assets of the holder group (as defined in paragraph (c)(5) of this section). For example, if a holder acquired the indebtedness in the ordinary course of its portfolio investment activities and the holder's acquisition of the indebtedness preceded any discussions concerning the acquisition of the holder by the debtor (or by a person related to the debtor) or the acquisition of the debtor by the holder (or by a person related to the holder), as the case may be, these facts, taken together, would ordinarily establish that the holder did not acquire the indebtedness in anticipation of becoming related to the debtor. The absence of discussions between the debtor and the holder (or their respective affiliates), however, does not by itself establish that the holder did not acquire the indebtedness in anticipation of becoming related to the debtor (if, for example, the facts and circumstances show that the holder was considering a potential acquisition of or by the debtor, or the relationship is created within a relatively short period of time of the acquisition, or the indebtedness constitutes a disproportionate portion of the holder group's assets).
(3) Indebtedness acquired within 6 months of becoming related. Notwithstanding any other provision of this paragraph (c), a holder of indebtedness is treated as having acquired the indebtedness in anticipation of becoming related to the debtor if the holder acquired the indebtedness less than 6 months before the date the holder becomes related to the debtor.
(4) Disclosure of potential indirect acquisition—(i) In general. If a holder of outstanding indebtedness becomes related to the debtor under the circumstances described in paragraph (c)(4)(ii) or (iii) of this section, the debtor is required to attach the statement described in paragraph (c)(4)(iv) of this section to its tax return (or to a qualified amended return within the meaning of § 1.6664-2(c)(3)) for the taxable year in which the debtor becomes related to the holder, unless the debtor reports its income on the basis that the holder acquired the indebtedness in anticipation of becoming related to the debtor. Disclosure under this paragraph (c)(4) is in addition to, and is not in substitution for, any disclosure required to be made under section 6662, 6664 or 6694.
(ii) Indebtedness represents more than 25 percent of holder group's assets—(A) In general. Disclosure under this paragraph (c)(4) is required if, on the date the holder becomes related to the debtor, indebtedness of the debtor represents more than 25 percent of the fair market value of the total gross assets of the holder group (as defined in paragraph (c)(5) of this section).
(B) Determination of total gross assets. In determining the total gross assets of the holder group, total gross assets do not include any cash, cash item, marketable stock or security, short-term indebtedness, option, futures contract, notional principal contract, or similar item (other than indebtedness of the debtor), nor do total gross assets include any asset in which the holder has substantially reduced its risk of loss. In addition, total gross assets do not include any ownership interest in or indebtedness of a member of the holder group.
(iii) Indebtedness acquired within 6 to 24 months of becoming related. Disclosure under this paragraph (c)(4) is required if the holder acquired the indebtedness 6 months or more before the date the holder becomes related to the debtor, but less than 24 months before that date.
(iv) Contents of statement. A statement under this paragraph (c)(4) must include the following—
(A) A caption identifying the statement as disclosure under § 1.108-2(c);
(B) An identification of the indebtedness with respect to which disclosure is made;
(C) The amount of such indebtedness and the amount of income from discharge of indebtedness is section 108(e)(4) were to apply;
(D) Whether paragraph (c)(4)(ii) or (iii) of this section applies to the transaction; and
(E) A statement describing the facts and circumstances supporting the debtor's position that the holder did not acquire the indebtedness in anticipation of becoming related to the debtor.
(v) Failure to disclose. In addition to any other penalties that may apply, if a debtor fails to provide a statement required by this paragraph (c)(4), the holder is presumed to have acquired the indebtedness in anticipation of becoming related to the debtor unless the facts and circumstances clearly established that the holder did not acquire the indebtedness in anticipation of becoming related to the debtor.
(5) Holder group. For purposes of this paragraph (c), the holder group consists of the holder of the indebtedness and all persons who are both—
(i) Related to the holder before the holder becomes related to the debtor; and
(ii) Related to the debtor after the holder becomes related to the debtor.
(6) Holding period—(i) Suspensions. The running of the holding periods set forth in paragraphs (c)(3) and (c)(4)(iii) of this section is suspended during any period in which the holder or any person related to the holder is protected (directly or indirectly) against risk of loss by an option, a short sale, or any other device or transaction.
(ii) Tacking. For purposes of paragraphs (c)(3) and (c)(4)(iii) of this section, the period for which a holder held the debtor's indebtedness includes—
(A) The period for which the indebtedness was held by a corporation to whose attributes the holder succeeded pursuant to section 381; and
(B) The period (ending on the date on which the holder becomes related to the debtor) for which the indebtedness was held continuously by members of the holder group (as defined in paragraph (c)(5) of this section).
(d) Definitions—(1) Acquisition date. For purposes of this section, the acquisition date is the date on which a direct acquisition of indebtedness or an indirect acquisition of indebtedness occurs.
(2) Relationship. For purposes of this section, persons are considered related if they are related within the meaning of sections 267(b) or 707(b)(1). However—
(i) Sections 267(b) and 707(b)(1) are applied as if section 267(c)(4) provided that the family of an individual consists of the individual's spouse, the individual's children, grandchildren, and parents, and any spouse of the individual's children or grandchildren; and
(ii) Two entities that are treated as a single employer under subsection (b) or (c) of section 414 are treated as having a relationship to each other that is described in section 267(b).
(e) Exceptions—(1) Indebtedness retired within one year. This section does not apply to a direct or indirect acquisition of indebtedness with a stated maturity date on or before the date that is one year after the acquisition date, if the indebtedness is, in fact, retired on or before its stated maturity date.
(2) Acquisitions by securities dealers. (i) This section does not apply to a direct acquisition or an indirect acquisition of indebtedness by a dealer that acquires and disposes of such indebtedness in the ordinary course of its business of dealing in securities if—
(A) The dealer accounts for the indebtedness as a security held primarily for sale to customers in the ordinary course of business;
(B) The dealer disposes of the indebtedness (or it matures while held by the dealer) within a period consistent with the holding of the indebtedness for sale to customers in the ordinary course of business, taking into account the terms of the indebtedness and the conditions and practices prevailing in the markets for similar indebtedness during the period in which it is held; and
(C) The dealer does not sell or otherwise transfer the indebtedness to a person related to the debtor (other than in a sale to a dealer that in turn meets the requirements of this paragraph (e)(2)).
(ii) A dealer will continue to satisfy the conditions of this paragraph (e)(2) with respect to indebtedness that is exchanged for successor indebtedness in a transaction in which unrelated holders also exchange indebtedness of the same issue, provided that the conditions of this paragraph (e)(2) are met with respect to the successor indebtedness.
(iii) For purposes of this paragraph (e)(2), if the period consistent with the holding of indebtedness for sale to customers in the ordinary course of business is 30 days or less, the dealer is considered to dispose of indebtedness within that period if the aggregate principal amount of indebtedness of that issue sold by the dealer to customers in the ordinary course of business (or that mature and are paid while held by the dealer) in the calendar month following the month in which the indebtedness is acquired equals or exceeds the aggregate principal amount of indebtedness of that issue held in the dealer's inventory at the close of the month in which the indebtedness is acquired. If the period consistent with the holding of indebtedness for sale to customers in the ordinary course of business is greater than 30 days, the dealer is considered to dispose of the indebtedness within that period if the aggregate principal amount of indebtedness of that issue sold by the dealer to customers in the ordinary course of business (or that mature and are paid while held by the dealer) within that period equals or exceeds the aggregate principal amount of indebtedness of that issue held in inventory at the close of the day on which the indebtedness was acquired.
(f) Amount of discharge of indebtedness income realized—(1) Holder acquired the indebtedness by purchase on or less than six months before the acquisition date. Except as otherwise provided in this paragraph (f), the amount of discharge of indebtedness income realized under paragraph (a) of this section is measured by reference to the adjusted basis of the related holder (or of the holder that becomes related to the debtor) in the indebtedness on the acquisition date if the holder acquired the indebtedness by purchase on or less than six months before the acquisition date. For purposes of this paragraph (f), indebtedness is acquired “by purchase” if the indebtedness in the hands of the holder is not substituted basis property within the meaning of section 7701(a)(42). However, indebtedness is also considered acquired by purchase within six months before the acquisition date if the holder acquired the indebtedness as transferred basis property (within the meaning of section 7701(a)(43)) from a person who acquired the indebtedness by purchase on or less than six months before the acquisition date.
(2) Holder did not acquire the indebtedness by purchase on or less than six months before the acquisition date. Except as otherwise provided in this paragraph (f), the amount of discharge of indebtedness income realized under paragraph (a) of this section is measured by reference to the fair market value of the indebtedness on the acquisition date if the holder (or the transferor to the holder in a transferred basis transaction) did not acquire the indebtedness by purchase on or less than six months before the acquisition date.
(3) Acquisitions of indebtedness in nonrecognition transactions. [Reserved]
(4) Avoidance transactions. The amount of discharge of indebtedness income realized by the debtor under paragraph (a) of this section is measured by reference to the fair market value of the indebtedness on the acquisition date if the indebtedness is acquired in a direct or an indirect acquisition in which a principal purpose for the acquisition is the avoidance of federal income tax.
(g) Correlative adjustments—(1) Deemed issuance. For income tax purposes, if a debtor realizes income from discharge of its indebtedness in a direct or an indirect acquisition under this section (whether or not the income is excludible under section 108(a)), the debtor's indebtedness is treated as new indebtedness issued by the debtor to the related holder on the acquisition date (the deemed issuance). The new indebtedness is deemed issued with an issue price equal to the amount used under paragraph (f) of this section to compute the amount realized by the debtor under paragraph (a) of this section (i.e., either the holder's adjusted basis or the fair market value of the indebtedness, as the case may be). Under section 1273(a)(1), the excess of the stated redemption price at maturity (as defined in section 1273(a)(2)) of the indebtedness over its issue price is original issue discount (OID) which, to the extent provided in sections 163 and 1272, is deductible by the debtor and includible in the gross income of the related holder. Notwithstanding the foregoing, the Commissioner may provide by Revenue Procedure or other published guidance that the indebtedness is not treated as newly issued indebtedness for purposes of designated provisions of the income tax laws.
(2) Treatment of related holder. The related holder does not recognize any gain or loss on the deemed issuance described in paragraph (g)(1) of this section. The related holder's adjusted basis in the indebtedness remains the same as it was immediately before the deemed issuance. The deemed issuance is treated as a purchase of the indebtedness by the related holder for purposes of section 1272(a)(7) (pertaining to reduction of original issue discount where a subsequent holder pays acquisition premium) and section 1276 (pertaining to acquisitions of debt at a market discount).
(3) Loss deferral on disposition of indebtedness acquired in certain exchanges. (i) Any loss otherwise allowable to a related holder on the disposition at any time of indebtedness acquired in a direct or indirect acquisition (whether or not any discharge of indebtedness income was realized under paragraph (a) of this section) is deferred until the date the debtor retires the indebtedness if—
(A) The related holder acquired the debtor's indebtedness in exchange for its own indebtedness; and
(B) The issue price of the related holder's indebtedness was not determined by reference to its fair market value (e.g., the issue price was determined under section 1273(b)(4) or 1274(a) or any other provision of applicable law).
(ii) Any comparable tax benefit that would otherwise be available to the holder, debtor, or any person related to either, in any other transaction that directly or indirectly results in the disposition of the indebtedness is also deferred until the date the debtor retires the indebtedness.
(4) Examples. The following examples illustrate the application of this paragraph (g). In each example, all taxpayers are calendar-year taxpayers, no taxpayer is insolvent or under the jurisdiction of a court in a title 11 case and no indebtedness is qualified farm indebtedness described in section 108(g).
Example 1. (i) P, a domestic corporation, owns 70 percent of the single class of stock of S, a domestic corporation. S has outstanding indebtedness that has an issue price of $10,000,000 and provides for monthly interest payments of $80,000 payable at the end of each month and a payment at maturity of $10,000,000. The indebtedness has a stated maturity date of December 31, 1994. On January 1, 1992, P purchases S's indebtedness from I, an individual not related to S within the meaning of paragraph (d)(2) of this section, for cash in the amount of $9,000,000. S repays the indebtedness in full at maturity.
(ii) Under section 61(a)(12), section 108(e)(4), and paragraphs (a) and (f) of this section, S realizes $1,000,000 of income from discharge of indebtedness on January 1, 1992.
(iii) Under paragraph (g)(1) of this section, the indebtedness is treated as issued to P on January 1, 1992, with an issue price of $9,000,000. Under section 1273(a), the $1,000,000 excess of the stated redemption price at maturity of the indebtedness ($10,000,000) over its issue price ($9,000,000) is original issue discount, which is includible in gross income by P and deductible by S over the remaining term of the indebtedness under sections 163(e) and 1272(a).
(iv) Accordingly, S deducts and P includes in income original issue discount, in addition to stated interest, as follows: in 1992, $289,144.88; in 1993, $331,286.06; and in 1994, $379,569.06.
Example 2.The facts are the same as in Example 1, except that on January 1, 1992, P sells S's indebtedness to J, who is not related to S within the meaning of paragraph (d)(2) of this section, for $9,400,000 in cash. J holds S's indebtedness to maturity. On January 1, 1993, P's adjusted basis in S's indebtedness is $9,289,144.88. Accordingly, P realizes gain in the amount of $110,855.12 upon the disposition. S and J continue to deduct and include the original issue discount on the indebtedness in accordance with Example 1. The amount of original issue discount includible by J is reduced by the $110,855.12 acquisition premium as provided in section 1272(a)(7).
Example 3.The facts are the same as in Example 1, except that on February 1, 1992 (one month after P purchased S's indebtedness), S retires the indebtedness for an amount of cash equal to the fair market value of the indebtedness. Assume that the fair market value of the indebtedness is $9,022,621.41, which in this case equals the issue price of indebtedness determined under paragraph (g)(1) of this section ($9,000,000) plus the accrued original issue discount through February 1 ($22,621.41). Section 1.61-12(c)(3) provides that if indebtedness is repurchased for a price that is exceeded by the issue price of the indebtedness plus the amount of discount already deducted, the excess is income from discharge of indebtedness. Therefore, S does not realize income from discharge of indebtedness. The result would be the same if P had contributed the indebtedness to the capital of S. Under section 108(e)(6), S would be treated as having satisfied the indebtedness with an amount of money equal to P's adjusted basis and, under section 1272(d)(2), P's adjusted basis is equal to $9,022,621.41.
Example 4. (i) P, a domestic corporation, owns 70 percent of the single class of stock of S, a domestic corporation. On January 1, 1986, P issued indebtedness that has an issue price of $5,000,000 and provides for no stated interest payments and a payment at maturity of $10,000,000. The indebtedness has a stated maturity date of December 31, 1995. On January 1, 1992, S purchases P's indebtedness from K, a partnership not related to P within the meaning of paragraph (d)(2) of this section, for cash in the amount of $6,000,000. The sum of the debt's issue price and previously deducted original issue discount is $7,578,582.83. P repays the indebtedness in full at maturity.
(ii) Under section 61(a)(12), section 108(e)(4), and paragraphs (a) and (f) of this section, P realizes $1,578,582.83 in income from discharge of indebtedness ($7,578,582.83 minus $6,000,000) on January 1, 1992.
(iii) Under paragraph (g)(1) of this section, the indebtedness is treated as issued to S on January 1, 1992, with an issue price of $6,000,000. Under section 1273(a), the $4,000,000 excess of the stated redemption price at maturity of the indebtedness ($10,000,000) over its issue price ($6,000,000) is orignial issue discount, which is includible in gross income by S and deductible by P over the remaining term of the indebtedness under sections 163(e) and 1272(a).
(iv) Accordingly, P deducts and S includes in income original issue discount as follows: in 1992, $817,316.20; in 1993, $928,650.49; in 1994, $1,055,150.67; and in 1995, $1,198,882.64.
(h) Effective date. This section applies to any transaction described in paragraph (a) and in either paragraph (b) or (c) of this section with an acquisition date on or after March 21, 1991. Although this section does not apply to direct or indirect acquisitions occurring before March 21, 1991, section 108(e)(4) is effective for any transaction after December 31, 1980, subject to the rules of section 7 of the Bankruptcy Tax Act of 1980 (Pub. L. 96-589, 94 Stat. 3389, 3411). Taxpayers may use any reasonable method of determining the amount of discharge of indebtedness income realized and the treatment of correlative adjustments under section 108(e)(4) for acquisitions of indebtedness before March 21, 1991, if such method is applied consistently by both the debtor and related holder.
[T.D. 8460, 57 FR 61808, Dec. 29, 1992]
§ 1.108-3 Intercompany losses and deductions.
