Assumption of Partner Liabilities, 30334-30358 [05-10266]
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30334
Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
FDA and USDA intend to prepare this
guidance.
Several articles in peer-reviewed
journals discuss studies on the
penetration of bacteria other than E. coli
O157:H7 into the interior of
mechanically tenderized beef products.
For example, one study concerning
salmonellae inoculated in beef rounds
found that mechanical tenderization
increased the level of salmonellae in
core samples by about 1 logarithm, that
dripping inoculated rounds into a 50
parts per million (ppm) chlorine
solution did not prevent the occurrence
of salmonellae in core samples of
mechanically tenderized units, and that
Salmonella survived in the core and on
the surface of some, but not all,
inoculated rounds cooked to an internal
temperature of 130 degrees F (‘‘The
Effect of Mechanical Tenderization on
Beef Rounds Inoculated with
Salmonellae,’’ Johnson, R.W.; Harris,
M.E., and Moran, A.B., Journal of Food
Safety. 1978; 1(3): 201–209; 9 ref.).
In another study, samples of
mechanically tenderized beef were
subjected to enumeration of aerobes,
coliforms, E. coli, and organisms that
formed black or grey on Harlequin TM
agar (a medium formulated for recovery
of Listeria). The study concluded that
cooking mechanically tenderized beef to
a medium rare condition may be
adequate for ensuring the
microbiological safety of this product,
provided it is devoid of excessive
contamination of deep tissues
(‘‘Microbiological Conditions for
Mechanically Tenderized Beef Cuts
Prepared at Four Retail Stores,’’ Gill,
C.O.; McGinnis, J.C., International
Journal of Food Microbiology. 2004;
95(1): 95–102).
Another study found that cleaning
and sanitizing the tenderizer with an
iodine-based sanitizer (25 ppm titratable
iodine) decreased the bacterial levels of
mechanically tenderized rounds
(‘‘Microbial Aspects of Mechanical
Tenderization of Beef,’’ Raccah, M.;
Henrickson, R.L., Journal of Food
Protection. 1979. 42(12): 971–973; 20
ref.).
Several industry associations (the
American Meat Institute, the National
Cattlemen’s Beef Association, the
National Meat Association, and the
Southwest Meat Association) have
developed guidelines to address
pathogen control in mechanically
tenderized beef products and enhanced
beef products. These guidelines are
currently available on the Internet, on
the Beef Industry Food Safety Council
Web site at https://www.bifsco.org/
BestPractices.aspx. The guidelines
present recommended practices
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throughout tenderizing or enhancing
operations and during cleaning and
sanitizing operations.
FSIS Actions To Enforce and Facilitate
Compliance with the Reassessment
Requirement
The Agency intends to instruct its
inspection program personnel to
determine whether establishments have
considered the significance of the three
outbreaks discussed in this notice as
part of an annual HACCP plan
reassessment for mechanically
tenderized beef products. FSIS will also
instruct inspection program personnel
to ensure that all establishments
producing mechanically tenderized beef
products, including small and very
small establishments that may not
belong to a trade association, are aware
that the Agency has issued this notice.
Finally, FSIS intends to instruct its
inspection program personnel to collect
data concerning the outcomes of the
required reassessment.
Paperwork Reduction Act
FSIS has reviewed the paperwork and
recordkeeping requirements in this
notice in accordance with the
Paperwork Reduction Act and has
determined that the paperwork
requirements for the regulations that
require establishments that produce
mechanically tenderized beef products
to reassess their HACCP Plans have
already been accounted for in the
Pathogen Reduction/HACCP Systems
information collection approved by the
Office of Management and Budget
(OMB). The OMB approval number for
the Pathogen Reduction/HACCP
Systems information collection is 0583–
0103.
Additional Public Notification
Public awareness of all segments of
rulemaking and policy development is
important. Consequently, in an effort to
ensure that the public and in particular
minorities, women, and persons with
disabilities, are aware of this notice,
FSIS will announce it on-line through
the FSIS web page located at https://
www.fsis.usda.gov/
regulations__&__policies/
2005__Notices__Index/index.asp.
FSIS also will make copies of this
Federal Register publication available
through the FSIS Constituent Update,
which is used to provide information
regarding FSIS policies, procedures,
regulations, Federal Register notices,
FSIS public meetings, recalls, and other
types of information that could affect or
would be of interest to our constituents
and stakeholders. The update is
communicated via Listserv, a free e-mail
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subscription service consisting of
industry, trade, and farm groups,
consumer interest groups, allied health
professionals, scientific professionals,
and other individuals who have
requested to be included. The update
also is available on the FSIS web page.
Through Listserv and the web page,
FSIS is able to provide information to a
much broader, more diverse audience.
In addition, FSIS offers an email
subscription service which provides an
automatic and customized notification
when popular pages are updated,
including Federal Register publications
and related documents. This service is
available at https://www.fsis.usda.gov/
news_and_events/email_subscription/
and allows FSIS customers to sign up
for subscription options in eight
categories. Options range from recalls to
export information to regulations,
directives and notices. Customers can
add or delete subscriptions themselves
and have the option to password protect
their account.
Done at Washington, DC on: May 20, 2005.
Barbara J. Masters,
Acting Administrator.
[FR Doc. 05–10471 Filed 5–25–05; 8:45 am]
BILLING CODE 3410–DM–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9207]
RIN 1545–AX93
Assumption of Partner Liabilities
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations; and removal of temporary
regulations.
AGENCY:
SUMMARY: This document contains final
regulations relating to the definition of
liabilities under section 752 of the
Internal Revenue Code (Code). These
regulations provide rules regarding a
partnership’s assumption of certain
fixed and contingent obligations in
connection with the issuance of a
partnership interest and provide
conforming changes to certain
regulations. These regulations also
provide rules under section 358(h) for
assumptions of liabilities by
corporations from partners and
partnerships. Finally, this document
also contains temporary regulations
relating to the assumption of certain
liabilities under section 358(h). The text
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Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
of the temporary regulations also serves
as the text of the proposed regulations
set forth in the notice of proposed
rulemaking on this subject in the
proposed rules section in this issue of
the Federal Register.
DATES: Effective Date: These regulations
are effective May 26, 2005.
Applicability Dates: The final § 1.752–
6 regulations apply to assumptions of
liabilities by a partnership occurring
after October 18, 1999, and before June
24, 2003. All of the other final
regulations in this Treasury Decision, as
well as the temporary regulations under
section 358, apply to liabilities assumed
on or after June 24, 2003, except as
otherwise noted.
FOR FURTHER INFORMATION CONTACT:
Laura Fields at (202) 622–3050 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545–
1843. Responses to these collections of
information are mandatory and are
required to obtain a benefit. The
collections of information in this final
regulation is in § 1.752–7(e), (f), (g), and
(h). This information is required for a
former or current partner of a
partnership to take deductions, losses,
or capital expenses attributable to the
satisfaction of the § 1.752–7 liability.
This information will be used by the
partner in order to take a deduction,
loss, or capital expense. An additional
collection of information in this final
regulation is in § 1.752–7(k)(2). This
information is required to inform the
IRS of partnerships making the
designated election and to report
income appropriately. The collection of
information is required to obtain a
benefit, i.e., to elect to apply the
provisions of § 1.752–7 of the
regulations in lieu of § 1.752–6. The
likely respondents are business or other
for-profit institutions and small
businesses or organizations.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
Estimated total annual reporting
burden: 125 hours.
The estimated annual burden per
respondent varies from 20 to 40
minutes, depending on individual
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circumstances, with an estimated
average of 30 minutes.
Estimated number of respondents:
250.
Estimated annual frequency of
responses: On occasion.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains amendments
to 26 CFR part 1 under sections 358,
704, 705, 737 and 752 of the Internal
Revenue Code (Code).
As part of the Community Renewal
Tax Relief Act of 2000 (the Act)(114
Stat. 2763), Congress enacted, on
December 15, 2000, section 358(h),
effective October 18, 1999, to address
certain situations in which property is
transferred to a corporation in exchange
for both stock and the corporation’s
assumption of certain obligations of the
transferor. In these situations,
transferors took the position that the
obligations were not liabilities within
the meaning of section 357(c) or that
they were described in section 357(c)(3),
and, therefore, the obligations did not
reduce the basis of the transferor’s stock.
These assumed obligations, however,
did reduce the value of the stock. The
transferors then sold the stock and
claimed a loss. In this way, taxpayers
attempted to duplicate a loss in
corporate stock and to accelerate
deductions that typically are allowed
only on the economic performance of
these types of obligations.
Section 358(h) addresses these
transactions by requiring that, after the
application of section 358(d), the basis
in stock received in an exchange to
which section 351, 354, 355, 356, or 361
applies be reduced (but not below the
fair market value of the stock) by the
amount of any liability assumed in the
exchange. Exceptions to section 358(h)
are provided where: (1) The trade or
business with which the liability is
associated is transferred to the person
assuming the liability as part of the
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30335
exchange; or (2) substantially all of the
assets with which the liability is
associated are transferred to the person
assuming the liability as part of the
exchange. The Secretary, however, has
the authority to limit these exceptions.
The term liability for purposes of
section 358(h) includes any fixed or
contingent obligation to make payment
without regard to whether the obligation
is otherwise taken into account for
purposes of the Code.
Congress recognized that taxpayers
were attempting to use partnerships and
S corporations to carry out the same
types of abuses that section 358(h) was
designed to deter. Therefore, in sections
309(c) and (d)(2) of the Act, Congress
directed the Secretary to prescribe rules
to provide ‘‘appropriate adjustments
under subchapter K of chapter 1 of the
Code to prevent the acceleration or
duplication of losses through the
assumption of (or transfer of assets
subject to) liabilities described in
section 358(h)(3) * * * in transactions
involving partnerships.’’ Under the
statute, these rules are to ‘‘apply to
assumptions of liability after October
18, 1999, or such later date as may be
prescribed in such rules.’’
In response to this directive, a notice
of proposed rulemaking (REG–106736–
00; 2003–28 I.R.B. 46) under sections
358, 704, 705, and 752 was published in
the Federal Register (68 FR 37434) on
June 24, 2003. In addition, temporary
regulations (TD 9062) were published
on that same day (68 FR 37414). The
proposed and temporary regulations
provide rules to prevent the duplication
and acceleration of loss through the
assumption by a partnership of certain
liabilities from a partner. Section 1.752–
6T of the temporary regulations (the
temporary regulations) applies to
liabilities assumed by a partnership
after October 18, 1999, and before June
24, 2003. Section 1.752–7 of the
proposed regulations (the proposed
regulations) applies to liabilities
assumed by a partnership on or after
June 24, 2003. However, taxpayers may
elect to apply the proposed regulations,
instead of the temporary regulations, to
liabilities assumed by a partnership
after October 18, 1999, and before June
24, 2003.
The temporary regulations adopt the
approach of section 358(h), with some
modifications. For example, the
exception for contributions of
‘‘substantially all of the assets with
which the liability is associated’’ does
not apply to certain abusive transactions
described in Notice 2000–44, released to
the public on August 11, 2000, and
published on September 5, 2000 (2000–
2 C.B. 255).
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Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
The proposed regulations deviate
somewhat from the rules of section
358(h). In particular, the proposed
regulations do not reduce the partner’s
basis in the partnership at the time of
the assumption of a § 1.752–7 liability
by the partnership, but delay that
reduction until an event occurs that
separates the partner from the liability
(triggering event). The triggering events
are: (1) A disposition (or partial
disposition) of the partnership interest
by the partner; (2) a liquidation of the
partner’s interest in the partnership; and
(3) the assumption of the liability by
another partner. After a triggering event,
the partnership’s (or the assuming
partner’s) deduction on the economic
performance of the § 1.752–7 liability is
limited. However, if the partnership (or
the assuming partner) notifies the
partner of the economic performance of
the § 1.752–7 liability, then the partner
may take a loss or deduction in the
amount of the prior basis reduction.
The proposed regulations include an
exception, similar to the exception in
section 358(h)(2)(A), for transactions in
which the partner contributes to the
partnership the trade or business with
which the liability is associated as part
of the exchange (the trade or business
exception), but do not include an
exception, similar to the exception in
section 358(h)(2)(B), for transactions in
which the partner contributes to the
partnership substantially all of the
assets associated with the liability as
part of the exchange. The proposed
regulations also include an additional
exception for situations in which,
immediately before the triggering event,
the amount of the remaining built-in
loss with respect to all § 1.752–7
liabilities assumed by the partnership
(other than § 1.752–7 liabilities assumed
by the partnership with an associated
trade or business) in one or more
§ 1.752–7 liability transfers is less than
the lesser of 10% of the gross value of
partnership assets or $1,000,000 (the de
minimis exception).
In addition, the proposed regulations
provide detailed rules to address the
treatment of the liability between the
date of the assumption of that liability
by the partnership and the date of a
triggering event and to address tiered
entity situations.
The proposed regulations distinguish
between a § 1.752–1 liability, for which
a basis reduction is required when the
liability is assumed by the partnership
from a partner, and a § 1.752–7 liability,
for which a basis reduction is not
required until the occurrence of a
triggering event. Under the proposed
regulations, an obligation is a § 1.752–1
liability to the extent the obligation
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creates or increases the basis of any of
the obligor’s assets (including cash),
gives rise to an immediate deduction to
the obligor, or gives rise to an expense
that is not deductible in computing the
obligor’s taxable income and is not
properly chargeable to capital. All
remaining obligations are § 1.752–7
liabilities. Under the proposed
regulations, § 1.752–7 liabilities are
subject to the rules of section 704(c) and
the regulations thereunder.
The American Jobs Creation Act of
2004, Public Law 108–357 (118 Stat.
1418) (the Act), was enacted on October
22, 2004. Section 833(a) of the Act
amended section 704(c) of the Code by
adding section 704(c)(1)(C), effective for
contributions of property to a
partnership after October 22, 2004.
Under new section 704(c)(1)(C), if
‘‘built-in loss’’ property is contributed to
a partnership, the built-in loss shall be
taken into account only in determining
the items allocated to the contributing
partner, and, except as provided in
regulations, in determining the amount
of items allocated to the other partners,
the basis of the contributed property
shall be treated as being equal to its fair
market value at the time of contribution.
For this purpose, a ‘‘built-in loss’’ is
defined to mean the excess of the
adjusted basis of the property in the
hands of the contributing partner over
its fair market value at the time of its
contribution to the partnership.
Section 833(b) of the Act requires
basis adjustments to be made following
certain transfers of interests in
partnerships for which no section 754
election is in effect. As amended by the
Act, section 743(a) and (b) of the Code
requires a partnership to reduce the
basis of partnership property upon the
transfer of an interest in the partnership
by sale or exchange or upon the death
of a partner, if, at the time of the
relevant transfer, the partnership has a
‘‘substantial built-in loss.’’ Section
743(d)(1) provides that, for purposes of
section 743, a partnership has a
substantial built-in loss with respect to
a transfer of a partnership interest if the
partnership’s adjusted basis in the
partnership’s property exceeds by more
than $250,000 the fair market value of
such property. Exceptions are provided
for electing investment partnerships and
for securitization partnerships, as
defined in the Act. See also sections
734(b) and (d), as amended by section
833(c) of the Act (requiring a basis
adjustment to be made following a
distribution from a partnership for
which no section 754 election is in
effect in the case of a ‘‘substantial basis
reduction’’).
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The IRS and the Treasury Department
are aware of certain similarities between
the treatment of § 1.752–7 liabilities in
these regulations and the treatment of
built-in losses under sections
704(c)(1)(C), 734, and 743 of the Code,
as added by the Act. For example, it is
possible to view the contribution of
property with an adjusted tax basis
equal to the fair market value of the
property, determined without regard to
any § 1.752–7 liabilities, as ‘‘built-in
loss’’ property after the § 1.752–7
liability is taken into account in those
cases where the § 1.752–7 liability is
related to the contributed property.
Although a partnership’s assumption of
a § 1.752–7 liability as part of the
contribution of property to the
partnership can be analogized to a
property with an adjusted tax basis
greater than fair market value, the
purposes of section 704(c)(1)(C) and
§ 1.752–7 are different in certain
respects. Section 704(c)(1)(C) and the
other changes in section 833 of the Act
are directed toward loss duplication
whereas § 1.752–7 is directed at both
loss duplication and loss acceleration.
Therefore, to the extent of any built-in
loss attributable to a § 1.752–7 liability,
§ 1.752–7 shall be applied without
regard to the amendments made by the
Act, unless future guidance provides to
the contrary. Any such guidance would
be prospective in application.
Written comments were received in
response to the notice of proposed
rulemaking, and a public hearing was
held on October 14, 2003. Two
commentators requested to speak at that
hearing. After consideration of the
comments, the proposed and temporary
regulations are adopted as modified by
this Treasury decision.
Explanation of Provisions
These final regulations generally
follow the proposed and temporary
regulations with the changes described
below.
1. Comments on § 1.752–6T
Several commentators suggested that
the issuance of § 1.752–6T exceeded the
authority granted to the Secretary in
section 309 of the Act. More
specifically, some commentators
suggested that § 1.752–6T results in the
inappropriate denial of a bona fide loss,
that § 1.752–6T was issued to bootstrap
the IRS’s litigating position regarding
transactions described in Notice 2000–
44 (2000–2 C.B. 255), and that section
309 of the Act only granted the
Secretary the authority to prescribe
rules to address situations in which a
partnership liability is assumed by a
corporation. In addition, several
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commentators argued that the Treasury
Department and the IRS exceeded their
authority in providing that § 1.752–6T
applies retroactively to assumptions of
liabilities occurring after October 18,
1999, and before June 24, 2003, the date
the regulations were issued.
The Treasury Department and the IRS
believe that § 1.752–6T does not result
in the inappropriate denial of a bona
fide loss. The exceptions in § 1.752–6T
generally limit the application of the
regulations to transactions that are
abusive in nature and that lack a
business purpose. In addition, the
regulations allow taxpayers to elect into
§ 1.752–7 so as to avoid the immediate
basis reduction under § 1.752–6T.
Recognizing, however, that some
taxpayers may not have expected the
approach taken in § 1.752–7 when
engaging in transactions in prior years,
§ 1.752–6T employs rules similar to
section 358(h) for partnership
transactions.
Those commentators who suggested
that the IRS issued § 1.752–6T to
‘‘bootstrap’’ its litigating position in
Notice 2000–44 pointed to the fact that
Notice 2000–44 did not mention that
regulations would be issued in the
future to challenge the transactions
described in that notice. As discussed
earlier, the Act was enacted with a
retroactive effective date and granted
the Treasury Department and the IRS
the authority to issue retroactive
regulations. The Treasury Department
and the IRS believe that they have
appropriately exercised this grant of
authority. Also, Notice 2000–44 was
released on August 11, 2000. The Act
was not enacted into law until
December 15, 2000, after the release of
Notice 2000–44. Therefore, the Treasury
Department and the IRS could not
reference regulations promulgated
under the Act in Notice 2000–44.
The Treasury Department and the IRS
have concluded that the Secretary’s
authority under section 309(c) is not
limited to addressing assumptions of
liabilities by corporations from
partnerships. The plain language of the
legislative directive is not so limited
and the legislative history does not
support such a limitation.
To the contrary, the Treasury
Department and the IRS believe that the
rules of § 1.752–6T carry out the explicit
directive of section 309(c) of the Act by
applying to partnership transactions
rules that are analogous to the rules that
apply to corporate transactions under
section 358(h). For example, if the
transactions described in Notice 2000–
44 were effected through a contribution
to a corporation, rather than a
contribution to a partnership, section
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30337
358(h) would generally apply to such a
transaction, causing a basis reduction
identical to that provided by § 1.752–6T.
Section 7805(b) addresses when a
regulation (temporary, proposed, or
final) may be effective retroactively.
Section 7805(b)(1) generally provides
that no temporary, proposed, or final
regulations relating to the internal
revenue laws shall apply to any taxable
period ending before the earliest of the
following dates: (A) The date on which
such regulation is filed with the Federal
Register; (B) in the case of any final
regulation, the date on which any
proposed or temporary regulation to
which such final regulation relates was
filed with the Federal Register; or (C)
the date on which any notice
substantially describing the expected
contents of any temporary, proposed, or
final regulation is issued to the public.
However, section 7805(b) provides a list
of exceptions to the general rule stated
above. Included in that list, and relevant
in this context, is section 7805(b)(6).
Section 7805(b)(6) provides that the
limitation may be superseded ‘‘by a
legislative grant from Congress
authorizing the Secretary to prescribe
the effective date with respect to any
regulation.’’ Also included among the
exceptions to the general rule in section
7805(b)(1) is section 7805(b)(3). Section
7805(b)(3) states that the ‘‘Secretary may
provide that any regulation may take
effect or apply retroactively to prevent
abuse.’’
The retroactive effective date of
§ 1.752–6T is in accordance with the
directive in section 309(c) and (d)(2) of
the Act and section 7805(b)(6).
Furthermore, pursuant to section
7805(b)(3), the Secretary has determined
that a retroactive effective date is
appropriate to prevent abuse.
For these reasons, the Treasury
Department and the IRS have concluded
that § 1.752–6T is a valid exercise of the
Secretary’s regulatory authority under
the Code and section 309 of the Act.
election. In response to these comments,
the election period described in § 1.752–
6T(d)(2) has been extended. Under the
extension, an election to apply the
regulations under § 1.752–7, rather than
the regulations under § 1.752–6, to all
liabilities assumed by a partnership
after October 18, 1999, and before June
24, 2003, must be filed with a Federal
income tax return filed by the
partnership on or after September 24,
2003, and on or before December 31,
2005.
