Qualified Business Income Deduction, 3015-3023 [2019-01023]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 27 (Friday, February 8, 2019)]
[Proposed Rules]
[Pages 3015-3023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-01023]



Federal Register / Vol. 84, No. 27 / Friday, February 8, 2019 / 
Proposed Rules

[[Page 3015]]


-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-134652-18]
RIN 1545-BP12


Qualified Business Income Deduction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations concerning the 
deduction for qualified business income under section 199A of the 
Internal Revenue Code (Code). The proposed regulations will affect 
certain individuals, partnerships, S corporations, trusts, and estates. 
The proposed regulations provide guidance on the treatment of 
previously suspended losses that constitute qualified business income. 
The proposed regulations also provide guidance on the determination of 
the section 199A deduction for taxpayers that hold interests in 
regulated investment companies, charitable remainder trusts, and split-
interest trusts.

DATES: Written or electronic comments and requests for a public hearing 
must be received by April 9, 2019.

ADDRESSES: Submit electronic submissions to the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-134652-18) by 
following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to CC:PA:LPD:PR (REG-134652-18), Room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
134652-18), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning Sec.  1.199A-3(d), Michael 
Y. Chin or Steven Harrison at (202) 317-6842; concerning Sec. Sec.  
1.199A-3(b) and 1.199A-6, Vishal R. Amin or Frank J. Fisher at (202) 
317-6850 or Robert D. Alinsky or Margaret Burow at 202-317-5279; 
concerning submissions of comments or requests for a public hearing, 
Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 199A of the Code.
    Section 199A was enacted on December 22, 2017, by section 11011 of 
``An Act to provide for reconciliation pursuant to titles II and V of 
the concurrent resolution on the budget for fiscal year 2018,'' Public 
Law 115-97 (TCJA), and was amended on March 23, 2018, retroactively to 
January 1, 2018, by section 101 of Division T of the Consolidated 
Appropriations Act, 2018, Public Law 115-141, (2018 Act). Section 199A 
applies to taxable years beginning after 2017 and before 2026.
    Section 199A provides a deduction of up to 20 percent of qualified 
business income from a U.S. trade or business operated as a sole 
proprietorship or through a partnership, S corporation, trust, or 
estate (section 199A deduction). The section 199A deduction may be 
taken by individuals and by some estates and trusts. A section 199A 
deduction is not available for wage income or for income earned by a C 
corporation. For taxpayers whose taxable income exceeds a statutorily-
defined amount (threshold amount), section 199A may limit the 
taxpayer's section 199A deduction based on (i) the type of trade or 
business engaged in by the taxpayer, (ii) the amount of W-2 wages paid 
with respect to the trade or business (W-2 wages), and/or (iii) the 
unadjusted basis immediately after acquisition (UBIA) of qualified 
property held for use in the trade or business (UBIA of qualified 
property). These statutory limitations are subject to phase-in rules 
based upon taxable income above the threshold amount.
    Section 199A also allows individuals and some trusts and estates 
(but not corporations) a deduction of up to 20 percent of their 
combined qualified real estate investment trust (REIT) dividends and 
qualified publicly traded partnership (PTP) income, including qualified 
REIT dividends and qualified PTP income earned through passthrough 
entities. This component of the section 199A deduction is not limited 
by W-2 wages or UBIA of qualified property.
    The section 199A deduction is the lesser of (1) the sum of the 
combined amounts described in the prior two paragraphs or (2) an amount 
equal to 20 percent of the excess (if any) of taxable income of the 
taxpayer for the taxable year over the net capital gain of the taxpayer 
for the taxable year.
    Additionally, section 199A(g) provides that specified agricultural 
or horticultural cooperatives may claim a special entity-level 
deduction that is substantially similar to the domestic production 
activities deduction under former section 199.
    The statute expressly grants the Secretary authority to prescribe 
such regulations as are necessary to carry out the purposes of section 
199A (section 199A(f)(4)), and also provides specific grants of 
authority with respect to certain issues: The treatment of 
acquisitions, dispositions, and short-tax years (section 199A(b)(5)); 
certain payments to partners for services rendered in a non-partner 
capacity (section 199A(c)(4)(C)); the allocation of W-2 wages and UBIA 
of qualified property (section 199A(f)(1)(A)(iii)); restricting the 
allocation of items and wages under section 199A and such reporting 
requirements as the Secretary determines appropriate (section 
199A(f)(4)(A)); the application of section 199A in the case of tiered 
entities (section 199A(f)(4)(B); preventing the manipulation of the 
depreciable period of qualified property using transactions between 
related parties (section 199A(h)(1)); and determining the UBIA of 
qualified property acquired in like-kind exchanges or involuntary 
conversions (section 199A(h)(2)).
    The Treasury Department and the Internal Revenue Service published 
proposed regulations interpreting section 199A on August 16, 2018 (the 
August Proposed Regulations) (83 FR 40884). The August Proposed 
Regulations contain six substantive sections, Sec. Sec.  1.199A-1 
through 1.199A-6, each of which provides rules relevant to the 
calculation of the section 199A deduction. The August Proposed 
Regulations, with modifications in response to comments and testimony 
received, were adopted as final regulations in TD 9847, issued 
concurrently with this notice of proposed rulemaking and published 
elsewhere in this issue of the Federal Register.

Explanation of Provisions

    These proposed regulations propose rules addressing issues not 
addressed in the August Proposed Regulations that are necessary to 
provide taxpayers with computational, definitional, and anti-avoidance 
guidance regarding the application of section 199A. Specifically, these 
proposed regulations contain amendments to two substantive sections of 
the August Proposed

[[Page 3016]]

Regulations, Sec. Sec.  1.199A-3 and 1.199A-6, each of which provides 
rules relevant to the calculation of the section 199A deduction. These 
additional proposed rules respond to comments received on the August 
Proposed Regulations as well as address certain issues identified after 
additional study. This Explanation of Provisions describes each of the 
proposed rules contained in this document in turn. The Treasury 
Department and the IRS request comments on all aspects of these 
proposed regulations.

I. Treatment of Previously Suspended Losses That Constitute QBI

    Section 1.199A-3(b)(1)(iv) of the final regulations provides that 
previously disallowed losses or deductions (including under sections 
465, 469, 704(d), and 1366(d)) allowed in the taxable year are 
generally taken into account for purposes of computing QBI except to 
the extent the losses or deductions were disallowed, suspended, 
limited, or carried over from taxable years ending before January 1, 
2018. The final regulations also provide a first-in-first-out ordering 
rule. One commenter on the August Proposed Regulations suggested that a 
special rule should be provided to identify the section 469 trade or 
business losses that are used to offset income if the taxpayer's 
section 469 groupings differ from the taxpayer's section 199A 
aggregations. The commenter recommended that any section 469 loss 
carryforward that is later used should be allocated across the 
taxpayer's section 199A aggregations based on income with respect to 
such aggregations in the year the loss was generated.
    The Treasury Department and the IRS believe that that previously 
disallowed losses should be treated as losses from a separate trade or 
business for both the reasons stated by the commenter and because the 
losses may relate to a trade or business that is no longer in 
existence. Accordingly, these proposed regulations amend Sec.  1.199A-
3(b)(1)(iv) to provide that such losses are treated as loss from a 
separate trade or business. To the extent that losses relate to a PTP, 
they must be treated as losses from a separate PTP. Section 1.199A-
3(b)(1)(iv)(B) provides that attributes of the disallowed loss are 
determined in the year the loss is incurred.