(a) General rule. This section applies to certain losses and deductions from the sale, exchange, or other transfer of property between corporations that are members of a consolidated group or a controlled group (an intercompany transaction). See section 267(f) (controlled groups) and § 1.1502-13 (consolidated groups) for applicable definitions. For purposes of determining the attributes to which section 108(b) applies, a loss or deduction not yet taken into account under section 267(f) or § 1.1502-13 (an intercompany loss or deduction) is treated as basis described in section 108(b) that the transferor retains in property. To the extent a loss not yet taken into account is reduced under this section, it cannot subsequently be taken into account under section 267(f) or § 1.1502-13. For example, if S and B are corporations filing a consolidated return, and S sells land with a $100 basis to B for $90 and the $10 loss is deferred under section 267(f) and § 1.1502-13, the deferred loss is treated for purposes of section 108(b) as $10 of basis that S has in land (even though S has no remaining interest in the land sold to B) and is subject to reduction under section 108(b)(2)(E). Similar principles apply, with appropriate adjustments, if S and B are members of a controlled group and S's loss is deferred only under section 267(f).
(b) Effective date. This section applies with respect to discharges of indebtedness occurring on or after September 11, 1995.
[T.D. 8597, 60 FR 36680, July 18, 1995]
§ 1.108-4 Election to reduce basis of depreciable property under section 108(b)(5) of the Internal Revenue Code .
(a) Description. An election under section 108(b)(5) is available whenever a taxpayer excludes discharge of indebtedness income (COD income) from gross income under sections 108(a)(1)(A), (B), or (C) (concerning title 11 cases, insolvency, and qualified farm indebtedness, respectively). See sections 108(d)(2) and (3) for the definitions of title 11 case and insolvent. See section 108(g)(2) for the definition of qualified farm indebtedness.
(b) Time and manner. To make an election under section 108(b)(5), a taxpayer must enter the appropriate information on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment), and attach the form to the timely filed (including extensions) Federal income tax return for the taxable year in which the taxpayer has COD income that is excluded from gross income under section 108(a). An election under this section may be revoked only with the consent of the Commissioner.
(c) Effective date. This section applies to elections concerning discharges of indebtedness occurring on or after October 22, 1998.
[T.D. 8787, 63 FR 56562, Oct. 22, 1998]
§ 1.108-5 Time and manner for making election under the Omnibus Budget Reconciliation Act of 1993.
(a) Description. Section 108(c)(3)(C), as added by section 13150 of the Omnibus Budget Reconciliation Act of 1993 (Pub. L. 103-66, 107 Stat. 446), allows certain noncorporate taxpayers to elect to treat certain indebtedness described in section 108(c)(3) that is discharged after December 31, 1992, as qualified real property business indebtedness. This discharged indebtedness is excluded from gross income to the extent allowed by section 108.
(b) Time and manner for making election. The election described in this section must be made on the timely-filed (including extensions) Federal income tax return for the taxable year in which the taxpayer has discharge of indebtedness income that is excludible from gross income under section 108(a). The election is to be made on a completed Form 982, in accordance with that Form and its instructions.
(c) Revocability of election. The election described in this section is revocable with the consent of the Commissioner.
(d) Effective date. The rules set forth in this section are effective December 27, 1993.
[T.D. 8688, 61 FR 65322, Dec. 12, 1996. Redesignated by T.D. 8787, 63 FR 56563, Oct. 22, 1998]
§ 1.108-6 Limitations on the exclusion of income from the discharge of qualified real property business indebtedness.
(a) Indebtedness in excess of value. With respect to any qualified real property business indebtedness that is discharged, the amount excluded from gross income under section 108(a)(1)(D) (concerning discharges of qualified real property business indebtedness) shall not exceed the excess, if any, of the outstanding principal amount of that indebtedness immediately before the discharge over the net fair market value of the qualifying real property, as defined in § 1.1017-1(c)(1), immediately before the discharge. For purposes of this section, net fair market value means the fair market value of the qualifying real property (notwithstanding section 7701(g)), reduced by the outstanding principal amount of any qualified real property business indebtedness (other than the discharged indebtedness) that is secured by such property immediately before and after the discharge. Also, for purposes of section 108(c)(2)(A) and this section, outstanding principal amount means the principal amount of indebtedness together with all additional amounts owed that, immediately before the discharge, are equivalent to principal, in that interest on such amounts would accrue and compound in the future, except that outstanding principal amount shall not include amounts that are subject to section 108(e)(2) and shall be adjusted to account for unamortized premium and discount consistent with section 108(e)(3).
(b) Overall limitation. The amount excluded from gross income under section 108(a)(1)(D) shall not exceed the aggregate adjusted bases of all depreciable real property held by the taxpayer immediately before the discharge (other than depreciable real property acquired in contemplation of the discharge) reduced by the sum of any—
(1) Depreciation claimed for the taxable year the taxpayer excluded discharge of indebtedness from gross income under section 108(a)(1)(D); and
(2) Reductions to the adjusted bases of depreciable real property required under section 108(b) or section 108(g) for the same taxable year.
(c) Effective date. This section applies to discharges of qualified real property business indebtedness occurring on or after October 22, 1998.
[T.D. 8787, 63 FR 56563, Oct. 22, 1998]
§ 1.108-7 Reduction of attributes.
(a) In general. (1) If a taxpayer excludes discharge of indebtedness income (COD income) from gross income under section 108(a)(1)(A), (B), or (C), then the amount excluded shall be applied to reduce the following tax attributes of the taxpayer in the following order:
(i) Net operating losses.
(ii) General business credits.
(iii) Minimum tax credits.
(iv) Capital loss carryovers.
(v) Basis of property.
(vi) Passive activity loss and credit carryovers.
(vii) Foreign tax credit carryovers.
(2) The taxpayer may elect under section 108(b)(5), however, to apply any portion of the excluded COD income to reduce first the basis of depreciable property. To the extent the excluded COD income is not so applied, the taxpayer must then reduce any remaining tax attributes in the order specified in section 108(b)(2). If the excluded COD income exceeds the sum of the taxpayer's tax attributes, the excess is permanently excluded from the taxpayer's gross income. For rules relating to basis reductions required by sections 108(b)(2)(E) and 108(b)(5), see sections 1017 and 1.1017-1. For rules relating to the time and manner for making an election under section 108(b)(5), see § 1.108-4.
(b) Carryovers and carrybacks. The tax attributes subject to reduction under section 108(b)(2) and paragraph (a)(1) of this section that are carryovers to the taxable year of the discharge, or that may be carried back to taxable years preceding the year of the discharge, are taken into account by the taxpayer for the taxable year of the discharge or the preceding years, as the case may be, before such attributes are reduced pursuant to section 108(b)(2) and paragraph (a)(1) of this section.
(c) Transactions to which section 381 applies. If a taxpayer realizes COD income that is excluded from gross income under section 108(a) either during or after a taxable year in which the taxpayer is the distributor or transferor of assets in a transaction described in section 381(a), any tax attributes to which the acquiring corporation succeeds, including the basis of property acquired by the acquiring corporation in the transaction, must reflect the reductions required by section 108(b). For this purpose, all attributes listed in section 108(b)(2) immediately prior to the transaction described in section 381(a), but after the determination of tax for the year of the distribution or transfer of assets, including basis of property, will be available for reduction under section 108(b)(2). However, the basis of stock or securities of the acquiring corporation, if any, received by the taxpayer in exchange for the transferred assets shall not be available for reduction under section 108(b)(2).
(d) Special rules for S corporations—(1) In general. If an S corporation excludes COD income from gross income under section 108(a)(1)(A), (B), or (C), the amount excluded shall be applied to reduce the S corporation's tax attributes under paragraph (a)(1) of this section. For purposes of paragraph (a)(1)(i) of this section, the aggregate amount of the shareholders' losses or deductions that are disallowed for the taxable year of the discharge under section 1366(d)(1), including disallowed losses or deductions of a shareholder that transfers all of the shareholder's stock in the S corporation during the taxable year of the discharge, is treated as the net operating loss tax attribute (deemed NOL) of the S corporation for the taxable year of the discharge.
(2) Allocation of excess losses or deductions—(i) In general. If the amount of an S corporation's deemed NOL exceeds the amount of the S corporation's COD income that is excluded from gross income under section 108(a)(1)(A), (B), or (C), the excess deemed NOL shall be allocated to the shareholder or shareholders of the S corporation as a loss or deduction that is disallowed under section 1366(d) for the taxable year of the discharge.
(ii) Multiple shareholders—(A) In general. If an S corporation has multiple shareholders, to determine the amount of the S corporation's excess deemed NOL to be allocated to each shareholder under paragraph (d)(2)(i) of this section, calculate with respect to each shareholder the shareholder's excess amount. The shareholder's excess amount is the amount (if any) by which the shareholder's losses or deductions disallowed under section 1366(d)(1) (before any reduction under paragraph (a)(1) of this section) exceed the amount of COD income that would have been taken into account by that shareholder under section 1366(a) had the COD income not been excluded under section 108(a).
(B) Shareholders with a shareholder's excess amount. Each shareholder that has a shareholder's excess amount, as determined under paragraph (d)(2)(ii)(A) of this section, is allocated an amount equal to the S corporation's excess deemed NOL multiplied by a fraction, the numerator of which is the shareholder's excess amount and the denominator of which is the sum of all shareholders' excess amounts.
(C) Shareholders with no shareholder's excess amount. If a shareholder does not have a shareholder's excess amount as determined in paragraph (d)(2)(ii)(A) of this section, none of the S corporation's excess deemed NOL shall be allocated to that shareholder.
(iii) Terminating shareholder. Any amount of the S corporation's excess deemed NOL allocated under paragraph (d)(2) of this section to a shareholder that had transferred all of the shareholder's stock in the corporation during the taxable year of the discharge is permanently disallowed under § 1.1366-2(a)(6), unless the transfer of stock is described in section 1041(a). If the transfer of stock is described in section 1041(a), the amount of the S corporation's excess deemed NOL allocated to the transferor under paragraph (d)(2) of this section shall be treated as a loss or deduction incurred by the corporation in the succeeding taxable year with respect to the transferee. See section 1366(d)(2)(B).
(3) Character of excess losses or deductions allocated to a shareholder. The character of an S corporation's excess deemed NOL that is allocated to a shareholder under paragraph (d)(2) of this section consists of a proportionate amount of each item of the shareholder's loss or deduction that is disallowed for the taxable year of the discharge under section 1366(d)(1).
(4) Information requirements. If an S corporation excludes COD income from gross income under section 108(a) for a taxable year, each shareholder of the S corporation during the taxable year of the discharge must report to the S corporation the amount of the shareholder's losses and deductions that are disallowed for the taxable year of the discharge under section 1366(d)(1), even if that amount is zero. If a shareholder fails to report the amount of the shareholder's losses and deductions that are disallowed for the taxable year of the discharge under section 1366(d)(1) to the S corporation, or if the S corporation knows that the amount reported by the shareholder is inaccurate, or if the information, as reported, appears to be incomplete or incorrect, the S corporation may rely on its own books and records, as well as other information available to the S corporation, to determine the amount of the shareholder's losses and deductions that are disallowed for the taxable year of the discharge under section 1366(d)(1), provided that the S corporation knows or reasonably believes that its information presents an accurate reflection of the shareholder's disallowed losses and deductions under section 1366(d)(1). The S corporation must report to each shareholder the amount of the S corporation's excess deemed NOL that is allocated to that shareholder under paragraph (d)(2) of this section, even if that amount is zero, in accordance with applicable forms and instructions.
(e) Examples. The following examples illustrate the application of this section:
Example 1. (i) Facts. In Year 4, X, a corporation in a title 11 case, is entitled under section 108(a)(1)(A) to exclude from gross income $100,000 of COD income. For Year 4, X has gross income in the amount of $50,000. In each of Years 1 and 2, X had no taxable income or loss. In Year 3, X had a net operating loss of $100,000, the use of which when carried over to Year 4 is not subject to any restrictions other than those of section 172.
(ii) Analysis. Pursuant to paragraph (b) of this section, X takes into account the net operating loss carryover from Year 3 in computing its taxable income for Year 4 before any portion of the COD income excluded under section 108(a)(1)(A) is applied to reduce tax attributes. Thus, the amount of the net operating loss carryover that is reduced under section 108(b)(2) and paragraph (a) of this section is $50,000.
Example 2. (i) Facts. The facts are the same as in Example 1, except that in Year 4 X sustains a net operating loss in the amount of $100,000. In addition, in each of Years 2 and 3, X reported taxable income in the amount of $25,000.
(ii) Analysis. Pursuant to paragraph (b) of this section and section 172, the net operating loss sustained in Year 4 is carried back to Years 2 and 3 before any portion of the COD income excluded under section 108(a)(1)(A) is applied to reduce tax attributes. Thus, the amount of the net operating loss that is reduced under section 108(b)(2) and paragraph (a) of this section is $50,000.
Example 3. (i) Facts. In Year 2, X, a corporation in a title 11 case, has outstanding debts of $200,000 and a depreciable asset that has an adjusted basis of $75,000 and a fair market value of $100,000. X has no other assets or liabilities. X has a net operating loss of $80,000 that is carried over to Year 2 but has no general business credit, minimum tax credit, or capital loss carryovers. Under a plan of reorganization, X transfers its asset to Corporation Y in exchange for Y stock with a value of $100,000. X distributes the Y stock to its creditors in exchange for release of their claims against X. X's shareholders receive nothing in the transaction. The transaction qualifies as a reorganization under section 368(a)(1)(G) that satisfies the requirements of section 354(b)(1)(A) and (B). For Year 2, X has gross income of $10,000 (without regard to any income from the discharge of indebtedness) and is allowed a depreciation deduction of $10,000 in respect of the asset. In addition, it generates no general business credits.
(ii) Analysis. On the distribution of Y stock to X's creditors, under section 108(a)(1)(A), X is entitled to exclude from gross income the debt discharge amount of $100,000. (Under section 108(e)(8), X is treated as satisfying $100,000 of the debt owed the creditors for $100,000, the fair market value of the Y stock transferred to those creditors.) In Year 2, X has no taxable income or loss because its gross income is exactly offset by the depreciation deduction. As a result of the depreciation deduction, X's basis in the asset is reduced by $10,000 to $65,000. Pursuant to paragraph (c) of this section, the amount of X's net operating loss to which Y succeeds pursuant to section 381 and the basis of X's property transferred to Y must take into account the reductions required by section 108(b). Pursuant to paragraph (a) of this section, X's net operating loss carryover in the amount of $80,000 is reduced by $80,000 of the COD income excluded under section 108(a)(1). In addition, X's basis in the asset is reduced by $20,000, the extent to which the COD income excluded under section 108(a)(1) did not reduce the net operating loss. Accordingly, as a result of the reorganization, there is no net operating loss to which Y succeeds under section 381. Pursuant to section 361, X recognizes no gain or loss on the transfer of its property to Y. Pursuant to section 362(b), Y's basis in the asset acquired from X is $45,000.
Example 4. (i) Facts. The facts are the same as in Example 3, except that X elects under section 108(b)(5) to reduce first the basis of its depreciable asset.
(ii) Analysis. As in Example 3, on the distribution of Y stock to X's creditors, under section 108(a)(1)(A), X is entitled to exclude from gross income the debt discharge amount of $100,000. In addition, in Year 2, X has no taxable income or loss because its gross income is exactly offset by the depreciation deduction. As a result of the depreciation deduction, X's basis in the asset is reduced by $10,000 to $65,000. Pursuant to paragraph (c) of this section, the amount of X's net operating loss to which Y succeeds pursuant to section 381 and the basis of X's property transferred to Y must take into account the reductions required by section 108(b). As a result of the election under section 108(b)(5), X's basis in the asset is reduced by $65,000 to $0. In addition, X's net operating loss is reduced by $35,000, the extent to which the amount excluded from income under section 108(a)(1)(A) does not reduce X's asset basis. Accordingly, as a result of the reorganization, Y succeeds to X's net operating loss in the amount of $45,000 under section 381. Pursuant to section 361, X recognizes no gain or loss on the transfer of its property to Y. Pursuant to section 362(b), Y's basis in the asset acquired from X is $0.