2. Extension of Time To Adopt the
Provisions of § 1.752–7 in Lieu of
§ 1.752–6T
Section 1.752–6T(d)(2) provides that
partnerships may elect to apply the
provisions of § 1.752–7 of the proposed
regulations to all assumptions of
liabilities by the partnership occurring
after October 18, 1999, and before June
24, 2003, in lieu of applying § 1.752–6T
of the temporary regulations. The
election must be filed with the first
Federal income tax return filed by the
partnership on or after September 24,
2003.
Several commentators expressed a
need for additional time to make this
4. Section 752–7 Liability
Commentators have asked for
clarification on whether an obligation
could be a § 1.752–1 liability in part and
a § 1.752–7 liability in part. Certain
obligations that create liabilities under
§ 1.752–1 may also create § 1.752–7
liabilities. For example, a fixed
obligation that gives rise to basis can
have a component portion that changes
in value between the time the obligation
is first incurred by the partner and the
time that the partnership assumes the
obligation due to changes in interest
rates, stock price, or other similar
factors. In these and other cases, the
value of the obligation to the holder has
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3. Section 1.358–5T, Special Rules for
Assumption of Liabilities
The preamble to the proposed
regulations advised taxpayers that, with
respect to an exchange to which section
358(a)(1) applies, the Treasury
Department and the IRS were
considering exercising their authority
under section 358(h)(2) to issue
regulations that would limit the
exceptions to section 358(h)(1) to follow
the exceptions set forth in the proposed
regulations under § 1.752–7 (other than
the de minimis exception). The
preamble indicated that such
regulations would be retroactive to the
extent necessary to prevent abuse. No
comments were received regarding the
appropriate scope or substance of such
regulations. The Treasury Department
and the IRS have determined that
removing the exception of section
358(h)(2)(B) (which applies where
substantially all of the assets with
which the liability is associated are
transferred to the person assuming the
liability as part of the exchange) is
necessary to prevent the abuse that
section 358(h) was designed to prevent.
Therefore, with respect to an exchange
to which section 358(a)(1) applies, this
document contains temporary
regulations providing that the exception
contained in section 358(h)(2)(B) does
not apply to exchanges under section
358(a)(1) in which liabilities are
assumed on or after June 24, 2003.
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increased and, as a result, the cost to the
obligor has increased by a like amount.
The final regulations clarify that an
obligation can be treated in part as a
§ 1.752–7 liability and in part as a
§ 1.752–1 liability.
5. Satisfaction Other Than by Economic
Performance
The proposed regulations allow the
§ 1.752–7 liability partner to claim a loss
or deduction upon ‘‘economic
performance’’ of the obligation. Certain
§ 1.752–7 liabilities may be settled in
cash or in kind, extinguished, satisfied
or otherwise resolved under
circumstances where there may not be
an ‘‘economic performance’’ of the
obligation within the meaning of that
term. See section 461(h) and § 1.461–4.
In addition, economic performance only
applies to ‘‘liabilities’’ as defined in
§ 1.446–1(c)(1)(ii)(B), and it is possible
that some § 1.752–7 liabilities may not
come within the meaning of that term.
As a result, the final regulations allow
the § 1.752–7 liability partner to claim a
loss or deduction under § 1.752–7 upon
the ‘‘satisfaction of the § 1.752–7
liability’’. A § 1.752–7 liability is treated
as satisfied on the date upon which, but
for § 1.752–7, the partnership, or the
assuming partner, would have been
allowed to take the § 1.752–7 liability
into account for federal tax purposes.
The final regulations provide a
nonexclusive list of examples of when
the § 1.752–7 liability would be taken
into account for these purposes.
6. Application of Section 704(c)
Under § 1.752–7(c), any § 1.752–7
liability assumed by a partnership in a
§ 1.752–7 liability transfer is treated
under section 704(c) principles as
having a built-in loss equal to the
amount of the § 1.752–7 liability as of
the date of the partnership’s assumption
of the § 1.752–7 liability. The proposed
regulations provide that, if a § 1.752–7
liability is assumed from the
partnership by a partner other than the
§ 1.752–7 liability partner, and the trade
or business or de minimis exceptions
does not apply, then section 704(c)(1)(B)
does not apply to the assumption and
instead the rules of § 1.752–7(g) apply.
Commentators asked whether section
704(c)(1)(B) applies to the assumption of
a § 1.752–7 liability by another partner
if the trade or business or de minimis
exceptions apply to that assumption. In
addition, commentators questioned
whether the successor partner rule of
§ 1.704–3(a)(7) applies to the built-in
loss amount of the § 1.752–7 liability.
The successor partner rule provides
that, if a contributing partner transfers a
partnership interest, built-in gain or loss
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must be allocated to the transferee
partner as it would have been allocated
to the transferor partner.
The intent of the Treasury Department
and the IRS was that all of the rules of
section 704(c), § 1.704–3, and § 1.704–4,
including section 704(c)(1)(B), apply to
§ 1.752–7 liabilities unless otherwise
specifically stated. The § 1.752–7
regulations have been modified to make
this clear. In addition, § 1.704–3 has
been amended to provide that § 1.752–
7 liabilities are section 704(c) property
and to provide that in general, the
successor partner rule does not apply to
§ 1.752–7 liabilities.
Comments were also received
regarding the application of section
704(c) principles to the extent that a
§ 1.752–7 liability has decreased after
the partnership’s assumption of the
liability. Consistent with the principles
of § 1.704–3, the final regulations
provide that, if there is a postassumption change in the value of the
§ 1.752–7 liability, resulting in an
obligation amount that is either greater
or less than the initial amount of the
obligation, the change in the amount
will be treated as a section 704(b) and
not a section 704(c) item, thereby
creating book income or loss to be
allocated to the partners. The final
regulations also provide that, if the
value of the § 1.752–7 liability decreases
after the assumption of the obligation by
the partnership, the ‘‘ceiling rule’’
applies, and the partnership and the
partners are entitled to adopt one of the
reasonable methods specified in
§ 1.704–3 to correct any ceiling rule
disparities.
7. Section 1.752–7 Liabilities That Are
Capitalized and Not Deducted
The proposed regulations make
reference in several places to a
‘‘deduction or capital expense’’, but no
rules are provided as to how the capital
expense is taken into account. For
example, no rules are provided in the
proposed regulations for situations
where the contributing partner is still a
partner in the partnership at the time
that the obligation is recognized for
federal tax purposes and capitalized
into the tax basis of one or more assets
of the partnership.
The final regulations add a rule to
§ 1.704–3 providing that, to the extent a
partnership properly capitalizes all or a
portion of an item as described in
paragraph § 1.704–3(a)(12), then the
item or items to which such cost is
properly capitalized is treated as section
704(c) property with the same amount
of built-in loss as corresponds to the
amount capitalized. Similar rules are
provided under §§ 1.704–4 and 1.737–2.
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In addition, the proposed regulations
do not provide any guidance as to the
appropriate tax treatment if a triggering
event occurs after a § 1.752–7 liability
has been capitalized into the basis of
one or more assets of the partnership.
Under the final regulations, no
reduction in the partner’s basis in the
partnership interest is required with
respect to such a capitalized amount as
a result of the triggering event, but, after
the triggering event, neither the
partnership nor the remaining partners
may use the capitalized basis.
8. Exception for Trading and Investment
Partnerships
The proposed regulations contain an
exception to § 1.752–7(e), (f), and (g) for
assumptions of liabilities in connection
with the contribution of an associated
trade or business, provided that the
partnership continues to carry on that
trade or business after the contribution.
The proposed regulations provide that,
for this purpose, a trade or business
generally does not include the activity
of acquiring, holding, or disposing of
financial instruments, unless such
activity is carried on by an entity
registered with the Securities and
Exchange Commission as a management
company under the Investment
Company Act of 1940, as amended (15
U.S.C. 80a).
The exception for entities registered
as management companies was
intended to apply narrowly to masterfeeder partnerships; however, it appears
that the exception could apply to a
broader range of entities, some of which
could be carrying on the types of
transactions that section 309 of the Act
and these regulations were intended to
address. Consequently, the Treasury
Department and the IRS have removed
the exception for entities registered as
management companies.
The Treasury Department and the IRS
do not believe that eliminating the
exception will create a substantial
burden for master-feeder partnerships,
because interests in these partnerships
are not regularly sold, and because
distributions by these partnerships
typically take the form of nonliquidating
distributions of cash. Accordingly,
master-feeder partnerships are unlikely
to engage in triggering events that would
implicate this regulation.
Therefore, under the final regulations,
the activity of acquiring, holding,
dealing in, or disposing of financial
instruments is not treated as a trade or
business even if engaged in by an entity
registered as a management company.
For assumptions of liabilities on or after
June 24, 2003, and before May 26, 2005,
however, entities registered as
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management companies may rely on the
exception to the trade or business
definition in the proposed regulations.
9. Technical Terminations, Mergers, and
Divisions
Section 1.708–1(b)(4) provides that if
a partnership is terminated under
section 708(b)(1)(B) by a sale or
exchange of an interest, the partnership
is deemed to contribute all of its assets
and liabilities to a new partnership in
exchange for an interest in the new
partnership; and, immediately
thereafter, the terminated partnership is
deemed to distribute interests in the
new partnership to the purchasing
partner and the other remaining
partners.
A commentator asked whether the
rules provided in § 1.752–7 apply to the
contribution and distribution of
partnership interests deemed to occur
under § 1.708–1(b)(4). Rules have been
added to the final regulations to clarify
how the regulations apply to technical
terminations and partnership mergers
and divisions. These rules are designed
to ensure that, after a technical
termination, merger, or division, the
partners that were § 1.752–7 liability
partners of the prior partnership
continue to be § 1.752–7 liability
partners of the new partnership, and
that built-in loss associated with the
§ 1.752–7 liability does not shift from
one partner to another partner. In
addition, these rules are designed to
ensure that a deemed assumption of a
liability as a result of a technical
termination of a partnership does not
create any new § 1.752–7 liabilities that
did not exist prior to the technical
termination.
Accordingly, § 1.752–7(b)(6)(ii) of the
final regulations provides that, in
determining if a deemed contribution of
assets and assumption of liability as a
result of a technical termination is
treated as a § 1.752–7 liability transfer,
only liabilities that were § 1.752–7
liabilities of the terminating partnership
are taken into account and, then, only
to the extent of the amount of the
liability that was subject to § 1.752–7
prior to the technical termination.
In addition, the definition of a
§ 1.752–7 liability partner has been
amended to clarify that, if, in a
transaction described in § 1.752–7(e)(3),
a partnership (lower-tier partnership)
assumes a § 1.752–7 liability from
another partnership (upper-tier
partnership), then any partners that
were § 1.752–7 liability partners of the
upper-tier partnership continue to be
§ 1.752–7 liability partners of the lowertier partnership with respect to the
remaining built-in loss associated with
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the § 1.752–7 liability at the time of the
assumption of the § 1.752–7 liability by
the lower-tier partnership from the
upper-tier partnership. Any new built-in
loss associated with the § 1.752–7
liability that is created on the
assumption of the § 1.752–7 liability
from the upper-tier partnership by the
lower-tier partnership is shared by all
the partners of the upper-tier
partnership in accordance with their
interests in the upper-tier partnership,
and each partner of the upper-tier
partnership is treated as a § 1.752–7
liability partner with respect to that new
built-in loss.
The definition of § 1.752–7 liability
partner has also been amended to
provide that, if, in a transaction
described in § 1.752–7(e)(3), an interest
in a partnership (lower-tier partnership)
that has assumed a § 1.752–7 liability is
distributed by a partnership (upper-tier
partnership) that is the § 1.752–7
liability partner with respect to that
liability, then the persons receiving
interests in the lower-tier partnership
are § 1.752–7 liability partners with
respect to the lower-tier partnership to
the same extent that they were prior to
the distribution. In addition, § 1.752–
7(e)(3) has been amended to provide
that a distribution of an interest in a
lower-tier partnership is exempt from
the application of § 1.752–7(e) only if
the partners that were § 1.752–7 liability
partners with respect to the lower-tier
partnership prior to the distribution
continue to be § 1.752–7 liability
partners with respect to the lower-tier
partnership after the distribution.
10. Disguised Sale Rules
Section 707(a)(2)(B) provides that
where there is a direct or indirect
transfer of money or other property by
a partner to a partnership and a related
direct or indirect transfer of money or
property by the partnership to such
partner and the transfers, when viewed
together, are properly characterized as a
sale or exchange, such transfers shall be
treated either as a transaction between
the partnership and one who is not a
partner, or as a transaction between two
or more partners acting other than in
their capacity as members of the
partnership. Section 1.752–7(a)(2) of the
proposed regulations provides that the
assumption of a § 1.752–7 liability is not
treated as an assumption of a liability or
as a transfer of cash for purposes of
section 707(a)(2)(B). One commentator
noted that the language contained in the
proposed regulations was not consistent
with § 1.707–5(a), which takes into
account all liabilities, regardless of
whether those liabilities are taken into
account under section 752.
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30339
The intent of the proposed regulations
under section 752 was not to override
the disguised sale rules under section
707, which may include § 1.752–7
liabilities as consideration. Therefore,
§ 1.752–7(a)(2) has been removed.
11. Revisions to § 1.704–1(b)(2)(iv)
Under section 704(b), a partner’s
distributive share of income, gain, loss,
deduction, or credit (or item thereof) is
determined in accordance with the
partnership agreement provided that
those allocations have substantial
economic effect. If the allocations under
the partnership agreement do not have
substantial economic effect or the
partnership agreement does not provide
as to a partner’s distributive share of
partnership items, then the partner’s
distributive share of such items is
determined in accordance with the
partner’s interest in the partnership
(determined by taking into account all
facts and circumstances).
Section 1.704–1(b) describes various
requirements that must be met for
partnership allocations to have
substantial economic effect. Among
these requirements is that (except as
otherwise provided in § 1.704–1(b)) the
partnership agreement must provide for
the determination and maintenance of
capital accounts in accordance with the
rules of § 1.704–1(b)(2)(iv).
Section 1.704–1(b)(2)(iv)(b) generally
requires that a partner’s capital account
be increased by the value of property
contributed by the partner to the
partnership net of liabilities secured by
such contributed property that the
partnership is considered to assume or
take subject to under section 752, and be
decreased by the value of property
distributed by the partnership to the
partner net of liabilities secured by such
distributed property that the partner is
considered to assume or take subject to
under section 752. Section 1.704–
1(b)(2)(iv)(c) requires that a partner’s
capital account be increased by
liabilities of the partnership that are
assumed by such partner (other than
liabilities described in § 1.704–
1(b)(2)(iv)(b)(5)), and be decreased by
liabilities of the partner that are
assumed by the partnership (other than
liabilities described in § 1.704–
1(b)(2)(iv)(b)(2)). The proposed
regulations revised § 1.704–1(b)(2)(iv)(b)
to take into account all liabilities to
which the contributed or distributed
property is subject, not just liabilities
described in section 752. The proposed
regulations did not revise § 1.704–
1(b)(2)(iv)(c), because that section is not
limited to assumptions of liabilities
described in section 752.
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A commentator suggested that, if all
liabilities are covered by § 1.704–
1(b)(2)(iv)(b), then § 1.704–1(b)(2)(iv)(c)
did not have any effect and should be
removed. The final regulations do not
adopt this comment, because the
Treasury Department and the IRS
believe that § 1.704–1(b)(2)(iv)(c) has
significance even though § 1.704–
1(b)(2)(iv)(b) is no longer limited to
liabilities described in section 752.
Section 1.704–1(b)(2)(iv)(b) applies only
to situations in which liabilities are
assumed by the partnership or the
partner in connection with the
contribution or distribution of property,
or contributed or distributed property is
taken subject to liabilities. Section
1.704–1(b)(2)(iv)(b) does not apply if
liabilities are assumed by the
partnership or a partner other than in
connection with a contribution or
distribution; these assumptions are
covered by § 1.704–1(b)(2)(iv)(c).
12. Notification Upon Satisfaction of the
§ 1.752–7 Liability
One commentator suggested that, to
prevent the loss of a deduction to the
§ 1.752–7 partner, the regulations
should require the assuming partnership
or partner to notify the § 1.752–7
liability partner of the satisfaction of the
§ 1.752–7 liability. The proposed
regulations impose no penalty on the
partnership for failure to notify the
§ 1.752–7 liability partner. The
commentator also suggested that the
§ 1.752–7 liability partner be required to
keep contact information current with
the assuming partnership or partner.
The Treasury Department and the IRS
do not believe that imposing additional
requirements is necessary in these
circumstances. It is anticipated that the
§ 1.752–7 liability partner, upon
entering the partnership, will negotiate
with the partnership for the necessary
notification. Therefore, this comment
was not adopted.
13. Treatment of § 1.752–7 Liabilities
Commentators have requested that the
final regulations include guidance on
the recourse or nonrecourse treatment of
§ 1.752–7 liabilities for all purposes of
subchapter K. Under the proposed
regulations, a § 1.752–7 liability is
treated as a nonrecourse liability solely
for purposes of § 1.704–2, dealing with
the allocation of nonrecourse
deductions among the partners. The
only other provision that the Treasury
Department and the IRS are aware of for
which the characterization of a § 1.752–
7 liability as recourse or nonrecourse is
§ 1.707–5 (addressing the treatment of
liabilities for purposes of the disguised
sale rules of section 707(a)(2)(B)), and
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§ 1.707–5 already provides adequate
rules for determining if a § 1.752–7
liability is recourse or nonrecourse.
Because a § 1.752–7 liability is not, by
definition, a § 1.752–1 liability, the
recourse or nonrecourse nature of a
§ 1.752–7 liability is not relevant for
purposes of §§ 1.752–1 through 1.752–5.
For this reason, this comment was not
adopted.
14. Valuation of § 1.752–7 Liabilities
Comments were received requesting
that the final regulations include
guidance on acceptable methods for
identifying and valuing § 1.752–7
liabilities, as well as identifying the
appropriate discount rate for
determining the liability’s present value.
The Treasury Department and the IRS
believe that such matters are best left to
the negotiation of the financial
arrangement among the parties and are
beyond the scope of this regulation. In
an arm’s length transaction, the parties
will take the potential occurrence of
these obligations into account in
arriving at the agreement among the
parties that will govern their affairs,
including the appropriate valuation
methodology to apply to these
obligations. Accordingly, the final
regulations do not adopt this comment.
However, the final regulations clarify
that, if the obligation arose under a
contract in exchange for rights granted
to the obligor under that contract, and
those contractual rights are contributed
to the partnership in connection with
the partnership’s assumption of the
contractual obligation, then the amount
of the § 1.752–7 liability is the amount
of cash, if any, that a willing assignor
would pay to a willing assignee to
assume the entire contract.
Effective Date
The final § 1.752–6 regulations apply
to assumptions of liabilities by a
partnership occurring after October 18,
1999, and before June 24, 2003. All of
the other final regulations in this
Treasury decision apply to liabilities
assumed on or after June 24, 2003,
except as otherwise noted.
Special Analyses
These final and temporary regulations
are necessary to prevent abusive
transactions involving transfers to
partnerships and corporations of the
type Section 358(h) was enacted to
prevent. Accordingly, good cause is
found for dispensing with notice and
public procedure pursuant to 5 U.S.C.
553(b)(B) with respect to the temporary
regulations, and for dispensing with a
delayed effective date pursuant to 5
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U.S.C. 553(d)(1) and (3) with respect to
the final and temporary regulations.
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that the final
regulations in this document will not
have a significant economic impact on
a substantial number of small entities.
This certification is based upon the fact
that few partnerships engage in the type
of transactions that are subject to these
regulations (assumptions of liabilities
not described in section 752(a) and (b)
from a partner). In addition, available
data indicates that most partnerships
that engage in the type of transactions
that are subject to these regulations are
large partnerships. Certain broad
exceptions to the application of these
regulations (including a de minimis
exception) further limit the economic
impact of these regulations on small
entities. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. For the
applicability of the Regulatory
Flexibility Act to the temporary
regulations in this document (§ 1.358–
5T), refer to the cross-reference notice of
proposed rulemaking published in the
proposed rules section in this issue of
the Federal Register. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking that preceded
these regulations was submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these
regulations is Laura Nash, Office of
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. However,
other personnel from the IRS and
Treasury Department participated in
their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
I
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PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in
numerical order to read, in part, as
follows:
I
Authority: 26 U.S.C. 7805 * * *
Section 1.358–5T also issued under 26
U.S.C. 358(h)(2). * * *
Section 1.358–7 also issued under Public
Law 106–554, 114 Stat. 2763, 2763A–638
(2001). * * *
Section 1.752–1(a) also issued under
Public Law 106–554, 114 Stat. 2763, 2763A–
638 (2001).
Section 1.752–6 also issued under Public
Law 106–554, 114 Stat. 2763, 2763A–638
(2001)
Section 1.752–7 also issued under Public
Law 106–554, 114 Stat. 2763, 2763A–638
(2001). * * *
I Par. 2. Section 1.358–5T is added to
read as follows:
§ 1.358–5T Special rules for assumption of
liabilities (temporary).
(a) In general. Section 358(h)(2)(B)
does not apply to an exchange occurring
on or after June 24, 2003.
(b) Effective dates. This section
applies to exchanges occurring on or
after June 24, 2003.
I Par. 3. Section 1.358–7 is added to
read as follows:
§ 1.358–7 Transfers by partners and
partnerships to corporations.
(a) Transfers by partners of
partnership interests. For purposes of
section 358(h), a transfer of a
partnership interest to a corporation is
treated as a transfer of the partner’s
share of each of the partnership’s assets
and an assumption by the corporation of
the partner’s share of partnership
liabilities (including section 358(h)
liabilities, as defined in paragraph (d) of
this section). See paragraph (e) Example
2 of this section.