II. Regulated Investment Companies With Interests in REITs and PTPs

A. REITs
    Section 1.199A-3 restates the definitions in section 199A(c) and 
provides additional guidance on the determination of QBI, qualified 
REIT dividends, and qualified PTP income. For simplicity, the 
regulations use the term individual when referring to an individual, 
trust, estate, or other person eligible to claim the section 199A 
deduction. See Sec.  1.199A-1(a)(2). The term relevant passthrough 
entity (RPE) is used to describe passthrough entities that directly 
operate the trade or business or pass through the trade or business' 
items of income, gain, loss, or deduction from lower-tier RPEs to the 
individual. See Sec.  1.199A-1(b)(10).
    A number of commenters on the August Proposed Regulations requested 
guidance that would allow a shareholder in a regulated investment 
company within the meaning of section 851(a) (RIC) to take a section 
199A deduction with respect to certain income of, or distributions 
from, the RIC. Because a RIC is a subchapter C corporation, a 
shareholder in a RIC generally does not take into account a share of 
the RIC's items of income, deduction, gain, or loss. Part 1 of 
subchapter M, however, has features that allow the tax consequences of 
investing in a RIC to approximate those of a direct investment in the 
assets of the RIC. The principal feature is the allowance of the 
deduction for dividends paid under section 852(b)(2)(D). If a 
corporation qualifies as a RIC under section 851 and meets the 
distribution requirements and other requirements in section 852(a), the 
RIC's income tax is computed on its investment company taxable income 
(ICTI), which is its taxable income with certain adjustments, including 
the allowance of the deduction for dividends paid. See section 
852(b)(2). ICTI also excludes the amount of the RIC's net capital gain, 
but tax is separately imposed on that amount to the extent it exceeds 
the deduction for dividends paid, taking into account only capital gain 
dividends. See section 852(b)(3)(A). The deduction for dividends paid 
allows RICs to eliminate all or most of their corporate income tax 
liability.
    If a RIC has certain items of income or gain, subchapter M also 
provides rules under which a RIC may pay dividends that a shareholder 
in the RIC may treat in the same manner (or a similar manner) as the 
shareholder would treat the underlying item of income or gain if the 
shareholder realized it directly. Although this treatment differs 
fundamentally from the pass-through treatment of partners or trust 
beneficiaries, this preamble refers to is as ``conduit treatment.'' For 
example, under section 852(b)(3), a RIC that has net capital gain for a 
taxable year generally may pay capital gain dividends, and shareholders 
receiving the capital gain dividends treat them as gain from the sale 
or exchange of a capital asset held for more than one year. Section 
852(b)(3) provides necessary limits and procedures that apply to 
capital gain dividends. There are similar statutory provisions for 
exempt-interest dividends under section 852(b)(5), interest-related 
dividends under section 871(k)(1), short-term capital gain dividends 
under section 871(k)(2), dividends eligible for the dividends received 
deduction under section 854(b)(1)(A), and qualified dividend income 
under section 854(b)(1)(B). Rules for paying dividends corresponding to 
different types of long-term capital gain have been provided in 
guidance under regulatory authority granted in section 1(h). See Notice 
2015-41, 2015-24 I.R.B. 1058, modifying Notice 2004-39, 2004-1 C.B. 982 
and Notice 97-64, 1997-2 C.B. 323.
    Investing in RICs enables small investors to gain benefits, such as 
professional management and broad diversification, that otherwise would 
be available only to investors with more resources. The House Report 
for the enactment of the Internal Revenue Code of 1954 explained that 
the RIC regime ``permits investors to pool their funds through the use 
of a corporation in order to obtain skilled, diversified investment in 
corporate securities without having to pay an additional layer of 
corporate tax.'' H.R. Rep. No. 83-1337, p. 73 (1954). The ability to 
elect to be taxed as a RIC is available typically only to domestic 
corporations that, at all times during the taxable year, are registered 
under the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 
to 80b-2). See section 851(a)(1)(A).
    Section 199A(f)(4) directs the Secretary to prescribe such 
regulations as are necessary to carry out the purposes of section 199A, 
including regulations for its application in the case of tiered 
entities. The Treasury Department and the IRS have determined that it 
is consistent with the grant of authority under section 199A and the 
purposes of part 1 of subchapter M of chapter 1 of the Code to provide 
for conduit treatment of qualified REIT dividends. The Treasury 
Department and the IRS continue to consider whether it is appropriate 
to provide for conduit treatment of qualified PTP income.
    These proposed regulations provide rules under which a RIC that 
receives qualified REIT dividends may pay section 199A dividends. Non-
corporate shareholders receiving section 199A dividends would treat 
them as qualified

[[Page 3017]]