Example 5. (i) Facts. During the entire calendar year 2009, A, B, and C each own equal shares of stock in X, a calendar year S corporation. As of December 31, 2009, A, B, and C each have a zero stock basis and X does not have any indebtedness to A, B, or C. For the 2009 taxable year, X excludes from gross income $45,000 of COD income under section 108(a)(1)(A). The COD income (had it not been excluded) would have been allocated $15,000 to A, $15,000 to B, and $15,000 to C under section 1366(a). For the 2009 taxable year, X has $30,000 of losses and deductions that X passes through pro rata to A, B, and C in the amount of $10,000 each. The losses and deductions that pass through to A, B, and C are disallowed under section 1366(d)(1). In addition, B has $10,000 of section 1366(d) losses from prior years and C has $20,000 of section 1366(d) losses from prior years. A's ($10,000), B's ($20,000) and C's ($30,000) combined $60,000 of disallowed losses and deductions for the taxable year of the discharge are treated as a current year net operating loss tax attribute of X under section 108(d)(7)(B) (deemed NOL) for purposes of the section 108(b) reduction of tax attributes.
(ii) Allocation. Under section 108(b)(2)(A), X's $45,000 of excluded COD income reduces the $60,000 deemed NOL to $15,000. Therefore, X has a $15,000 excess net operating loss (excess deemed NOL) to allocate to its shareholders. Under paragraph (d)(2)(ii)(C) of this section, none of the $15,000 excess deemed NOL is allocated to A because A's section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction ($10,000) do not exceed A's share of the excluded COD income for 2008 ($15,000). Thus, A has no shareholder's excess amount. Each of B's and C's respective section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction exceed each of B's and C's respective shares of the excluded COD income for 2008. B's excess amount is $5,000 ($20,000−$15,000) and C's excess amount is $15,000 ($30,000−$15,000). Therefore, the total of all shareholders' excess amounts is $20,000. Under paragraph (d)(2) of this section, X will allocate $3,750 of the $15,000 excess deemed NOL to B ($15,000 × $5,000/$20,000) and $11,250 of the $15,000 excess deemed NOL to C ($15,000 × $15,000/$20,000). These amounts are treated as losses and deductions disallowed under section 1366(d)(1) for the taxable year of the discharge. Accordingly, at the beginning of 2010, A has no section 1366(d)(2) carryovers, B has $3,750 of carryovers, and C has $11,250 of carryovers.
(iii) Character. Immediately prior to the section 108(b)(2)(A) reduction, B's $20,000 of section 1366(d) losses and deductions consisted of $8,000 of long-term capital losses, $7,000 of section 1231 losses, and $5,000 of ordinary losses. After the section 108(b)(2)(A) tax attribute reduction, X will allocate $3,750 of the excess deemed NOL to B. Under paragraph (d)(3) of this section, the $3,750 excess deemed NOL allocated to B consists of $1,500 of long-term capital losses (($8,000/$20,000) × $3,750), $1,312.50 of section 1231 losses (($7,000/$20,000) × $3,750), and $937.50 of ordinary losses (($5,000/$20,000) × $3,750). As a result, at the beginning of 2010, B's $3,750 of section 1366(d)(2) carryovers consist of $1,500 of long-term capital losses, $1,312.50 of section 1231 losses, and $937.50 of ordinary losses.
Example 6. (i) A and B each own 50 percent of the shares of stock in X, a calendar year S corporation. On March 1, 2009, X realizes $12,000 of COD income and excludes this amount from gross income under section 108(a)(1)(A) for X's 2009 taxable year. On June 30, 2009, A sells all of her shares of stock in X to C in a transfer not described in section 1041(a). X does not make a terminating election under section 1377(a)(2). The COD income (had it not been excluded) would have been allocated $3,000 to A, $6,000 to B, and $3,000 to C under section 1366(a). Prior to the section 108(b)(2)(A) reduction, for the taxable year of the discharge the shareholders have disallowed losses and deductions under section 1366(d) (including disallowed losses carried over to the current year under section 1366(d)(2)) in the following amounts: A—$5,000, B—$13,000, and C—$2,000. The combined $20,000 of disallowed losses and deductions for the taxable year of the discharge are treated as a current year net operating loss tax attribute of X under section 108(d)(7)(B) (deemed NOL).
(ii) Under section 108(b)(2)(A), X's $12,000 of excluded COD income reduces the $20,000 deemed NOL to $8,000. Therefore, X has an $8,000 excess net operating loss (excess deemed NOL) to allocate to its shareholders. Under paragraph (d)(2)(ii)(C) of this section, none of the $8,000 excess deemed NOL is allocated to C because C's section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction ($2,000) do not exceed C's share of the excluded COD income for 2008 ($3,000). However, each of A's and B's respective section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction exceed each of A's and B's respective shares of the excluded COD income for 2009. A's excess amount is $2,000 ($5,000−$3,000) and B's excess amount is $7,000 ($13,000−$6,000). Therefore, the total of all shareholders' excess amounts is $9,000. Under paragraph (d)(2) of this section, X will allocate $1,777.78 of the $8,000 excess deemed NOL to A ($8,000 × $2,000/$9,000) and $6,222.22 of the $8,000 excess deemed NOL to B ($8,000 × $7,000/$9,000). However, because A transferred all of her shares of stock in X in a transaction not described in section 1041(a), A's $1,777.78 of section 1366(d) losses and deductions are permanently disallowed under paragraph (d)(2)(iii) of this section. Accordingly, at the beginning of 2010, B has $6,222.22 of section 1366(d)(2) carryovers and C has no section 1366(d)(2) carryovers.
Example 7.The facts are the same as in Example 6, except that X, with the consent of A and C, makes a terminating election under section 1377(a)(2) upon A's sale of her stock in X to C. Therefore, the COD income (had it not been excluded) would have been allocated $6,000 to A, $6,000 to B, and $0 to C. Under paragraph (d)(2)(ii)(C) of this section, none of the $8,000 excess deemed NOL is allocated to A because A's section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction ($5,000) do not exceed A's share of the excluded COD income for 2009 ($6,000). However, each of B's and C's respective section 1366(d) losses and deductions immediately prior to the section 108(b)(2)(A) reduction exceed each of B's and C's respective shares of the excluded COD income for 2009. B's excess amount is $7,000 ($13,000−$6,000), C's excess amount is $2,000 ($2,000−$0). Therefore, the total of all shareholders' excess amounts is $9,000. Under paragraph (d)(2) of this section, X will allocate $6,222.22 of the $8,000 excess deemed NOL to B ($8,000 × $7,000/$9,000) and $1,777.78 of the $8,000 excess deemed NOL to C. Accordingly, at the beginning of 2010, B has $6,222.22 of section 1366(d)(2) carryovers and C has $1,777.78 of section 1366(d)(2) carryovers.
(f) Effective/applicability date—(1) Paragraphs (a), (b), (c), and Examples 1, 2, 3, and 4 of paragraph (e) of this section apply to discharges of indebtedness occurring on or after May 10, 2004.
(2) Paragraph (d) and Examples 5, 6, and 7 of paragraph (e) of this section apply to discharges of indebtedness occurring on or after October 30, 2009. Paragraph (d)(2)(iii) of this section applies on and after July 23, 2014. For rules that apply before that date, see 26 CFR part 1 (revised as of April 1, 2014).
[T.D. 9080, 68 FR 42592, July 18, 2003; 68 FR 56556, Oct. 1, 2003. Redesignated and amended by T.D. 9127, 69 FR 26039, May 11, 2004; T.D. 9469, 74 FR 56111, Oct. 30, 2009; T.D. 9682, 79 FR 42677, July 23, 2014]
§ 1.108-8 Indebtedness satisfied by partnership interest.
(a) In general. For purposes of determining income of a debtor from discharge of indebtedness (COD income), if a debtor partnership transfers a capital or profits interest in the partnership to a creditor in satisfaction of its recourse or nonrecourse indebtedness (a debt-for-equity exchange), the partnership is treated as having satisfied the indebtedness with an amount of money equal to the fair market value of the partnership interest.
(b) Determination of fair market value—(1) In general. All the facts and circumstances are considered in determining the fair market value of a partnership interest transferred by a debtor partnership to a creditor in satisfaction of the debtor partnership's indebtedness (debt-for-equity interest) for purposes of paragraph (a) of this section. If the fair market value of the debt-for-equity interest does not equal the fair market value of the indebtedness exchanged, then general tax law principles shall apply to account for the difference.
(2) Safe harbor—(i) General rule. For purposes of paragraph (a) of this section, the fair market value of a debt-for-equity interest is deemed to be equal to the liquidation value of the debt-for-equity interest, as defined in paragraph (b)(2)(iii) of this section, if the following requirements are satisfied—
(A) The creditor, debtor partnership, and its partners treat the fair market value of the indebtedness as being equal to the liquidation value of the debt-for-equity interest for purposes of determining the tax consequences of the debt-for-equity exchange;
(B) If, as part of the same overall transaction, the debtor partnership transfers more than one debt-for-equity interest to one or more creditors, then each creditor, debtor partnership, and its partners treat the fair market value of each debt-for-equity interest transferred by the debtor partnership to such creditors as equal to its liquidation value;
(C) The debt-for-equity exchange is a transaction that has terms that are comparable to terms that would be agreed to by unrelated parties negotiating with adverse interests; and
(D) Subsequent to the debt-for-equity exchange, the debtor partnership does not redeem the debt-for-equity interest, and no person bearing a relationship to the debtor partnership or its partners that is specified in section 267(b) or section 707(b) purchases the debt-for-equity interest, as part of a plan at the time of the debt-for-equity exchange that has as a principal purpose the avoidance of COD income by the debtor partnership.
(ii) Tiered-partnership rule. For purposes of this paragraph (b)(2), the liquidation value of a debt-for-equity interest in a partnership (upper-tier partnership) that directly or indirectly owns an interest in one or more partnerships (lower-tier partnership(s)) is determined by taking into account the liquidation value of such lower-tier partnership interests.
(iii) Definition of liquidation value. For purposes of this paragraph (b)(2), the liquidation value of a debt-for-equity interest equals the amount of cash that the creditor would receive with respect to the debt-for-equity interest if, immediately after the debt-for-equity exchange, the partnership sold all of its assets (including goodwill, going concern value, and any other intangibles) for cash equal to the fair market value of those assets and then liquidated.
(c) Example. The following example illustrates the provisions of this section:
Example. (i) AB partnership has $1,000 of outstanding indebtedness owed to C. C agrees to transfer to AB partnership the $1,000 indebtedness in a debt-for-equity exchange for a debt-for-equity interest in AB partnership. The liquidation value of C's debt-for-equity interest is $700, which is the amount of cash that C would receive with respect to that interest if, immediately after the debt-for-equity exchange, AB partnership sold all of its assets for cash equal to the fair market value of those assets and then liquidated. Each of the requirements of the liquidation value safe harbor described in paragraph (b)(2) of this section is satisfied.
(ii) Because the requirements in paragraph (b)(2) of this section are satisfied, the fair market value of C's debt-for-equity interest in AB partnership for purposes of determining AB partnership's COD income is the liquidation value of C's debt-for-equity interest, or $700. Accordingly, AB partnership is treated as satisfying the $1,000 indebtedness for $700 under section 108(e)(8).
(d) Effective/applicability date. This section applies to debt-for-equity exchanges occurring on or after November 17, 2011.
[T.D. 9557, 76 FR 71258, Nov. 17, 2011]
§ 1.108-9 Application of the bankruptcy and the insolvency provisions of section 108 to grantor trusts and disregarded entities.
(a) General rule—(1) Owner is the taxpayer. For purposes of applying section 108(a)(1)(A) and (B) to discharge of indebtedness income of a grantor trust or a disregarded entity, neither the grantor trust nor the disregarded entity shall be considered to be the “taxpayer,” as that term is used in section 108(a)(1) and (d)(1) through (3). Rather, for purposes of section 108(a)(1)(A) and (B) and (d)(1) through (3) and subject to section 108(d)(6), the owner of the grantor trust or the owner of the disregarded entity is the “taxpayer.”
(2) The bankruptcy exclusion. If indebtedness of a grantor trust or a disregarded entity is discharged in a title 11 case, section 108(a)(1)(A) applies to that discharged indebtedness only if the owner of the grantor trust or the owner of the disregarded entity is under the jurisdiction of the court in a title 11 case as the title 11 debtor. If the grantor trust or the disregarded entity is under the jurisdiction of the court in a title 11 case as the title 11 debtor, but the owner of the grantor trust or the owner of the disregarded entity is not, section 108(a)(1)(A) does not apply to the discharge of indebtedness income.
(3) The insolvency exclusion. Section 108(a)(1)(B) applies to the discharged indebtedness of a grantor trust or a disregarded entity only to the extent the owner of the grantor trust or the owner of the disregarded entity is insolvent. If the grantor trust or the disregarded entity is insolvent, but the owner of the grantor trust or the owner of the disregarded entity is solvent, section 108(a)(1)(B) does not apply to the discharge of indebtedness income.
(b) Application to partnerships. Under section 108(d)(6), in the case of a partnership, section 108(a)(1)(A) and (B) applies at the partner level. If a partnership holds an interest in a grantor trust or a disregarded entity, the applicability of section 108(a)(1)(A) and (B) to the discharge of indebtedness income is tested by looking to each partner to whom the income is allocable.
(c) Definitions—(1) Disregarded entity. For purposes of this section, a disregarded entity is an entity that is disregarded as an entity separate from its owner for Federal income tax purposes. See § 301.7701-2(c)(2)(i) of this chapter, the Procedure and Administration Regulations. Examples of disregarded entities include a domestic single-member limited liability company that does not elect to be classified as a corporation for Federal income tax purposes pursuant to § 301.7701-3 of this chapter, a corporation that is a qualified REIT subsidiary (within the meaning of section 856(i)(2)), and a corporation that is a qualified subchapter S subsidiary (within the meaning of section 1361(b)(3)(B)).
(2) Grantor trust. For purposes of this section, a grantor trust is any portion of a trust that is treated under subpart E of part I of subchapter J of chapter 1 of subtitle A of title 26 of the United States Code as being owned by the grantor or another person.
(3) Owner. Notwithstanding any other provision of this section to the contrary, neither a grantor trust nor a disregarded entity shall be considered an owner for purposes of this section.
(4) Title 11 debtor. For purposes of this section, a title 11 debtor is a debtor in a case under title 11 of the United States Code, as defined in 11 U.S.C. 101(13).
(d) Applicability date. The rules of this section apply to discharge of indebtedness income occurring on or after June 10, 2016.
[T.D. 9771, 81 FR 37507, June 10, 2016]
§ 1.108(c)-1T [Reserved]
§ 1.108(i)-0 Definitions and effective/applicability dates.
(a) Definitions. For purposes of regulations under section 108(i)—
(1) Acquisition. An acquisition, with respect to any applicable debt instrument, includes an acquisition of the debt instrument for cash or other property, the exchange of the debt instrument for another debt instrument (including an exchange resulting from a modification of the debt instrument), the exchange of the debt instrument for corporate stock or a partnership interest, the contribution of the debt instrument to capital, the complete forgiveness of the indebtedness by the holder of the debt instrument, and a direct or an indirect acquisition within the meaning of § 1.108-2.
(2) Applicable debt instrument. An applicable debt instrument is a debt instrument that was issued by a C corporation or any other person in connection with the conduct of a trade or business by such person. In the case of an intercompany obligation (as defined in § 1.1502-13(g)(2)(ii)), applicable debt instrument includes only an instrument for which COD income is realized upon the instrument's deemed satisfaction under § 1.1502-13(g)(5).
(3) C corporation issuer. C corporation issuer means a C corporation that issues a debt instrument with any deferred OID deduction.
(4) C corporation partner. A C corporation partner is a C corporation that is a direct or indirect partner of an electing partnership or a related partnership.
(5) COD income. COD income means income from the discharge of indebtedness, as determined under sections 61(a)(12) and 108(a) and the regulations under those sections.
(6) COD income amount. A COD income amount is a partner's distributive share of COD income with respect to an applicable debt instrument of an electing partnership.
(7) Debt instrument. Debt instrument means a bond, debenture, note, certificate, or any other instrument or contractual arrangement constituting indebtedness (within the meaning of section 1275(a)(1)).
(8) Deferral period. For a reacquisition that occurs in 2009, deferral period means the taxable year of the reacquisition and the four taxable years following such taxable year. For a reacquisition that occurs in 2010, deferral period means the taxable year of the reacquisition and the three taxable years following such taxable year.
(9) Deferred amount. A deferred amount is the portion of a partner's COD income amount with respect to an applicable debt instrument that is deferred under section 108(i).
(10) Deferred COD income. Deferred COD income means COD income that is deferred under section 108(i).
(11) Deferred item. A deferred item is any item of deferred COD income or deferred OID deduction that has not been previously taken into account under section 108(i).