(b) Transfers by partnerships. If a
corporation assumes a section 358(h)
liability from a partnership in an
exchange to which section 358(a)
applies, then, for purposes of applying
section 705 (determination of basis of
partner’s interest) and § 1.704–1(b), any
reduction, under section 358(h)(1), in
the partnership’s basis in corporate
stock received in the transaction is
treated as an expenditure of the
partnership described in section
705(a)(2)(B). See paragraph (e) Example
1 of this section. This expenditure must
be allocated among the partners in
accordance with section 704(b) and (c)
and § 1.752–7(c). If a partner’s share of
the reduction, under section 358(h)(1),
in the partnership’s basis in corporate
stock exceeds the partner’s basis in the
partnership interest, then the partner
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recognizes gain equal to the excess,
which is treated as gain from the sale or
exchange of a partnership interest. This
paragraph does not apply to the extent
that § 1.752–7(j)(4) applies to the
assumption of the § 1.752–7 liability by
the corporation.
(c) Assumption of section 358(h)
liability by partnership followed by
transfer of partnership interest or
partnership property to a corporation—
trade or business exception. Where a
partnership assumes a section 358(h)
liability from a partner and,
subsequently, the partner transfers all or
part of the partner’s partnership interest
to a corporation in an exchange to
which section 358(a) applies, then, for
purposes of applying section 358(h)(2),
the section 358(h) liability is treated as
associated only with the contribution
made to the partnership by that partner.
See paragraph (e) Example 2 of this
section. Similar rules apply where a
partnership assumes a section 358(h)
liability of a partner and a corporation
subsequently assumes that section
358(h) liability from the partnership in
an exchange to which section 358(a)
applies.
(d) Section 358(h) liabilities defined.
For purposes of this section, section
358(h) liabilities are liabilities described
in section 358(h)(3).
(e) Examples. The following examples
illustrate the provisions of this section.
Assume, for purposes of these examples,
that the obligation assumed by the
corporation does not reduce the
shareholder’s basis in the corporate
stock under section 358(d). The
examples are as follows:
Example 1. Transfer of partnership
property to corporation. In 2004, in an
exchange to which section 351(a) applies,
PRS, a cash basis taxpayer, transfers
$2,000,000 cash to Corporation X, also a cash
basis taxpayer, in exchange for Corporation X
shares and the assumption by Corporation X
of $1,000,000 of accounts payable incurred
by PRS. At the time of the exchange, PRS has
two partners, A, a 90% partner, who has a
$2,000,000 basis in the PRS interest, and B,
a 10% partner, who has a $50,000 basis in
the PRS interest. Assume that, under section
358(h)(1), PRS’s basis in the Corporation X
stock is reduced by the accounts payable
assumed by Corporation X ($1,000,000).
Under paragraph (b) of this section, A’s and
B’s bases in PRS must be reduced, but not
below zero, by their respective shares of the
section 358(h)(1) basis reduction. If either
partner’s share of the section 358(h)(1) basis
reduction exceeds the partner’s basis in the
partnership interest, then the partner
recognizes gain equal to the excess. A’s share
of the section 358(h) basis reduction is
$900,000 (90% of $1,000,000). Therefore, A’s
basis in the PRS interest is reduced to
$1,100,000 ($2,000,000 ¥ $900,000). B’s
share of the section 358(h) basis reduction is
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$100,000 (10% of $1,000,000). Because B’s
share of the section 358(h) basis reduction
($100,000) exceeds B’s basis in the PRS
interest ($50,000), B’s basis in the PRS
interest is reduced to $0 and B recognizes
$50,000 of gain. This gain is treated as gain
from the sale of the PRS interest.
Example 2. Transfer of partnership interest
to corporation. In 2004, A contributes
undeveloped land with a value and basis of
$4,000,000 in exchange for a 50% interest in
PRS and an assumption by PRS of $2,000,000
of pension liabilities from a separate business
that A conducts. A’s basis in the PRS interest
immediately after the contribution is A’s
basis in the land, $4,000,000, unreduced by
the amount of the pension liabilities. PRS
develops the land as a landfill. Before PRS
has economically performed with respect to
the pension liabilities, A transfers A’s
interest in PRS to Corporation X, in an
exchange to which section 351 applies. At
the time of the exchange, the value of A’s
PRS interest is $2,000,000, A’s basis in PRS
is $4,000,000, and A has no share of
partnership liabilities other than the pension
liabilities. For purposes of applying section
358(h), the transfer of the PRS interest to
Corporation X is treated as a transfer to
Corporation X of A’s share of PRS assets and
an assumption by Corporation X of A’s share
of the pension liabilities of PRS ($2,000,000).
Because the pension liabilities were not
assumed by PRS from A in an exchange in
which the trade or business associated with
the liability was transferred to PRS, the
transfer of the PRS interest to Corporation X
is not excepted from section 358(h) under
section 358(h)(2). See paragraph (c) of this
section. Under section 358(h), A’s basis in
the Corporation X stock is reduced by the
$2,000,000 of pension liabilities.
(f) Effective date. This section applies
to assumptions of liabilities by a
corporation occurring on or after June
24, 2003.
I Par. 4. Section 1.704–1 is amended as
follows:
I 1. Paragraph (b)(1)(ii)(a) is amended by
removing the language ‘‘The’’ at the
beginning of the first sentence and
adding ‘‘Except as otherwise provided in
this section, the’’ in its place.
I 2. Paragraph (b)(2)(iv)(b) is amended
by adding a sentence at the end of the
paragraph.
I 3. Paragraph (b)(2)(iv)(b)(2) is amended
by removing the language ‘‘secured by
such contributed property’’ in the
parenthetical.
I 4. Paragraph (b)(2)(iv)(b)(2) is further
amended by removing the language
‘‘under section 752’’ in the parenthetical.
I 5. Paragraph (b)(2)(iv)(b)(5) is amended
by removing the language ‘‘secured by
such distributed property’’ in the
parenthetical.
I 6. Paragraph (b)(2)(iv)(b)(5) is further
amended by removing the language
‘‘under section 752’’ in the parenthetical.
The addition reads as follows:
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§ 1.704–1
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Partner’s distributive share.
*
*
*
*
*
(b) * * *
(2) * * *
(iv) * * *
(b) * * * For liabilities assumed
before June 24, 2003, references to
liabilities in this paragraph (b)(2)(iv)(b)
shall include only liabilities secured by
the contributed or distributed property
that are taken into account under
section 752(a) and (b).
*
*
*
*
*
§ 1.704–2
[Amended]
Par. 5. In § 1.704–2, paragraph (b)(3) is
amended by adding the language ‘‘or a
§ 1.752–7liability (as defined in § 1.752–
7(b)(3)(i)) assumed by the partnership
from a partner on or after June 24, 2003’’
at the end of the sentence.
I Par. 6. Section 1.704–3 is amended as
follows:
I 1. The paragraph heading for (a)(7) is
revised.
I 2. Two sentences are added to the end
of paragraph (a)(7).
I 3. Paragraphs (a)(8)(ii) and (iii) are
removed and reserved and paragraph
(a)(8)(iv) is added.
I 4. Paragraph (a)(12) is added.
I 5. Two additional sentences are added
at the end of paragraph (f).
The revisions and additions read as
follows:
I
§ 1.704–3
Contributed property.
(a) * * *
(7) Transfer of a partnership interest.
* * * This rule does not apply to any
person who acquired a partnership
interest from a § 1.752–7 liability
partner in a transaction to which
paragraph (e)(1) of § 1.752–7 applies.
See § 1.752–7(c)(1).
(8) * * * (i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized amounts. To the
extent that a partnership properly
capitalizes all or a portion of an item as
described in paragraph (a)(12) of this
section, then the item or items to which
such cost is properly capitalized is
treated as section 704(c) property with
the same amount of built-in loss as
corresponds to the amount capitalized.
*
*
*
*
*
(12) § 1.752–7 liabilities. Except as
otherwise provided in § 1.752–7,
§ 1.752–7 liabilities (within the meaning
of § 1.752–7(b)(2)) are section 704(c)
property (built-in loss property that at
the time of contribution has a book
value that differs from the contributing
partner’s adjusted tax basis) for
purposes of applying the rules of this
section. See § 1.752–7(c). To the extent
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that the built-in loss associated with the
§ 1.752–7 liability exceeds the cost of
satisfying the § 1.752–7 liability (as
defined in § 1.752–7(b)(3)), the excess
creates a ‘‘ceiling rule’’ limitation,
within the meaning of § 1.704–3(b)(1),
subject to the methods of allocation set
forth in § 1.704–3(b), (c) and (d).
*
*
*
*
*
(f) * * * Except as otherwise
provided in § 1.752–7(k), paragraphs
(a)(8)(iv) and (a)(12) apply to § 1.752–7
liability transfers, as defined in § 1.752–
7(b)(4), occurring on or after June 24,
2003. See § 1.752–7(k).
I Par. 7. Section 1.704–4 is amended as
follows:
I 1. The paragraph heading for (d)(1) is
revised.
I 2. Paragraphs (d)(1)(ii) and (iii) are
removed and reserved and paragraph
(d)(1)(iv) is added.
I 3. Paragraph (g) is revised.
The additions and revisions read as
follows:
§ 1.704–4
property.
Distribution of contributed
§ 1.705–1 Determination of basis of
partner’s interest.
(a) * * *
(8) For basis adjustments necessary to
coordinate sections 705 and 358(h), see
§ 1.358–7(b). For certain basis
adjustments with respect to a § 1.752–7
liability assumed by a partnership from
a partner, see § 1.752–7.
*
*
*
*
*
I Par. 9. Section 1.737–2 is amended as
follows:
I 1. The paragraph heading for (d)(3) is
revised.
Frm 00014
§ 1.737–2
Fmt 4700
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Exceptions and special rules.
(d) * * *
(3) Nonrecognition transactions,
installment sales, contributed contracts,
and capitalized costs—(i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to
which the cost of section 704(c)
property is properly capitalized is
treated as section 704(c) property for
purposes of section 737 to the extent
that such property is treated as section
704(c) property under § 1.704–
3(a)(8)(iv). See § 1.704–4(d)(1) for a
similar rule in the context of section
704(c)(1)(B).
*
*
*
*
*
I Par. 10. Section 1.737–5 is revised to
read as follows:
§ 1.737–5
(d) Special rules—(1) Nonrecognition
transactions, installment obligations,
contributed contracts, and capitalized
costs—(i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to
which the cost of section 704(c)
property is properly capitalized is
treated as section 704(c) property for
purposes of section 704(c)(1)(B) and this
section to the extent that such property
is treated as section 704(c) property
under § 1.704–3(a)(8)(iv). See § 1.737–
2(d)(3) for a similar rule in the context
of section 737.
*
*
*
*
*
(g) Effective dates. This section
applies to distributions by a partnership
to a partner on or after January 9, 1995,
except that paragraph (d)(1)(iv) applies
to distributions by a partnership to a
partner on or after June 24, 2003.
I Par. 8. Section 1.705–1 is amended by
adding paragraph (a)(8) to read as
follows:
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2. Paragraphs (d)(3)(ii) and (iii) are
removed and reserved and paragraph
(d)(3)(iv) is added.
The additions and revisions read as
follows:
I
Effective dates.
Sections 1.737–1, 1.737–2, 1.737–3,
and 1.737–4 apply to distributions by a
partnership to a partner on or after
January 9, 1995, except that § 1.737–
2(d)(3)(iv) applies to distributions by a
partnership to a partner on or after June
24, 2003.
I Par. 11. Section 1.752–0 is amended as
follows:
I 1. The section heading and
introductory text of § 1.752–0 are
revised.
I 2. An entry for § 1.752–1(a)(4) is
added.
I 3. Entries for § 1.752–1(a)(4)(i), (ii),
(iii), and (iv) are added.
I 4. Entries for § 1.752–6 and § 1.752–7
are added.
The revision and additions read as
follows:
§ 1.752–0
Table of contents.
This section lists the major
paragraphs that appear in §§ 1.752–1
through 1.752–7.
§ 1.752–1 Treatment of partnership
liabilities.
(a) * * *
(4) Liability defined.
(i) In general.
(ii) Obligation.
(iii) Other liabilities.
(iv) Effective date.
*
*
*
*
*
§ 1.752–6 Partnership assumption of
partner’s section 358(h)(3) liability after
October 18, 1999, and before June 24, 2003.
(a) In general.
(b) Exceptions.
(1) In general.
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(2) Transactions described in Notice 2000–
44.
(c) Example.
(d) Effective date.
(1) In general.
(2) Election to apply § 1.752–7.
§ 1.752–7 Partnership assumption of
partner’s § 1.752–7 liability on or after June
24, 2003.
(a) Purpose and structure.
(b) Definitions.
(1) Assumption.
(2) Adjusted value.
(3) § 1.752–7 liability.
(i) In general.
(ii) Amount and share of § 1.752–7
liability.
(iii) Example.
(4) § 1.752–7 liability transfer.
(i) In general.
(ii) Terminations under section
708(b)(1)(B).
(5) § 1.752–7 liability partner.
(i) In general.
(ii) Tiered partnerships.
(A) Assumption by a lower-tier
partnership.
(B) Distribution of partnership interest.
(6) Remaining built-in loss associated with
a § 1.752–7 liability.
(i) In general.
(ii) Partial dispositions and assumptions.
(7) § 1.752–7 liability reduction.
(i) In general.
(ii) Partial dispositions and assumptions.
(8) Satisfaction of § 1.752–7 liability.
(9) Testing date.
(10) Trade or business.
(i) In general.
(ii) Examples.
(c) Application of section 704(b) and (c) to
assumed § 1.752–7 liabilities.
(1) In general.
(i) Section 704(c).
(ii) Section 704(b).
(2) Example.
(d) Special rules for transfers of
partnership interests, distributions of
partnership assets, and assumptions of the
§ 1.752–7 liability after a § 1.752–7 liability
transfer.
(1) In general.
(2) Exceptions.
(i) In general.
(ii) Examples.
(e) Transfer of § 1.752–7 liability partner’s
partnership interest.
(1) In general.
(2) Examples.
(3) Exception for nonrecognition
transactions.
(i) In general.
(ii) Examples.
(f) Distribution in liquidation of § 1.752–7
liability partner’s partnership interest.
(1) In general.
(2) Example.
(g) Assumption of § 1.752–7 liability by a
partner other than § 1.752–7 liability partner.
(1) In general.
(2) Consequences to § 1.752–7 liability
partner.
(3) Consequences to partnership.
(4) Consequences to assuming partner.
(5) Example.
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(h) Notification by the partnership (or
successor) of the satisfaction of the § 1.752–
7 liability.
(i) Special rule for amounts that are
capitalized prior to the occurrence of an
event described in paragraphs (e), (f), or (g).
(1) In general.
(2) Example.
(j) Tiered partnerships.
(1) Look-through treatment.
(2) Trade or business exception.
(3) Partnership as a § 1.752–7 liability
partner.
(4) Transfer of § 1.752–7 liability by
partnership to another partnership or
corporation after a transaction described in
paragraphs (e),(f), or (g).
(i) In general.
(ii) Subsequent transfers.
(5) Example.
(k) Effective dates.
(1) In general.
(2) Election to apply this section to
assumptions of liabilities occurring after
October 18, 1999 and before June 24, 2003.
(i) In general.
(ii) Manner of making election.
(iii) Filing of amended returns.
(iv) Time for making election.
Par. 12. In § 1.752–1, paragraph (a)(4)
is added to read as follows:
I
§ 1.752–1 Treatment of partnership
liabilities.
(a) * * *
(4) Liability defined—(i) In general.
An obligation is a liability for purposes
of section 752 and the regulations
thereunder (§ 1.752–1 liability), only if,
when, and to the extent that incurring
the obligation—
(A) Creates or increases the basis of
any of the obligor’s assets (including
cash);
(B) Gives rise to an immediate
deduction to the obligor; or
(C) Gives rise to an expense that is not
deductible in computing the obligor’s
taxable income and is not properly
chargeable to capital.
(ii) Obligation. For purposes of this
paragraph and § 1.752–7, an obligation
is any fixed or contingent obligation to
make payment without regard to
whether the obligation is otherwise
taken into account for purposes of the
Internal Revenue Code. Obligations
include, but are not limited to, debt
obligations, environmental obligations,
tort obligations, contract obligations,
pension obligations, obligations under a
short sale, and obligations under
derivative financial instruments such as
options, forward contracts, futures
contracts, and swaps.
(iii) Other liabilities. For obligations
that are not § 1.752–1 liabilities, see
§§ 1.752–6 and 1.752–7.
(iv) Effective date. Except as
otherwise provided in § 1.752–7(k), this
paragraph (a)(4) applies to liabilities
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Fmt 4700
Sfmt 4700
30343
that are incurred or assumed by a
partnership on or after June 24, 2003.
*
*
*
*
*
§ 1.752–5(a)
[Amended]
Par. 13. In § 1.752–5, paragraph (a) is
amended by removing the language
‘‘Unless’’ at the beginning of the first
sentence and adding ‘‘Except as
otherwise provided in §§ 1.752–1
through 1.752–4, unless’’ in its place.
I Par. 14. Section 1.752–6 is added to
read as follows:
I
§ 1.752–6 Partnership assumption of
partner’s section 358(h)(3) liability after
October 18, 1999, and before June 24, 2003.
(a) In general. If, in a transaction
described in section 721(a), a
partnership assumes a liability (defined
in section 358(h)(3)) of a partner (other
than a liability to which section 752(a)
and (b) apply), then, after application of
section 752(a) and (b), the partner’s
basis in the partnership is reduced (but
not below the adjusted value of such
interest) by the amount (determined as
of the date of the exchange) of the
liability. For purposes of this section,
the adjusted value of a partner’s interest
in a partnership is the fair market value
of that interest increased by the
partner’s share of partnership liabilities
under §§ 1.752–1 through 1.752–5.
(b) Exceptions—(1) In general. Except
as provided in paragraph (b)(2) of this
section, the exceptions contained in
section 358(h)(2)(A) and (B) apply to
this section.
(2) Transactions described in Notice
2000–44. The exception contained in
section 358(h)(2)(B) does not apply to an
assumption of a liability (defined in
section 358(h)(3)) by a partnership as
part of a transaction described in, or a
transaction that is substantially similar
to the transactions described in, Notice
2000–44 (2000–2 C.B. 255). See
§ 601.601(d)(2) of this chapter.
(c) Example. The following example
illustrates the principles of paragraph
(a) of this section:
Example. In 1999, A and B form
partnership PRS. A contributes property with
a value and basis of $200, subject to a
nonrecourse debt obligation of $50 and a
fixed or contingent obligation of $100 that is
not a liability to which section 752(a) and (b)
applies, in exchange for a 50% interest in
PRS. Assume that, after the contribution, A’s
share of partnership liabilities under
§§ 1.752–1 through 1.752–5 is $25. Also
assume that the $100 liability is not
associated with a trade or business
contributed by A to PRS or with assets
contributed by A to PRS. After the
contribution, A’s basis in PRS is $175 (A’s
basis in the contributed land ($200) reduced
by the nonrecourse debt assumed by PRS
($50), increased by A’s share of partnership
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liabilities under §§ 1.752–1 through 1.752–5
($25)). Because A’s basis in the PRS interest
is greater than the adjusted value of A’s
interest, $75 (the fair market value of A’s
interest ($50) increased by A’s share of
partnership liabilities ($25)), paragraph (a) of
this section operates to reduce A’s basis in
the PRS interest (but not below the adjusted
value of that interest) by the amount of
liabilities described in section 358(h)(3)
(other than liabilities to which section 752(a)
and (b) apply) assumed by PRS. Therefore,
A’s basis in PRS is reduced to $75.
(d) Effective date—(1) In general. This
section applies to assumptions of
liabilities occurring after October 18,
1999, and before June 24, 2003.
(2) Election to apply § 1.752–7. The
partnership may elect, under § 1.752–
7(k)(2), to apply the provisions
referenced in § 1.752–7(k)(2)(ii) to all
assumptions of liabilities by the
partnership occurring after October 18,
1999, and before June 24, 2003. Section
1.752–7(k)(2) describes the manner in
which the election is made.
§ 1.752–6T
[Removed]
Par. 15. Section 1.752–6T is removed.
Par. 16. Section 1.752–7 is added to
read as follows:
I
I
§ 1.752–7 Partnership assumption of
partner’s § 1.752–7 liability on or after June
24, 2003.
(a) Purpose and structure. The
purpose of this section is to prevent the
acceleration or duplication of loss
through the assumption of obligations
not described in § 1.752–1(a)(4)(i) in
transactions involving partnerships.
Under paragraph (c) of this section, any
such obligation that is assumed by a
partnership from a partner in a
transaction governed by section 721(a)
is treated as section 704(c) property.
Paragraphs (e), (f), and (g) of this section
provide rules for situations where a
partnership assumes such an obligation
from a partner and, subsequently, that
partner transfers all or part of the
partnership interest, that partner
receives a distribution in liquidation of
the partnership interest, or another
partner assumes part or all of that
obligation from the partnership. These
rules prevent the duplication of loss by
prohibiting the partnership and any
person other than the partner from
whom the obligation was assumed from
claiming a deduction, loss, or capital
expense to the extent of the built-in loss
associated with the obligation. These
rules also prevent the acceleration of
loss by deferring the partner’s deduction
or loss attributable to the obligation (if
any) until the satisfaction of the § 1.752–
7 liability (within the meaning of
paragraph (b)(8) of this section).
Paragraph (d) of this section provides a
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number of exceptions to paragraphs (e),
(f), and (g) of this section, including a
de minimis exception. Paragraph (i)
provides a special rule for situations in
which an amount paid to satisfy a
§ 1.752–7 liability is capitalized into
other partnership property. Paragraph (j)
of this section provides special rules for
tiered partnership transactions.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Assumption. The principles of
§ 1.752–1(d) and (e) apply in
determining if a § 1.752–7 liability has
been assumed.