REIT dividends under section 199A(e)(3), provided the shareholder meets 
the holding period requirements for its shares in the RIC.
    The rules under which a RIC would compute and report section 199A 
dividends are based on the rules for capital gain dividends in section 
852(b)(3) and exempt-interest dividends in section 852(b)(5). The 
amount of a RIC's section 199A dividends for a taxable year would be 
limited to the excess of the RIC's qualified REIT dividends for the 
taxable year over allocable expenses. Section 199A dividends generally 
are also subject to the principles that apply to other RIC dividends. 
See, e.g., Rev. Rul. 2005-31, 2005-1 C.B. 1084; Rev. Rul. 89-81, 1989-1 
C.B. 226.
B. PTPs
    One of the commenters recommending that the regulations permit 
conduit treatment for qualified REIT dividends received by a RIC also 
recommended that the regulations permit conduit treatment for qualified 
PTP income received by a RIC. In response to this comment, the Treasury 
Department and the IRS have given significant consideration to 
including in this notice of proposed rulemaking regulations that would 
provide conduit treatment for qualified PTP income. However, unlike 
conduit treatment for qualified REIT dividends received by a RIC, 
conduit treatment of qualified PTP income received by a RIC presents 
several novel issues. The commenter recommending this conduit treatment 
did not address these issues or make any suggestions as to how they 
should be resolved. The need to resolve these issues in a way that 
would afford RIC shareholders treatment that is similar to the 
treatment they would receive if they held the PTP interests directly 
while preserving the relative simplicity of the tax treatment of RIC 
investors has prevented the Treasury Department and the IRS from 
crafting and including appropriate rules in these proposed regulations. 
As noted later in this part of the Explanation of Provisions, the 
Treasury Department and the IRS continue to consider permitting conduit 
treatment for qualified PTP income received by a RIC to further the 
purposes of section 199A(b)(1)(B) and seek public comment to assist in 
resolving these novel issues with a view to developing regulations 
permitting conduit treatment for qualified PTP income.
    These issues arise in part from the fact that income attributable 
to a specified service trade or business within the meaning of section 
199A(d)(2) (SSTB) of a PTP may be qualified PTP income for taxpayers 
with taxable income below the threshold amount, but not for taxpayers 
with taxable income above the top of the phase-out range. For taxpayers 
with taxable income in the phase-out range, a portion of PTP income 
attributable to an SSTB is qualified PTP income. There is no precedent 
for providing conduit treatment for a RIC (or any other C corporation) 
with respect to income of a PTP or other partnership taxed in this 
manner, and the complexity and potential confusion such treatment might 
create for RIC investors is arguably inconsistent with the relative 
simplicity that the tax system has historically provided for RIC 
investors. This is particularly true given the limitation on the 
portion of a RIC's assets that can be invested in qualified PTPs as 
defined in section 851(h) (the type of PTP likely to be engaged in a 
trade or business) and the limited portion of the RIC's dividends that 
would likely be attributable to income from such PTPs.
    Another novel issue is presented by the rules relating to the 
treatment of losses for purposes of section 199A. First, a PTP may not 
net losses from an SSTB against income from a non-SSTB, and vice versa, 
in determining the amounts that it reports to its partners. Thus, PTPs 
are required to separately calculate income and deductions from SSTBs 
and non-SSTBs and report that information to their partners. Second, if 
a taxpayer has a net loss from an SSTB or a non-SSTB that is allowed in 
determining taxable income for a taxable year, that loss may be 
required to be carried over to the subsequent year for section 199A 
attribute purposes. In the case of a RIC, it is not clear to what 
extent these requirements can be implemented by permitting RIC 
dividends to reflect attributes of the RIC's investment experiences in 
PTPs. For example, it is difficult to conceive how losses of a RIC can 
be passed through to shareholders upon the payment of a dividend, which 
would be inconsistent with the status of a RIC as a C corporation. See 
section 311(a). In addition, RICs and RIC shareholders would experience 
complexity inconsistent with the longstanding tax policy of providing 
simplified reporting for RIC investors.
    Consistent with RICs' status as C corporations, RICs could instead 
offset losses from PTPs against qualified REIT dividends received, with 
any excess PTP losses carried forward as negative qualified PTP income 
for section 199A attribute purposes at the RIC level. To the extent 
RICs would be required to carry forward PTP losses, it would appear 
that RICs would need to track separate loss carryforwards for SSTB PTP 
losses and non-SSTB PTP losses. While netting qualified non-SSTB losses 
from PTPs against larger amounts of qualified REIT dividends would 
support RIC dividends that could be treated as eligible for the section 
199A deduction by the RICs' shareholders regardless of income level, 
SSTB losses from PTPs would complicate the offset of qualified PTP 
losses against qualified REIT dividends by RICs because SSTB losses 
from a PTP do not offset qualified REIT dividends for taxpayers with 
taxable income above the phase-out range. Such losses do, however, 
offset qualified REIT dividends for taxpayers with income below the 
threshold amount. For taxpayers with income in the phase-out range, 
these losses partially offset qualified REIT dividends to a greater or 
lesser extent depending on where the taxpayer's income falls in the 
phase-out range. It is not clear how a conduit regime for qualified PTP 
income could work in terms of treating RIC shareholders in the phase-
out range in a manner that is consistent with the treatment they would 
receive if they received the qualified REIT dividend and the qualified 
PTP loss from an SSTB directly rather than through a RIC.
    Providing conduit treatment for qualified PTP income would also 
raise potentially significant issues with respect to the treatment of 
RIC shareholders that are non-U.S. persons, tax-exempt organizations, 
and trusts underlying individual retirement accounts (IRAs) and 
qualified retirement plans. In order to be qualified PTP income, 
section 199A(c)(3)(A)(i) requires that the income must be effectively 
connected with a U.S. trade or business. If conduit treatment is 
afforded to RIC dividends attributable to such PTP income for section 
199A purposes, it is not clear that a RIC dividend attributable to such 
income could be disregarded for purposes of calculating effectively 
connected income of a non-U.S. shareholder or unrelated business 
taxable income of a tax-exempt organization or trust underlying an IRA 
or qualified retirement plan. Given that such investors typically do 
not hold directly interests in PTPs intentionally, but do so through 
corporate ``blockers,'' allowing conduit treatment for qualified PTP 
income through RICs could cause unwelcome results for non-U.S. 
shareholders, tax-exempt organizations, and trusts underlying IRAs and 
qualified retirement plans holding RIC stock.

[[Page 3018]]

    The Treasury Department and the IRS continue to evaluate whether it 
is appropriate to provide conduit treatment for qualified PTP income 
through RICs, and request detailed comments on these novel issues. In 
particular, comments are requested concerning: (1) Whether RICs have 
sufficient qualified items of PTP income, gain, deduction, or loss to 
warrant a conduit regime that would permit RICs to pay qualified PTP 
dividends to shareholders; (2) How to provide conduit treatment for 
qualified PTP income for taxpayers with income below the threshold 
amount or within the phase-out range, particularly where a RIC has 
qualified REIT dividends and a qualified PTP loss from an SSTB; (3) How 
to treat losses of PTPs arising from SSTBs and non-SSTBs; (4) Whether 
conduit treatment for qualified PTP income can be disregarded for 
purposes of determining the effectively connected income or unrelated 
business taxable income of certain RIC shareholders; (5) Whether SSTB 
items are sufficiently rare or incidental for PTPs that a conduit 
regime for PTP dividends should exclude all SSTB items; and (6) How to 
implement conduit treatment for qualified PTP income in a way that is 
consistent with the policy goal of preserving the overall relative 
simplicity of the tax treatment of investors in RICs while still 
achieving the policy goals of section 199A and section 199A(b)(1)(B) in 
particular.