(12) Deferred OID deduction. A deferred OID deduction means an otherwise allowable deduction for OID that is deferred under section 108(i)(2) with respect to a debt instrument issued (or treated as issued under section 108(e)(4)) in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a).
(13) Deferred section 465 amount. A deferred section 465 amount is described in paragraph (d)(3) of § 1.108(i)-2.
(14) Deferred section 752 amount. A deferred section 752 amount is described in paragraph (b)(3) of § 1.108(i)-2.
(15) Direct partner. A direct partner is a person that owns a direct interest in a partnership.
(16) Electing corporation. An electing corporation is a C corporation with deferred COD income by reason of a section 108(i) election.
(17) Electing entity. An electing entity is an entity that is a taxpayer that makes an election under section 108(i).
(18) Electing member. An electing member is an electing corporation that is a member of an affiliated group that files a consolidated return.
(19) Electing partnership. An electing partnership is a partnership that makes an election under section 108(i).
(20) Electing S corporation. An electing S corporation is an S corporation that makes an election under section 108(i).
(21) Included amount. An included amount is the portion of a partner's COD income amount with respect to an applicable debt instrument that is not deferred under section 108(i) and is included in the partner's distributive share of partnership income for the taxable year of the partnership in which the reacquisition occurs.
(22) Inclusion period. The inclusion period is the five taxable years following the last taxable year of the deferral period.
(23) Indirect partner. An indirect partner is a person that owns an interest in a partnership through an S corporation and/or one or more partnerships.
(24) Issuing entity. An issuing entity is any entity that is—
(i) A related partnership;
(ii) A related S corporation;
(iii) An electing partnership that issues a debt instrument (or is treated as issuing a debt instrument under section 108(e)(4)) in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a); or
(iv) An electing S corporation that issues a debt instrument (or is treated as issuing a debt instrument under section 108(e)(4)) in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a).
(25) OID. OID means original issue discount, as determined under sections 1271 through 1275 (and the regulations under those sections). If the amount of OID with respect to a debt instrument is less than a de minimis amount as determined under § 1.1273-1(d), the OID is treated as zero for purposes of section 108(i)(2).
(26) Reacquisition. A reacquisition, with respect to any applicable debt instrument, is any event occurring after December 31, 2008 and before January 1, 2011, that causes COD income with respect to such applicable debt instrument, including any acquisition of the debt instrument by the debtor that issued (or is otherwise the obligor under) the debt instrument or a person related to such debtor (within the meaning of section 108(i)(5)(A)).
(27) Related partnership. A related partnership is a partnership that is related to the electing entity (within the meaning of section 108(i)(5)(A)) and that issues a debt instrument in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a).
(28) Related S corporation. A related S corporation is an S corporation that is related to the electing entity (within the meaning of section 108(i)(5)(A)) and that issues a debt instrument in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a).
(29) Separate interest. A separate interest is a direct interest in an electing partnership or in a partnership or S corporation that is a direct or indirect partner of an electing partnership.
(30) S corporation partner. An S corporation partner is an S corporation that is a direct or indirect partner of an electing partnership or a related partnership.
(b) Effective/Applicability dates—(1) In general. The rules of this section, § 1.108(i)-1, and § 1.108(i)-2, apply on or after July 2, 2013, to reacquisitions of applicable debt instruments in taxable years ending after December 31, 2008. In addition, the rules of § 1.108(i)-3 apply on or after July 2, 2013, to debt instruments issued after December 31, 2008, in connection with reacquisitions of applicable debt instruments in taxable years ending after December 31, 2008.
(2) Prior periods. For rules applying before July 2, 2013, see § 1.108(i)-0T, § 1.108(i)-1T, § 1.108(i)-2T, and § 1.108(i)-3T, as contained in 26 CFR part 1, revised April 1, 2013.
[T.D. 9622, 78 FR 39986, July 3, 2013; 78 FR 48607, Aug. 9, 2013]
§ 1.108(i)-1 Deferred discharge of indebtedness income and deferred original issue discount deductions of C corporations.
(a) Overview. Section 108(i)(1) provides an election for the deferral of COD income arising in connection with the reacquisition of an applicable debt instrument. An electing corporation generally includes deferred COD income ratably over the inclusion period. Paragraph (b) of this section provides rules for the mandatory acceleration of an electing corporation's remaining deferred COD income, the mandatory acceleration of a C corporation issuer's deferred OID deductions, and for the elective acceleration of an electing member's (other than the common parent's) remaining deferred COD income. Paragraph (c) of this section provides examples illustrating the application of the mandatory and elective acceleration rules. Paragraph (d) of this section provides rules for the computation of an electing corporation's earnings and profits. Paragraph (e) of this section refers to the effective/applicability dates.
(b) Acceleration events—(1) Deferred COD income. Except as otherwise provided in paragraphs (b)(2) and (3) of this section, and § 1.108(i)-2(b)(6) (in the case of a corporate partner), an electing corporation's deferred COD income is taken into account ratably over the inclusion period.
(2) Mandatory acceleration events. An electing corporation takes into account all of its remaining deferred COD income, including its share of an electing partnership's deferred COD income, immediately before the occurrence of any one of the events described in this paragraph (b)(2) (mandatory acceleration events), regardless of whether the electing corporation is in a title 11 or similar case at the time the mandatory acceleration event occurs.
(i) Changes in tax status. The electing corporation changes its tax status. For purposes of the preceding sentence, an electing corporation is treated as changing its tax status if it becomes one of the following entities:
(A) A tax-exempt entity as defined in § 1.337(d)-4(c)(2).
(B) An S corporation as defined in section 1361(a)(1).
(C) A qualified subchapter S subsidiary as defined in section 1361(b)(3)(B).
(D) An entity operating on a cooperative basis within the meaning of section 1381.
(E) A regulated investment company (RIC) as defined in section 851 or a real estate investment trust (REIT) as defined in section 856.
(F) A qualified REIT subsidiary as defined in section 856(i), but only if the qualified REIT subsidiary was not a REIT immediately before it became a qualified REIT subsidiary.
(ii) Cessation of corporate existence—(A) In general. The electing corporation ceases to exist for Federal income tax purposes.
(B) Exception for section 381(a) transactions—(1) In general. The electing corporation is not treated as ceasing to exist and is not required to take into account its remaining deferred COD income solely because its assets are acquired in a transaction to which section 381(a) applies. In such a case, the acquiring corporation succeeds to the electing corporation's remaining deferred COD income and becomes subject to section 108(i) and the regulations thereunder, including all reporting requirements, as if the acquiring corporation were the electing corporation. A transaction is not treated as one to which section 381(a) applies for purposes of this paragraph (b)(2)(ii)(B) in the following circumstances—
(i) The acquisition of the assets of an electing corporation by an S corporation, if the acquisition is described in section 1374(d)(8);
(ii) The acquisition of the assets of an electing corporation by a RIC or REIT, if the acquisition is described in § 1.337(d)-7(a)(2)(ii);
(iii) The acquisition of the assets of a domestic electing corporation by a foreign corporation;
(iv) The acquisition of the assets of a foreign electing corporation by a domestic corporation, if as a result of the transaction, one or more exchanging shareholders include in income as a deemed dividend the all earnings and profits amount with respect to stock in the foreign electing corporation pursuant to § 1.367(b)-3(b)(3);
(v) The acquisition of the assets of an electing corporation by a tax-exempt entity as defined in § 1.337(d)-4(c)(2); or
(vi) The acquisition of the assets of an electing corporation by an entity operating on a cooperative basis within the meaning of section 1381.
(2) Special rules for consolidated groups—(i) Liquidations. For purposes of paragraph (b)(2)(ii)(B) of this section, the acquisition of assets by distributee members of a consolidated group upon the liquidation of an electing corporation is not treated as a transaction to which section 381(a) applies, unless immediately prior to the liquidation, one of the distributee members owns stock in the electing corporation meeting the requirements of section 1504(a)(2) (without regard to § 1.1502-34). See § 1.1502-80(g).
(ii) Taxable years. In the case of an intercompany transaction to which section 381(a) applies, the transaction does not cause the transferor or distributor to have a short taxable year for purposes of determining the taxable year of the deferral and inclusion period.
(iii) Net value acceleration rule—(A) In general. The electing corporation engages in an impairment transaction and, immediately after the transaction, the gross value of the electing corporation's assets (gross asset value) is less than one hundred and ten percent of the sum of its total liabilities and the tax on the net amount of its deferred items (the net value floor) (the net value acceleration rule). Impairment transactions are any transactions, however effected, that impair an electing corporation's ability to pay the amount of Federal income tax liability on its deferred COD income and include, for example, distributions (including section 381(a) transactions), redemptions, below-market sales, charitable contributions, and the incurrence of additional indebtedness without a corresponding increase in asset value. Value-for-value sales or exchanges (for example, an exchange to which section 351 or section 721 applies), or mere declines in the market value of the electing corporation's assets are not impairment transactions. In addition, an electing corporation's investments and expenditures in pursuance of its good faith business judgment are not impairment transactions. For purposes of determining an electing corporation's gross asset value, the amount of any distribution that is not treated as an impairment transaction under paragraph (b)(2)(iii)(D) of this section (distributions and charitable contributions consistent with historical practice) or under paragraph (b)(2)(iii)(E) of this section (special rules for RICs and REITs) is treated as an asset of the electing corporation. Solely for purposes of computing the amount of the net value floor, the tax on the deferred items is determined by applying the highest rate of tax specified in section 11(b) for the taxable year.
(B) Transactions integrated. Any transaction that occurs before the reacquisition of an applicable debt instrument, but that occurs pursuant to the same plan as the reacquisition, is taken into account in determining whether the gross asset value of the electing corporation is less than the net value floor.
(C) Corrective action to restore net value. An electing corporation is not required to take into account its deferred COD income under the net value acceleration rule of paragraph (b)(2)(iii)(A) of this section if, before the due date of the electing corporation's return (including extensions), value is restored in a transaction in an amount equal to the lesser of—
(1) The amount of value that was removed from the electing corporation in one or more impairment transactions (net of amounts previously restored under this paragraph (b)(2)(iii)(C)); or
(2) The amount by which the electing corporation's net value floor exceeds its gross asset value.
For example, assume an electing corporation incurs $50 of debt, distributes the $50 of proceeds to its shareholder, and immediately after the distribution, the electing corporation's gross asset value is below the net value floor by $25. The electing corporation may avoid the inclusion of its remaining deferred COD income if value of at least $25 is restored to it before the due date of the electing corporation's tax return (including extensions) for the taxable year that includes the distribution. The value that must be restored is determined at the time of the impairment transaction on a net value basis (for example, additional borrowings by an electing corporation do not restore value).
(D) Exceptions for distributions and charitable contributions that are consistent with historical practice. An electing corporation's distributions are not treated as impairment transactions (and are not taken into account as a reduction of the electing corporation's gross asset value when applying the net value acceleration rule to any impairment transaction), to the extent that the distributions are described in section 301(c) and the amount of these distributions, in the aggregate, for the applicable taxable year (applicable distribution amount) does not exceed the annual average amount of section 301(c) distributions over the preceding three taxable years (average distribution amount). If an electing corporation's applicable distribution amount exceeds its average distribution amount (excess amount), then the amount of the impairment transaction equals the excess amount. Appropriate adjustments must be made to take into account any issuances or redemptions of stock, or similar transactions, occurring during the taxable year of distribution or any of the preceding three taxable years. If the electing corporation has a short taxable year for the year of the distribution or for any of the preceding three taxable years, the amounts are determined on an annualized basis. If an electing corporation has been in existence for less than three years, the period during which the electing corporation has been in existence is substituted for the preceding three taxable years. For purposes of determining an electing corporation's average distribution amount, the electing corporation does not take into account the distribution history of a distributor or transferor in a transaction to which section 381(a) applies (other than a transaction described in section 368(a)(1)(F)). Rules similar to those prescribed in this paragraph (b)(2)(iii)(D) also apply to an electing corporation's charitable contributions (within the meaning of section 170(c)) that are consistent with its historical practice.
(E) Special rules for RICs and REITs—(1) Distributions. Notwithstanding paragraph (b)(2)(iii)(D) of this section, in the case of a RIC or REIT, any distribution with respect to stock that is treated as a dividend under section 852 or 857 is not treated as an impairment transaction (and is not taken into account as a reduction in gross asset value when applying the net value acceleration rule to any impairment transaction).
(2) Redemptions by RICs. Any redemption of a redeemable security, as defined in 15 U.S.C. section 80a-2(a)(32), by a RIC in the ordinary course of business is not treated as an impairment transaction (and is not taken into account as a reduction in gross asset value when applying the net value acceleration rule to any impairment transaction).
(F) Special rules for consolidated groups—(1) Impairment transactions and net value acceleration rule. In the case of an electing member, the determination of whether the member has engaged in an impairment transaction is made on a group-wide basis. An electing member is treated as engaging in an impairment transaction if any member's transaction impairs the group's ability to pay the tax liability associated with all electing members' deferred COD income. Accordingly, intercompany transactions are not impairment transactions. Similarly, the net value acceleration rule is applied by reference to the gross asset value of all members (excluding stock of members whether or not described in section 1504(a)(4)), the liabilities of all members, and the tax on all members' deferred items. For example, assume P is the common parent of the P-S consolidated group, S has a section 108(i) election in effect, and S makes a $100 distribution to P which, on a separate entity basis, would reduce S's gross asset value below the net value floor. S's intercompany distribution to P is not an impairment transaction. However, if P makes a $100 distribution to its shareholder, P's distribution is an impairment transaction (unless the distribution is consistent with its historical practice under paragraph (b)(2)(iii)(D) of this section), and the net value acceleration rule is applied by reference to the assets, liabilities, and deferred items of the P-S group.
(2) Departing member. If an electing member that previously engaged in one or more impairment transactions on a separate entity basis ceases to be a member of a consolidated group (departing member), the cessation is treated as an impairment transaction and the net value acceleration rule under paragraph (b)(2)(iii)(A) of this section is applied to the departing member on a separate entity basis immediately after ceasing to be a member (and taking into account the impairment transaction(s) that occurred on a separate entity basis). If the departing member's gross asset value is below the net value floor, the departing member's remaining deferred COD income is taken into account immediately before the departing member ceases to be a member (unless value is restored under paragraph (b)(2)(iii)(C) of this section). If the departing member's deferred COD income is not accelerated, the departing member is subject to the reporting requirements of section 108(i) on a separate entity basis. If the departing member becomes a member of another consolidated group, the cessation is treated as an impairment transaction and the net value acceleration rule under paragraph (b)(2)(iii)(A) of this section is applied by reference to the assets, liabilities, and the tax on deferred items of the members of the acquiring group immediately after the transaction. If the acquiring group's gross asset value is below the net value floor, the departing member's remaining deferred COD income is taken into account immediately before the departing member ceases to be a member (unless value is restored under paragraph (b)(2)(iii)(C) of this section). If the departing member's remaining deferred COD income is not accelerated, the common parent of the acquiring group succeeds to the reporting requirements of section 108(i) with respect to the departing member.
(3) Elective acceleration for certain consolidated group members—(i) In general. An electing member (other than the common parent) of a consolidated group may elect at any time to accelerate in full (and not in part) the inclusion of its remaining deferred COD income with respect to all applicable debt instruments by filing a statement described in paragraph (b)(3)(ii) of this section. Once made, an election to accelerate deferred COD income under this paragraph (b)(3) is irrevocable.
(ii) Time and manner for making election—(A) In general. The election to accelerate the inclusion of an electing member's remaining deferred COD income with respect to all applicable debt instruments is made on a statement attached to a timely filed tax return (including extensions) for the year in which the deferred COD income is taken into account. The election is made by the common parent on behalf of the electing member. See § 1.1502-77(a).
(B) Additional information. The statement must include—
(1) Label. A label entitled “SECTION 1.108(i)-1 ELECTION AND INFORMATION STATEMENT BY [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF THE ELECTING MEMBER]”; and
(2) Required Information. An identification of each applicable debt instrument to which an election under this paragraph (b)(3) applies and the corresponding amount of—
(i) Deferred COD income that is accelerated under this paragraph (b)(3); and
(ii) Deferred OID deductions that are accelerated under paragraph (b)(4) of this section.
(4) Deferred OID deductions—(i) In general. Except as otherwise provided in paragraph (b)(4)(ii) of this section and § 1.108(i)-2(b)(6) (in the case of a C corporation partner), a C corporation issuer's deferred OID deductions are taken into account ratably over the inclusion period.