(2) Adjusted value. The adjusted
value of a partner’s interest in a
partnership is the fair market value of
that interest increased by the partner’s
share of partnership liabilities under
§§ 1.752–1 through 1.752–5.
(3) § 1.752–7 liability—(i) In general.
A § 1.752–7 liability is an obligation
described in § 1.752–1(a)(4)(ii) to the
extent that either—
(A) The obligation is not described in
§ 1.752–1(a)(4)(i); or
(B) The amount of the obligation
(under paragraph (b)(3)(ii) of this
section) exceeds the amount taken into
account under § 1.752–1(a)(4)(i).
(ii) Amount and share of § 1.752–7
liability. The amount of a § 1.752–7
liability (or, for purposes of paragraph
(b)(3)(i) of this section, the amount of an
obligation) is the amount of cash that a
willing assignor would pay to a willing
assignee to assume the § 1.752–7
liability in an arm’s-length transaction.
If the obligation arose under a contract
in exchange for rights granted to the
obligor under that contract, and those
contractual rights are contributed to the
partnership in connection with the
partnership’s assumption of the
contractual obligation, then the amount
of the § 1.752–7 liability or obligation is
the amount of cash, if any, that a willing
assignor would pay to a willing assignee
to assume the entire contract. A
partner’s share of a partnership’s
§ 1.752–7 liability is the amount of
deduction that would be allocated to the
partner with respect to the § 1.752–7
liability if the partnership disposed of
all of its assets, satisfied all of its
liabilities (other than § 1.752–7
liabilities), and paid an unrelated
person to assume all of its § 1.752–7
liabilities in a fully taxable arm’s-length
transaction (assuming such payment
would give rise to an immediate
deduction to the partnership).
(iii) Example. In 2005, A, B, and C form
partnership PRS. A contributes $10,000,000
in exchange for a 25% interest in PRS and
PRS’s assumption of a debt obligation. The
debt obligation was issued for cash and the
issue price was equal to the stated
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Frm 00016
Fmt 4700
Sfmt 4700
redemption price at maturity ($5,000,000).
The debt obligation bears interest, payable
quarterly, at a fixed rate of interest, which
was a market rate of interest when the debt
obligation was issued. At the time of the
assumption, all accrued interest has been
paid. Prior to the partnership assuming the
obligation, interest rates decrease, resulting
in the debt obligation bearing an abovemarket interest rate. Assume that, as a result
of the decline in interest rates, A would have
had to pay a willing assignee $6,000,000 to
assume the debt obligation. The assumption
of the debt obligation by PRS from A is
treated as an assumption of a § 1.752–
1(a)(4)(i) liability in the amount of $5,000,000
(the portion of the total amount of the debt
obligation that has created basis in A’s assets,
that is, the $5,000,000 that was issued in
exchange for the debt obligation ) and an
assumption of a § 1.752–7 liability in the
amount of $1,000,000 (the difference between
the total obligation, $6,000,000, and the
§ 1.752–1(a)(4)(i)liability, $5,000,000).
(4) § 1.752–7 liability transfer—(i) In
general. Except as provided in
paragraph (b)(4)(ii) of this section, a
§ 1.752–7 liability transfer is any
assumption of a § 1.752–7 liability by a
partnership from a partner in a
transaction governed by section 721(a).
(ii) Terminations under section
708(b)(1)(B). In determining if a deemed
contribution of assets and assumption of
liability as a result of a technical
termination is treated as a § 1.752–7
liability transfer, only § 1.752–7
liabilities that were assumed by the
terminating partnership as part of an
earlier § 1.752–7 liability transfer are
taken into account and, then, only to the
extent of the remaining built-in loss
associated with that § 1.752–7 liability.
(5) § 1.752–7 liability partner—(i) In
general. A § 1.752–7 liability partner is
a partner from whom a partnership
assumes a § 1.752–7 liability as part of
a § 1.752–7 liability transfer or any
person who acquires a partnership
interest from the § 1.752–7 liability
partner in a transaction to which
paragraph (e)(3) of this section applies.
(ii) Tiered partnerships—(A)
Assumption by a lower-tier partnership.
If, in a § 1.752–7 liability transfer, a
partnership (lower-tier partnership)
assumes a § 1.752–7 liability from
another partnership (upper-tier
partnership), then both the upper-tier
partnership and the partners of the
upper-tier partnership are § 1.752–7
liability partners. Therefore, paragraphs
(e) and (f) of this section apply on a sale
or liquidation of any partner’s interest
in the upper-tier partnership and on a
sale or liquidation of the upper-tier
partnership’s interest in the lower-tier
partnership. See paragraph (j)(3) of this
section. If, in a § 1.752–7 liability
transfer, the upper-tier partnership
assumes a § 1.752–7 liability from a
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partner, and, subsequently, in another
§ 1.752–7 liability transfer, a lower-tier
partnership assumes that § 1.752–7
liability from the upper-tier partnership,
then the partner from whom the uppertier partnership assumed the § 1.752–7
liability continues to be the § 1.752–7
liability partner of the lower-tier
partnership with respect to the
remaining built-in loss associated with
that § 1.752–7 liability. Any new builtin loss associated with the § 1.752–7
liability that is created on the
assumption of the § 1.752–7 liability
from the upper-tier partnership by the
lower-tier partnership is shared by all
the partners of the upper-tier
partnership in accordance with their
interests in the upper-tier partnership,
and each partner of the upper-tier
partnership is treated as a § 1.752–7
liability partner with respect to that new
built-in loss. See paragraph (e)(3)(ii),
Example 3 of this section.
(B) Distribution of partnership
interest. If, in a transaction described in
§ 1.752–7(e)(3), an interest in a
partnership (lower-tier partnership) that
has assumed a § 1.752–7 liability is
distributed by a partnership (upper-tier
partnership) that is the § 1.752–7
liability partner with respect to that
liability, then the persons receiving
interests in the lower-tier partnership
are § 1.752–7 liability partners with
respect to the lower-tier partnership to
the same extent that they were prior to
the distribution.
(6) Remaining built-in loss associated
with a § 1.752–7 liability. (i) In general.
The remaining built-in loss associated
with a § 1.752–7 liability equals the
amount of the § 1.752–7 liability as of
the time of the assumption of the
§ 1.752–7 liability by the partnership,
reduced by the portion of the § 1.752–
7 liability previously taken into account
by the § 1.752–7 liability partner under
paragraph (j)(3) of this section and
adjusted as provided in paragraph (c) of
this section and § 1.704–3 for—
(A) Any portion of that built-in loss
associated with the § 1.752–7 liability
that is satisfied by the partnership on or
prior to the testing date (whether
capitalized or deducted); and
(B) Any assumption of all or part of
the § 1.752–7 liability by the § 1.752–7
liability partner (including any
assumption that occurs on the testing
date).
(ii) Partial dispositions and
assumptions. In the case of a partial
disposition of the § 1.752–7 liability
partner’s partnership interest or a partial
assumption of the § 1.752–7 liability by
another partner, the remaining built-in
loss associated with § 1.752–7 liability
is pro rated based on the portion of the
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interest sold or the portion of the
§ 1.752–7 liability assumed.
(7) § 1.752–7 liability reduction—(i) In
general. The § 1.752–7 liability
reduction is the amount by which the
§ 1.752–7 liability partner is required to
reduce the basis in the partner’s
partnership interest by operation of
paragraphs (e), (f), and (g) of this
section. The § 1.752–7 liability
reduction is the lesser of—
(A) The excess of the § 1.752–7
liability partner’s basis in the
partnership interest over the adjusted
value of that interest (as defined in
paragraph (b)(2) of this section); or
(B) The remaining built-in loss
associated with the § 1.752–7 liability
(as defined in paragraph (b)(6) of this
section without regard to paragraph
(b)(6)(ii) of this section).
(ii) Partial dispositions and
assumptions. In the case of a partial
disposition of the § 1.752–7 liability
partner’s partnership interest or a partial
assumption of the § 1.752–7 liability by
another partner, the § 1.752–7 liability
reduction is pro rated based on the
portion of the interest sold or the
portion of the § 1.752–7 liability
assumed.
(8) Satisfaction of § 1.752–7 liability—
In general. A § 1.752–7 liability is
treated as satisfied (in whole or in part)
on the date on which the partnership (or
the assuming partner) would have been
allowed to take the § 1.752–7 liability
into account for federal tax purposes but
for this section. For example, a § 1.752–
7 liability is treated as satisfied when,
but for this section, the § 1.752–7
liability would give rise to—
(i) An increase in the basis of the
partnership’s or the assuming partner’s
assets (including cash);
(ii) An immediate deduction to the
partnership or to the assuming partner;
(iii) An expense that is not deductible
in computing the partnership’s or the
assuming partner’s taxable income and
not properly chargeable to capital
account; or
(iv) An amount realized on the sale or
other disposition of property subject to
that liability if the property was
disposed of by the partnership or the
assuming partner at that time.
(9) Testing date. The testing date is—
(i) For purposes of paragraph (e) of
this section, the date of the sale,
exchange, or other disposition of part or
all of the § 1.752–7 liability partner’s
partnership interest;
(ii) For purposes of paragraph (f) of
this section, the date of the
partnership’s distribution in liquidation
of the § 1.752–7 liability partner’s
partnership interest; and
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(iii) For purposes of paragraph (g) of
this section, the date of the assumption
(or partial assumption) of the § 1.752–7
liability by a partner other than the
§ 1.752–7 liability partner.
(10) Trade or business—(i) In general.
A trade or business is a specific group
of activities carried on by a person for
the purpose of earning income or profit,
other than a group of activities
consisting of acquiring, holding, dealing
in, or disposing of financial
instruments, if the activities included in
that group include every operation that
forms a part of, or a step in, the process
of earning income or profit. Such group
of activities ordinarily includes the
collection of income and the payment of
expenses. The group of activities must
constitute the carrying on of a trade or
business under section 162(a)
(determined as though the activities
were conducted by an individual).
(ii) Examples. The following
examples illustrate the provisions of
this paragraph (b)(10):
Example 1. Corporation Y owns, manages,
and derives rental income from an office
building and also owns vacant land that may
be subject to environmental liabilities.
Corporation Y contributes the land subject to
the environmental liabilities to PRS in a
transaction governed by section 721(a). PRS
plans to develop the land as a landfill. The
contribution of the vacant land does not
constitute the contribution of a trade or
business because Corporation Y did not
conduct any significant business or
development activities with respect to the
land prior to the contribution.
Example 2. For the past 5 years,
Corporation X has owned and operated gas
stations in City A, City B, and City C.
Corporation X transfers all of the assets
associated with the operation of the gas
station in City A to PRS for interests in PRS
and the assumption by PRS of the § 1.752–
7 liabilities associated with that gas station.
PRS continues to operate the gas station in
City A after the contribution. The
contribution of the gas station to PRS
constitutes the contribution of a trade or
business.
Example 3. For the past 7 years,
Corporation Z has engaged in the
manufacture and sale of household products.
Throughout this period, Corporation Z has
maintained a research department for use in
connection with its manufacturing activities.
The research department has 10 employees
actively engaged in the development of new
products. Corporation Z contributes the
research department to PRS in exchange for
a PRS interest and the assumption by PRS of
pension liabilities with respect to the
employees of the research department. PRS
continues the research operations on a
contractual basis with several businesses,
including Corporation Z. The contribution of
the research operations to PRS constitutes a
contribution of a trade or business.
(c) Application of section 704(b) and
(c) to assumed § 1.752–7 liabilities—(1)
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In general—(i) Section 704(c). Except as
otherwise provided in this section,
sections 704(c)(1)(A) and (B), section
737, and the regulations thereunder,
apply to § 1.752–7 liabilities. See
§ 1.704–3(a)(12). However, § 1.704–
3(a)(7) does not apply to any person
who acquired a partnership interest
from a § 1.752–7 liability partner in a
transaction to which paragraph (e)(1) of
this section applies.
(ii) Section 704(b). Section 704(b) and
§ 1.704–1(b) apply to a post-contribution
change in the value of a § 1.752–7
liability. If there is a decrease in the
value of a § 1.752–7 liability that is
reflected in the capital accounts of the
partners under § 1.704–1(b)(2)(iv)(f), the
amount of the decrease constitutes an
item of income for purposes of section
(ii) Analysis. Pursuant to paragraph (c) of
this section, $100X of the deduction
attributable to the satisfaction of the § 1.752–
7 liability is specially allocated to A, the
§ 1.752–7 liability partner, under section
704(c)(1)(A) and § 1.704–3. No book item
corresponds to this tax allocation. The
remaining $100X of deduction attributable to
the satisfaction of the § 1.752–7 liability is
allocated, for both book and tax purposes,
according to the partnership agreement, $25X
to A, $25X to B, and $50X to C. If the
partnership, instead, satisfied the § 1.752–7
liability over a number of years, the first
$100X of deduction with respect to the
§ 1.752–7 liability would be allocated to A,
the § 1.752–7 liability partner, before any
deduction with respect to the § 1.752–7
liability would be allocated to the other
partners. For example, if PRS were to satisfy
$50X of the § 1.752–7 liability, the $50X
deduction with respect to the § 1.752–7
liability would be allocated to A for tax
purposes only. No deduction would arise for
book purposes. If PRS later paid a further
$100X in satisfaction of the § 1.752–7
liability, $50X of the deduction with respect
to the § 1.752–7 liability would be allocated,
solely for tax purposes, to A and the
remaining $50X would be allocated, for both
book and tax purposes, according to the
partnership agreement. Under these
circumstances, the partnership’s method of
allocating the built-in loss associated with
the § 1.752–7 liability is reasonable.
(d) Special rules for transfers of
partnership interests, distributions of
partnership assets, and assumptions of
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704(b) and § 1.704–1(b). Conversely, if
there is an increase in the value of a
§ 1.752–7 liability that is reflected in the
capital accounts of the partners under
§ 1.704–1(b)(2)(iv)(f), the amount of the
increase constitutes an item of loss for
purposes of section 704(b) and § 1.704–
1(b).
(2) Example. The following example
illustrates the provisions of this
paragraph (c):
Example— (i) Facts. In 2004, A, B, and C
form partnership PRS. A contributes Property
1 with a fair market value and basis of $400X,
subject to a § 1.752–7 liability of $100X, for
a 25% interest in PRS. B contributes $300X
cash for a 25% interest in PRS, and C
contributes $600X cash for a 50% interest in
PRS. Assume that the partnership complies
with the substantial economic effect safe
the § 1.752–7 liability after a § 1.752–7
liability transfer—(1) In general. Except
as provided in paragraphs (d)(2) and (i)
of this section, paragraphs (e), (f), and
(g) of this section apply to certain
partnership transactions occurring after
a § 1.752–7 liability transfer.
(2) Exceptions—(i) In general.
Paragraphs (e), (f), and (g) of this section
do not apply—
(A) If the partnership assumes the
§ 1.752–7 liability as part of a
contribution to the partnership of the
trade or business with which the
liability is associated, and the
partnership continues to carry on that
trade or business after the contribution
(for the definition of a trade or business,
see paragraph (b)(10) of this section); or
(B) If, immediately before the testing
date, the amount of the remaining builtin loss with respect to all § 1.752–7
liabilities assumed by the partnership
(other than § 1.752–7 liabilities assumed
by the partnership with an associated
trade or business) in one or more
§ 1.752–7 liability transfers is less than
the lesser of 10% of the gross value of
partnership assets or $1,000,000.
(ii) Examples. The following
examples illustrate the principles of this
paragraph (d)(2):
Example 1. For the past 5 years,
Corporation X, a C corporation, has been
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harbor of § 1.704–1(b)(2). Under § 1.704–
1(b)(2)(iv)(b), A’s capital account is credited
with $300X (the fair market value of Property
1, $400X, less the § 1.752–7 liability assumed
by PRS, $100X). In accordance with
§§ 1.752–7(c)(1)(i) and 1.704–3, the
partnership can use any reasonable method
for section 704(c) purposes. In this case, the
partnership elects the traditional method
under § 1.704–3(b) and also elects to treat the
deductions or losses attributable to the
§ 1.752–7 liability as coming first from the
built-in loss. In 2005, PRS earns $200X of
income and uses it to satisfy the § 1.752–7
liability which has increased in value to
$200X. Assume that the cost to PRS of
satisfying the § 1.752–7 liability is deductible
by PRS. The $200X of partnership income is
allocated according to the partnership
agreement, $50X to A, $50X to B, and $100X
to C.
engaged in Business A and Business B. In
2004, Corporation X contributes Business A,
in a transaction governed by section 721(a),
to PRS in exchange for a PRS interest and the
assumption by PRS of pension liabilities with
respect to the employees engaged in Business
A. PRS plans to carry on Business A after the
contribution. Because PRS has assumed the
pension liabilities as part of a contribution to
PRS of the trade or business with which the
liabilities are associated, the treatment of the
pension liabilities is not affected by
paragraphs (e), (f), and (g) of this section with
respect to any transaction occurring after the
§ 1.752–7 liability transfer of the pension
liabilities.
Example 2. (i) Facts. The facts are the same
as in Example 1, except that PRS also
assumes from Corporation X certain pension
liabilities with respect to the employees of
Business B. At the time of the assumption,
the amount of the pension liabilities with
respect to the employees of Business A is
$3,000,000 (the A liabilities) and the amount
of the pension liabilities associated with the
employees of Business B (the B liabilities) is
$2,000,000. Two years later, Corporation X
sells its interest in PRS to Y for $9,000,000.
At the time of the sale, the remaining builtin loss associated with the A liabilities is
$2,100,000, the remaining built-in loss
associated with the B liabilities is $900,000,
and the gross value of PRS’s assets (excluding
§ 1.752–7 liabilities) is $20,000,000. Assume
that PRS has no § 1.752–7 liabilities other
than those assumed from Corporation X.
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(ii) Analysis. The only liabilities assumed
by PRS from Corporation X that were not
assumed as part of Corporation X’s
contribution of Business A were the B
liabilities. Immediately before the testing
date, the remaining built-in loss associated
with the B liabilities ($900,000) was less than
the lesser of 10% of the gross value of PRS’s
assets ($2,000,000) or $1,000,000. Therefore,
paragraph (d)(2)(i)(B) of this section applies
to exclude Corporation X’s sale of the PRS
interest to Y from the application of
paragraph (e) of this section.
30347
partner had satisfied the liability. To the
extent that the § 1.752–7 liability
reduction exceeds the amount that the
partnership would, but for this section,
take into account on the satisfaction of
the § 1.752–7 liability, the character of
the § 1.752–7 liability partner’s loss is
capital.
(2) Examples. The following examples
illustrate the principles of paragraph
(e)(1) of this section:
(ii) Sale of A’s PRS interest. Immediately
before the sale of the PRS interest to D, A’s
basis in the PRS interest is reduced (to
$3,000,000) by the § 1.752–7 liability
reduction, i.e., the lesser of the excess of A’s
basis in the PRS interest ($4,000,000) over
the adjusted value of that interest
($3,000,000), $1,000,000, or the remaining
built-in loss associated with the § 1.752–7
liability, $2,000,000. Therefore, A neither
realizes nor recognizes any gain or loss on
the sale of the PRS interest to D. D’s basis in
the PRS interest is $3,000,000. D’s share of
the adjusted basis of partnership property, as
determined under § 1.743–1(d), equals D’s
interest in the partnership’s previously taxed
capital of $2,000,000 (the amount of cash that
D would receive on a liquidation of the
partnership, $3,000,000, increased by the
amount of tax loss that would be allocated to
D in the hypothetical transaction, $0, and
reduced by the amount of tax gain that would
be allocated to D in the hypothetical
transaction, $1,000,000). Therefore, the
positive basis adjustment under section
743(b) is $1,000,000.
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Example 1. (i) Facts. In 2004, A, B, and
C form partnership PRS. A contributes
Property 1 with a fair market value of
$5,000,000 and basis of $4,000,000 subject to
a § 1.752–7 liability of $2,000,000 in
exchange for a 25% interest in PRS. B
contributes $3,000,000 cash in exchange for
a 25% interest in PRS, and C contributes
$6,000,000 cash in exchange for a 50%
interest in PRS. In 2006, when PRS has a
section 754 election in effect, A sells A’s
interest in PRS to D for $3,000,000. At the
time of the sale, the basis of A’s PRS interest
is $4,000,000, the remaining built-in loss
associated with the § 1.752–7 liability is
$2,000,000, and PRS has no liabilities (as
defined in § 1.752–1(a)(4)). Assume that none
of the exceptions of paragraph (d)(2) of this
section apply and that the satisfaction of the
§ 1.752–7 liability would have given rise to
a deductible expense to A. In 2007, PRS pays
$3,000,000 to satisfy the liability.
ER26MY05.001
(e) Transfer of § 1.752–7 liability
partner’s partnership interest—(1) In
general. Except as provided in
paragraphs (d)(2), (e)(3), and (i) of this
section, immediately before the sale,
exchange, or other disposition of all or
a part of a § 1.752–7 liability partner’s
partnership interest, the § 1.752–7
liability partner’s basis in the
partnership interest is reduced by the
§ 1.752–7 liability reduction (as defined
in paragraph (b)(7) of this section). No
deduction, loss, or capital expense is
allowed to the partnership on the
satisfaction of the § 1.752–7 liability
(within the meaning of paragraph (b)(8)
of this section) to the extent of the
remaining built-in loss associated with
the § 1.752–7 liability (as defined in
paragraph (b)(6) of this section). For
purposes of section 705(a)(2)(B) and
§ 1.704–1(b)(2)(ii)(b) only, the remaining
built-in loss associated with the § 1.752–
7 liability is not treated as a
nondeductible, noncapital expenditure
of the partnership. Therefore, the
remaining partners’ capital accounts
and bases in their partnership interests
are not reduced by the remaining builtin loss associated with the § 1.752–7
liability. If the partnership (or any
successor) notifies the § 1.752–7 liability
partner of the satisfaction of the § 1.752–
7 liability, then the § 1.752–7 liability
partner is entitled to a loss or deduction.