III. Special Rules for Trusts and Estates

    Section 1.199A-6 provides guidance that certain specified entities 
(for example, trusts and estates) may need to follow to enable the 
computation of the section 199A deduction of the entity and each of its 
owners. Section 1.199A-6(d) contains special rules for applying section 
199A to trusts and decedents' estates. The August Proposed Regulations 
expressly requested comments, and comments were submitted, on whether 
and how certain trusts and other entities would be able to take a 
deduction under section 199A. These proposed regulations take those 
suggestions into consideration in proposing rules applicable to those 
particular situations identified by commenters.
    In the case of a section 199A deduction claimed by a non-grantor 
trust or estate, section 199A(f)(1)(B) applies rules similar to the 
rules under former section 199(d)(1)(B)(i) for the apportionment of W-2 
wages and the apportionment of UBIA of qualified property. In the case 
of a non-grantor trust or estate, the QBI and expenses properly 
allocable to the business, including the W-2 wages relevant to the 
computation of the wage limitation, and relevant UBIA of depreciable 
property must be allocated among the trust or estate and its various 
beneficiaries. Specifically, Sec.  1.199A-6(d)(3)(ii) provides that 
each beneficiary's share of the trust's or estate's QBI and W-2 wages 
is determined based on the proportion of the trust's or estate's DNI 
that is deemed to be distributed to that beneficiary for that taxable 
year. Similarly, the proportion of the entity's DNI that is not deemed 
distributed by the trust or estate will determine the entity's share of 
the QBI and W-2 wages. In addition, if the trust or estate has no DNI 
in a particular taxable year, any QBI and W-2 wages are allocated to 
the trust or estate, and not to any beneficiary.
    In addition, Sec.  1.199A-6(d)(3)(ii) provides that, to the extent 
the trust's or estate's UBIA of qualified property is relevant to a 
trust or estate and any beneficiary, the trust's or estate's UBIA of 
qualified property will be allocated among the trust or estate and its 
beneficiaries in the same proportions as is the DNI of the trust or 
estate. This is the case regardless of how any depreciation or 
depletion deductions resulting from the same property may be allocated 
under section 643(c) among the trust or estate and its beneficiaries 
for purposes other than section 199A.
    Under Sec.  1.199A-6(d)(3)(iv), the threshold amount is determined 
at the trust level after taking into account any distribution 
deductions. Commenters have noted that taxpayers could circumvent the 
threshold amount by dividing assets among multiple trusts, each of 
which would claim its own threshold amount. This result is 
inappropriate and inconsistent with the purpose of section 199A. 
Therefore, Sec.  1.199A-6(d)(3)(vii) provides that a trust formed or 
funded with a principal purpose of receiving a deduction under section 
199A will not be respected for purposes of determining the threshold 
amount under section 199A.
    In the August Proposed Regulations, the Treasury Department and the 
IRS requested comments with respect to whether taxable recipients of 
annuity and unitrust interests in charitable remainder trusts and 
taxable beneficiaries of other split-interest trusts may be eligible 
for the section 199A deduction to the extent that the amounts received 
by such recipients include amounts that may give rise to the deduction. 
The request for such comments indicated that such comments should 
include explanations of how amounts that may give rise to the section 
199A deduction would be identified and reported in the various classes 
of income of the trusts received by such recipients and how the excise 
tax rules in section 664(c) would apply to such amounts.
A. Charitable Remainder Trust Beneficiary's Eligibility for the 
Deduction
    A few commenters suggested that a charitable remainder trust under 
section 664 should be allowed to calculate the deduction at the trust 
level and that the charitable remainder trust should be treated as a 
single taxpayer for purposes of the thresholds for taxable income, W-2 
wages, and UBIA of qualified property.
    Several commenters recommended that, if unrelated business taxable 
income (UBTI) is qualified business income, the section 199A deduction 
should be allowed before the UBTI excise tax is imposed. However, other 
commenters disagreed. Another commenter stated that the section 199A 
deduction should not be allowed when calculating UBTI because it is not 
a deduction directly connected with carrying on the trade or business 
and is allowable only for purposes of chapter 1, while the excise tax 
on UBTI is imposed under chapter 42 (that is, it is not an income tax). 
Another commenter said the UBTI excise tax under section 664(c) should 
not affect QBI because that tax is charged to principal.
    One commenter recommended that QBI should be allocated to the 
ordinary income tier. Another recommended that QBI should be the bottom 
of the first tier (last to be distributed) and section 199A items 
should be reported on the Schedule K-1 when QBI is deemed distributed. 
Another commenter stated that a charitable remainder trust has no 
taxable income and no DNI, so the allocation of QBI, W-2 wages, and 
UBIA of qualified property should be allocated to beneficiaries based 
on the percentage of distributions from the ordinary income tier, with 
QBI allocated to the charitable remainder trust remaining a tier one 
item. Another commenter stated that QBI cannot be a separate tier 
because it is a deduction, rather than a rate difference.
    The Treasury Department and the IRS believe that, because a 
charitable remainder trust described in section 664 is not subject to 
income tax, and because the excise tax imposed by section 664(c) is 
treated as imposed under chapter 42, the trust does not either have or 
calculate a section 199A deduction and the threshold amount described 
in section 199A(e)(2) does not apply to the trust. Furthermore, 
application of section 199A to

[[Page 3019]]