(ii) OID acceleration events. A C corporation issuer takes into account all of its remaining deferred OID deductions with respect to a debt instrument immediately before the occurrence of any one of the events described in this paragraph (b)(4)(ii), regardless of whether the C corporation issuer is in a title 11 or similar case.
(A) Inclusion of deferred COD income. An electing entity or its owners take into account all of the remaining deferred COD income to which the C corporation issuer's deferred OID deductions relate. If, under § 1.108(i)-2(b) or (c), an electing entity or its owners take into account only a portion of the deferred COD income to which the deferred OID deductions relate, then the C corporation issuer takes into account a proportionate amount of the remaining deferred OID deductions.
(B) Changes in tax status. The C corporation issuer changes its tax status within the meaning of paragraph (b)(2)(i) of this section.
(C) Cessation of corporate existence—(1) In general. The C corporation issuer ceases to exist for Federal income tax purposes.
(2) Exception for section 381(a) transactions—(i) In general. A C corporation issuer is not treated as ceasing to exist and does not take into account its remaining deferred OID deductions in a transaction to which section 381(a) applies, taking into account the application of § 1.1502-34, as appropriate. See § 1.1502-80(g). This exception does not apply to a transaction that is not treated as one to which section 381(a) applies under paragraph (b)(2)(iii)(B)(1) of this section.
(ii) Taxable years. In the case of an intercompany transaction to which section 381(a) applies, the transaction does not cause the transferor or distributor to have a short taxable year for purposes of determining the taxable year of the deferral and inclusion period.
(c) Examples. The application of this section is illustrated by the following examples. Unless otherwise stated, P, S, S1, and X are domestic C corporations, and each files a separate return on a calendar year basis:
Example 1. Net value acceleration rule. (i) Facts. On January 1, 2009, S reacquires its own note and realizes $400 of COD income. Pursuant to an election under section 108(i), S defers recognition of the entire $400 of COD income. Therefore, absent a mandatory acceleration event, S will take into account $80 of its deferred COD income in each year of the inclusion period. On December 31, 2010, S makes a $25 distribution to its sole shareholder, P, and this is the only distribution made by S in the past four years. Immediately following the distribution, S's gross asset value is $100, S has no liabilities, and the Federal income tax on S's $400 of deferred COD income is $140. Accordingly, S's net value floor is $154 (110% × $140).
(ii) Analysis. Under paragraph (b)(2)(iii)(A) of this section, S's distribution is an impairment transaction. Immediately following the distribution, S's gross asset value of $100 is less than the net value floor of $154. Accordingly, under the net value acceleration rule of paragraph (b)(2)(iii)(A) of this section, S takes into account its $400 of deferred COD income immediately before the distribution.
(iii) Corrective action to restore value. The facts are the same as in paragraph (i) of this Example 1, except that P contributes assets with a value of $25 to S before the due date of S's 2010 return (including extensions). Because P restores $25 of value to S (the lesser of the amount of value removed in the distribution ($25) or the amount by which S's net value floor exceeds its gross asset value ($54)), under paragraph (b)(2)(iii)(C) of this section, S does not take into account its $400 of deferred COD income.
Example 2. Distributions consistent with historical practice. (i) Facts. P, a publicly traded corporation, makes a valid section 108(i) election with respect to COD income realized in 2009. On December 31, 2009, P distributes $25 million on its 5 million shares of common stock outstanding. As of January 1, 2006, P has 10 million shares of common stock outstanding, and on March 31, 2006, P distributes $10 million on those 10 million shares. On September 15, 2006, P effects a 2:1 reverse stock split, and on December 31, 2006, P distributes $10 million on its 5 million shares of common stock outstanding. In each of 2007 and 2008, P distributes $5 million on its 5 million shares of common stock outstanding. All of the distributions are described in section 301(c).
(ii) Amount of impairment transaction. Under paragraph (b)(2)(iii)(D) of this section, P's 2009 distributions are not treated as impairment transactions (and are not taken into account as a reduction of P's gross asset value when applying the net value acceleration rule to any impairment transaction), to the extent that the aggregate amount distributed in 2009 (the applicable distribution amount) does not exceed the annual average amount of distributions (the average distribution amount) over the preceding three taxable years. Accordingly, P's applicable distribution amount for 2009 is $25 million, and its average distribution amount is $10 million ($20 million (2006) plus $5 million (2007) plus $5 million (2008) divided by 3). The reverse stock split in 2006 is not a transaction requiring an adjustment to the determination of the average distribution amount. Because P's applicable distribution amount of $25 million exceeds its average distribution amount of $10 million, under paragraph (b)(2)(iii)(D) of this section, the amount of P's 2009 distribution that is treated as an impairment transaction is $15 million. The balance of the 2009 distribution, $10 million, is not treated as an impairment transaction (and is not taken into account as a reduction in P's gross asset value when applying the net value acceleration rule to any impairment transaction).
(iii) Distribution history. The facts are the same as in paragraph (i) of this Example 2, except that in 2010, P merges into X in a transaction to which section 381(a) applies, with X succeeding to P's deferred COD income, and X makes a distribution to its shareholders. For purposes of determining whether X's distribution is consistent with its historical practice, the average distribution amount is determined solely with respect to X's distribution history.
Example 3. Cessation of corporate existence. (i) Transaction to which section 381(a) applies. P owns all of the stock of S. In 2009, S reacquires its own note and elects to defer recognition of its $400 of COD income under section 108(i). On December 31, 2010, S liquidates into P in a transaction that qualifies under section 332. Under paragraph (b)(2) of this section, S must take into account all of its remaining deferred COD income upon the occurrence of any one of the mandatory acceleration events. Although S ceases its corporate existence as a result of the liquidation, S is not required to take into account its remaining deferred COD income under the exception in paragraph (b)(2)(ii)(B) of this section because its assets are acquired in a transaction to which section 381(a) applies. However, under paragraph (b)(2)(iii)(A) of this section, S's distribution to P is an impairment transaction and the net value acceleration rule is applied with respect to the assets, liabilities, and deferred items of P (S's successor) immediately following the distribution. If S's deferred COD income is not taken into account under the net value acceleration rule of (b)(2)(iii) of this section, P succeeds to S's remaining deferred COD income and to S's reporting requirements as if P were the electing corporation.
(ii) Debt-laden distributee. The facts are the same as in paragraph (i) of this Example 3, except that in the liquidation, S distributes $100 of assets to P, a holding company whose only asset is its stock in S. Assume that immediately following the distribution, P's gross asset value is $100, P has $60 of liabilities, and the Federal income tax on the $400 of deferred COD income is $140. Under paragraph (b)(2) of this section, S must take into account all of its remaining deferred COD income upon the occurrence of any one of the mandatory acceleration events. Although S ceases its corporate existence as a result of the liquidation, S is not required to take into account its remaining deferred COD income under the exception in paragraph (b)(2)(ii)(B) of this section because its assets are acquired in a transaction to which section 381(a) applies. However, under paragraph (b)(2)(iii)(A) of this section, S's distribution to P is an impairment transaction and the net value acceleration rule is applied with respect to the assets, liabilities, and deferred items of P (S's successor). Immediately following the distribution, P's gross asset value of $100 is less than the net value floor of $220 [110% × ($60 + $140)]. Accordingly, under the net value acceleration rule of paragraph (b)(2)(iii)(A) of this section, S is required to take into account its $400 of deferred COD income immediately before the distribution, unless value is restored to P pursuant to paragraph (b)(2)(iii)(C) of this section.
(iii) Foreign acquirer. The facts are the same as in paragraph (i) of this Example 3, except that P is a foreign corporation. Although S's assets are acquired in a transaction to which section 381(a) applies, under paragraph (b)(2)(ii)(B)(1)(iii) of this section, the exception to accelerated inclusion does not apply and S takes into account its remaining deferred COD income immediately before the liquidation. See also section 367(e)(2) and the regulations thereunder.
(iv) Section 338 transaction. P, the common parent of a consolidated group (P group), owns all the stock of S1, one of the members of the P group. In 2009, S1 reacquires its own indebtedness and realizes $30 of COD income. Pursuant to an election under section 108(i), S1 defers recognition of the entire $30 of COD income. In 2010, P sells all the stock of S1 to X, an unrelated corporation, for $300, and P and X make a timely section 338(h)(10) election with respect to the sale. Under paragraph (b)(2)(ii)(A) of this section, an electing corporation takes into account its remaining deferred COD income when it ceases its existence for Federal income tax purposes unless the exception in paragraph (b)(2)(ii)(B) of this section applies. Pursuant to section 338(h)(10) and the regulations, S1 is treated as transferring all of its assets to an unrelated person in exchange for consideration that includes the discharge of its liabilities. This deemed value-for-value exchange is not an impairment transaction. Following the deemed sale, while S1 is still a member of the P group, S1 is treated as distributing all of its assets to P and as ceasing its existence. Under these facts, the distribution of all of S1's assets constitutes a deemed liquidation, and is a transaction to which sections 332 and 381(a) apply. Although S1 ceases its corporate existence as a result of the liquidation, S1 is not required to take into account its remaining deferred COD income under the exception in paragraph (b)(2)(ii)(B) of this section because its assets are acquired in a transaction to which section 381(a) applies. P succeeds to S1's remaining deferred COD income and to S1's reporting requirements as if P were the electing corporation. Under paragraph (b)(2)(iii)(F)(1) of this section, the intercompany distribution from S1 to P is not an impairment transaction.
(d) Earnings and profits—(1) In general. Deferred COD income increases earnings and profits in the taxable year that it is realized and not in the taxable year or years that the deferred COD income is includible in gross income. Deferred OID deductions decrease earnings and profits in the taxable year or years in which the deduction would be allowed without regard to section 108(i).
(2) Exceptions—(i) RICs and REITs. Notwithstanding paragraph (d)(1) of this section, deferred COD income increases earnings and profits of a RIC or REIT in the taxable year or years in which the deferred COD income is includible in gross income and not in the year that the deferred COD income is realized. Deferred OID deductions decrease earnings and profits of a RIC or REIT in the taxable year or years that the deferred OID deductions are deductible.
(ii) Alternative minimum tax. For purposes of calculating alternative minimum taxable income, any items of deferred COD income or deferred OID deduction increase or decrease, respectively, adjusted current earnings under section 56(g)(4) in the taxable year or years that the item is includible or deductible.
(e) Effective/applicability dates. For effective/applicability dates, see § 1.108(i)-0(b).
[T.D. 9622, 78 FR 39987, July 3, 2013; 78 FR 48607, Aug. 9, 2013]
§ 1.108(i)-2 Application of section 108(i) to partnerships and S corporations.
(a) Overview. Under section 108(i), a partnership or an S corporation may elect to defer COD income arising in connection with a reacquisition of an applicable debt instrument for the deferral period. COD income deferred under section 108(i) is included in gross income ratably over the inclusion period, or earlier upon the occurrence of any acceleration event described in paragraph (b)(6) or (c)(3) of this section. If a debt instrument is issued (or treated as issued under section 108(e)(4)) in a debt-for-debt exchange described in section 108(i)(2)(A) or a deemed debt-for-debt exchange described in § 1.108(i)-3(a), some or all of the deductions for OID with respect to such debt instrument must be deferred during the deferral period. The aggregate amount of OID deductions deferred during the deferral period is generally allowed as a deduction ratably over the inclusion period, or earlier upon the occurrence of any acceleration event described in paragraph (b)(6) or (c)(3) of this section. Paragraph (b) of this section provides rules that apply to partnerships. Paragraph (c) of this section provides rules that apply to S corporations. Paragraph (d) of this section provides general rules that apply to partnerships and S corporations. Paragraph (e) of this section provides election procedures and reporting requirements. Paragraph (f) of this section contains the effective/applicability date. See § 1.108(i)-0(a) for definitions that apply to this section.
(b) Specific rules applicable to partnerships—(1) Allocation of COD income and partner's deferred amounts. An electing partnership that defers any portion of COD income realized from a reacquisition of an applicable debt instrument under section 108(i) must allocate all of the COD income with respect to the applicable debt instrument to its direct partners that are partners in the electing partnership immediately before the reacquisition in the manner in which the income would be included in the distributive shares of the partners under section 704 and the regulations under section 704, including § 1.704-1(b)(2)(iii), without regard to section 108(i). The electing partnership may determine, in any manner, the portion, if any, of a partner's COD income amount with respect to an applicable debt instrument that is the deferred amount, and the portion, if any, that is the included amount. However, no partner's deferred amount with respect to an applicable debt instrument may exceed that partner's COD income amount with respect to such applicable debt instrument, and the aggregate amount of the partners' COD income amounts and deferred amounts with respect to each applicable debt instrument must equal the electing partnership's COD income amount and deferred amount, respectively, with respect to each such applicable debt instrument.
(2) Basis adjustments and capital account maintenance—(i) Basis adjustments. The adjusted basis of a partner's interest in a partnership is not increased under section 705(a)(1) by the partner's deferred amount in the taxable year of the reacquisition. The adjusted basis of a partner's interest in a partnership is not decreased under section 705(a)(2) by the partner's share of any deferred OID deduction in the taxable year in which the deferred OID accrues. The adjusted basis of a partner's interest in a partnership is adjusted under section 705(a) by the partner's share of the electing partnership's deferred items for the taxable year in which the partner takes into account such deferred items under this section.
(ii) Capital account maintenance. For purposes of maintaining a partner's capital account under § 1.704-1(b)(2)(iv) and notwithstanding § 1.704-1(b)(2)(iv)(n), the capital account of a partner of a partnership is adjusted under § 1.704-1(b)(2)(iv) for a partner's share of an electing partnership's deferred items as if no election under section 108(i) were made.
(3) Deferred section 752 amount—(i) In general. An electing partnership shall determine, for each of its direct partners with a deferred amount, the partner's deferred section 752 amount, if any, with respect to an applicable debt instrument. A partner's deferred section 752 amount with respect to an applicable debt instrument equals the decrease in the partner's share of a partnership liability under section 752(b) resulting from the reacquisition of the applicable debt instrument that is not treated as a current distribution of money under section 752(b) by reason of section 108(i)(6) (deferred section 752 amount). A partner's deferred section 752 amount is treated as a distribution of money by the partnership to the partner under section 752(b) at the same time and, to the extent remaining, in the same amount as the partner recognizes the deferred amount with respect to the applicable debt instrument.
(ii) Electing partnership's computation of a partner's deferred section 752 amount. To compute a partner's deferred section 752 amount, the electing partnership must first determine the amount of gain that its direct partner would recognize in the taxable year of a reacquisition under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the deferral provided in the second sentence of section 108(i)(6) (the section 108(i)(6) deferral). If a direct partner of an electing partnership would not recognize any gain under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the section 108(i)(6) deferral, the partner will not have a deferred section 752 amount with respect to any applicable debt instrument that is reacquired during the taxable year. If a direct partner of an electing partnership would recognize gain under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the section 108(i)(6) deferral, the partner's deferred section 752 amount for all applicable debt instruments that are reacquired during the taxable year is equal to the lesser of the partner's aggregate deferred amounts from the electing partnership for all applicable debt instruments reacquired during the taxable year, or the gain that the partner would recognize in the taxable year of the reacquisitions under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral. In determining the amount of gain that the direct partner would recognize in the taxable year of a reacquisition under section 731 as a result of the reacquisition of one or more applicable debt instruments during the taxable year absent the section 108(i)(6) deferral, the rule under § 1.731-1(a)(1)(ii) applies to any deemed distribution of money under section 752(b) resulting from a decrease in the partner's share of a reacquired applicable debt instrument that is treated as an advance or drawing of money. The amount of any deemed distribution of money under section 752(b) resulting from a decrease in the partner's share of a reacquired applicable debt instrument that is treated as an advance or drawing of money under § 1.731-1(a)(1)(ii) is determined as if no COD income resulting from the reacquisition of the applicable debt instrument is deferred under section 108(i).
(iii) Multiple section 108(i) elections. If a direct partner of an electing partnership has a deferred section 752 amount under paragraph (b)(3)(ii) of this section for the taxable year of a reacquisition, and the partner has a deferred amount with respect to more than one applicable debt instrument from the electing partnership for which a section 108(i) election is made in that taxable year, the partner's deferred section 752 amount with respect to each such applicable debt instrument equals the partner's deferred section 752 amount as determined under paragraph (b)(3)(ii) of this section, multiplied by a ratio, the numerator of which is the partner's deferred amount with respect to such applicable debt instrument, and the denominator of which is the partner's aggregate deferred amounts from the electing partnership for all applicable debt instruments reacquired during the taxable year.