The amount of that deduction or loss is,
in the case of a partial satisfaction of the
§ 1.752–7 liability, the amount that the
partnership would, but for this section,
take into account on the partial
satisfaction of the § 1.752–7 liability
(but not, in total, more than the § 1.752–
7 liability reduction) or, in the case of
a complete satisfaction of the § 1.752–7
liability, the remaining § 1.752–7
liability reduction. To the extent of the
amount that the partnership would, but
for this section, take into account on the
satisfaction of the § 1.752–7 liability, the
character of that deduction or loss is
determined as if the § 1.752–7 liability
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however, for the amount by which the cost
of satisfying the § 1.752–7 liability exceeds
the remaining built-in loss associated with
the § 1.752–7 liability. Therefore, in 2007,
PRS may deduct $1,000,000 (cost to satisfy
the § 1.752–7 liability, $3,000,000, less the
remaining built-in loss associated with the
§ 1.752–7 liability, $2,000,000). If PRS
notifies A of the satisfaction of the § 1.752–
7 liability, then A is entitled to an ordinary
deduction in 2007 of $1,000,000 (the § 1.752–
7 liability reduction).
Example 2. The facts are the same as in
Example 1 except that, at the time of A’s sale
of the PRS interest to D, PRS has a
nonrecourse liability of $4,000,000, of which
A’s share is $1,000,000. A’s basis in PRS is
$5,000,000. At the time of the sale of the PRS
interest to D, the adjusted value of A’s
interest is $4,000,000 (the fair market value
of the interest ($3,000,000), increased by A’s
share of partnership liabilities ($1,000,000)).
The difference between the basis of A’s
interest ($5,000,000) and the adjusted value
of that interest ($4,000,000) is $1,000,000.
Therefore, the § 1.752–7 liability reduction is
$1,000,000 (the lesser of this difference or the
remaining built-in loss associated with the
§ 1.752–7 liability, $2,000,000). Immediately
before the sale of the PRS interest to D, A’s
basis is reduced from $5,000,000 to
$4,0000,000. A’s amount realized on the sale
of the PRS interest to D is $4,000,000
($3,000,000 paid by D, increased under
section 752(d) by A’s share of partnership
liabilities, or $1,000,000). Therefore, A
neither realizes nor recognizes any gain or
loss on the sale. D’s basis in the PRS interest
is $4,000,000. Because D’s share of the
adjusted basis of partnership property is
$3,000,000 (D’s share of the partnership’s
previously taxed capital, $2,000,000, plus D’s
share of partnership liabilities, $1,000,000),
the basis adjustment under section 743(b) is
$1,000,000.
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(iii) Satisfaction of § 1.752–7 liability.
Neither PRS nor any of its partners is entitled
to a deduction, loss, or capital expense upon
the satisfaction of the § 1.752–7 liability to
the extent of the remaining built-in loss
associated with the § 1.752–7 liability
($2,000,000). PRS is entitled to a deduction,
Example 3. The facts are the same as in
Example 1, except that the satisfaction of the
§ 1.752–7 liability would have given rise to
a capital expense to A or PRS. Neither PRS
nor any of its partners are entitled to a capital
expense upon the satisfaction of the § 1.752–
7 liability to the extent of the remaining
built-in loss associated with the § 1.752–7
liability ($2,000,000). PRS may, however,
increase the basis of appropriate partnership
assets by the amount by which the cost of
satisfying the § 1.752–7 liability exceeds the
remaining built-in loss associated with the
§ 1.752–7 liability. Therefore, in 2007, PRS
may capitalize $1,000,000 (cost to satisfy the
§ 1.752–7 liability, $3,000,000, less the
remaining built-in loss associated with the
§ 1.752–7 liability, $2,000,000) to the
appropriate partnership assets. If A is
notified by PRS that the § 1.752–7 liability
has been satisfied, then A is entitled to a
capital loss in 2007 as provided in paragraph
(e)(1) of this section, the year of the
satisfaction of the § 1.752–7 liability.
(3) Exception for nonrecognition
transactions—(i) In general. Paragraph
(e)(1) of this section does not apply
where a § 1.752–7 liability partner
transfers all or part of the partner’s
partnership interest in a transaction in
which the transferee’s basis in the
partnership interest is determined in
whole or in part by reference to the
transferor’s basis in the partnership
interest. In addition, paragraph (e)(1) of
this section does not apply to a
distribution of an interest in the
partnership (lower-tier partnership) that
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has assumed the § 1.752–7 liability by a
partnership that is the § 1.752–7 liability
partner (upper-tier partnership) if the
partners of the upper-tier partnership
that were § 1.752–7 liability partners
with respect to the lower-tier
partnership prior to the distribution
continue to be § 1.752–7 liability
partners with respect to the lower-tier
partnership after the distribution. See
paragraphs (b)(4)(ii) and (j)(3) of this
section for rules on the application of
this section to partners of the § 1.752–
7 liability partner.
(ii) Examples. The following
examples illustrate the provisions of
this paragraph (e)(3):
Example 1. Transfer of partnership interest
to lower-tier partnership. (i) Facts. In 2004,
X contributes undeveloped land with a value
and basis of $2,000,000 and subject to
environmental liabilities of $1,500,000 to
partnership LTP in exchange for a 50%
interest in LTP. LTP develops the land as a
landfill. In 2005, in a transaction governed by
section 721(a), X contributes the LTP interest
to UTP in exchange for a 50% interest in
UTP. In 2008, X sells the UTP interest to A
for $500,000. At the time of the sale, X’s basis
in UTP is $2,000,000, the remaining built-in
loss associated with the environmental
liability is $1,500,000, and the gross value of
UTP’s assets is $2,500,000. The
environmental liabilities were not assumed
by LTP as part of a contribution by X to LTP
of a trade or business with which the
liabilities were associated. (See paragraph
(b)(10)(ii), Example 1 of this section.)
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30349
(ii) Analysis. Because UTP’s basis in the
LTP interest is determined by reference to X’s
basis in the LTP interest, X’s contribution of
the LTP interest to UTP is exempted from the
rules of paragraph (e)(1) of this section.
Under paragraph (j)(1) of this section, X’s
contribution of the LTP interest to UTP is
treated as a contribution of X’s share of the
assets of LTP and UTP’s assumption of X’s
share of the LTP liabilities (including
§ 1.752–7 liabilities). Therefore, X’s transfer
of the LTP interest to UTP is a § 1.752–7
liability transfer. The § 1.752–7 liabilities
deemed transferred by X to UTP are not
associated with a trade or business
transferred to UTP for purposes of paragraph
(d)(2)(i)(A) of this section, because they were
not associated with a trade or business
transferred by X to LTP as part of the original
§ 1.752–7 liability transfer. See paragraph
(j)(2) of this section. Because none of the
exceptions described in paragraph (d)(2) of
this section apply to X’s taxable sale of the
UTP interest to A in 2008, paragraph (e)(1)
of this section applies to that sale.
Example 2. Transfer of partnership interest
to corporation. The facts are the same as in
Example 1, except that, rather than
transferring the LTP interest to UTP in 2005,
X contributes the LTP interest to Corporation
Y in an exchange to which section 351
applies. Because Corporation Y’s basis in the
LTP interest is determined by reference to X’s
basis in that interest, X’s contribution of the
LTP interest is exempted from the rules of
paragraph (e)(1) of this section. But see
section 358(h) and § 1.358–7 for appropriate
basis adjustments.
Example 3. Partnership merger. (i) Facts. In
2004, A, B, C, and D form equal partnership
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PRS1. A contributes Blackacre with a value
and basis of $2,000,000 to PRS1 and PRS1
assumes from A $1,500,000 of pension
liabilities unrelated to Blackacre. B, C, and D
each contribute $500,000 cash to PRS1. PRS1
uses the cash contributed by B, C, and D
($1,500,000) to purchase Whiteacre. In 2006,
PRS1 merges into PRS2 in an assets-over
merger under § 1.708–1(c)(3). Assume that,
under § 1.708–1(c), PRS2 is the surviving
partnership and PRS1 is the terminating
partnership. At the time of the merger, the
value of Blackacre is still $2,000,000, the
remaining built-in loss with respect to the
pension liabilities is still $1,500,000, but the
value of Whiteacre has declined to $500,000.
(ii) Deemed assumption by PRS2 of PRS1
liabilities. Under § 1.708–1(c)(3), the merger
is treated as a contribution of the assets and
liabilities of PRS1 to PRS2, followed by a
distribution of the PRS2 interests by PRS1 in
liquidation of PRS1. Because PRS2 assumes
a § 1.752–7 liability (the pension liabilities)
of PRS1, PRS1 is a § 1.752–7 liability partner
of PRS2. Under paragraph (b)(5)(ii)(A) of this
section, A is also § 1.752–7 liability partner
of PRS2 to the extent of the remaining
$1,500,000 built-in loss associated with the
pension liabilities. B, C, and D are not
§ 1.752–7 liability partners with respect to
PRS1. If the amount of the pension liabilities
had increased between the date of PRS1’s
assumption of those liabilities from A and
the date of the merger of PRS1 into PRS2,
then B, C, and D would be § 1.752–7 liability
partners with respect to PRS2 to the extent
of their respective shares of that increase. See
paragraph (b)(5)(ii) of this section.
(iii) Deemed distribution of PRS2 interests.
Paragraph (e)(1) does not apply to PRS1’s
deemed distribution of the PRS2 interests,
because, under paragraph (b)(5)(ii)(B) of this
section, all of the partners that were § 1.752–
7 liability partners with respect to PRS2
before the distribution, i.e., A, continue to be
§ 1.752–7 liability partners after the
distribution. After the distribution, A’s share
of the pension liabilities now held by PRS2
will continue to be $1,500,000.
Example 4. Partnership division; no
shifting of § 1.752–7 liability. The facts are
the same as in Example 3, except that PRS1
does not merge with PRS2, but instead
contributes Blackacre to PRS2 in exchange
for PRS2 interests and the assumption by
PRS2 of the pension liabilities. Immediately
thereafter, PRS1 distributes the PRS2
interests to A and B in liquidation of their
interests in PRS1. The analysis is the same
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as in Example 3. After the assumption of the
pension liabilities by PRS2, A is a § 1.752–
7 liability partner with respect to PRS2. After
the distribution of a PRS2 interest to A, A
continues to be a § 1.752–7 liability partner
with respect to PRS2, and the amount of A’s
built-in loss with respect to the § 1.752–7
liabilities continues to be $1,500,000.
Therefore, paragraph (e)(1) of this section
does not apply to the distribution of the PRS2
interests to A and B.
Example 5. Partnership division; shifting of
§ 1.752–7 liability. The facts are the same as
in Example 4, except that PRS1 distributes
the PRS2 interests not to A and B, but to C
and D, in liquidation of their interests in
PRS1. After this distribution, A does not
continue to be a § 1.752–7 liability partner of
PRS2, because A no longer has an interest in
PRS2. Therefore, paragraph (e)(1) of this
section applies to the distribution of the
PRS2 interests to C and D.
(f) Distribution in liquidation of
§ 1.752–7 liability partner’s partnership
interest—(1) In general. Except as
provided in paragraphs (d)(2) and (i) of
this section, immediately before a
distribution in liquidation of a § 1.752–
7 liability partner’s partnership interest,
the § 1.752–7 liability partner’s basis in
the partnership interest is reduced by
the § 1.752–7 liability reduction (as
defined in paragraph (b)(7) of this
section). This rule applies before section
737. No deduction, loss, or capital
expense is allowed to the partnership on
the satisfaction of the § 1.752–7 liability
(within the meaning of paragraph (b)(8)
of this section) to the extent of the
remaining built-in loss associated with
the § 1.752–7 liability (as defined in
paragraph (b)(6) of this section). For
purposes of section 705(a)(2)(B) and
§ 1.704–1(b)(2)(ii)(b) only, the remaining
built-in loss associated with the § 1.752–
7 liability is not treated as a
nondeductible, noncapital expenditure
of the partnership. Therefore, the
remaining partners’ capital accounts
and bases in their partnership interests
are not reduced by the remaining builtin loss associated with the § 1.752–7
liability. If the partnership (or any
successor) notifies the § 1.752–7 liability
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partner of the satisfaction of the § 1.752–
7 liability, then the § 1.752–7 liability
partner is entitled to a loss or deduction.
The amount of that deduction or loss is,
in the case of a partial satisfaction of the
§ 1.752–7 liability, the amount that the
partnership would, but for this section,
take into account on the partial
satisfaction of the § 1.752–7 liability
(but not, in total, more than the § 1.752–
7 liability reduction) or, in the case of
a complete satisfaction of the § 1.752–7
liability, the remaining § 1.752–7
liability reduction. To the extent of the
amount that the partnership would, but
for this section, take into account on
satisfaction of the § 1.752–7 liability, the
character of that deduction or loss is
determined as if the § 1.752–7 liability
partner had satisfied the liability. To the
extent that the § 1.752–7 liability
reduction exceeds the amount that the
partnership would, but for this section,
take into account on satisfaction of the
§ 1.752–7 liability, the character of the
§ 1.752–7 liability partner’s loss is
capital.
(2) Example. The following example
illustrates the provision of this
paragraph (f):
Example. (i) Facts. In 2004, A, B, and C
form partnership PRS. A contributes Property
1 with a fair market value and basis of
$5,000,000 subject to a § 1.752–7 liability of
$2,000,000 for a 25% interest in PRS. B
contributes $3,000,000 cash for a 25%
interest in PRS, and C contributes $6,000,000
cash for a 50% interest in PRS. In 2012, when
PRS has a section 754 election in effect, PRS
distributes Property 2, which has a basis and
fair market value of $3,000,000, to A in
liquidation of A’s PRS interest. At the time
of the distribution, the fair market value of
A’s PRS interest is still $3,000,000, the basis
of that interest is still $5,000,000, and the
remaining built-in loss associated with the
§ 1.752–7 liability is still $2,000,000. Assume
that none of the exceptions of paragraph
(d)(2) of this section apply to the distribution
and that the satisfaction of the § 1.752–7
liability would have given rise to a
deductible expense to A. In 2013, PRS pays
$1,000,000 to satisfy the entire § 1.752–7
liability.
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the same as the partnership’s basis in
Property 2 immediately before the
distribution, the partnership’s basis
adjustment under section 734(b) is $0.
(iii) Satisfaction of § 1.752–7 liability. PRS
is not entitled to a deduction, loss, or capital
expense on the satisfaction of the § 1.752–7
liability to the extent of the remaining builtin loss associated with the § 1.752–7 liability
($2,000,000). Because this amount exceeds
the amount paid by PRS to satisfy the
§ 1.752–7 liability ($1,000,000), PRS is not
entitled to any deduction for the § 1.752–7
liability in 2013. If, however, PRS notifies A
of the satisfaction of the § 1.752–7 liability,
A is entitled to an ordinary deduction in
2013 of $1,000,000 (the amount paid in
satisfaction of the § 1.752–7 liability) and a
capital loss of $1,000,000 (the remaining
§ 1.752–7 liability reduction).
(g) Assumption of § 1.752–7 liability
by a partner other than § 1.752–7
liability partner—(1) In general. If this
paragraph (g) applies, section
704(c)(1)(B) does not apply to an
assumption of a § 1.752–7 liability from
a partnership by a partner other than the
§ 1.752–7 liability partner. The rules of
paragraph (g)(2) of this section apply
only if the § 1.752–7 liability partner is
a partner in the partnership at the time
of the assumption of the § 1.752–7
liability from the partnership. The rules
of paragraphs (g)(3) and (4) of this
section apply to any assumption of the
§ 1.752–7 liability by a partner other
than the § 1.752–7 liability partner,
whether or not the § 1.752–7 liability
partner is a partner in the partnership at
the time of the assumption from the
partnership.
(2) Consequences to § 1.752–7 liability
partner. If, at the time of an assumption
of a § 1.752–7 liability from a
partnership by a partner other than the
§ 1.752–7 liability partner, the § 1.752–
7 liability partner remains a partner in
the partnership, then the § 1.752–7
liability partner’s basis in the
partnership interest is reduced by the
§ 1.752–7 liability reduction (as defined
in paragraph (b)(7) of this section). If the
assuming partner (or any successor)
notifies the § 1.752–7 liability partner of
the satisfaction of the § 1.752–7 liability
(within the meaning of paragraph (b)(8)
of this section), then the § 1.752–7
liability partner is entitled to a
deduction or loss. The amount of that
deduction or loss is, in the case of a
partial satisfaction of the § 1.752–7
liability, the amount that the assuming
partner would, but for this section, take
into account on the satisfaction of the
§ 1.752–7 liability (but not, in total,
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($5,000,000) over the adjusted value
($3,000,000) of that interest ($2,000,000) or
the remaining built-in loss associated with
the § 1.752–7 liability ($2,000,000).
Therefore, A’s basis in Property 2 under
section 732(b) is $3,000,000. Because this is
ER26MY05.007
(ii) Liquidation of A’s PRS interest.
Immediately before the distribution of
Property 2 to A, A’s basis in the PRS interest
is reduced (to $3,000,000) by the § 1.752–7
liability reduction, i.e., the lesser of the
excess of A’s basis in the PRS interest
Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
more than the § 1.752–7 liability
reduction) or, in the case of a complete
satisfaction of the § 1.752–7 liability, the
remaining § 1.752–7 liability reduction.
To the extent of the amount that the
assuming partner would, but for this
section, take into account on the
satisfaction of the § 1.752–7 liability, the
character of that deduction or loss is
determined as if the § 1.752–7 liability
partner had satisfied the liability. To the
extent that the § 1.752–7 liability
reduction exceeds the amount that the
assuming partner would, but for this
section, take into account on the
satisfaction of the § 1.752–7 liability, the
character of the § 1.752–7 liability
partner’s loss is capital.
(3) Consequences to partnership.
Immediately after the assumption of the
§ 1.752–7 liability from the partnership
by a partner other than the § 1.752–7
liability partner, the partnership must
reduce the basis of partnership assets by
the remaining built-in loss associated
with the § 1.752–7 liability (as defined
in paragraph (b)(6) of this section). The
reduction in the basis of partnership
assets must be allocated among
partnership assets as if that adjustment
were a basis adjustment under section
734(b).
(4) Consequences to assuming
partner. No deduction, loss, or capital
expense is allowed to an assuming
partner (other than the § 1.752–7
liability partner) on the satisfaction of
the § 1.752–7 liability assumed from a
partnership to the extent of the
remaining built-in loss associated with
the § 1.752–7 liability. Instead, upon the
satisfaction of the § 1.752–7 liability, the
assuming partner must adjust the basis
of the partnership interest, any assets
(other than cash, accounts receivable, or
inventory) distributed by the
partnership to the partner, or gain or
loss on the disposition of the
partnership interest, as the case may be.
These adjustments are determined as if
the assuming partner’s basis in the
partnership interest at the time of the
assumption were increased by the lesser
of the amount paid (or to be paid) to
satisfy the § 1.752–7 liability or the
remaining built-in loss associated with
the § 1.752–7 liability. However, the
assuming partner cannot take into
account any adjustments to depreciable
basis, reduction in gain, or increase in
loss until the satisfaction of the § 1.752–
7 liability.
(ii) Assumption of § 1.752–7 liability by B.
Section 704(c)(1)(B) does not apply to the
assumption of the § 1.752–7 liability by B.
Instead, A’s basis in the PRS interest is
reduced (to $3,000,000) by the § 1.752–7
liability reduction, i.e., the lesser of the
excess of A’s basis in the PRS interest
($5,000,000) over the adjusted value
($3,000,000) of that interest ($2,000,000), or
the remaining built-in loss associated with
the § 1.752–7 liability as of the time of the
assumption ($2,000,000). PRS’s basis in
Property 2 is reduced (to $7,000,000) by the
$2,000,000 remaining built-in loss associated
with the § 1.752–7 liability. B’s basis in
Property 1 under section 732(b) is $3,000,000
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(5) Example. The following example
illustrates the provisions of this
paragraph (g):
Example. (i) Facts. In 2004, A, B, and C
form partnership PRS. A contributes Property
1, a nondepreciable capital asset with a fair
market value and basis of $5,000,000, in
exchange for a 25% interest in PRS and
assumption by PRS of a § 1.752–7 liability of
$2,000,000. B contributes $3,000,000 cash for
a 25% interest in PRS, and C contributes
$6,000,000 cash for a 50% interest in PRS.
PRS uses the cash contributed to purchase
Property 2. In 2007, PRS distributes Property
1, subject to the § 1.752–7 liability to B in
liquidation of B’s interest in PRS. At the time
of the distribution, A’s interest in PRS still
has a value of $3,000,000 and a basis of
$5,000,000, and B’s interest in PRS still has
a value and basis of $3,000,000. Also at that
time, Property 1 still has a value and basis
of $5,000,000, Property 2 still has a value and
basis of $9,000,000, and the remaining builtin loss associated with the § 1.752–7 liability
still is $2,000,000. Assume that none of the
exceptions of paragraph (d)(2)(i) of this
section apply to the assumption of the
§ 1.752–7 liability by B and that the
satisfaction of the § 1.752–7 liability by A
would have given rise to a deductible
expense to A. In 2010, B pays $1,000,000 to
satisfy the entire § 1.752–7 liability. At that
time, B still owns Property 1, which has a
basis of $3,000,000.
(B’s basis in the PRS interest). This is
$2,000,000 less than PRS’s basis in Property
1 before the distribution of Property 1 to B.
If PRS has a section 754 election in effect for
2007, PRS may increase the basis of Property
2 under section 734(b) by $2,000,000.