effectively reduce the 100 percent rate of tax imposed by section 
664(c) on any UBTI would be inconsistent with the intent of section 
664(c) to deter trusts from making investments that generate 
significant UBTI. However, any taxable recipient of a unitrust or 
annuity amount from the trust must determine and apply the recipient's 
own threshold amount for purposes of section 199A, taking into account 
any annuity or unitrust amounts received from the trust. Therefore, a 
taxable recipient of a unitrust or annuity amount from a charitable 
remainder trust may take into account QBI, qualified REIT dividends, 
and qualified PTP income for purposes of determining the recipient's 
section 199A deduction for the taxable year to the extent that the 
unitrust or annuity amount distributed to such recipient consists of 
such section 199A items under Sec.  1.664-1(d).
    In order to determine the order of distribution of the various 
classes of income of the trust for purposes of applying Sec.  1.664-
1(d), QBI, qualified REIT dividends, and qualified PTP income of a 
charitable remainder trust will be allocated to the classes of income 
within the category of income described in Sec.  1.664-1(d)(1)(i)(a)(1) 
based on the rate of tax that normally would apply to that type of 
income, not taking into account the characterization of that income as 
QBI, qualified REIT dividends, or qualified PTP income for purposes of 
section 199A. Accordingly, any QBI, qualified REIT dividends, and 
qualified PTP income will be treated as distributed from the trust to a 
unitrust or annuity recipient only when all other classes of income 
within the ordinary income category subject to a higher rate of tax 
(not taking into account section 199A) have been exhausted. The 
unitrust or annuity recipient will be treated as receiving a 
proportionate amount of any QBI, qualified REIT dividends, and 
qualified PTP income that is distributed along with other income in the 
same class within the ordinary income category. To the extent that a 
trust is treated as distributing QBI, qualified REIT dividends, or 
qualified PTP income to more than one unitrust or annuity recipient in 
the taxable year, the distribution of such income will be treated as 
made to the recipients proportionately, based on their respective 
shares of the total of QBI, qualified REIT dividends, and qualified PTP 
income distributed for that year. The amount of any W-2 wages or UBIA 
of qualified property of the charitable remainder trust in a taxable 
year will be allocable to unitrust or annuity recipients based on each 
recipient's share of the trust's total QBI (whether or not distributed) 
for that taxable year.
    Any QBI, qualified REIT dividends, or qualified PTP income of the 
trust that is unrelated business taxable income is subject to excise 
tax and Sec.  1.664-1(c) requires that tax to be allocated to the 
corpus of the trust. Certain other rules relating to charitable 
remainder trusts are provided.
B. Split-interest Trusts
    The August Proposed Regulations requested comments on whether any 
special rules were necessary with respect to split-interest trusts. One 
commenter suggested that additional rules may be necessary for split-
interest trusts other than charitable reminder trusts. After 
considering the comment and studying other split-interest trusts in 
more depth after the publication of the August Proposed Regulations, 
the Treasury Department and the IRS have determined that special rules 
for other split-interest trusts, such as non-grantor charitable lead 
trusts or pooled income funds, are not necessary because such trusts 
are taxable under part I, subchapter J, chapter 1 of the Code, except 
subpart E. Such split-interest trusts would apply the rules for non-
grantor trusts and estates set forth in Sec.  1.199A-6(d)(3) to 
determine any applicable section 199A deduction for the trust or its 
taxable beneficiaries.
C. Separate Shares
    Although no comments were received with respect the application of 
the threshold amount to separate shares, the Treasury Department and 
the IRS believe that clarification with respect to this issue may be 
necessary. These proposed regulations provide that, in the case of a 
trust described in section 663(c) with substantially separate and 
independent shares for multiple beneficiaries, such separate shares 
will not be treated as separate trusts for purposes of applying the 
threshold amount. Instead, the trust will be treated as a single trust 
for purposes of determining whether the taxable income of the trust 
exceeds the threshold amount. The purpose of the separate share rule in 
section 663(c) is to treat distributions of trust DNI to trust 
beneficiaries as independent taxable events solely for purposes of 
applying sections 661 and 662 with respect to each beneficiary's 
separate share. The rule determines each beneficiary's share of DNI 
based on the amount of DNI from that beneficiary's separate share, 
rather than as a percentage of the trust's DNI.
    Nevertheless, under the separate share rule, if a trust retains any 
portion of DNI, the trust will be subject to tax as a single trust with 
respect to the retained DNI. Only trusts with retained DNI will be 
eligible for the section 199A deduction, because a trust will be 
allocated QBI, qualified REIT dividends, and qualified PTP income only 
in proportion to the amount of DNI retained by the trust for the 
taxable year. For this reason, a trust, regardless of the number of 
separate shares it has for its beneficiaries under the separate share 
rule of section 663(c), will be treated as a single trust for purposes 
of applying the threshold amount under section 199A. To the extent that 
a taxable beneficiary of a trust receives a distribution of DNI from 
the beneficiary's separate share of the trust which includes section 
199A items, the beneficiary would apply its own threshold amount to 
those section 199A items in computing its section 199A deduction in 
accordance with the rules of Sec.  1.199A-6(d).

Availability of IRS Documents

    IRS notices cited in this preamble are made available by the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402.

Proposed Effective/Applicability Date

    Section 7805(b)(1)(A) and (B) of the Code generally provide that no 
temporary, proposed, or final regulation relating to the internal 
revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which such regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register.
    The amendments to Sec. Sec.  1.199A-3 and 1.199A-6 set forth in 
this notice of proposed rulemaking generally are proposed to apply to 
taxable years ending after the date of publication of a Treasury 
decision adopting these rules as final regulations in the Federal 
Register. However, taxpayers may rely on the rules in the amendments to 
Sec. Sec.  1.199A-3 and 1.199A-6 set forth in this notice of proposed 
rulemaking, in their entirety, until the date a Treasury decision 
adopting these regulations as final regulations is published in the 
Federal Register.

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 13563 and 12866 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory

[[Page 3020]]

approaches that maximize net benefits (including potential economic, 
environmental, public health and safety effects, distributive impacts, 
and equity). Executive Order 13563 emphasizes the importance of 
quantifying both costs and benefits, of reducing costs, of harmonizing 
rules, and of promoting flexibility.
    The proposed regulations have been designated by the Office of 
Management and Budget's (``OMB'') Office of Information and Regulatory 
Affairs (``OIRA'') as subject to review under Executive Order 12866 
pursuant to the Memorandum of Agreement (April 11, 2018) between the 
Treasury Department and OMB regarding review of tax regulations. It has 
been determined that the proposed rulemaking is economically 
significant under section 1(c) of the Memorandum of Agreement and 
thereby subject to review. Accordingly, the proposed regulations have 
been reviewed by OMB.
A. Overview
    Congress enacted section 199A to provide taxpayers other than 
corporations a deduction of up to 20 percent of QBI from domestic 
businesses plus up to 20 percent of their combined qualified REIT 
dividends and qualified PTP income. As stated in the Explanation of 
Provisions, these regulations are necessary to provide taxpayers with 
computational, definitional, and anti-avoidance guidance regarding the 
application of section 199A. These proposed regulations contain 
amendments to Sec.  1.199A-3, providing further guidance to taxpayers 
for purposes of calculating the section 199A deduction. They provide 
clarity for taxpayers in determining their eligibility for the 
deduction and the amount of the allowed deduction. Among other 
benefits, this clarity helps ensure that taxpayers all calculate the 
deduction in a similar manner, which encourages decision-making that is 
economically efficient contingent on the provisions of the overall 
Code.
B. Baseline
    The analysis in this section compares the proposed regulation to a 
no-action baseline reflecting anticipated Federal income tax-related 
behavior in the absence of these regulations.
C. Economic Analysis of the Proposed Amendments to Sec.  1.199A-3
1. Background
    Because the section 199A deduction has not previously been 
available, Sec. Sec.  1.199A-1 through 1.199A-6 provide greater 
specificity for a large number of the relevant terms and necessary 
calculations taxpayers are currently required to apply under the 
statute. However, one subject not covered by the August 2018 Proposed 
Regulations is the treatment of REIT dividends received by RICs. 
Because RICs are taxed as C corporations, they are ineligible for the 
section 199A deduction under the statute, which generally does not 
apply to C corporations. However, the statute also directs the 
Secretary to prescribe such regulations as are necessary to carry out 
the purposes of section 199A, including regulations for its application 
in the case of tiered entities. Thus these proposed regulations 
establish rules under which a RIC that earns qualified REIT dividends 
may pay section 199A dividends to its shareholders.
    An alternative approach the Treasury Department and the IRS could 
have taken would be to remain silent on this issue. For reasons given 
below, the Treasury Department and the IRS concluded such an approach 
would likely give rise to less economically efficient decisions than 
the approach taken in these proposed regulations.
2. Anticipated Benefits of the Proposed Amendments to Sec.  1.199A-3
    The Treasury Department and the IRS expect that the definitions and 
guidance provided in the proposed amendments to Sec.  1.199A-3 will 
implement the section 199A deduction in an economically efficient 
manner. An economically efficient tax system generally aims to treat 
income derived from similar economic decisions similarly in order to 
reduce incentives to make choices based on tax rather than market 
incentives. In absence of these proposed regulations, the section 199A 
statute would not accomplish this in the case of REIT dividends. Under 
the statute and the section 199A final regulations, individuals who 
directly hold ownership interests in a REIT would generally qualify for 
the section 199A deduction on their qualified REIT dividends. However, 
individuals who are shareholders of a RIC that has an ownership 
interest in a REIT would not receive any benefit from section 199A on 
REIT dividends received by the RIC, even if the RIC pays dividends to 
the individual. Thus, in the absence of these supplemental proposed 
regulations, a market distortion is introduced by section 199A whereby 
direct ownership of REITs is tax-advantaged relative to indirect 
ownership of REITs through RICs.
    These proposed regulations remove this distortion. The proposed 
amendments to Sec.  1.199A-3 establish rules under which a RIC that 
earns qualified REIT dividends may pay section 199A dividends to its 
shareholders, such that the effective tax treatment of qualified REIT 
dividends is similar under the proposed regulations regardless of 
whether a taxpayer invests in a REIT directly or through a RIC.
3. Anticipated Costs of the Proposed Amendments to Sec.  1.199A-3
    The Treasury Department and the IRS do not anticipate any 
meaningful economic distortions to be induced by the proposed 
amendments to Sec.  1.199A-3 because the proposed amendments seek to 
continue to provide similar tax treatment to REIT income regardless of 
whether it is held directly or through a RIC. Prior to TCJA, the tax 
treatment was similar, but TCJA made REIT dividends eligible for the 
section 199A deduction, and the section 199A final regulations did not 
address this uncertainty. This proposed amendment ensures that REIT 
income earned through a RIC is also eligible for the same deduction. 
RICs are financial intermediaries, and, as a general rule, economic 
distortion is minimized to the extent that the tax consequences of 
investment through an intermediary correspond to the tax consequences 
of direct investment. The Treasury Department and the IRS request 
comments regarding any anticipated economic costs. Changes to the 
collective paperwork burden arising from this and other sections of 
these regulations are discussed in section D, Anticipated impacts on 
administrative and compliance costs, of this analysis.
D. Anticipated Impacts on Administrative and Compliance Costs
    The proposed regulations add to the compliance costs of RICs and 
intermediaries such as brokerage firms that hold RIC shares. In order 
for a RIC's shareholders to benefit from the section 199A deduction on 
qualified REIT dividends earned by the RIC, the proposed regulations 
require the RIC to compute and report section 199A dividends to its 
shareholders. Though many RICs keep detailed records of their 
investment portfolios, this action nonetheless creates non-trivial 
administrative costs for any RICs and intermediaries that wish to 
provide section 199A dividends to their shareholders. These costs and 
the associated impacted tax forms are described in the Paperwork 
Reduction Act section of this proposed amendment.