(iv) Electing partnership's request for information. At the request of an electing partnership, each direct partner of the electing partnership that has a deferred amount with respect to such partnership must provide to the electing partnership a written statement containing information requested by the partnership that is necessary to determine the partner's deferred section 752 amount (such as the partner's adjusted basis in the partner's interest in the electing partnership). The written statement must be signed under penalties of perjury and provided to the requesting partnership within 30 days of the date of the request by the electing partnership.
(v) Examples. The following examples illustrate the rules under paragraph (b)(3) of this section:
Example 1. (i) A and B each hold a 50 percent interest in Partnership, a calendar-year partnership. As of January 1, 2009, A and B each have an adjusted basis of $50 in their partnership interests. Partnership has two applicable debt instruments outstanding, debt one of $300 and debt two of $200. A and B share equally in the debt for section 752(b) purposes. On March 1, 2009, debt one is cancelled and Partnership realizes $300 of COD income. On December 1, 2009, debt two is cancelled and Partnership realizes $200 of COD income. The Partnership has no other income or loss items for 2009. A and B are each allocated $150 of COD income from debt one and $100 of COD income from debt two. Partnership makes an election under section 108(i) to defer $225 of the $300 of COD income realized from the reacquisition of debt one, $150 of which is A's deferred amount, and $75 of which is B's deferred amount. Partnership also makes an election under section 108(i) to defer $125 of the $200 of COD income realized from the reacquisition of debt two, $100 of which is A's deferred amount, and $25 of which is B's deferred amount. A has no included amount for either debt. B has an included amount of $75 with respect to debt one and an included amount of $75 with respect to debt two for 2009.
(ii) Under paragraph (b)(3)(ii) of this section, the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral is $200. Thus, A's deferred section 752 amount with respect to debt one and debt two equals $200 (the lesser of A's aggregate deferred amounts with respect to debt one and debt two of $250, or gain that A would recognize under section 731 in 2009, as a result of the reacquisitions absent the section 108(i)(6) deferral, of $200). Under paragraph (b)(3)(iii) of this section, $120 of A's $200 deferred section 752 amount relates to debt one ($200 × $150/$250) and $80 relates to debt two ($200 × $100/$250).
(iii) Under paragraph (b)(3)(ii) of this section, the amount of gain that B would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral is $50. Thus, B's deferred section 752 amount with respect to debt one and debt two equals $50 (the lesser of B's aggregate deferred amounts with respect to debt one and debt two of $100, or gain that B would recognize under section 731 in 2009, as a result of the reacquisitions absent the section 108(i)(6) deferral, of $50). Under paragraph (b)(3)(iii) of this section, $37.50 of B's $50 deferred section 752 amount relates to debt one ($50 × $75/$100) and $12.50 relates to debt two ($50 × $25/$100).
(iv) A will recognize $50 of deferred COD income ($30 with respect to debt one and $20 with respect to debt two) in each of the five taxable years of the inclusion period, provided there are no earlier acceleration events under paragraph (b)(6) of this section. Under paragraph (b)(3)(i) of this section, A will be treated as receiving a $30 deemed distribution under section 752(b) with respect to debt one and a $20 deemed distribution with respect to debt two in each of the first, second, third, and fourth taxable years of the inclusion period. A will not have any remaining deferred section 752 amounts in the fifth taxable year of the inclusion period.
(v) B will recognize $20 of deferred COD income ($15 with respect to debt one and $5 with respect to debt two) in each of the five taxable years of the inclusion period, provided there are no earlier acceleration events under paragraph (b)(6) of this section. Under paragraph (b)(3)(i) of this section, B will be treated as receiving a $15 deemed distribution under section 752(b) with respect to debt one and a $5 deemed distribution with respect to debt two in the first and second taxable year of the inclusion period, and a $7.50 deemed distribution under section 752(b) with respect to debt one ($10 × $15/$20) and a $2.50 deemed distribution with respect to debt two ($10 × $5/$20) in the third taxable year of the inclusion period. B will not have any remaining deferred section 752 amounts in the fourth and fifth taxable years of the inclusion period.
Example 2. (i) The facts are the same as in Example 1, except that Partnership has gross income for the year (including the $500 of COD income) of $700 and other separately stated losses of $500. A's and B's distributive share of each item is 50 percent.
(ii) In determining the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral, Partnership first increases A's $50 adjusted basis in his interest in Partnership by A's distributive share of Partnership income (other than the deferred amounts relating to debt one and debt two) of $100, and then decreases A's adjusted basis in Partnership by deemed distributions under section 752(b) of $250 and, thereafter, by A's distributive share of Partnership losses of $250, but only to the extent that A's basis is not reduced below zero. Under paragraph (b)(3)(ii) of this section, the amount of gain that A would recognize under section 731 as a result of the reacquisitions absent section 108(i)(6) deferral is $100. Thus, A's deferred section 752 amount with respect to debt one and debt two equals $100 (the lesser of A's aggregate deferred amounts with respect to debt one and debt two of $250, or gain that A would recognize under section 731 as a result of the reacquisitions absent the deferral section 108(i)(6) deferral of $100). Under paragraph (b)(3)(iii) of this section, A's deferred section 752 amount with respect to debt one is $60 ($100 × $150/$250), and A's deferred section 752 amount with respect to debt two is $40 ($100 × $100/$250). A's $250 of Partnership losses are suspended under section 704(d).
(iii) In determining the amount of gain that B would recognize under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral, Partnership first increases B's $50 adjusted basis in his interest in Partnership by B's distributive share of Partnership income (other than the deferred amounts relating to debt one and debt two) of $250 ($100 other income plus $150 included amount with respect to debt one and debt two), and then decreases B's adjusted basis in Partnership by deemed distributions under section 752(b) of $250 and, thereafter, by B's distributive share of Partnership losses of $250, but only to the extent that B's basis is not reduced below zero. Under paragraph (b)(3)(ii) of this section, B would not recognize any gain under section 731 as a result of the reacquisitions absent the section 108(i)(6) deferral. Thus, B has no deferred section 752 amount with respect to either debt one or debt two. B may deduct his distributive share of Partnership losses to the extent of $50, with the remaining $200 suspended under section 704(d).
(4) Tiered partnerships—(i) In general. If a partnership (upper-tier partnership) is a direct or indirect partner of an electing partnership and directly or indirectly receives an allocation of a COD income amount from the electing partnership, all or a portion of which is deferred under section 108(i), the upper-tier partnership must allocate its COD income amount to its partners that are partners in the upper-tier partnership immediately before the reacquisition in the manner in which the income would be included in the distributive shares of the partners under section 704 and the regulations under section 704, including § 1.704-1(b)(2)(iii), without regard to section 108(i). The upper-tier partnership may determine, in any manner, the portion, if any, of a partner's COD income amount with respect to an applicable debt instrument that is the deferred amount, and the portion, if any, that is the included amount. However, no partner's deferred amount with respect to an applicable debt instrument may exceed that partner's COD income amount with respect to such applicable debt instrument, and the aggregate amount of the partners' COD income amounts and deferred amounts with respect to each applicable debt instrument must equal the upper-tier partnership's COD income amount and deferred amount, respectively, with respect to each such applicable debt instrument.
(ii) Deferred section 752 amount. The computation of a partner's deferred section 752 amount, as described in paragraph (b)(3)(ii) of this section, is calculated only for direct partners of the electing partnership. An upper-tier partnership's deferred section 752 amount with respect to an applicable debt instrument of the electing partnership is allocated only to those partners of the upper-tier partnership that have a deferred amount with respect to that applicable debt instrument, and in proportion to such partners' share of the upper-tier partnership's deferred amount with respect to that applicable debt instrument. A partner's share of the upper-tier partnership's deferred section 752 amount with respect to an applicable debt instrument must not exceed that partner's share of the upper-tier partnership's deferred amount with respect to the applicable debt instrument to which the deferred section 752 amount relates. The deferred section 752 amount of a partner of an upper-tier partnership is treated as a distribution of money by the upper-tier partnership to the partner under section 752(b), at the same time and, to the extent remaining, in the same amount as the partner recognizes the deferred amount with respect to the applicable debt instrument.
(iii) Examples. The following examples illustrate the rules under paragraph (b)(4) of this section:
Example 1. (i) PRS, a calendar-year partnership, has two equal partners, A, an individual, and XYZ, a partnership. As of January 1, 2009, A and XYZ each have an adjusted basis of $50 in their partnership interests. PRS has a $500 applicable debt instrument outstanding. On June 1, 2009, the creditor agrees to cancel the $500 indebtedness. PRS realizes $500 of COD income as a result of the reacquisition. PRS has no other income or loss items for 2009. PRS makes an election under section 108(i) to defer $200 of the $500 of COD income. PRS allocates the $500 of COD income equally between its partners ($250 each). PRS determines that, for each partner, $100 of the COD income amount is the deferred amount, and $150 is the included amount. For 2009, each of A's and XYZ's share of the decrease in PRS's reacquired applicable debt instrument is $250.
(ii) XYZ has two equal partners, individuals X and Y. X and Y share equally in XYZ's liabilities. XYZ allocates the $250 COD income amount from PRS equally between X and Y ($125 each). XYZ determines that X has a deferred amount of $100 and an included amount of $25. All $125 of Y's COD income amount is Y's included amount. For 2009, each of X's and Y's share of XYZ's $250 decrease in liability with respect to the reacquired applicable debt instrument of PRS is $125.
(iii) Under paragraph (b)(3)(ii) of this section, PRS determines that XYZ has a deferred section 752 amount of $50. Therefore, for 2009, of XYZ's $250 share of the decrease in PRS's reacquired applicable debt instrument, $200 is treated as a deemed distribution under section 752(b) and $50 is the deferred section 752 amount.
(iv) Under paragraph (b)(4)(ii) of this section, none of XYZ's $50 deferred section 752 amount is allocated to Y because Y does not have a deferred amount with respect to the reacquired applicable debt interest. XYZ's entire $50 of deferred section 752 amount is allocated to X. Therefore, of X's $125 share of the XYZ's decrease in liability with respect to the reacquired applicable debt instrument of PRS, $75 is treated as a deemed distribution under section 752(b) and $50 is X's deferred section 752 amount. Y's $125 share of XYZ's decrease in liability with respect to the reacquired applicable debt instrument of PRS is treated as a deemed distribution under section 752(b) and none is a deferred section 752 amount.
Example 2. (i) The facts are the same as in Example 1, except for the following: XYZ has three partners, X, Y, and Z. The profits and losses of XYZ are shared 25 percent by X, 25 percent by Y, and 50 percent by Z. XYZ allocates its $250 COD income amount from PRS $62.50 to each of X and Y, and $125 to Z. XYZ determines that X has a deferred amount of $50 and an included amount of $12.50, Y has a deferred amount of $0 and an included amount of $62.50, and Z has a deferred amount of $50 and an included amount of $75 with respect to the applicable debt instrument. X's, Y's, and Z's share of XYZ's decrease in liability with respect to the reacquired applicable debt instrument of PRS is $62.50, $62.50 and $125, respectively.
(ii) Under paragraph (b)(4)(ii) of this section, none of XYZ's $50 deferred section 752 amount is allocated to Y because Y does not have a deferred amount with respect to the reacquired applicable debt instrument. XYZ's $50 deferred section 752 amount is allocated to X and Z in proportion to X's and Z's share of XYZ's deferred amount, or $25 each ($50 × ($50/$100)). Therefore, of X's $62.50 share of XYZ's decrease in liability with respect to the reacquired applicable debt instrument, $37.50 is treated as a deemed distribution under section 752(b) and $25 is X's deferred section 752 amount. All of Y's $62.50 share of XYZ's decrease in liability with respect to the reacquired applicable debt instrument is treated as a deemed distribution under section 752(b). Of Z's $125 share of XYZ's decrease in liability with respect to the reacquired applicable debt instrument, $100 is treated as a deemed distribution under section 752(b) and $25 is Z's deferred section 752 amount.
(5) S corporation partner—(i) In general. If an S corporation partner has a deferred amount with respect to an applicable debt instrument of an electing partnership, such deferred amount is shared pro rata only among those shareholders that are shareholders of the S corporation partner immediately before the reacquisition of the applicable debt instrument.
(ii) Basis adjustments. The adjusted basis of a shareholder's stock in an S corporation partner is not increased under section 1367(a)(1) by the shareholder's share of the S corporation partner's deferred amount in the taxable year of the reacquisition. The adjusted basis of a shareholder's stock in an S corporation partner is not decreased under section 1367(a)(2) by the shareholder's share of the S corporation partner's deferred OID deduction in the taxable year in which the deferred OID accrues. The adjusted basis of a shareholder's stock in an S corporation partner is adjusted under section 1367(a) by the shareholder's share of the S corporation partner's share of the electing partnership's deferred items for the taxable year in which the shareholder takes into account its share of such deferred items under this section.
(iii) Accumulated adjustments account. The accumulated adjustments account (AAA), as defined in section 1368(e)(1), of an S corporation partner that has a deferred amount with respect to an applicable debt instrument of an electing partnership is not increased by its deferred amount in the taxable year of the reacquisition. The AAA of an S corporation partner is not decreased by its share of any deferred OID deduction in the taxable year in which the deferred OID accrues. The AAA of an S corporation partner is adjusted under section 1368(e) by a shareholder's share of the S corporation partner's share of the electing partnership's deferred items for the S period (as defined in section 1368(e)(2)) in which the shareholder of the S corporation partner takes into account its share of the deferred items under this section.
(6) Acceleration of deferred items—(i) Electing partnership-level events
(A) General rules. Except as provided in paragraph (b)(6)(iii) of this section, a direct or indirect partner's share of an electing partnership's deferred items is accelerated and must be taken into account by such partner—
(1) In the taxable year in which the electing partnership liquidates;
(2) In the taxable year in which the electing partnership sells, exchanges, transfers (including contributions and distributions), or gifts substantially all of its assets;
(3) In the taxable year in which the electing partnership ceases doing business; or
(4) In the taxable year that includes the day before the day on which the electing partnership files a petition in a title 11 or similar case.
(B) Substantially all requirement. For purposes of this paragraph (b)(6), substantially all of a partnership's assets means assets representing at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the partnership immediately prior to the sale, exchange, transfer, or gift. For purposes of applying the rule in paragraph (b)(6)(i)(A)(2) of this section, a sale, exchange, transfer, or gift by any direct or indirect lower-tier partnership of the electing partnership (lower-tier partnership) of all or part of its assets is not treated as a sale, exchange, transfer, or gift of the assets of any partnership that holds, directly or indirectly, an interest in such lower-tier partnership. However, for purposes of applying the rule in paragraph (b)(6)(i)(A)(2) of this section, a sale, exchange, transfer, or gift of substantially all of the assets of a transferee partnership (as described in paragraph (b)(6)(iii)(A)(1) of this section), or of a lower-tier partnership that received assets of the electing partnership from a transferee partnership or another lower-tier partnership in a transaction governed all or in part by section 721, is treated as a sale, exchange, transfer, or gift by the holder of an interest in such transferee partnership or lower-tier partnership of its entire interest in that transferee partnership or lower-tier partnership.
(ii) Direct or indirect partner-level events—(A) General rules. Except as provided in paragraph (b)(6)(iii) of this section, a direct or indirect partner's share of an electing partnership's deferred items with respect to a separate interest is accelerated and must be taken into account by such partner in the taxable year in which—
(1) The partner dies or liquidates;
(2) The partner sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions and distributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of its separate interest;
(3) The partner's separate interest is redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section; or
(4) The partner abandons its separate interest.
(B) Meaning of terms; special rules—(1) Partial transfers. For purposes of paragraph (b)(6)(ii)(A)(2) of this section, if a partner sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions and distributions), or gifts (including transfers treated as gifts under section 1041) a portion of its separate interest, such partner's share of the electing partnership's deferred items with respect to the separate interest proportionate to the separate interest sold, exchanged, transferred, or gifted is accelerated and must be taken into account by such partner.
(2) Redemptions. For purposes of paragraph (b)(6)(ii)(A)(3) of this section, a partner's separate interest is redeemed if the partner receives a distribution of cash and/or property in complete liquidation of such separate interest.
(3) S corporation partners. In addition to the rules in paragraphs (b)(6)(i) and (ii) of this section, an S corporation partner's share of the electing partnership's deferred items is accelerated and the shareholders of the S corporation partner must take into account their respective shares of the S corporation partner's share of the electing partnership's deferred items in the taxable year in which the S corporation partner's election under section 1362(a) terminates.