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30353
of the § 1.752–7 liability, then A is entitled
to an ordinary deduction in 2010 of
$1,000,000 (the amount paid in satisfaction
of the § 1.752–7 liability) and a capital loss
of $1,000,000 (the remaining § 1.752–7
liability reduction).
(h) Notification by the partnership (or
successor) of the satisfaction of the
§ 1.752–7 liability. For purposes of
paragraphs (e), (f), and (g) of this
section, notification by the partnership
(or successor) of the satisfaction of the
§ 1.752–7 liability must be attached to
the § 1.752–7 liability partner’s return
(whether an original or an amended
return) for the year in which the loss is
being claimed and must include—
(1) The amount paid in satisfaction of
the § 1.752–7 liability, and whether the
amounts paid were in partial or
complete satisfaction of the § 1.752–7
liability;
(2) The name and address of the
person satisfying the § 1.752–7 liability;
(3) The date of the payment on the
§ 1.752–7 liability; and
(4) The character of the loss to the
§ 1.752–7 liability partner with respect
to the § 1.752–7 liability.
(i) Special rule for amounts that are
capitalized prior to the occurrence of an
event described in paragraphs (e), (f), or
(g)—(1) In general. If all or a portion of
a § 1.752–7 liability is properly
capitalized (capitalized basis) prior to
an event described in paragraph (e), (f),
or (g) of this section, then, before an
event described in paragraph (e), (f), or
(g) of this section, the partnership may
take the capitalized basis into account
for purposes of computing cost recovery
and gain or loss on the sale of the asset
to which the basis has been capitalized
(and for any other purpose for which the
basis of the asset is relevant), but after
an event described in paragraph (e), (f),
or (g) of this section, the partnership
may not take any remaining capitalized
basis into account for tax purposes.
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of the § 1.752–7 liability in 2010. B may,
however, increase the basis of Property 1 by
the lesser of the remaining built-in loss
associated with the § 1.752–7 liability
($2,000,000) or the amount paid to satisfy the
§ 1.752–7 liability ($1,000,000). Therefore,
B’s basis in Property 1 is increased to
$4,000,000. If B notifies A of the satisfaction
ER26MY05.011
(iii) Satisfaction of § 1.752–7 liability. B is
not entitled to a deduction on the satisfaction
of the § 1.752–7 liability in 2010 to the extent
of the remaining built-in loss associated with
the § 1.752–7 liability ($2,000,000). As this
amount exceeds the amount paid by B to
satisfy the § 1.752–7 liability, B is not
entitled to any deduction on the satisfaction
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(iii) Partial Satisfaction. Assume that, prior
to the sale of A’s interest in PRS to C, PRS
had paid $1,500,000 to satisfy a portion of
the § 1.752–7 liability. Therefore,
immediately before the sale of the PRS
interest to C, A’s basis in the PRS interest
would be reduced (to $4,500,000) by the
$500,000 remaining built-in loss associated
with the § 1.752–7 liability ($2,000,000 less
the 1,500,000 portion capitalized by the
partnership as that time). On the sale of the
PRS interest, A realizes a loss of $1,500,000
(the excess of $4,500,000, the basis of the
PRS interest, over $3,000,000, the amount
realized on the sale). Neither PRS nor any of
its partners is entitled to a deduction, loss,
or capital expense upon the satisfaction of
the § 1.752–7 liability to the extent of the
remaining built-in loss associated with the
§ 1.752–7 liability ($500,000). If PRS notifies
A of the satisfaction of the remaining portion
of the § 1.752–7 liability, then A is entitled
to a deduction or loss of $500,000 (the
remaining § 1.752–7 liability reduction). The
partnership may not take any remaining
capitalized basis into account for tax
purposes.
(j) Tiered partnerships—(1) Lookthrough treatment. For purposes of this
section, a contribution by a partner of an
interest in a partnership (lower-tier
partnership) to another partnership
(upper-tier partnership) is treated as a
contribution by the partner of the
partner’s share of each of the lower-tier
partnership’s assets and an assumption
by the upper-tier partnership of the
partner’s share of the lower-tier
partnership’s liabilities (including
§ 1.752–7 liabilities). See paragraph
(e)(3)(ii) Example 1 of this section. In
addition, a partnership is treated as
having its share of any § 1.752–7
liabilities of the partnerships in which
it has an interest.
(2) Trade or business exception. If a
partnership (upper-tier partnership)
assumes a § 1.752–7 liability of a
partner, and, subsequently, another
partnership (lower-tier partnership)
assumes that § 1.752–7 liability from the
upper-tier partnership, then the § 1.752–
7 liability is treated as associated only
with any trade or business contributed
to the upper-tier partnership by the
§ 1.752–7 liability partner. The same
rule applies where a partnership
assumes a § 1.752–7 liability of a
partner, and, subsequently, the § 1.752–
7 liability partner transfers that
partnership interest to another
partnership. See paragraph (e)(3)(ii)
Example 1 of this section.
(3) Partnership as a § 1.752–7 liability
partner. If a transaction described in
paragraph (e), (f), or (g) of this section
occurs with respect to a partnership
(upper-tier partnership) that is a
§ 1.752–7 liability partner of another
partnership (lower-tier partnership),
then such transaction will also be
treated as a transaction described in
paragraph (e), (f), or (g) of this section,
as appropriate, with respect to the
partners of the upper-tier partnership,
regardless of whether the upper-tier
partnership assumed the § 1.752–7
liability from those partners. (See
paragraph (b)(5) of this section for rules
relating to the treatment of transactions
by the partners of the upper-tier
partnership). In such a case, each
partner’s share of the § 1.752–7 liability
reduction in the upper-tier partnership
is equal to that partner’s share of the
§ 1.752–7 liability. The partners of the
upper-tier partnership at the time of the
transaction described in paragraph (e),
(f), or (g) of this section, and not the
upper-tier partnership, are entitled to
the deduction or loss on the satisfaction
of the § 1.752–7 liability. Similar
principles apply where the upper-tier
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of the PRS interest (the excess of $5,000,000,
the basis of the partnership interest, over
$3,000,000, the amount realized on sale). The
remaining built-in loss associated with the
§ 1.752–7 liability at that time is zero because
all of the § 1.752–7 liability as of the time of
the assumption of the § 1.752–7 liability by
the partnership was capitalized by the
partnership. The partnership may not take
any remaining capitalized basis into account
for tax purposes.
ER26MY05.013
Example. (i) Facts. In 2004, A and B form
partnership PRS. A contributes Property 1, a
nondepreciable capital asset, with a fair
market value and basis of 5,000,000, in
exchange for a 25% interest in PRS and an
assumption by PRS of a § 1.752–7 liability of
$2,000,000. B contributes $9,000,000 in cash
in exchange for a 75% interest in PRS. PRS
uses $7,000,000 of the cash to purchase
Property 2, also a nondepreciable capital
asset. In 2007, when PRS’s assets have not
changed, PRS satisfies the § 1.752–7 liability
by paying $2,000,000. Assume that PRS is
required to capitalize the cost of satisfying
the § 1.752–7 liability. In 2008, A sells his
interest in PRS to C for $3,000,000. At the
time of the sale, the basis of A’s interest is
still $5,000,000.
(ii) Analysis. On the sale of A’s interest to
C, A realizes a loss of $2,000,000 on the sale
(2) Example. The following example
illustrates the provisions of this
paragraph (i):
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30355
this section (but the partners of the
upper-tier partnership do not reduce
their bases or capital accounts in the
upper-tier partnership); and
(B) No deduction, loss, or capital
expense is allowed to the assuming
partnership or corporation on the
satisfaction of the § 1.752–7 liability to
the extent of the remaining built-in loss
associated with the § 1.752–7 liability.
(ii) Subsequent transfers. Similar
rules apply to subsequent assumptions
of the § 1.752–7 liability in transactions
in which the basis of property is
determined, in whole or in part, by
reference to the basis of the property in
the hands of the transferor. If,
subsequent to an assumption of the
§ 1.752–7 liability by a partnership in a
transaction to which paragraph (j)(4)(i)
of this section applies, the § 1.752–7
liability is assumed from the
partnership by a partner other than the
partner from whom the partnership
assumed the § 1.752–7 liability, then the
rules of paragraph (g) of this section
apply.
(5) Example. The following example
illustrates the provisions of paragraphs
(j)(3) and (4) of this section:
Example. (i) Assumption of § 1.752–7
liability by UTP and transfer of § 1.752–7
liability partner’s interest in UTP. In 2004, A,
B, and C form partnership UTP. A
contributes Property 1 with a fair market
value and basis of $5,000,000 subject to a
§ 1.752–7 liability of $2,000,000 in exchange
for a 25% interest in UTP. B contributes
$3,000,000 cash in exchange for a 25%
interest in UTP, and C contributes $6,000,000
cash in exchange for a 50% interest in UTP.
UTP invests the $9,000,000 cash in Property
2. In 2006, A sells A’s interest in UTP to D
for $3,000,000. At the time of the sale, the
basis of A’s UTP interest is $5,000,000, the
remaining built-in loss associated with the
§ 1.752–7 liability is $2,000,000, and UTP has
no liabilities other than the § 1.752–7
liabilities assumed from A. Assume that none
of the exceptions of paragraph (d)(2) of this
section apply and that the satisfaction of the
§ 1.752–7 liability would give rise to a
deductible expense to A and to UTP. Under
paragraph (e) of this section, immediately
before the sale of the UTP interest to D, A’s
basis in UTP is reduced to $3,000,000 by the
$2,000,000 § 1.752–7 liability reduction.
Therefore, A neither realizes nor recognizes
any gain or loss on the sale of the UTP
interest to D. D’s basis in the UTP interest is
$3,000,000.
(ii) Assumption of § 1.752–7 liability by
LTP from UTP. In 2008, at a time when the
estimated amount of the § 1.752–7 liability
has increased to $3,500,000, UTP contributes
Property 1 and Property 2, subject to the
§ 1.752–7 liability, to LTP in exchange for a
50% interest in LTP. At the time of the
contribution, Property 1 still has a value and
basis of $5,000,000 and Property 2 still has
a value and basis of $9,000,000. UTP’s basis
in LTP under section 722 is $14,000,000.
Under paragraph (j)(4)(i) of this section, UTP
must reduce its basis in LTP by the
$2,000,000 remaining built-in loss associated
with the § 1.752–7 liability (as of the time of
the sale of the UTP interest by A). The
partners in UTP are not required to reduce
their bases in UTP by this amount. UTP is
a § 1.752–7 liability partner of LTP with
respect to the entire $3,500,000 § 1.752–7
liability assumed by LTP. However, as A is
no longer a partner of UTP, none of the
partners of UTP (as of the time of the
assumption of the § 1.752–7 liability by LTP)
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ER26MY05.015
partnership is itself owned by one or a
series of partnerships. This paragraph
does not apply to the extent that
§ 1.752–7(j)(4) applied to the
assumption of the § 1.752–7 liability by
the lower-tier partnership.
(4) Transfer of § 1.752–7 liability by
partnership to another partnership or
corporation after a transaction
described in paragraph (e), (f), or (g)—
(i) In general. If, after a transaction
described in paragraph (e), (f), or (g) of
this section with respect to a § 1.752–7
liability assumed by a partnership (the
upper-tier partnership), another
partnership or a corporation assumes
the § 1.752–7 liability from the uppertier partnership (or the assuming
partner) in a transaction in which the
basis of property is determined, in
whole or in part, by reference to the
basis of the property in the hands of the
upper-tier partnership (or assuming
partner), then—
(A) The upper-tier partnership (or
assuming partner) must reduce its basis
in any corporate stock or partnership
interest received by the remaining builtin loss associated with the § 1.752–7
liability, at the time of the transaction
described in paragraph (e), (f), or (g) of
30356
Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
A). The UTP partners (as of the time of the
assumption of the § 1.752–7 liability by LTP)
are § 1.752–7 liability partners of LTP with
respect to the $1,500,000 increase in the
amount of the § 1.752–7 liability of UTP
since the assumption of that § 1.752–7
liability by UTP from A.
(iii) Sale by UTP of LTP interest. In 2010,
UTP sells its interest in LTP to E for
$10,500,000. At the time of the sale, the LTP
interest still has a value of $10,500,000 and
a basis of $12,000,000, and the remaining
built-in loss associated with the § 1.752–7
liability is $3,500,000. Under paragraph (e) of
this section, immediately before the sale,
UTP must reduce its basis in the LTP interest
by the § 1.752–7 liability reduction. Under
paragraph (a)(4) of this section, the remaining
built-in loss associated with the § 1.752–7
liability is $1,500,000 (remaining built-in loss
associated with the § 1.752–7 liability,
$3,500,000, reduced by the amount of the
§ 1.752–7 liability taken into account under
paragraph (j)(4) of this section, $2,000,000).
The difference between the basis of the LTP
interest held by UTP ($12,000,000) and the
adjusted value of that interest ($10,500,000)
is also $1,500,000. Therefore, the § 1.752–7
liability reduction is $1,500,000 and UTP’s
basis in the LTP interest must be reduced to
$10,500,000. In addition, UTP’s partners
must reduce their bases in their UTP interests
by their proportionate shares of the § 1.752–
7 liability reduction. Thus, the basis of each
of B’s and D’s interest in UTP must be
reduced by $375,000 and the basis of C’s
interest in UTP must be reduced by $750,000.
In 2011, D sells the UTP interest to F.
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ER26MY05.016
are § 1.752–7 liability partners of LTP with
respect to the $2,000,000 remaining built-in
loss associated with the § 1.752–7 liability (as
of the time of the sale of the UTP interest by
Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
(k) Effective dates—(1) In general.
This section applies to § 1.752–7
liability transfers occurring on or after
June 24, 2003. For assumptions
occurring after October 18, 1999, and
before June 24, 2003, see § 1.752–6. For
§ 1.752–7 liability transfers occurring on
or after June 24, 2003 and before May
26, 2005, taxpayers may rely on the
exception for trading and investment
partnerships in paragraph (b)(8)(ii) of
§ 1.752.7 (2003–28 I.R.B. 46; 68 FR
37434).
(2) Election to apply this section to
assumptions of liabilities occurring after
October 18, 1999 and before June 24,
2003—(i) In general. A partnership may
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Jkt 205001
elect to apply this section to all
assumptions of liabilities (including
§ 1.752–7 liabilities) occurring after
October 18, 1999, and before June 24,
2003. Such an election is binding on the
partnership and all of its partners. A
partnership making such an election
must apply all of the provisions of
§ 1.752–1 and § 1.752–7, including
§ 1.358–5T, § 1.358–7, § 1.704–1(b)(1)(ii)
and (b)(2)(iv)(b), § 1.704–2(b)(3),
§ 1.704–3(a)(7), (a)(8)(iv), and (a)(12),
§ 1.704–4(d)(1)(iv), § 1.705–1(a)(8),
§ 1.732–2(d)(3)(iv), and § 1.737–5.
(ii) Manner of making election. A
partnership makes an election under
this paragraph (k)(2) by attaching the
following statement to its timely filed
return: [Insert name and employer
identification number of electing
partnership] elects under § 1.752–7 of
the Income Tax Regulations to be
subject to the rules of § 1.358–5T,
§ 1.358–7, § 1.704–1(b)(1)(ii) and
(b)(2)(iv)(b), § 1.704–2(b)(3), § 1.704–
3(a)(7), (a)(8)(iv), and (a)(12), § 1.704–
4(d)(1)(iv), § 1.705–1(a)(8), § 1.732–
2(d)(3)(iv), and § 1.737–5 with respect to
all liabilities (including § 1.752–7
liabilities) assumed by the partnership
after October 18, 1999 and before June
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Fmt 4700
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24, 2003. In the statement, the
partnership must list, with respect to
each liability (including each § 1.752–7
liability) assumed by the partnership
after October 18, 1999 and before June
24, 2003—
(A) The name, address, and taxpayer
identification number of the partner
from whom the liability was assumed;
(B) The date on which the liability
was assumed by the partnership;
(C) The amount of the liability as of
the time of its assumption; and
(D) A description of the liability.
(iii) Filing of amended returns. An
election under this paragraph (k)(2) will
be valid only if the partnership and its
partners promptly amend any returns
for open taxable years that would be
affected by the election.
(iv) Time for making election. An
election under this paragraph (k)(2)
must be filed with any timely filed
Federal income tax return filed by the
partnership on or after September 24,
2003 and on or before December 31,
2005.
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26MYR1
ER26MY05.017
(iv) Deduction, expense, or loss associated
with the § 1.752–7 liability by LTP. In 2012,
LTP pays $3,500,000 to satisfy the § 1.752–
7 liability. Under paragraphs (e) and (j)(4) of
this section, LTP is not entitled to any
deduction with respect to the § 1.752–7
liability. Under paragraph (j)(3) of this
section, UTP also is not entitled to any
deduction with respect to the § 1.752–7
liability. If LTP notifies A, B, C and D of the
satisfaction of the § 1.752–7 liability, then A
is entitled to a deduction in 2012 of
$2,000,000, B and D are each entitled to
deductions in 2012 of $375,000, and C is
entitled to a deduction in 2012 of $750,000.
30357
30358
Federal Register / Vol. 70, No. 101 / Thursday, May 26, 2005 / Rules and Regulations
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 17. The authority for part 602
continues to read as follows:
I
Authority: 26 U.S.C.7805.
Par. 18. In § 602.101, paragraph (b) is
amended by adding an entry to the table
in numerical order to read as follows:
I
§ 602.101
*
OMB Control numbers.
*
*
(b) * * *
*
*
Current
OMB control
number
CFR part or section where
identified and described
This rule is effective from May
27, 2005, until May 29, 2005.
ADDRESSES: Comments and material
received from the public, as well as
documents indicated in this preamble as
being available in the docket, are part of
docket CGD01–05–033 and are available
for inspection or copying at Group/MSO
Long Island Sound, New Haven, CT,
between 9 a.m. and 3 p.m., Monday
through Friday, except Federal holidays.
FOR FURTHER INFORMATION CONTACT:
Lieutenant A. Logman, Chief,
Waterways Management Division, Coast
Guard Group/Marine Safety Office Long
Island Sound at (203) 468–4429.
SUPPLEMENTARY INFORMATION:
DATES:
Regulatory Information
*
*
*
*
*
1.752–7 .....................................
1545–1843
*
*
*
*
*
Mark E. Matthews,
Deputy Commissioner for Services and
Enforcement.
Approved: May 16, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the
Treasury.
[FR Doc. 05–10266 Filed 5–23–05; 11:17 am]
BILLING CODE 4830–01–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[CGD01–05–033]
RIN 1625–AA00
Safety Zone; Jones Beach Air Show,
Jones Beach, NY
Coast Guard, DHS.
ACTION: Temporary final rule.
AGENCY:
SUMMARY: The Coast Guard is
establishing a temporary safety zone for
the Jones Beach Air show, Jones Beach,
New York. The safety zone will provide
for safety of navigation of the maritime
public viewing the air show and the air
show practice sessions, which consists
of aircraft performing aerobatics over
the water area off of Jones Beach
specified within this safety zone. This
temporary safety zone is necessary to
protect the maritime community
viewing this event from the hazards
inherent with an air show. Entry into
this zone is prohibited unless
authorized by the Captain of the Port,
Long Island Sound, New Haven,
Connecticut.
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15:46 May 25, 2005
Jkt 205001
We did not publish a notice of
proposed rulemaking (NPRM) for this
regulation. Under 5 U.S.C. 553(b)(B), the
Coast Guard finds that good cause exists
for not publishing an NPRM and for
making this rule effective in less than 30
days after publication. Jones Beach State
Park submitted a Biological Opinion
discussing environmental impacts of the
air show on May 3, 2005. Due to the late
completion of the Application for
Approval of Marine Event by Jones
Beach State Park, specifically the late
submission of required environmental
documentation, insufficient time
remained to draft and publish an NPRM
and publish the rule at least 30 days
prior to its effective date.
Any delay in the effective date of this
regulation would be contrary to the
public interest as immediate action is
necessary to close a portion of the
Atlantic Ocean off of Jones Beach New
York to protect the maritime community
from the hazards associated with the air
show.
Background and Purpose
The New York State Office of Parks,
Recreation and Historic Preservation is
sponsoring an air show at Jones Beach
State Park. Jones Beach State Park is
located on the south shore of Long
Island, New York. The air show will
consist of aircraft performing aerobatics
in close proximity to other aircraft over
a specified area of the Atlantic Ocean off
of Jones Beach State Park. Several aerial
groups will participate in the Air show,
including the United States Air Force
Thunderbirds. The entire air show will
take place over the waters of the
Atlantic Ocean immediately to the south
of Jones Beach Island. The Coast Guard
is establishing a safety zone in order to
provide for the safety of the maritime
community and spectators viewing the
air show from the water, should an
accident, namely, collision of aircraft,
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occur during the show. The safety zone
will be in place from May 27, 2005,
through May 29, 2005. Air shows will
be held on May 28, 2005, and May 29,
2005. The air shows will take place from
10 a.m. to 3 p.m. each day. Practice air
shows will be held on May 27, 2005,
from 2 p.m. to 3 p.m. This rule will be
enforced from 1 p.m. to 3:30 p.m. on
Friday May 27, 2005, and 9 a.m. to 3:30
p.m. each day on May 28, 2005, and
May 29, 2005, providing for sufficient
time to clear the safety zone area prior
to the practice sessions or shows, as
well as additional time should the
shows run over the scheduled period.
The actual air show will be conducted
within an area which is contained in
and smaller than the safety zone area
outlined by the coordinates indicated
above. The larger safety zone area is
needed to protect the boating
community from the inherent hazards of
air shows.