[[Page 3021]]

E. Executive Order 13771
    These regulations have been designated as regulatory under E.O. 
13771.

II. Paperwork Reduction Act

    The collection of information required by this proposed regulation 
is in proposed Sec.  1.199A-3. The collection of information in 
proposed Sec.  1.199A-3 is required for RICs that choose to report 
information regarding qualified REIT dividends to their shareholders. 
It is necessary to report the information to the IRS and relevant 
taxpayers in order to ensure that taxpayers properly report in 
accordance with the rules of the proposed regulations the correct 
amount of deduction under section 199A. The collection of information 
in proposed Sec.  1.199A-3 is satisfied by providing information about 
section 199A dividends as Form 1099-DIV and its instructions may 
prescribe.
    For purpose of the PRA, the reporting burden associated with Sec.  
1.199A-3 will be reflected in the IRS Form 14029, Paperwork Reduction 
Act Submission, associated with Form 1099-DIV (OMB control number 1545-
0110). The burden associated with the information collection in the 
proposed regulations represents 1.567 million hours and $149 million 
($2018) annually to comply with the information collection requirement 
in the proposed regulations. The burden hours estimate was derived from 
IRS's legacy burden model and is discussed in further detail on 1545-
0110. The hourly rate is derived from RAAS's Business Taxpayer Burden 
model that relates time and out-of-pocket costs of business tax 
preparation, derived from survey data, to assets and receipts of 
affected taxpayers along with other relevant variables, and converted 
by the Treasury Department to $2017. The Treasury Department and the 
IRS request comments on all aspects of information collection burdens 
related to the proposed regulations. In addition, when available, 
drafts of the applicable IRS forms are posted for comment at https://www.irs.gov/pub/irs-pdf/f1099div.pdf.

III. Regulatory Flexibility Act

    It is hereby certified that the collections of information in 
proposed Sec.  1.199A-3 will not have a significant economic impact on 
a substantial number of small entities.
    The collection in proposed Sec.  1.199A-3 applies only to RICs that 
pay section 199A dividends. As described above, Congress created RICs 
to give small investors access to the professional management and asset 
diversification that are available only with very large investment 
portfolios. To insure appropriate non-tax regulation of these 
substantial investment portfolios, subchapter M of chapter 1 of 
subtitle A the Code requires that such RICs must be eligible for 
registration, and must actually be registered, with the Securities and 
Exchange Commission under the Investment Company Act of 1940. There are 
some small businesses that are publicly traded, but most publicly 
traded businesses are not small entities as defined by the Regulatory 
Flexibility Act. Thus, the Treasury Department and IRS expect that most 
RICs are not small entities for purposes of the Regulatory Flexibility 
Act. Accordingly, the Treasury Department and the IRS have determined 
that the collection of information in this notice of proposed 
rulemaking will not have a significant economic impact. Accordingly, a 
regulatory flexibility analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Notwithstanding this certification, 
the Treasury Department and the IRS invite comments from interested 
members of the public on both the number of entities affected and the 
economic impact on small entities.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.
    Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    The Treasury Department and the IRS request comments on all aspects 
of the proposed rules.
    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
All comments will be available at www.regulations.gov or upon request. 
A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, then notice of the date, time, and place for the public 
hearing will be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Michael Y. Chin and 
Steven Harrison, Office of the Associate Chief Counsel (Financial 
Institutions and Products) and Robert Alinsky, Vishal R. Amin, Margaret 
Burow, and Frank J. Fisher, Office of the Associate Chief Counsel 
(Passthroughs and Special Industries). However, other personnel from 
the Treasury Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citations for part 1 are revised by amending 
sectional authorities for Sec. Sec.  1.199A-3 and 1.199A-6 to read in 
part as follows:

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

    Section 1.199A-3 also issued under 26 U.S.C. 199A(c)(4)(C) and 
(f)(4).
* * * * *
    Section 1.199A-6 also issued under 26 U.S.C. 199A(f)(1)(B) and 
(f)(4).
* * * * *
0
Par. 2. Section 1.199A-0 is amended by:
0
1. Adding entries for Sec.  1.199A-3(b)(1)(iv)(A) and (B).
0
2. Adding entries for Sec.  1.199A-3(d), (d)(1) and (2), (d)(2)(i) 
through (iii), (d)(2)(iii)(A) and (B), (d)(3), (d)(3)(i) through (v), 
(d)(4), (d)(4)(i) and (ii), and (d)(5) and (6).
0
3. Adding entries for Sec.  1.199A-6(d)(3)(iii) and (v).
    The additions read as follows:


Sec.  1.199A-0  Table of contents.