(4) C corporation partners. In addition to the rules in paragraphs (b)(6)(i), (ii), and (iii) of this section, the acceleration rules in § 1.108(i)-1(b) and the earnings and profits rules in § 1.108(i)-1(d) apply to partners that are electing corporations.
(iii) Events not constituting acceleration. Notwithstanding the rules in paragraphs (b)(6)(i) and (ii) of this section, a direct or indirect partner's share of an electing partnership's deferred items with respect to a separate interest is not accelerated by any of the events described in this paragraph (b)(6)(iii).
(A) Section 721 contributions—(1) Electing partnership contributions. A direct or indirect partner's share of an electing partnership's deferred items is not accelerated if the electing partnership contributes all or a portion of its assets in a transaction governed all or in part by section 721(a) to another partnership (transferee partnership) in exchange for an interest in the transferee partnership provided that the electing partnership does not terminate under section 708(b)(1)(A) or transfer its assets and liabilities in a transaction described in section 708(b)(2)(A) or section 708(b)(2)(B). See paragraph (b)(6)(iii)(D) of this section for transactions governed by section 708(b)(2)(A). Notwithstanding the rules in this paragraph (b)(6)(iii)(A)(1), the rules in paragraphs (b)(6)(i)(A) and (b)(6)(ii)(A) of this section apply to any part of the transaction to which section 721(a) does not apply.
(2) Partner contributions. A direct or indirect partner's share of an electing partnership's deferred items with respect to a separate interest is not accelerated if the holder of such interest (contributing partner) contributes its entire separate interest (contributed separate interest) in a transaction governed all or in part by section 721(a) to another partnership (transferee partnership) in exchange for an interest in the transferee partnership provided that the partnership in which the separate interest is held does not terminate under section 708(b)(1)(A) or transfer its assets and liabilities in a transaction described in section 708(b)(2)(A) or section 708(b)(2)(B). See paragraph (b)(6)(iii)(D) of this section for transactions governed by section 708(b)(2)(A). The transferee partnership becomes subject to section 108(i), including all reporting requirements under this section, with respect to the contributing partner's share of the electing partnership's deferred items associated with the contributed separate interest. The transferee partnership must allocate and report the share of the electing partnership's deferred items that is associated with the contributed separate interest to the contributing partner to the same extent that such share of the electing partnership's deferred items would have been allocated and reported to the contributing partner in the absence of such contribution. Notwithstanding the rules in this paragraph (b)(6)(iii)(A)(2), the rules in paragraph (b)(6)(ii)(A) of this section apply to any part of the transaction to which section 721(a) does not apply.
(B) Section 1031 exchanges. A direct or indirect partner's share of the electing partnership's deferred items is not accelerated if the electing partnership transfers property held for productive use in a trade or business or for investment in exchange for property of like kind which is to be held either for productive use in a trade or business or for investment in a transaction to which section 1031(a)(1) applies. Notwithstanding the rules in this paragraph (b)(6)(iii)(B), to the extent the electing partnership receives money or other property which does not meet the requirements of section 1031(a) (boot) in the exchange, a proportionate amount of the property transferred by the electing partnership equal to the proportion of the boot to the total consideration received in the exchange shall be treated as sold for purposes of paragraph (b)(6)(i)(A)(2) of this section.
(C) Section 708(b)(1)(B) terminations. A direct or indirect partner's share of the deferred items of an electing partnership with respect to a separate interest is not accelerated if the electing partnership or a partnership that is a direct or indirect partner of the electing partnership terminates under section 708(b)(1)(B). Notwithstanding the rules in this paragraph (b)(6)(iii)(C), the rules in paragraph (b)(6)(ii)(A) of this section apply to the event that causes the termination under section 708(b)(1)(B) to the extent not otherwise excepted under paragraph (b)(6)(iii) of this section.
(D) Section 708(b)(2)(A) mergers or consolidations. A direct or indirect partner's share of the deferred items of an electing partnership with respect to a separate interest is not accelerated if the partnership in which the separate interest is held (the merger transaction partnership) merges into or consolidates with another partnership in a transaction to which section 708(b)(2)(A) applies. The resulting partnership or new partnership, as determined under § 1.708-1(c)(1), becomes subject to section 108(i), including all reporting requirements under this section, to the same extent that the merger transaction partnership was so subject prior to the transaction, and must allocate and report any merger transaction partnership's deferred items to the same extent and to the same partners that the merger transaction partnership allocated and reported such items prior to such transaction. Notwithstanding the rules in this paragraph (b)(6)(iii)(D), the rules in paragraphs (b)(6)(i)(A)(2) and (b)(6)(ii)(A)(2) of this section apply to that portion of the transaction that is treated as a sale, and the rules of (b)(6)(ii)(A)(3) apply if, as part of the transaction, the partner's separate interest is redeemed and the partner does not receive an interest in the resulting partnership with respect to such separate interest.
(E) Certain distributions of separate interests. If a partnership (upper-tier partnership) that is a direct or indirect partner of an electing partnership distributes its entire separate interest (distributed separate interest) to one or more of its partners (distributee partners) that have a share of the electing partnership's deferred items from upper-tier partnership with respect to the distributed separate interest, the distributee partners' shares of the electing partnership's deferred items with respect to such distributed separate interest are not accelerated. The partnership, the separate interest in which was distributed, must allocate and report the share of the electing partnership's deferred items associated with the distributed separate interest only to such distributee partners that had a share of the electing partnership's deferred items from the upper-tier partnership with respect to the distributed separate interest prior to the distribution. This paragraph (b)(6)(iii)(E) does not apply if the electing partnership terminates under section 708(b)(1)(A).
(F) Section 381 transactions. A C corporation partner's share of an electing partnership's deferred items is not accelerated if, as part of a transaction described in paragraph (b)(6)(ii)(A) of this section, the assets of the C corporation partner are acquired by another C corporation (acquiring C corporation) in a transaction that is treated, under § 1.108(i)-1(b)(2)(ii)(B), as a transaction to which section 381(a) applies. An S corporation partner's share of an electing partnership's deferred items is not accelerated if, as part of a transaction described in paragraph (b)(6)(ii)(A) of this section, the assets of the S corporation partner are acquired by another S corporation (acquiring S corporation) in a transaction to which section 381(a) applies. In such cases, the acquiring C corporation or acquiring S corporation, as the case may be, succeeds to the C corporation partner's or the S corporation partner's remaining share of the electing partnership's deferred items and becomes subject to section 108(i), including all reporting requirements under this section, as if the acquiring C corporation or acquiring S corporation were the C corporation partner or the S corporation partner, respectively. The acquiring S corporation must allocate and report the S corporation partner's deferred items to the same extent as the S corporation partner would have been required to allocate and report those deferred items, and only to those shareholders of the S corporation partner who had a share of the S corporation partner's deferred items from the electing partnership prior to the transaction. This paragraph (b)(6)(iii)(F) does not apply if the electing partnership terminates under section 708(b)(1)(A).
(G) Intercompany transfers. A C corporation partner's share of an electing partnership's deferred items is not accelerated if, as part of a transaction described in paragraph (b)(6)(ii)(A) of this section, the C corporation partner transfers its entire separate interest in an intercompany transaction, as described in § 1.1502-13(b)(1)(i), and the electing partnership does not terminate under section 708(b)(1)(A) as a result of the intercompany transaction.
(H) Retirement of a debt instrument. See § 1.108(i)-3(c)(1) for rules regarding the retirement of a debt instrument that is subject to section 108(i).
(I) Other non-acceleration events. A direct or indirect partner's share of an electing partnership's deferred items is not accelerated with respect to any transaction if the Commissioner makes a determination by published guidance that such transaction is not an acceleration event under the rules of this paragraph (b)(6).
(iv) Related partnerships. A direct or indirect partner's share of a related partnership's deferred OID deduction (as determined in paragraph (d)(2) of this section) that has not previously been taken into account is accelerated and taken into account by the direct or indirect partner in the taxable year in which, and to the extent that, the deferred COD income to which the related partnership's deferred OID deduction relates is taken into account by the electing entity or its owners.
(v) Examples. The following examples illustrate the rules under this paragraph (b)(6):
Example 1. Meaning of “separate interest.”
(i) Electing partnership (EP) has three partners, MT1, MT2, and UT, each of which is a partnership. The partners of MT1 are X and UT. The partners of MT2 are Y, UT, and B. The partners of UT are A, B, and C. In addition to their interests in the partnerships noted, MT1, MT2, and UT own other assets.
(ii) Within the meaning of paragraph (a)(29) of § 1.108(i)-0, A and C each hold one separate interest (their interests in UT), B holds two separate interests (its interests in UT and MT2), UT holds three separate interests (its interests in MT1, MT2, and EP), MT1 and MT2 each hold one separate interest (their interests in EP), and X and Y each hold one separate interest (their interests in MT1 and MT2, respectively) with respect to EP.
Example 2. Distributions of separate interests in an electing partnership.
(i) The facts are the same as in Example 1, except that A, as a direct partner of UT, has a share of EP's deferred items with respect to UT's interests in MT1 and EP. A does not have a share of EP's deferred items with respect to UT's interest in MT2. B, as a direct partner of UT, has a share of EP's deferred items with respect to UT's interest in MT1 and MT2, but not with respect to UT's interest in EP. B also has a share of EP's deferred items with respect to its separate interest in MT2. C does not have any share of EP's deferred items with respect to UT's interest in MT1, MT2, or EP.
(ii) UT distributes 40 percent of its separate interest in MT1 to A in redemption of A's interest in UT. Under paragraphs (b)(6)(ii)(A)(2) and (b)(6)(ii)(B)(1) of this section, a portion of UT's interest in MT1 has been transferred and a corresponding portion (40 percent) of UT's share of EP's deferred items from MT1 is accelerated. Thus, 40 percent of A's and B's share of EP's deferred items from UT with respect to UT's interest in MT1 is accelerated. Further, because A's interest in UT is redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of A's shares of EP's deferred items from UT are accelerated under paragraph (b)(6)(ii)(A)(3) of this section. UT continues to allocate and report to B its remaining share of EP's deferred items from its separate interest in MT1 that was not distributed to A.
(iii) UT distributes its entire separate interest in MT1 to B (other than in redemption of B's interest in UT). Under paragraph (b)(6)(ii)(A)(2) of this section, UT's share of EP's deferred items from MT1 would be accelerated. However, because UT distributes its entire separate interest in MT1 to B, B's share of EP's deferred items from UT with respect to UT's separate interest in MT1 is not accelerated under paragraph (b)(6)(iii)(E) of this section. MT1 allocates and reports to B B's share of EP's deferred items from UT's separate interest in MT1 that was distributed to B.
(iv) UT distributes its entire separate interest in MT1 to A and B (other than in redemption of their interests in UT). Under paragraph (b)(6)(iii)(E) of this section, none of A's or B's shares of EP's deferred items from UT with respect to UT's separate interest in MT1 is accelerated, and MT1 allocates and reports to A and B their respective share of EP's deferred items from UT's separate interest in MT1 that was distributed to A and B.
Example 3. Partial sale of interest by an indirect partner.
(i) Individual A holds a 50 percent partnership interest in UTP, a partnership that holds a 50 percent interest in EP, a partnership that makes an election to defer COD income under section 108(i). A's share of UTP's deferred amount with respect to EP's election under section 108(i) is $100. During a taxable year within the deferral period, A sells 25 percent of his partnership interest in UTP to an unrelated third party.
(ii) Under paragraphs (b)(6)(ii)(A)(2) and (b)(6)(ii)(B)(1) of this section, 25 percent of A's $100 deferred amount is accelerated as a result of A's partial sale of his interest in UTP. Thus, A must recognize $25 of his deferred amount in the taxable year of the sale. A's remaining deferred amount is $75.
Example 4. Section 708(b)(1)(B) termination of electing partnership.
(i) A and B are equal partners in partnership AB. On January 1, 2009, AB reacquires an applicable debt instrument and makes an election under section 108(i) to defer $400 of COD income. A and B each have a deferred amount with respect to the applicable debt instrument of $200. On January 1, 2010, A sells its entire 50 percent interest in AB to C in a transfer that terminates the partnership under section 708(b)(1)(B).
(ii) Under paragraph (b)(6)(iii)(C) of this section, the technical termination of AB under section 708(b)(1)(B) does not cause A's or B's shares of AB's deferred items to be accelerated. However, A's $200 deferred amount is accelerated under paragraph (b)(6)(ii)(A)(2) of this section as a result of the sale.
Example 5. Section 708(b)(2)(A) mergers.
(i) A, B, and C are equal partners in partnership X, which has made an election under section 108(i) to defer $150 of COD income. The fair market value of each interest in partnership X is $100. A, B, and C each has a deferred amount of $50 with respect to partnership X's election under section 108(i). E, F, and G are partners in partnership Y. Partnership X and partnership Y merge in a taxable year during the deferral period of partnership X's election under section 108(i). Under section 708(b)(2)(A), the resulting partnership is considered a continuation of partnership Y and partnership X is considered terminated. Under state law, partnerships X and Y undertake the assets-over form of § 1.708-1(c)(3)(i) to accomplish the merger. C does not want to become a partner in partnership Y, and partnership X does not have the resources to redeem C's interest before the merger. C, partnership X, and partnership Y enter into a merger agreement that satisfies the requirements of § 1.708-1(c)(4) and specifies that partnership Y will purchase C's interest in partnership X for $100 before the merger, and as part of the agreement, C consents to treat the transaction in a manner that is consistent with the agreement. As part of the merger, partnership X receives from partnership Y $100 (which will be distributed to C immediately before the merger), $100 (which will be distributed equally to A and B ($50 each)), and interests in partnership Y with a value of $100 (which will be distributed equally to A and B) in exchange for partnership X's assets and liabilities.
(ii) Under the general rule of paragraph (b)(6)(iii)(D) of this section, and except as provided below, the deferred items of partnership X are not accelerated as a result of the merger with partnership Y. Partnership Y, the resulting partnership that is considered the continuation of partnership X, becomes subject to section 108(i), including all reporting requirements under section 108(i), to the same extent that partnership X was subject to such rules. Under paragraph (b)(6)(iii)(D) of this section, partnership Y must allocate and report partnership X's deferred items to A and B in the same manner as partnership X had prior to the merger transaction.
(iii) Under § 1.708-1(c)(4), C is treated as selling its interest in partnership X immediately before the merger. As a result, C's $50 deferred amount is accelerated under paragraph (b)(6)(ii)(A)(2) of this section.
(iv) Under section 707(a)(2)(B), partnership X is deemed to have sold a portion of its assets to partnership Y. Because partnership X is not treated as selling substantially all of its assets under paragraph (b)(6)(i)(B) of this section, A's and B's deferred amounts are not accelerated under paragraph (b)(6)(i)(A)(2) of this section.
(v) Because A's and B's interests in partnership X are redeemed within the meaning of paragraph (b)(6)(ii)(B)(2) of this section, all of their shares of partnership X's deferred items would be accelerated under paragraph (b)(6)(ii)(A)(3). However, because they receive an interest in partnership Y in the merger, none of A's and B's share of partnership X's deferred items is accelerated.
(7) Withholding under section 1446. See section 1446 regarding withholding by a partnership on a foreign partner's share of income effectively connected with a U.S. trade or business.
(c) Specific rules applicable to S corporations—(1) Deferred COD income. An electing S corporation's COD income deferred under section 108(i) (an S corporation's deferred COD income) is shared pro rata among those shareholders that are shareholders of the electing S corporation immediately before the reacquisition of the applicable debt instrument. Any COD income deferred under section 108(i) is taken into account under section 1366(a) by those shareholders in the inclusion period, or earlier upon the occurrence of an acceleration event described in paragraph (c)(3) of this section.
(2) Basis adjustments and accumulated adjustments account—(i) Basis adjustments. The adjusted basis of a shareholder's stock in an electing S corporation is not increased under section 1367(a)(1) by the shareholder's share of the S corporation's deferred COD income in the taxable year of the reacquisition. The adjusted basis of a shareholder's stock in an electing S corporation or a related S corporation is not decreased under section 1367(a)(2) by the shareholder's share of the S corporation's deferred OID deduction in the taxable year in which the deferred OID accrues. The adjusted basis of a shareholder's stock in an electing S corporation or a related S corporation is adjusted under section 1367(a) by the shareholder's share of the S corporation's deferred items for the taxable year in which the shareholder takes into account its share of the deferred items under this section.
