Final regulations provide additional guidance on the base erosion and anti-abuse tax (BEAT) under Code Sec. 59A. The regulations also address certain aspects of the BEAT under Code Secs. 1502 and 6031.
The final regulations retain the basic approach and structure of the 2018 proposed regulations ( NPRM REG-112607-19), with certain revisions. The final regulations generally provide rules addressing the following:
- the determination of a taxpayer’s aggregate group for purposes of determining gross receipts and the base erosion percentage;
- an election to waive deductions for purposes of the BEAT;
- the application of the BEAT to partnerships; and
- the anti-abuse rule provided in Reg. §1.59A-9(b)(4) with respect to certain basis step-up transactions.
Determination of Taxpayer’s Aggregate Group
The final regulations provide guidance regarding how a taxpayer determines its aggregate group. Specifically, rules are provided for the calculation of gross receipts and the base erosion percentage when either the taxpayer or a member of the taxpayer’s aggregate group has a short tax year. The final regulations generally retain the rule in the 2018 proposed regulations that permits the use of a reasonable approach to determine whether a taxpayer’s aggregate group meets the gross receipts test and base erosion percentage test with respect to a short tax year of the taxpayer. The final rules provide examples of methods that may or may not constitute a reasonable approach.
In addition, the final regulations provide guidance on how the gross receipts and the base erosion percentage of an aggregate group are determined when members join or leave a taxpayer’s aggregate group, such as through a sale of the stock of a member to a third party. Clarification is provided regarding the close of the tax year rule for determining gross receipts and base erosion percentage. The final rules also address concerns regarding over-and under-counting of gross receipts of aggregate group members with different tax years.
Finally, guidance is provided on the application of the aggregate group rules to predecessors and successors.
Election to Waive Allowable Deductions
The final regulations address the election to waive allowable deduction and more specifically:
- when a taxpayer is eligible to make the BEAT waiver election;
- the effect of the BEAT waiver election on the base erosion percentage (whether deductions
- waived pursuant to the BEAT waiver election should be included in the denominator of the base erosion percentage);
- a reduction of waived deductions during audit or on an amended return;
- a waiver of life and non-life reinsurance premiums;
- procedures for making the BEAT waiver election;
- the application of the BEAT waiver election to partnerships;
- the application of the BEAT waiver election to consolidated groups; and
- the interaction of the BEAT waiver election with other regulations.
Application of the BEAT to Partnerships
The final regulations expand the ECI exception to apply to certain partnership transactions. The regulations also clarify the treatment of curative allocations and the partnership anti-abuse rule for derivatives.
Anti-abuse Rules of Reg. §1.59A-9 for Basis Step-up Transactions
The anti-abuse rule of Reg. §1.59A-9 is revised to address concerns about the breadth of this rule and its potential to create a “cliff effect,” whereby a minimal amount of pre-transaction basis step-up could disqualify an entire transaction that would have otherwise qualified for the specified nonrecognition transaction exception.
Possible Future Guidance Concerning the QDP Reporting Requirements
The IRS is currently studying the interaction of the QDP exception, the BEAT netting rule in Reg. §1.59A-2(e)(3)(iv), and the QDP reporting requirements in Reg. §1.59A-6 and Reg. §1.6038A-2(b)(7)(ix) and considering whether future guidance may be appropriate.
The final regulations generally apply to tax years beginning on or after the date they are published in Federal Register. Certain rules apply to tax years ending on or after December 2, 2019. However, taxpayers may apply these final regulations in their entirety for tax years beginning after December 31, 2017, and before their applicability date, provided that, once applied, taxpayers must continue to apply these regulations in their entirety for all subsequent tax years. Alternatively, taxpayers may apply only Reg. §§1.59A-3(c)(5) and (6) for tax 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 tax years. Taxpayers may also rely on Proposed Reg. §§1.59A-2(c)(2)(ii) and (c)(4) through (c)(6), and 1.59A-3(c)(5) and (c)(6) in their entirety for tax years beginning after December 31, 2017, and before the date of publication of these final regulations in the Federal Register.