* * * * *


Sec.  1.199A-3  Qualified business income, qualified REIT dividends, 
and qualified PTP income.

* * * * *
    (b) * * *
    (1) * * *
    (iv) * * *
    (A) In general.
    (B) Attributes of disallowed loss determined in year loss is 
incurred.
* * * * *
    (d) Section 199A dividends paid by a regulated investment company.
    (1) In general.
    (2) Definition of section 199A dividend.
    (i) In general.
    (ii) Reduction in the case of excess reported amounts.
    (iii) Allocation of excess reported amount.

[[Page 3022]]

    (A) In general.
    (B) Special rule for noncalendar-year RICs.
    (3) Definitions.
    (i) Reported section 199A dividend amount.
    (ii) Excess reported amount.
    (iii) Aggregate reported amount.
    (iv) Post-December reported amount.
    (v) Qualified REIT dividend income.
    (4) Treatment of section 199A dividends by shareholders.
    (i) In general.
    (ii) Holding period.
    (5) Example.
    (6) Applicability date.
* * * * *


Sec.  1.199A-6  Relevant passthrough entities (RPEs), publicly traded 
partnerships (PTPs), trusts, and estates.

* * * * *
    (d) * * *
    (3) * * *
    (iii) Separate shares.
* * * * *
    (v) Charitable remainder trusts.
* * * * *
0
Par. 3. Section 1.199A-3 is amended by revising paragraph (b)(1)(iv) 
and adding paragraph (d) to read as follows:


Sec.  1.199A-3  Qualified business income, qualified REIT dividends, 
and qualified PTP income.

* * * * *
    (b) * * *
    __(1) * * *
    (iv) Previously disallowed losses--(A) In general. Previously 
disallowed losses or deductions (including losses disallowed under 
sections 465, 469, 704(d), and 1366(d)) allowed in the taxable year 
generally are taken into account for purposes of computing QBI to the 
extent the disallowed loss or deduction is otherwise allowed by section 
199A and this section. These losses shall be used, for purposes of 
section 199A and these regulations, in order from the oldest to the 
most recent on a first-in, first-out (FIFO) basis and shall be treated 
as losses from a separate trade or business. To the extent such losses 
relate to a PTP, they must be treated as a loss from a separate PTP in 
the taxable year the losses are taken into account. However, losses or 
deductions that were disallowed, suspended, limited, or carried over 
from taxable years ending before January 1, 2018 (including under 
sections 465, 469, 704(d), and 1366(d)), are not taken into account in 
a later taxable year for purposes of computing QBI.
    (B) Attributes of disallowed loss determined in year loss is 
incurred. Whether a disallowed loss or deduction is attributable to a 
trade or business, and otherwise meets the requirements of this section 
is determined in the year the loss is incurred. Whether a disallowed 
loss or deduction is attributable to a specified service trade or 
business (including whether an individual has taxable income under the 
threshold amount, within the phase-in range, or in excess of the phase-
in range) also is determined in the year the loss is incurred. To the 
extent a loss is partially disallowed, QBI in the year of disallowance 
must be reduced proportionately.
* * * * *
    (d) Section 199A dividends paid by a regulated investment company--
(1) In general. If section 852(b) applies to a regulated investment 
company (RIC) for a taxable year, the RIC may pay section 199A 
dividends, as defined in this paragraph (d).
    (2) Definition of section 199A dividend--(i) In general. Except as 
provided in paragraph (d)(2)(ii) of this section, a section 199A 
dividend is any dividend or part of such a dividend that a RIC pays to 
its shareholders and reports as a section 199A dividend in written 
statements furnished to its shareholders.
    (ii) Reduction in the case of excess reported amounts. If the 
aggregate reported amount with respect to the RIC for any taxable year 
exceeds the RIC's qualified REIT dividend income for the taxable year, 
then a section 199A dividend is equal to--
    (A) The reported section 199A dividend amount, reduced by;
    (B) The excess reported amount that is allocable to that reported 
section 199A dividend amount.
    (iii) Allocation of excess reported amount--(A) In general. Except 
as provided in paragraph (d)(2)(iii)(B) of this section, the excess 
reported amount (if any) that is allocable to the reported section 199A 
dividend amount is that portion of the excess reported amount that 
bears the same ratio to the excess reported amount as the reported 
section 199A dividend amount bears to the aggregate reported amount.
    (B) Special rule for noncalendar-year RICs. In the case of any 
taxable year that does not begin and end in the same calendar year, if 
the post-December reported amount equals or exceeds the excess reported 
amount for that taxable year, paragraph (d)(2)(iii)(A) of this section 
is applied by substituting ``post-December reported amount'' for 
``aggregate reported amount,'' and no excess reported amount is 
allocated to any dividend paid on or before December 31 of that taxable 
year.
    (3) Definitions. For purposes of paragraph (d) of this section--
    (i) Reported section 199A dividend amount. The term reported 
section 199A dividend amount means the amount of a dividend 
distribution reported to the RIC's shareholders under paragraph 
(d)(2)(i) of this section as a section 199A dividend.
    (ii) Excess reported amount. The term excess reported amount means 
the excess of the aggregate reported amount over the RIC's qualified 
REIT dividend income for the taxable year.
    (iii) Aggregate reported amount. The term aggregate reported amount 
means the aggregate amount of dividends reported by the RIC under 
paragraph (d)(2)(i) of this section as section 199A dividends for the 
taxable year (including section 199A dividends paid after the close of 
the taxable year and described in section 855).
    (iv) Post-December reported amount. The term post-December reported 
amount means the aggregate reported amount determined by taking into 
account only dividends paid after December 31 of the taxable year.
    (v) Qualified REIT dividend income. The term qualified REIT 
dividend income means, with respect to a taxable year of a RIC, the 
excess of the amount of qualified REIT dividends, as defined in Sec.  
1.199A-3(c)(2), includible in the RIC's taxable income for the taxable 
year over the amount of the RIC's deductions that are properly 
allocable to such income.
    (4) Treatment of section 199A dividends by shareholders--(i) In 
general. For purposes of section 199A and the regulations under section 
199A, a section 199A dividend is treated by a taxpayer that receives 
the section 199A dividend as a qualified REIT dividend.
    (ii) Holding period. Paragraph (d)(4)(i) does not apply to any 
dividend received with respect to a share of RIC stock--
    (A) That is held by the shareholder for 45 days or less (taking 
into account the principles of section 246(c)(3) and (4)) during the 
91-day period beginning on the date which is 45 days before the date on 
which the share becomes ex-dividend with respect to such dividend; or
    (B) To the extent that the shareholder is under an obligation 
(whether pursuant to a short sale or otherwise) to make related 
payments with respect to positions in substantially similar or related 
property.
    (5) Example. The following example illustrates the provisions of 
this paragraph (d).