Discussion of Rule
The New York State Office of Parks,
Recreation and Historic Preservation is
sponsoring an air show at the Jones
Beach State Park on May 28, 2005, and
May 29, 2005. A practice session for this
air show will be held on May 27, 2005.
A safety zone is necessary to protect the
maritime community from the hazards
associated with an air show. This rule
will be enforced from 1 p.m. to 3:30
p.m. on Friday May 27, 2005, and 9 a.m.
to 3:30 p.m. each day on May 28, 2005,
and May 29, 2005. The safety zone will
be established by reference to
geographic coordinates, consisting as
follows: Beginning at a point on land
located in Jones Beach State Park at
approximate position 40°35′06″ N,
073°32′37″ W, then running east along
the shoreline of Jones Beach State Park
to approximate position 40°35′49″ N,
073°28′47″ W; then running south to an
position in the Atlantic Ocean off of
Jones Beach at approximate position
40°34′23″ N, 073°32′23″ W; then
running west to approximate position
40°35′05″ N, 073°28′34″ W; then
running north to the point of beginning
at approximate position 40°35′06″ N,
073°32′37″ W. All coordinates are North
American Datum 1983.
Any violation of the safety zone
described herein, is punishable by,
among others, civil and criminal
penalties, in rem liability against the
offending vessel, and license sanctions.
Regulatory Evaluation
This rule is not a ‘‘significant
regulatory action’’ under section 3(f) of
Executive Order 12866, Regulatory
Planning and Review, and does not
require an assessment of potential costs
E:\FR\FM\26MYR1.SGM
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Agencies
[Federal Register Volume 70, Number 101 (Thursday, May 26, 2005)]
[Rules and Regulations]
[Pages 30334-30358]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-10266]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9207]
RIN 1545-AX93
Assumption of Partner Liabilities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations; and removal of temporary
regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
definition of liabilities under section 752 of the Internal Revenue
Code (Code). These regulations provide rules regarding a partnership's
assumption of certain fixed and contingent obligations in connection
with the issuance of a partnership interest and provide conforming
changes to certain regulations. These regulations also provide rules
under section 358(h) for assumptions of liabilities by corporations
from partners and partnerships. Finally, this document also contains
temporary regulations relating to the assumption of certain liabilities
under section 358(h). The text
[[Page 30335]]
of the temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the proposed rules section in this issue of the Federal
Register.
DATES: Effective Date: These regulations are effective May 26, 2005.
Applicability Dates: The final Sec. 1.752-6 regulations apply to
assumptions of liabilities by a partnership occurring after October 18,
1999, and before June 24, 2003. All of the other final regulations in
this Treasury Decision, as well as the temporary regulations under
section 358, apply to liabilities assumed on or after June 24, 2003,
except as otherwise noted.
FOR FURTHER INFORMATION CONTACT: Laura Fields at (202) 622-3050 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
has been reviewed and approved by the Office of Management and Budget
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(d)) under control number 1545-1843. Responses to these collections
of information are mandatory and are required to obtain a benefit. The
collections of information in this final regulation is in Sec. 1.752-
7(e), (f), (g), and (h). This information is required for a former or
current partner of a partnership to take deductions, losses, or capital
expenses attributable to the satisfaction of the Sec. 1.752-7
liability. This information will be used by the partner in order to
take a deduction, loss, or capital expense. An additional collection of
information in this final regulation is in Sec. 1.752-7(k)(2). This
information is required to inform the IRS of partnerships making the
designated election and to report income appropriately. The collection
of information is required to obtain a benefit, i.e., to elect to apply
the provisions of Sec. 1.752-7 of the regulations in lieu of Sec.
1.752-6. The likely respondents are business or other for-profit
institutions and small businesses or organizations.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Estimated total annual reporting burden: 125 hours.
The estimated annual burden per respondent varies from 20 to 40
minutes, depending on individual circumstances, with an estimated
average of 30 minutes.
Estimated number of respondents: 250.
Estimated annual frequency of responses: On occasion.
Comments concerning the accuracy of this burden estimate and
suggestions for reducing this burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP Washington, DC 20224, and to the Office of
Management and Budget, Attn: Desk Officer for the Department of the
Treasury, Office of Information and Regulatory Affairs, Washington, DC
20503.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to 26 CFR part 1 under sections
358, 704, 705, 737 and 752 of the Internal Revenue Code (Code).
As part of the Community Renewal Tax Relief Act of 2000 (the
Act)(114 Stat. 2763), Congress enacted, on December 15, 2000, section
358(h), effective October 18, 1999, to address certain situations in
which property is transferred to a corporation in exchange for both
stock and the corporation's assumption of certain obligations of the
transferor. In these situations, transferors took the position that the
obligations were not liabilities within the meaning of section 357(c)
or that they were described in section 357(c)(3), and, therefore, the
obligations did not reduce the basis of the transferor's stock. These
assumed obligations, however, did reduce the value of the stock. The
transferors then sold the stock and claimed a loss. In this way,
taxpayers attempted to duplicate a loss in corporate stock and to
accelerate deductions that typically are allowed only on the economic
performance of these types of obligations.
Section 358(h) addresses these transactions by requiring that,
after the application of section 358(d), the basis in stock received in
an exchange to which section 351, 354, 355, 356, or 361 applies be
reduced (but not below the fair market value of the stock) by the
amount of any liability assumed in the exchange. Exceptions to section
358(h) are provided where: (1) The trade or business with which the
liability is associated is transferred to the person assuming the
liability as part of the exchange; or (2) substantially all of the
assets with which the liability is associated are transferred to the
person assuming the liability as part of the exchange. The Secretary,
however, has the authority to limit these exceptions. The term
liability for purposes of section 358(h) includes any fixed or
contingent obligation to make payment without regard to whether the
obligation is otherwise taken into account for purposes of the Code.
Congress recognized that taxpayers were attempting to use
partnerships and S corporations to carry out the same types of abuses
that section 358(h) was designed to deter. Therefore, in sections
309(c) and (d)(2) of the Act, Congress directed the Secretary to
prescribe rules to provide ``appropriate adjustments under subchapter K
of chapter 1 of the Code to prevent the acceleration or duplication of
losses through the assumption of (or transfer of assets subject to)
liabilities described in section 358(h)(3) * * * in transactions
involving partnerships.'' Under the statute, these rules are to ``apply
to assumptions of liability after October 18, 1999, or such later date
as may be prescribed in such rules.''
In response to this directive, a notice of proposed rulemaking
(REG-106736-00; 2003-28 I.R.B. 46) under sections 358, 704, 705, and
752 was published in the Federal Register (68 FR 37434) on June 24,
2003. In addition, temporary regulations (TD 9062) were published on
that same day (68 FR 37414). The proposed and temporary regulations
provide rules to prevent the duplication and acceleration of loss
through the assumption by a partnership of certain liabilities from a
partner. Section 1.752-6T of the temporary regulations (the temporary
regulations) applies to liabilities assumed by a partnership after
October 18, 1999, and before June 24, 2003. Section 1.752-7 of the
proposed regulations (the proposed regulations) applies to liabilities
assumed by a partnership on or after June 24, 2003. However, taxpayers
may elect to apply the proposed regulations, instead of the temporary
regulations, to liabilities assumed by a partnership after October 18,
1999, and before June 24, 2003.
The temporary regulations adopt the approach of section 358(h),
with some modifications. For example, the exception for contributions
of ``substantially all of the assets with which the liability is
associated'' does not apply to certain abusive transactions described
in Notice 2000-44, released to the public on August 11, 2000, and
published on September 5, 2000 (2000-2 C.B. 255).
[[Page 30336]]
The proposed regulations deviate somewhat from the rules of section
358(h). In particular, the proposed regulations do not reduce the
partner's basis in the partnership at the time of the assumption of a
Sec. 1.752-7 liability by the partnership, but delay that reduction
until an event occurs that separates the partner from the liability
(triggering event). The triggering events are: (1) A disposition (or
partial disposition) of the partnership interest by the partner; (2) a
liquidation of the partner's interest in the partnership; and (3) the
assumption of the liability by another partner. After a triggering
event, the partnership's (or the assuming partner's) deduction on the
economic performance of the Sec. 1.752-7 liability is limited.
However, if the partnership (or the assuming partner) notifies the
partner of the economic performance of the Sec. 1.752-7 liability,
then the partner may take a loss or deduction in the amount of the
prior basis reduction.
The proposed regulations include an exception, similar to the
exception in section 358(h)(2)(A), for transactions in which the
partner contributes to the partnership the trade or business with which
the liability is associated as part of the exchange (the trade or
business exception), but do not include an exception, similar to the
exception in section 358(h)(2)(B), for transactions in which the
partner contributes to the partnership substantially all of the assets
associated with the liability as part of the exchange. The proposed
regulations also include an additional exception for situations in
which, immediately before the triggering event, the amount of the
remaining built-in loss with respect to all Sec. 1.752-7 liabilities
assumed by the partnership (other than Sec. 1.752-7 liabilities
assumed by the partnership with an associated trade or business) in one
or more Sec. 1.752-7 liability transfers is less than the lesser of
10% of the gross value of partnership assets or $1,000,000 (the de
minimis exception).
In addition, the proposed regulations provide detailed rules to
address the treatment of the liability between the date of the
assumption of that liability by the partnership and the date of a
triggering event and to address tiered entity situations.
The proposed regulations distinguish between a Sec. 1.752-1
liability, for which a basis reduction is required when the liability
is assumed by the partnership from a partner, and a Sec. 1.752-7
liability, for which a basis reduction is not required until the
occurrence of a triggering event. Under the proposed regulations, an
obligation is a Sec. 1.752-1 liability to the extent the obligation
creates or increases the basis of any of the obligor's assets
(including cash), gives rise to an immediate deduction to the obligor,
or gives rise to an expense that is not deductible in computing the
obligor's taxable income and is not properly chargeable to capital. All
remaining obligations are Sec. 1.752-7 liabilities. Under the proposed
regulations, Sec. 1.752-7 liabilities are subject to the rules of
section 704(c) and the regulations thereunder.
The American Jobs Creation Act of 2004, Public Law 108-357 (118
Stat. 1418) (the Act), was enacted on October 22, 2004. Section 833(a)
of the Act amended section 704(c) of the Code by adding section
704(c)(1)(C), effective for contributions of property to a partnership
after October 22, 2004. Under new section 704(c)(1)(C), if ``built-in
loss'' property is contributed to a partnership, the built-in loss
shall be taken into account only in determining the items allocated to
the contributing partner, and, except as provided in regulations, in
determining the amount of items allocated to the other partners, the
basis of the contributed property shall be treated as being equal to
its fair market value at the time of contribution. For this purpose, a
``built-in loss'' is defined to mean the excess of the adjusted basis
of the property in the hands of the contributing partner over its fair
market value at the time of its contribution to the partnership.
Section 833(b) of the Act requires basis adjustments to be made
following certain transfers of interests in partnerships for which no
section 754 election is in effect. As amended by the Act, section
743(a) and (b) of the Code requires a partnership to reduce the basis
of partnership property upon the transfer of an interest in the
partnership by sale or exchange or upon the death of a partner, if, at
the time of the relevant transfer, the partnership has a ``substantial
built-in loss.'' Section 743(d)(1) provides that, for purposes of
section 743, a partnership has a substantial built-in loss with respect
to a transfer of a partnership interest if the partnership's adjusted
basis in the partnership's property exceeds by more than $250,000 the
fair market value of such property. Exceptions are provided for
electing investment partnerships and for securitization partnerships,
as defined in the Act. See also sections 734(b) and (d), as amended by
section 833(c) of the Act (requiring a basis adjustment to be made
following a distribution from a partnership for which no section 754
election is in effect in the case of a ``substantial basis
reduction'').
The IRS and the Treasury Department are aware of certain
similarities between the treatment of Sec. 1.752-7 liabilities in
these regulations and the treatment of built-in losses under sections
704(c)(1)(C), 734, and 743 of the Code, as added by the Act. For
example, it is possible to view the contribution of property with an
adjusted tax basis equal to the fair market value of the property,
determined without regard to any Sec. 1.752-7 liabilities, as ``built-
in loss'' property after the Sec. 1.752-7 liability is taken into
account in those cases where the Sec. 1.752-7 liability is related to
the contributed property. Although a partnership's assumption of a
Sec. 1.752-7 liability as part of the contribution of property to the
partnership can be analogized to a property with an adjusted tax basis
greater than fair market value, the purposes of section 704(c)(1)(C)
and Sec. 1.752-7 are different in certain respects. Section
704(c)(1)(C) and the other changes in section 833 of the Act are
directed toward loss duplication whereas Sec. 1.752-7 is directed at
both loss duplication and loss acceleration. Therefore, to the extent
of any built-in loss attributable to a Sec. 1.752-7 liability, Sec.
1.752-7 shall be applied without regard to the amendments made by the
Act, unless future guidance provides to the contrary. Any such guidance
would be prospective in application.
Written comments were received in response to the notice of
proposed rulemaking, and a public hearing was held on October 14, 2003.
Two commentators requested to speak at that hearing. After
consideration of the comments, the proposed and temporary regulations
are adopted as modified by this Treasury decision.
Explanation of Provisions
These final regulations generally follow the proposed and temporary
regulations with the changes described below.
1. Comments on Sec. 1.752-6T
Several commentators suggested that the issuance of Sec. 1.752-6T
exceeded the authority granted to the Secretary in section 309 of the
Act. More specifically, some commentators suggested that Sec. 1.752-6T
results in the inappropriate denial of a bona fide loss, that Sec.
1.752-6T was issued to bootstrap the IRS's litigating position
regarding transactions described in Notice 2000-44 (2000-2 C.B. 255),
and that section 309 of the Act only granted the Secretary the
authority to prescribe rules to address situations in which a
partnership liability is assumed by a corporation. In addition, several
[[Page 30337]]
commentators argued that the Treasury Department and the IRS exceeded
their authority in providing that Sec. 1.752-6T applies retroactively
to assumptions of liabilities occurring after October 18, 1999, and
before June 24, 2003, the date the regulations were issued.
The Treasury Department and the IRS believe that Sec. 1.752-6T
does not result in the inappropriate denial of a bona fide loss. The
exceptions in Sec. 1.752-6T generally limit the application of the
regulations to transactions that are abusive in nature and that lack a
business purpose. In addition, the regulations allow taxpayers to elect
into Sec. 1.752-7 so as to avoid the immediate basis reduction under
Sec. 1.752-6T. Recognizing, however, that some taxpayers may not have
expected the approach taken in Sec. 1.752-7 when engaging in
transactions in prior years, Sec. 1.752-6T employs rules similar to
section 358(h) for partnership transactions.
Those commentators who suggested that the IRS issued Sec. 1.752-6T
to ``bootstrap'' its litigating position in Notice 2000-44 pointed to
the fact that Notice 2000-44 did not mention that regulations would be
issued in the future to challenge the transactions described in that
notice. As discussed earlier, the Act was enacted with a retroactive
effective date and granted the Treasury Department and the IRS the
authority to issue retroactive regulations. The Treasury Department and
the IRS believe that they have appropriately exercised this grant of
authority. Also, Notice 2000-44 was released on August 11, 2000. The
Act was not enacted into law until December 15, 2000, after the release
of Notice 2000-44. Therefore, the Treasury Department and the IRS could
not reference regulations promulgated under the Act in Notice 2000-44.
The Treasury Department and the IRS have concluded that the
Secretary's authority under section 309(c) is not limited to addressing
assumptions of liabilities by corporations from partnerships. The plain
language of the legislative directive is not so limited and the
legislative history does not support such a limitation.
To the contrary, the Treasury Department and the IRS believe that
the rules of Sec. 1.752-6T carry out the explicit directive of section
309(c) of the Act by applying to partnership transactions rules that
are analogous to the rules that apply to corporate transactions under
section 358(h). For example, if the transactions described in Notice
2000-44 were effected through a contribution to a corporation, rather
than a contribution to a partnership, section 358(h) would generally
apply to such a transaction, causing a basis reduction identical to
that provided by Sec. 1.752-6T.
Section 7805(b) addresses when a regulation (temporary, proposed,
or final) may be effective retroactively. Section 7805(b)(1) generally
provides that no temporary, proposed, or final regulations relating to
the internal revenue laws shall apply to any taxable period ending
before the earliest of the following dates: (A) The date on which such
regulation is filed with the Federal Register; (B) in the case of any
final regulation, the date on which any proposed or temporary
regulation to which such final regulation relates was filed with the
Federal Register; or (C) the date on which any notice substantially
describing the expected contents of any temporary, proposed, or final
regulation is issued to the public. However, section 7805(b) provides a
list of exceptions to the general rule stated above. Included in that
list, and relevant in this context, is section 7805(b)(6). Section
7805(b)(6) provides that the limitation may be superseded ``by a
legislative grant from Congress authorizing the Secretary to prescribe
the effective date with respect to any regulation.'' Also included
among the exceptions to the general rule in section 7805(b)(1) is
section 7805(b)(3). Section 7805(b)(3) states that the ``Secretary may
provide that any regulation may take effect or apply retroactively to
prevent abuse.''
The retroactive effective date of Sec. 1.752-6T is in accordance
with the directive in section 309(c) and (d)(2) of the Act and section
7805(b)(6). Furthermore, pursuant to section 7805(b)(3), the Secretary
has determined that a retroactive effective date is appropriate to
prevent abuse.
For these reasons, the Treasury Department and the IRS have
concluded that Sec. 1.752-6T is a valid exercise of the Secretary's
regulatory authority under the Code and section 309 of the Act.
2. Extension of Time To Adopt the Provisions of Sec. 1.752-7 in Lieu
of Sec. 1.752-6T
Section 1.752-6T(d)(2) provides that partnerships may elect to
apply the provisions of Sec. 1.752-7 of the proposed regulations to
all assumptions of liabilities by the partnership occurring after
October 18, 1999, and before June 24, 2003, in lieu of applying Sec.
1.752-6T of the temporary regulations. The election must be filed with
the first Federal income tax return filed by the partnership on or
after September 24, 2003.
Several commentators expressed a need for additional time to make
this election. In response to these comments, the election period
described in Sec. 1.752-6T(d)(2) has been extended. Under the
extension, an election to apply the regulations under Sec. 1.752-7,
rather than the regulations under Sec. 1.752-6, to all liabilities
assumed by a partnership after October 18, 1999, and before June 24,
2003, must be filed with a Federal income tax return filed by the
partnership on or after September 24, 2003, and on or before December
31, 2005.
3. Section 1.358-5T, Special Rules for Assumption of Liabilities
The preamble to the proposed regulations advised taxpayers that,
with respect to an exchange to which section 358(a)(1) applies, the
Treasury Department and the IRS were considering exercising their
authority under section 358(h)(2) to issue regulations that would limit
the exceptions to section 358(h)(1) to follow the exceptions set forth
in the proposed regulations under Sec. 1.752-7 (other than the de
minimis exception). The preamble indicated that such regulations would
be retroactive to the extent necessary to prevent abuse. No comments
were received regarding the appropriate scope or substance of such
regulations. The Treasury Department and the IRS have determined that
removing the exception of section 358(h)(2)(B) (which applies where
substantially all of the assets with which the liability is associated
are transferred to the person assuming the liability as part of the
exchange) is necessary to prevent the abuse that section 358(h) was
designed to prevent. Therefore, with respect to an exchange to which
section 358(a)(1) applies, this document contains temporary regulations
providing that the exception contained in section 358(h)(2)(B) does not
apply to exchanges under section 358(a)(1) in which liabilities are
assumed on or after June 24, 2003.
4. Section 752-7 Liability
Commentators have asked for clarification on whether an obligation
could be a Sec. 1.752-1 liability in part and a Sec. 1.752-7
liability in part. Certain obligations that create liabilities under
Sec. 1.752-1 may also create Sec. 1.752-7 liabilities. For example, a
fixed obligation that gives rise to basis can have a component portion
that changes in value between the time the obligation is first incurred
by the partner and the time that the partnership assumes the obligation
due to changes in interest rates, stock price, or other similar
factors. In these and other cases, the value of the obligation to the
holder has
[[Page 30338]]
increased and, as a result, the cost to the obligor has increased by a
like amount. The final regulations clarify that an obligation can be
treated in part as a Sec. 1.752-7 liability and in part as a Sec.
1.752-1 liability.
5. Satisfaction Other Than by Economic Performance
The proposed regulations allow the Sec. 1.752-7 liability partner
to claim a loss or deduction upon ``economic performance'' of the
obligation. Certain Sec. 1.752-7 liabilities may be settled in cash or
in kind, extinguished, satisfied or otherwise resolved under
circumstances where there may not be an ``economic performance'' of the
obligation within the meaning of that term. See section 461(h) and
Sec. 1.461-4. In addition, economic performance only applies to
``liabilities'' as defined in Sec. 1.446-1(c)(1)(ii)(B), and it is
possible that some Sec. 1.752-7 liabilities may not come within the
meaning of that term. As a result, the final regulations allow the
Sec. 1.752-7 liability partner to claim a loss or deduction under
Sec. 1.752-7 upon the ``satisfaction of the Sec. 1.752-7 liability''.
A Sec. 1.752-7 liability is treated as satisfied on the date upon
which, but for Sec. 1.752-7, the partnership, or the assuming partner,
would have been allowed to take the Sec. 1.752-7 liability into
account for federal tax purposes. The final regulations provide a
nonexclusive list of examples of when the Sec. 1.752-7 liability would
be taken into account for these purposes.
