26 CFR § 1.59A-2 - Applicable taxpayer.

§ 1.59A-2 Applicable taxpayer.
Link to an amendment published at 85 FR 64363, Oct. 9, 2020.

(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.

(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) [Reserved]

(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)-(6) [Reserved]

(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.

(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)(iii) 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) 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) [Reserved]

[T.D. 9885, 84 FR 67017, Dec. 6, 2019]