    (i) Example. (A) X is a corporation that has elected to be a 
RIC. For its taxable year ending March 31, 2019, X has $25,000x of 
net long-term capital gain, $60,000x of qualified dividend income, 
$25,000x of taxable interest

[[Page 3023]]

income, $15,000x of net short-term capital gain, and $25,000x of 
qualified REIT dividends. X has $15,000x of deductible expenses, of 
which $3,000x is allocable to the qualified REIT dividends. On 
December 31, 2018, X pays a single dividend of $100,000x on December 
31, and reports $20,000x of the dividend as a section 199A dividend 
in written statements to its shareholders. On March 31, 2019, X pays 
a dividend of $35,000x, and reports $5,000x of the dividend as a 
section 199A dividend in written statements to its shareholders.
    (B) X's qualified REIT dividend income under paragraph (d)(3)(v) 
of this section is $22,000x, which is the excess of X's $25,000x of 
qualified REIT dividends over $3,000x in allocable expenses. The 
reported section 199A dividend amounts for the December 31, 2018, 
and March 31, 2019, distributions are $20,000x and $5,000x, 
respectively. For the taxable year ending March 31, 2019, the 
aggregate reported amount of section 199A dividends is $25,000x, and 
the excess reported amount under paragraph (d)(3)(ii) of this 
section is $3,000x. Because X is a noncalendar-year RIC and the 
post-December reported amount of $5,000x exceeds the excess reported 
amount of $3,000x, the entire excess reported amount is allocated 
under paragraphs (d)(2)(iii)(A) and (B) of this section to the 
reported section 199A dividend amount for the March 31, 2019, 
distribution. No portion of the excess reported amount is allocated 
to the reported section 199A dividend amount for the December 31, 
2018, distribution. Thus, the section 199A dividend on March 31, 
2019, is $2,000x, which is the reported section 199A dividend amount 
of $5,000x reduced by the $3,000x of allocable excess reported 
amount. The section 199A dividend on December 31, 2018, is the 
$20,000x that X reports as a section 199A dividend.
    (C) Shareholder A, a United States person, receives a dividend 
from X of $100x on December 31, 2018, of which $20x is reported as a 
section 199A dividend. If A meets the holding period requirements in 
paragraph (d)(4)(ii) of this section with respect to the stock of X, 
A treats $20x of the dividend from X as a qualified REIT dividend 
for purposes of section 199A for A's 2018 taxable year.
    (D) A receives a dividend from X of $35x on March 31, 2019, of 
which $5x is reported as a section 199A dividend. If A meets the 
holding period requirements in paragraph (d)(4)(ii) of this section 
with respect to the stock of X, A may only treat $2x of the dividend 
from X as a section 199A dividend for A's 2019 taxable year.

    (6) Applicability date. The provisions of paragraph (d) of this 
section apply to taxable years ending after the date the Treasury 
decision adopting these regulations as final regulations is published 
in the Federal Register. However, taxpayers may rely on the rules of 
this section until the date the Treasury decision adopting these 
regulations as final regulations is published in the Federal Register.
* * * * *
0
Par. 4. Section 1.199A-6 is amended by adding paragraphs (d)(3)(iii) 
and (v) to read as follows:


Sec.  1.199A-6   Relevant passthrough entities (RPEs), publicly traded 
partnerships (PTPs), trusts, and estates.

* * * * *
    (d) * * *
    (3) * * *
    (iii) Separate shares. In the case of a trust described in section 
663(c) with substantially separate and independent shares for multiple 
beneficiaries, such trust will be treated as a single trust for 
purposes of determining whether the taxable income of the trust exceeds 
the threshold amount.
* * * * *
    (v) Charitable remainder trusts. A charitable remainder trust 
described in section 664 is not entitled to and does not calculate a 
section 199A deduction and the threshold amount described in section 
199A(e)(2) does not apply to the trust. However, any taxable recipient 
of a unitrust or annuity amount from the trust must determine and apply 
the recipient's own threshold amount for purposes of section 199A 
taking into account any annuity or unitrust amounts received from the 
trust. A recipient of a unitrust or annuity amount from a trust may 
take into account QBI, qualified REIT dividends, or qualified PTP 
income for purposes of determining the recipient's section 199A 
deduction for the taxable year to the extent that the unitrust or 
annuity amount distributed to such recipient consists of such section 
199A items under Sec.  1.664-1(d). For example, if a charitable 
remainder trust has investment income of $500, qualified dividend 
income of $200, and qualified REIT dividends of $1,000, and distributes 
$1,000 to the recipient, the trust would be treated as having income in 
two classes within the category of income described in Sec.  1.664-
1(d)(1)(i)(a)(1), for purposes of Sec.  1.664-1(d)(1)(ii)(b). Because 
the annuity amount first carries out income in the class subject to the 
highest income tax rate, the entire annuity payment comes from the 
class with the investment income and qualified REIT dividends. Thus, 
the charitable remainder trust would be treated as distributing a 
proportionate amount of the investment income ($500/(1,000+500)*1,000 = 
$333) and qualified REIT dividends ($1000/(1,000+500)*1000 = $667) 
because the investment income and qualified REIT dividends are taxed at 
the same rate and within the same class, which is higher than the rate 
of tax for the qualified dividend income which is in a separate class. 
The charitable remainder trust in this example would not be treated as 
distributing any of the qualified dividend income until it distributed 
all of the investment income and qualified REIT dividends (more than 
$1,500 in total) to the recipient. To the extent that a trust is 
treated as distributing QBI, qualified REIT dividends, or qualified PTP 
income to more than one unitrust or annuity recipient in the taxable 
year, the distribution of such income will be treated as made to the 
recipients proportionately, based on their respective shares of the 
total of QBI, qualified REIT dividends, or qualified PTP income 
distributed for that year. The trust allocates and reports any W-2 
wages or UBIA of qualified property to the taxable recipient of the 
annuity or unitrust interest based on each recipient's share of the 
trust's total QBI (whether or not distributed) for that taxable year. 
Accordingly, if 10 percent of the QBI of a charitable remainder trust 
is distributed to the recipient and 90 percent of the QBI is retained 
by the trust, 10 percent of the W-2 wages and UBIA of qualified 
property is allocated and reported to the recipient and 90 percent of 
the W-2 wages and UBIA of qualified property is treated as retained by 
the trust. However, any W-2 wages retained by the trust do not carry 
over to subsequent taxable years for section 199A purposes. Any QBI, 
qualified REIT dividends, or qualified PTP income of the trust that is 
unrelated business taxable income is subject to excise tax and that tax 
must be allocated to the corpus of the trust under Sec.  1.664-1(c).
* * * * *

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-01023 Filed 2-4-19; 4:15 pm]
 BILLING CODE 4830-01-P