(ii) Accumulated adjustments account. The AAA of an electing S corporation is not increased by the S corporation's deferred COD income in the taxable year of a reacquisition. The AAA of an electing S corporation or a related S corporation is not decreased by the S corporation's deferred OID deduction in the taxable year in which the deferred OID accrues. The AAA of an electing S corporation or a related S corporation is adjusted under section 1368(e) by a shareholder's share of the S corporation's deferred items for the S period (as defined in section 1368(e)(2)) in which a shareholder of the S corporation takes into account its share of the deferred items under this section.
(3) Acceleration of deferred items—(i) Electing S corporation-level events—(A) General rules. Except as provided in paragraph (c)(3)(iii) of this section, a shareholder's share of an electing S corporation's deferred items is accelerated and must be taken into account by such shareholder—
(1) In the taxable year in which the electing S corporation liquidates;
(2) In the taxable year in which the electing S corporation sells, exchanges, transfers (including contributions and distributions), or gifts substantially all of its assets;
(3) In the taxable year in which the electing S corporation ceases doing business;
(4) In the taxable year in which the electing S corporation's election under section 1362(a) terminates; or
(5) In the taxable year that includes the day before the day on which the electing S corporation files a petition in a title 11 or similar case.
(B) Substantially all requirement. For purposes of this paragraph (c)(3), substantially all of an electing S corporation's or partnership's assets means assets representing at least 90 percent of the fair market value of the net assets, and at least 70 percent of the fair market value of the gross assets, held by the S corporation or partnership immediately prior to the sale, exchange, transfer, or gift. For purposes of applying the rule in paragraph (c)(3)(i)(A)(2) of this section, a sale, exchange, transfer, or gift by any direct or indirect lower-tier partnership of the electing S corporation (lower-tier partnership) of all or part of its assets is not treated as a sale, exchange, transfer, or gift of the assets of any person that holds, directly or indirectly, an interest in such lower-tier partnership. However, for purposes of applying the rule in paragraph (c)(3)(i)(A)(2) of this section, a sale, exchange, transfer, or gift of substantially all of the assets of a transferee partnership (as described in paragraph (c)(3)(iii)(A) of this section), or of a lower-tier partnership that received assets of the electing S corporation from a transferee partnership of the electing S corporation or another lower-tier partnership in a transaction governed all or in part by section 721, is treated as a sale, exchange, transfer, or gift by the holder of an interest in such transferee partnership or lower-tier partnership of its entire interest in that transferee partnership or lower-tier partnership.
(ii) Shareholder events—(A) General rules. Except as provided in paragraph (c)(3)(iii) of this section, a shareholder's share of an electing S corporation's deferred items is accelerated and must be taken into account by such shareholder in the taxable year in which—
(1) The shareholder dies;
(2) The shareholder sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions and distributions), or gifts (including transfers treated as gifts under section 1041) all or a portion of its interest in the electing S corporation; or
(3) The shareholder abandons its interest in the electing S corporation.
(B) Partial transfers. For purposes of paragraph (c)(3)(ii)(A)(2) of this section, if a shareholder of an electing S corporation sells, exchanges (including redemptions treated as exchanges under section 302), transfers (including contributions or distributions), or gifts (including transfers treated as gifts under section 1041) a portion of its interest in the electing S corporation, such shareholder's share of the electing S corporation's deferred items proportionate to the interest that was sold, exchanged, transferred, or gifted is accelerated and must be taken into account by such shareholder.
(iii) Events not constituting acceleration. Notwithstanding the rules in paragraphs (c)(3)(i) and (ii) of this section, a shareholder's share of an electing S corporation's deferred items is not accelerated by any of the events described in this paragraph (c)(3)(iii).
(A) Electing S corporation's contributions. A shareholder's share of an electing S corporation's deferred items is not accelerated if the electing S corporation contributes all or a portion of its assets in a transaction governed all or in part by section 721(a) to a partnership (transferee partnership) in exchange for an interest in the transferee partnership. Notwithstanding the rules in this paragraph (c)(3)(iii)(A), the rules in paragraph (c)(3)(i)(A) of this section apply to any part of the transaction to which section 721(a) does not apply.
(B) Section 1031 exchanges. A shareholder's share of an electing S corporation's deferred items is not accelerated if the electing S corporation transfers property held for productive use in a trade or business or for investment in exchange for property of like kind which is to be held either for productive use in a trade or business or for investment in a transaction to which section 1031(a)(1) applies. Notwithstanding the rules in this paragraph (c)(3)(iii)(B), to the extent the electing S corporation receives money or other property which does not meet the requirements of section 1031(a) (boot) in the exchange, a proportionate amount of the property transferred by the electing S corporation equal to the proportion of the boot to the total consideration received in the exchange shall be treated as sold for purposes of paragraph (c)(3)(i)(A)(2) of this section.
(C) Section 381 transactions. A shareholder's share of an electing S corporation's deferred items is not accelerated if, as part of a transaction described in paragraph (c)(3)(i)(A) of this section, the electing S corporation's assets are acquired by another S corporation (acquiring S corporation) in a transaction to which section 381(a) applies. In such a case, the acquiring S corporation succeeds to the electing S corporation's remaining deferred items and becomes subject to section 108(i), including all reporting requirements under this section, as if the acquiring S corporation were the electing S corporation. The acquiring S corporation must allocate and report the electing S corporation's deferred items to the same extent that the electing S corporation would have been required to allocate and report those deferred items, and only to those shareholders who had a share of the electing S corporation's deferred items prior to the transaction.
(D) Retirement of a debt instrument. See § 1.108(i)-3(c)(1) for rules regarding the retirement of a debt instrument that is subject to section 108(i).
(E) Other non-acceleration events. A shareholder's share of an electing S corporation's deferred items is not accelerated with respect to any transaction if the Commissioner makes a determination by published guidance that such transaction is not an acceleration event under the rules of this paragraph (c)(3).
(iv) Related S corporations. A shareholder's share of a related S corporation's deferred OID deduction (as determined in paragraph (d)(2) of this section) that has not previously been taken into account is accelerated and taken into account by the shareholder in the taxable year in which, and to the extent that, deferred COD income to which the related S corporation's deferred OID deduction relates is taken into account by the electing entity or its owners.
(d) General rules applicable to partnerships and S corporations—(1) Applicable debt instrument (trade or business requirement). The determination of whether a debt instrument issued by a partnership or an S corporation is treated as a debt instrument issued in connection with the conduct of a trade or business by the partnership or S corporation for purposes of this section is based on all the facts and circumstances. However, a debt instrument issued by a partnership or an S corporation shall be treated as an applicable debt instrument for purposes of this section if the electing partnership or electing S corporation can establish that—
(i) The gross fair market value of the trade or business assets of the partnership or S corporation that issued the debt instrument represented at least 80 percent of the gross fair market value of that partnership's or S corporation's total assets on the date of issuance;
(ii) The trade or business expenditures of the partnership or S corporation that issued the debt instrument represented at least 80 percent of the partnership's or S corporation's total expenditures for the taxable year of issuance;
(iii) At least 95 percent of interest paid or accrued on the debt instrument issued by the partnership or S corporation was allocated to one or more trade or business expenditures under § 1.163-8T for the taxable year of issuance;
(iv) At least 95 percent of the proceeds from the debt instrument issued by the partnership or S corporation were used by the partnership or S corporation to acquire one or more trades or businesses within six months from the date of issuance; or
(v) The partnership or S corporation issued the debt instrument to a seller of a trade or business to acquire the trade or business.
(2) Deferral of OID at entity level—(i) In general. For each taxable year during the deferral period, an issuing entity determines the amount of its deferred OID deduction with respect to a debt instrument, if any. An issuing entity's deferred OID deduction for a taxable year is the lesser of:
(A) The OID that accrues in a current taxable year during the deferral period with respect to the debt instrument (less any of such OID that is allowed as a deduction in the current taxable year as a result of an acceleration event), or
(B) The excess, if any, of the electing entity's deferred COD income (less the aggregate amount of such deferred COD income that has been included in income in the current taxable year and any previous taxable year during the deferral period) over the aggregate amount of OID that accrued in previous taxable years during the deferral period with respect to the debt instrument (less the aggregate amount of such OID that has been allowed as a deduction in the current taxable year and any previous taxable year during the deferral period).
(ii) Excess deferred OID deduction. If, as a result of an acceleration event during a taxable year in the deferral period, an issuing entity's aggregate deferred OID deduction for previous taxable years with respect to a debt instrument (less the aggregate amount of such deferred OID deduction that has been allowed as a deduction in a previous taxable year during the deferral period) exceeds the amount of the electing entity's deferred COD income (less the aggregate amount of such deferred COD income that has been included in income in the current taxable year and any previous taxable year during the deferral period), the excess deferred OID deduction shall be allowed as a deduction in the taxable year in which the acceleration event occurs.
(iii) Examples. The following examples illustrate the rules under paragraph (d)(2) of this section:
Example 1. Partner joins partnership during deferral period. (i) A and B each hold a 50 percent interest in AB partnership, a calendar-year partnership. On January 1, 2009, AB partnership issues a new debt instrument with OID and uses all of the proceeds to reacquire an outstanding applicable debt instrument of AB partnership, realizing $100 of COD income, and makes an election under section 108(i) to defer $50 of the COD income. During the deferral period, a total of $150 of OID accrues on the new debt instrument issued as part of the reacquisition. A and B each have a deferred amount of $25 with respect to the applicable debt instrument reacquired by AB partnership. For 2009, $28 of OID accrues on the new debt instrument and A and B are each allocated $14 of accrued OID with respect to the new debt instrument. On January 1, 2010, C contributes cash to AB partnership in exchange for a 1/3 partnership interest. For 2010, $29 of OID accrues on the new debt instrument, and A, B, and C are each allocated $9.67 of accrued OID.
(ii) Under paragraph (d)(2) of this section, AB partnership's deferred OID deduction for 2009 is the lesser of: $28 of OID that accrues on the new debt instrument in 2009, or the excess of AB partnership's deferred COD income of $50 over the aggregate amount of OID that accrued on the debt instrument in previous taxable years during the deferral period of $0, or $50. Thus, all $28 of the OID that accrues on the debt instrument in 2009 is deferred under section 108(i).
(iii) Under paragraph (d)(2) of this section, AB partnership's deferred OID deduction for 2010 is the lesser of: $29 of OID that accrues on the new debt instrument in 2010, or the excess of AB partnership's deferred COD income of $50 over the aggregate amount of OID that accrued on the debt instrument in previous taxable years during the deferral period of $28, or $22. Thus, $22 of the $29 of OID that accrues in 2010 is deferred under section 108(i). A, B, and C will each defer $7.33 of the $9.67 of accrued OID that was allocated to each of them.
Example 2. Acceleration of deferred items during deferral period. (i) On January 1, 2009, ABC partnership, a calendar-year partnership with three partners, issues a new debt instrument with OID and uses all of the proceeds to reacquire an outstanding applicable debt instrument of ABC partnership. ABC partnership realizes $150 of COD income and makes an election under section 108(i) to defer the $150 of COD income. A's deferred amount with respect to the applicable debt instrument is $75, while B and C each have a deferred amount of $37.50. In 2009, $28 of OID accrues on the new debt instrument and is allocated $7.00 to A and $10.50 to each of B and C. In 2010, $29 of OID accrues on the new debt instrument and is allocated $7.25 to A and $10.87 to each of B and C. In 2011, $30 of OID accrues on the new debt instrument and is allocated $7.50 to A and $11.25 to each of B and C. In 2012, $31 of OID accrues on the new debt instrument and is allocated $7.75 to A and $11.62 to each of B and C. On December 31, 2012, A's entire share of ABC partnership's deferred items is accelerated under paragraph (b)(6) of this section. For 2012, A includes $75 of COD income in income and is allowed a deduction of $21.75 for A's share of ABC partnership's deferred OID deduction for taxable years 2009 through 2011, and a deduction of $7.75 for A's share of ABC partnership's OID that accrues on the debt instrument in 2012.
(ii) Under paragraph (d)(2) of this section, ABC partnership's deferred OID deduction for 2012 is the lesser of: $23.25 ($31 of OID that accrues on the new debt instrument in 2012 less $7.75 of this OID that is allowed as a deduction to A in 2012) or $9.75 (the excess of $75 (ABC partnership's deferred COD income of $150 less A's share of ABC partnership's deferred COD income that is included in A's income for 2012 of $75) over $65.25 (the aggregate amount of OID that accrued in previous taxable years of $87 less the aggregate amount of such OID that has been allowed as a deduction by A in 2012 of $21.75)). Thus, of the $31 of OID that accrues in 2012, $9.75 is deferred under section 108(i).
(3) Effect of an election under section 108(i) on recapture amounts under section 465(e)—(i) In general. To the extent that a decrease in a partner's or shareholder's amount at risk (as defined in section 465) in an activity as a result of a reacquisition of an applicable debt instrument would cause a partner with a deferred amount or a shareholder with a share of the S corporation's deferred COD income to have income under section 465(e) in the taxable year of the reacquisition, such decrease (not to exceed the partner's deferred amount or the shareholder's share of the S corporation's deferred COD income with respect to that applicable debt instrument) (deferred section 465 amount) shall not be taken into account for purposes of determining the partner's or shareholder's amount at risk in an activity under section 465 as of the close of the taxable year of the reacquisition. A partner's or shareholder's deferred section 465 amount is treated as a decrease in the partner's or shareholder's amount at risk in an activity at the same time, and to the extent remaining in the same amount, as the partner recognizes its deferred amount or the S corporation shareholder recognizes its share of the S corporation's deferred COD income.
(ii) Example. The following example illustrates the rules in paragraph (d)(3) of this section:
Example. (i) PRS is a calendar-year partnership with two equal partners, individuals A and B. PRS is engaged in an activity described in section 465(c) (Activity). PRS has a $500 recourse applicable debt instrument outstanding. Each partner's amount at risk on January 1, 2009 is $50. On June 1, 2009, the creditor agrees to cancel the $500 indebtedness. PRS realizes $500 of COD income as a result of the reacquisition. The partners' share of the liabilities of PRS decreases by $500 under section 752(b), and each partner's amount at risk is decreased by $250. Other than the $500 of COD income, PRS's income and expenses for 2009 are equal. PRS makes an election under section 108(i) to defer $200 of the $500 COD income realized in connection with the reacquisition. PRS allocates the $500 of COD income equally between its partners, A and B. A and B each have a COD income amount of $250 with respect to the applicable debt instrument. PRS determines that, for both partners A and B, $100 of the $250 COD income amount is the deferred amount, and $150 is the included amount. Beginning in each taxable year 2014 through 2018, A and B each include $20 of the deferred amount in gross income.
(ii) Under paragraph (d)(3)(i) of this section, $50 of the $250 decrease in A's and B's amount at risk in Activity is the deferred section 465 amount for each of A and B and is not taken into account for purposes of determining A's and B's amount at risk in Activity at the close of 2009. In taxable year 2014, A's and B's amount at risk in Activity is decreased by $20 (deferred section 465 amount that equals the deferred amount included in A's and B's gross income in 2014). In taxable year 2015, A's and B's amount at risk in Activity is decreased by $20 for the deferred section 465 amount that equals the deferred amount included in A's and B's gross income in 2015. In taxable year 2016, A's and B's amount at risk in Activity is decreased by $10 (the remaining amount of the deferred section 465 amount).
(e) Election procedures and reporting requirements—(1) Partnerships—(i) In general. A partnership makes an election under section 108(i) by following procedures outlined in guidance and applicable forms and instructions issued by the Commissioner. An electing partnership (or its successor) must provide to its partners certain information as required by guidance and applicable forms and instructions issued by the Commissioner.
(ii) Tiered passthrough entities. A partnership that is a direct or indirect partner of an electing partnership (or its successor) or a related partnership or an S corporation partner must provide to its partners or shareholders, as the case may be, certain information as required by guidance and applicable forms and instructions issued by the Commissioner.
(iii) Related partnerships. A related partnership must provide to its partners certain information as required by guidance and applicable forms and instructions issued by the Commissioner.
(2) S corporations—(i) In general. An S corporation makes an election under section 108(i) by following procedures outlined in guidance and applicable forms and instructions issued by the Commissioner. An electing S corporation (or its successor) must provide to its shareholders certain information as required by guidance and applicable forms and instructions issued by the Commissioner.
(ii) Related S corporations. A related S corporation must provide to its shareholders certain information as required by guidance and applicable forms and instructions issued by the Commissioner.
(f) Effective/applicability dates. For the applicability dates of this section, see § 1.108(i)-0(b).
[T.D. 9623, 78 FR 39975, July 3, 2013; 78 FR 49366, Aug. 14, 2013]