6. Application of Section 704(c)
Under Sec. 1.752-7(c), any Sec. 1.752-7 liability assumed by a
partnership in a Sec. 1.752-7 liability transfer is treated under
section 704(c) principles as having a built-in loss equal to the amount
of the Sec. 1.752-7 liability as of the date of the partnership's
assumption of the Sec. 1.752-7 liability. The proposed regulations
provide that, if a Sec. 1.752-7 liability is assumed from the
partnership by a partner other than the Sec. 1.752-7 liability
partner, and the trade or business or de minimis exceptions does not
apply, then section 704(c)(1)(B) does not apply to the assumption and
instead the rules of Sec. 1.752-7(g) apply. Commentators asked whether
section 704(c)(1)(B) applies to the assumption of a Sec. 1.752-7
liability by another partner if the trade or business or de minimis
exceptions apply to that assumption. In addition, commentators
questioned whether the successor partner rule of Sec. 1.704-3(a)(7)
applies to the built-in loss amount of the Sec. 1.752-7 liability. The
successor partner rule provides that, if a contributing partner
transfers a partnership interest, built-in gain or loss must be
allocated to the transferee partner as it would have been allocated to
the transferor partner.
The intent of the Treasury Department and the IRS was that all of
the rules of section 704(c), Sec. 1.704-3, and Sec. 1.704-4,
including section 704(c)(1)(B), apply to Sec. 1.752-7 liabilities
unless otherwise specifically stated. The Sec. 1.752-7 regulations
have been modified to make this clear. In addition, Sec. 1.704-3 has
been amended to provide that Sec. 1.752-7 liabilities are section
704(c) property and to provide that in general, the successor partner
rule does not apply to Sec. 1.752-7 liabilities.
Comments were also received regarding the application of section
704(c) principles to the extent that a Sec. 1.752-7 liability has
decreased after the partnership's assumption of the liability.
Consistent with the principles of Sec. 1.704-3, the final regulations
provide that, if there is a post-assumption change in the value of the
Sec. 1.752-7 liability, resulting in an obligation amount that is
either greater or less than the initial amount of the obligation, the
change in the amount will be treated as a section 704(b) and not a
section 704(c) item, thereby creating book income or loss to be
allocated to the partners. The final regulations also provide that, if
the value of the Sec. 1.752-7 liability decreases after the assumption
of the obligation by the partnership, the ``ceiling rule'' applies, and
the partnership and the partners are entitled to adopt one of the
reasonable methods specified in Sec. 1.704-3 to correct any ceiling
rule disparities.
7. Section 1.752-7 Liabilities That Are Capitalized and Not Deducted
The proposed regulations make reference in several places to a
``deduction or capital expense'', but no rules are provided as to how
the capital expense is taken into account. For example, no rules are
provided in the proposed regulations for situations where the
contributing partner is still a partner in the partnership at the time
that the obligation is recognized for federal tax purposes and
capitalized into the tax basis of one or more assets of the
partnership.
The final regulations add a rule to Sec. 1.704-3 providing that,
to the extent a partnership properly capitalizes all or a portion of an
item as described in paragraph Sec. 1.704-3(a)(12), then the item or
items to which such cost is properly capitalized is treated as section
704(c) property with the same amount of built-in loss as corresponds to
the amount capitalized. Similar rules are provided under Sec. Sec.
1.704-4 and 1.737-2.
In addition, the proposed regulations do not provide any guidance
as to the appropriate tax treatment if a triggering event occurs after
a Sec. 1.752-7 liability has been capitalized into the basis of one or
more assets of the partnership. Under the final regulations, no
reduction in the partner's basis in the partnership interest is
required with respect to such a capitalized amount as a result of the
triggering event, but, after the triggering event, neither the
partnership nor the remaining partners may use the capitalized basis.
8. Exception for Trading and Investment Partnerships
The proposed regulations contain an exception to Sec. 1.752-7(e),
(f), and (g) for assumptions of liabilities in connection with the
contribution of an associated trade or business, provided that the
partnership continues to carry on that trade or business after the
contribution. The proposed regulations provide that, for this purpose,
a trade or business generally does not include the activity of
acquiring, holding, or disposing of financial instruments, unless such
activity is carried on by an entity registered with the Securities and
Exchange Commission as a management company under the Investment
Company Act of 1940, as amended (15 U.S.C. 80a).
The exception for entities registered as management companies was
intended to apply narrowly to master-feeder partnerships; however, it
appears that the exception could apply to a broader range of entities,
some of which could be carrying on the types of transactions that
section 309 of the Act and these regulations were intended to address.
Consequently, the Treasury Department and the IRS have removed the
exception for entities registered as management companies.
The Treasury Department and the IRS do not believe that eliminating
the exception will create a substantial burden for master-feeder
partnerships, because interests in these partnerships are not regularly
sold, and because distributions by these partnerships typically take
the form of nonliquidating distributions of cash. Accordingly, master-
feeder partnerships are unlikely to engage in triggering events that
would implicate this regulation.
Therefore, under the final regulations, the activity of acquiring,
holding, dealing in, or disposing of financial instruments is not
treated as a trade or business even if engaged in by an entity
registered as a management company. For assumptions of liabilities on
or after June 24, 2003, and before May 26, 2005, however, entities
registered as
[[Page 30339]]
management companies may rely on the exception to the trade or business
definition in the proposed regulations.
9. Technical Terminations, Mergers, and Divisions
Section 1.708-1(b)(4) provides that if a partnership is terminated
under section 708(b)(1)(B) by a sale or exchange of an interest, the
partnership is deemed to contribute all of its assets and liabilities
to a new partnership in exchange for an interest in the new
partnership; and, immediately thereafter, the terminated partnership is
deemed to distribute interests in the new partnership to the purchasing
partner and the other remaining partners.
A commentator asked whether the rules provided in Sec. 1.752-7
apply to the contribution and distribution of partnership interests
deemed to occur under Sec. 1.708-1(b)(4). Rules have been added to the
final regulations to clarify how the regulations apply to technical
terminations and partnership mergers and divisions. These rules are
designed to ensure that, after a technical termination, merger, or
division, the partners that were Sec. 1.752-7 liability partners of
the prior partnership continue to be Sec. 1.752-7 liability partners
of the new partnership, and that built-in loss associated with the
Sec. 1.752-7 liability does not shift from one partner to another
partner. In addition, these rules are designed to ensure that a deemed
assumption of a liability as a result of a technical termination of a
partnership does not create any new Sec. 1.752-7 liabilities that did
not exist prior to the technical termination.
Accordingly, Sec. 1.752-7(b)(6)(ii) of the final regulations
provides that, in determining if a deemed contribution of assets and
assumption of liability as a result of a technical termination is
treated as a Sec. 1.752-7 liability transfer, only liabilities that
were Sec. 1.752-7 liabilities of the terminating partnership are taken
into account and, then, only to the extent of the amount of the
liability that was subject to Sec. 1.752-7 prior to the technical
termination.
In addition, the definition of a Sec. 1.752-7 liability partner
has been amended to clarify that, if, in a transaction described in
Sec. 1.752-7(e)(3), a partnership (lower-tier partnership) assumes a
Sec. 1.752-7 liability from another partnership (upper-tier
partnership), then any partners that were Sec. 1.752-7 liability
partners of the upper-tier partnership continue to be Sec. 1.752-7
liability partners of the lower-tier partnership with respect to the
remaining built-in loss associated with the Sec. 1.752-7 liability at
the time of the assumption of the Sec. 1.752-7 liability by the lower-
tier partnership from the upper-tier partnership. Any new built-in loss
associated with the Sec. 1.752-7 liability that is created on the
assumption of the Sec. 1.752-7 liability from the upper-tier
partnership by the lower-tier partnership is shared by all the partners
of the upper-tier partnership in accordance with their interests in the
upper-tier partnership, and each partner of the upper-tier partnership
is treated as a Sec. 1.752-7 liability partner with respect to that
new built-in loss.
The definition of Sec. 1.752-7 liability partner has also been
amended to provide that, if, in a transaction described in Sec. 1.752-
7(e)(3), an interest in a partnership (lower-tier partnership) that has
assumed a Sec. 1.752-7 liability is distributed by a partnership
(upper-tier partnership) that is the Sec. 1.752-7 liability partner
with respect to that liability, then the persons receiving interests in
the lower-tier partnership are Sec. 1.752-7 liability partners with
respect to the lower-tier partnership to the same extent that they were
prior to the distribution. In addition, Sec. 1.752-7(e)(3) has been
amended to provide that a distribution of an interest in a lower-tier
partnership is exempt from the application of Sec. 1.752-7(e) only if
the partners that were Sec. 1.752-7 liability partners with respect to
the lower-tier partnership prior to the distribution continue to be
Sec. 1.752-7 liability partners with respect to the lower-tier
partnership after the distribution.
10. Disguised Sale Rules
Section 707(a)(2)(B) provides that where there is a direct or
indirect transfer of money or other property by a partner to a
partnership and a related direct or indirect transfer of money or
property by the partnership to such partner and the transfers, when
viewed together, are properly characterized as a sale or exchange, such
transfers shall be treated either as a transaction between the
partnership and one who is not a partner, or as a transaction between
two or more partners acting other than in their capacity as members of
the partnership. Section 1.752-7(a)(2) of the proposed regulations
provides that the assumption of a Sec. 1.752-7 liability is not
treated as an assumption of a liability or as a transfer of cash for
purposes of section 707(a)(2)(B). One commentator noted that the
language contained in the proposed regulations was not consistent with
Sec. 1.707-5(a), which takes into account all liabilities, regardless
of whether those liabilities are taken into account under section 752.
The intent of the proposed regulations under section 752 was not to
override the disguised sale rules under section 707, which may include
Sec. 1.752-7 liabilities as consideration. Therefore, Sec. 1.752-
7(a)(2) has been removed.
11. Revisions to Sec. 1.704-1(b)(2)(iv)
Under section 704(b), a partner's distributive share of income,
gain, loss, deduction, or credit (or item thereof) is determined in
accordance with the partnership agreement provided that those
allocations have substantial economic effect. If the allocations under
the partnership agreement do not have substantial economic effect or
the partnership agreement does not provide as to a partner's
distributive share of partnership items, then the partner's
distributive share of such items is determined in accordance with the
partner's interest in the partnership (determined by taking into
account all facts and circumstances).
Section 1.704-1(b) describes various requirements that must be met
for partnership allocations to have substantial economic effect. Among
these requirements is that (except as otherwise provided in Sec.
1.704-1(b)) the partnership agreement must provide for the
determination and maintenance of capital accounts in accordance with
the rules of Sec. 1.704-1(b)(2)(iv).
Section 1.704-1(b)(2)(iv)(b) generally requires that a partner's
capital account be increased by the value of property contributed by
the partner to the partnership net of liabilities secured by such
contributed property that the partnership is considered to assume or
take subject to under section 752, and be decreased by the value of
property distributed by the partnership to the partner net of
liabilities secured by such distributed property that the partner is
considered to assume or take subject to under section 752. Section
1.704-1(b)(2)(iv)(c) requires that a partner's capital account be
increased by liabilities of the partnership that are assumed by such
partner (other than liabilities described in Sec. 1.704-
1(b)(2)(iv)(b)(5)), and be decreased by liabilities of the partner that
are assumed by the partnership (other than liabilities described in
Sec. 1.704-1(b)(2)(iv)(b)(2)). The proposed regulations revised Sec.
1.704-1(b)(2)(iv)(b) to take into account all liabilities to which the
contributed or distributed property is subject, not just liabilities
described in section 752. The proposed regulations did not revise Sec.
1.704-1(b)(2)(iv)(c), because that section is not limited to
assumptions of liabilities described in section 752.
[[Page 30340]]
A commentator suggested that, if all liabilities are covered by
Sec. 1.704-1(b)(2)(iv)(b), then Sec. 1.704-1(b)(2)(iv)(c) did not
have any effect and should be removed. The final regulations do not
adopt this comment, because the Treasury Department and the IRS believe
that Sec. 1.704-1(b)(2)(iv)(c) has significance even though Sec.
1.704-1(b)(2)(iv)(b) is no longer limited to liabilities described in
section 752. Section 1.704-1(b)(2)(iv)(b) applies only to situations in
which liabilities are assumed by the partnership or the partner in
connection with the contribution or distribution of property, or
contributed or distributed property is taken subject to liabilities.
Section 1.704-1(b)(2)(iv)(b) does not apply if liabilities are assumed
by the partnership or a partner other than in connection with a
contribution or distribution; these assumptions are covered by Sec.
1.704-1(b)(2)(iv)(c).
12. Notification Upon Satisfaction of the Sec. 1.752-7 Liability
One commentator suggested that, to prevent the loss of a deduction
to the Sec. 1.752-7 partner, the regulations should require the
assuming partnership or partner to notify the Sec. 1.752-7 liability
partner of the satisfaction of the Sec. 1.752-7 liability. The
proposed regulations impose no penalty on the partnership for failure
to notify the Sec. 1.752-7 liability partner. The commentator also
suggested that the Sec. 1.752-7 liability partner be required to keep
contact information current with the assuming partnership or partner.
The Treasury Department and the IRS do not believe that imposing
additional requirements is necessary in these circumstances. It is
anticipated that the Sec. 1.752-7 liability partner, upon entering the
partnership, will negotiate with the partnership for the necessary
notification. Therefore, this comment was not adopted.
13. Treatment of Sec. 1.752-7 Liabilities
Commentators have requested that the final regulations include
guidance on the recourse or nonrecourse treatment of Sec. 1.752-7
liabilities for all purposes of subchapter K. Under the proposed
regulations, a Sec. 1.752-7 liability is treated as a nonrecourse
liability solely for purposes of Sec. 1.704-2, dealing with the
allocation of nonrecourse deductions among the partners. The only other
provision that the Treasury Department and the IRS are aware of for
which the characterization of a Sec. 1.752-7 liability as recourse or
nonrecourse is Sec. 1.707-5 (addressing the treatment of liabilities
for purposes of the disguised sale rules of section 707(a)(2)(B)), and
Sec. 1.707-5 already provides adequate rules for determining if a
Sec. 1.752-7 liability is recourse or nonrecourse. Because a Sec.
1.752-7 liability is not, by definition, a Sec. 1.752-1 liability, the
recourse or nonrecourse nature of a Sec. 1.752-7 liability is not
relevant for purposes of Sec. Sec. 1.752-1 through 1.752-5. For this
reason, this comment was not adopted.
14. Valuation of Sec. 1.752-7 Liabilities
Comments were received requesting that the final regulations
include guidance on acceptable methods for identifying and valuing
Sec. 1.752-7 liabilities, as well as identifying the appropriate
discount rate for determining the liability's present value.
The Treasury Department and the IRS believe that such matters are
best left to the negotiation of the financial arrangement among the
parties and are beyond the scope of this regulation. In an arm's length
transaction, the parties will take the potential occurrence of these
obligations into account in arriving at the agreement among the parties
that will govern their affairs, including the appropriate valuation
methodology to apply to these obligations. Accordingly, the final
regulations do not adopt this comment.
However, the final regulations clarify that, if the obligation
arose under a contract in exchange for rights granted to the obligor
under that contract, and those contractual rights are contributed to
the partnership in connection with the partnership's assumption of the
contractual obligation, then the amount of the Sec. 1.752-7 liability
is the amount of cash, if any, that a willing assignor would pay to a
willing assignee to assume the entire contract.
Effective Date
The final Sec. 1.752-6 regulations apply to assumptions of
liabilities by a partnership occurring after October 18, 1999, and
before June 24, 2003. All of the other final regulations in this
Treasury decision apply to liabilities assumed on or after June 24,
2003, except as otherwise noted.
Special Analyses
These final and temporary regulations are necessary to prevent
abusive transactions involving transfers to partnerships and
corporations of the type Section 358(h) was enacted to prevent.
Accordingly, good cause is found for dispensing with notice and public
procedure pursuant to 5 U.S.C. 553(b)(B) with respect to the temporary
regulations, and for dispensing with a delayed effective date pursuant
to 5 U.S.C. 553(d)(1) and (3) with respect to the final and temporary
regulations.
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It is hereby
certified that the final regulations in this document will not have a
significant economic impact on a substantial number of small entities.
This certification is based upon the fact that few partnerships engage
in the type of transactions that are subject to these regulations
(assumptions of liabilities not described in section 752(a) and (b)
from a partner). In addition, available data indicates that most
partnerships that engage in the type of transactions that are subject
to these regulations are large partnerships. Certain broad exceptions
to the application of these regulations (including a de minimis
exception) further limit the economic impact of these regulations on
small entities. Therefore, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. For
the applicability of the Regulatory Flexibility Act to the temporary
regulations in this document (Sec. 1.358-5T), refer to the cross-
reference notice of proposed rulemaking published in the proposed rules
section in this issue of the Federal Register. Pursuant to section
7805(f) of the Code, the notice of proposed rulemaking that preceded
these regulations was submitted to the Chief Counsel for Advocacy of
the Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Laura Nash, Office of
Associate Chief Counsel (Passthroughs and Special Industries), IRS.
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:
[[Page 30341]]
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.358-5T also issued under 26 U.S.C. 358(h)(2). * * *
Section 1.358-7 also issued under Public Law 106-554, 114 Stat.
2763, 2763A-638 (2001). * * *
Section 1.752-1(a) also issued under Public Law 106-554, 114
Stat. 2763, 2763A-638 (2001).
Section 1.752-6 also issued under Public Law 106-554, 114 Stat.
2763, 2763A-638 (2001)
Section 1.752-7 also issued under Public Law 106-554, 114 Stat.
2763, 2763A-638 (2001). * * *
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Par. 2. Section 1.358-5T is added to read as follows:
Sec. 1.358-5T Special rules for assumption of liabilities
(temporary).
(a) In general. Section 358(h)(2)(B) does not apply to an exchange
occurring on or after June 24, 2003.
(b) Effective dates. This section applies to exchanges occurring on
or after June 24, 2003.
0
Par. 3. Section 1.358-7 is added to read as follows:
Sec. 1.358-7 Transfers by partners and partnerships to corporations.
(a) Transfers by partners of partnership interests. For purposes of
section 358(h), a transfer of a partnership interest to a corporation
is treated as a transfer of the partner's share of each of the
partnership's assets and an assumption by the corporation of the
partner's share of partnership liabilities (including section 358(h)
liabilities, as defined in paragraph (d) of this section). See
paragraph (e) Example 2 of this section.
(b) Transfers by partnerships. If a corporation assumes a section
358(h) liability from a partnership in an exchange to which section
358(a) applies, then, for purposes of applying section 705
(determination of basis of partner's interest) and Sec. 1.704-1(b),
any reduction, under section 358(h)(1), in the partnership's basis in
corporate stock received in the transaction is treated as an
expenditure of the partnership described in section 705(a)(2)(B). See
paragraph (e) Example 1 of this section. This expenditure must be
allocated among the partners in accordance with section 704(b) and (c)
and Sec. 1.752-7(c). If a partner's share of the reduction, under
section 358(h)(1), in the partnership's basis in corporate stock
exceeds the partner's basis in the partnership interest, then the
partner recognizes gain equal to the excess, which is treated as gain
from the sale or exchange of a partnership interest. This paragraph
does not apply to the extent that Sec. 1.752-7(j)(4) applies to the
assumption of the Sec. 1.752-7 liability by the corporation.
(c) Assumption of section 358(h) liability by partnership followed
by transfer of partnership interest or partnership property to a
corporation--trade or business exception. Where a partnership assumes a
section 358(h) liability from a partner and, subsequently, the partner
transfers all or part of the partner's partnership interest to a
corporation in an exchange to which section 358(a) applies, then, for
purposes of applying section 358(h)(2), the section 358(h) liability is
treated as associated only with the contribution made to the
partnership by that partner. See paragraph (e) Example 2 of this
section. Similar rules apply where a partnership assumes a section
358(h) liability of a partner and a corporation subsequently assumes
that section 358(h) liability from the partnership in an exchange to
which section 358(a) applies.
(d) Section 358(h) liabilities defined. For purposes of this
section, section 358(h) liabilities are liabilities described in
section 358(h)(3).
(e) Examples. The following examples illustrate the provisions of
this section. Assume, for purposes of these examples, that the
obligation assumed by the corporation does not reduce the shareholder's
basis in the corporate stock under section 358(d). The examples are as
follows:
Example 1. Transfer of partnership property to corporation. In
2004, in an exchange to which section 351(a) applies, PRS, a cash
basis taxpayer, transfers $2,000,000 cash to Corporation X, also a
cash basis taxpayer, in exchange for Corporation X shares and the
assumption by Corporation X of $1,000,000 of accounts payable
incurred by PRS. At the time of the exchange, PRS has two partners,
A, a 90% partner, who has a $2,000,000 basis in the PRS interest,
and B, a 10% partner, who has a $50,000 basis in the PRS interest.
Assume that, under section 358(h)(1), PRS's basis in the Corporation
X stock is reduced by the accounts payable assumed by Corporation X
($1,000,000). Under paragraph (b) of this section, A's and B's bases
in PRS must be reduced, but not below zero, by their respective
shares of the section 358(h)(1) basis reduction. If either partner's
share of the section 358(h)(1) basis reduction exceeds the partner's
basis in the partnership interest, then the partner recognizes gain
equal to the excess. A's share of the section 358(h) basis reduction
is $900,000 (90% of $1,000,000). Therefore, A's basis in the PRS
interest is reduced to $1,100,000 ($2,000,000 - $900,000). B's share
of the section 358(h) basis reduction is $100,000 (10% of
$1,000,000). Because B's share of the section 358(h) basis reduction
($100,000) exceeds B's basis in the PRS interest ($50,000), B's
basis in the PRS interest is reduced to $0 and B recognizes $50,000
of gain. This gain is treated as gain from the sale of the PRS
interest.
Example 2. Transfer of partnership interest to corporation. In
2004, A contributes undeveloped land with a value and basis of
$4,000,000 in exchange for a 50% interest in PRS and an assumption
by PRS of $2,000,000 of pension liabilities from a separate business
that A conducts. A's basis in the PRS interest immediately after the
contribution is A's basis in the land, $4,000,000, unreduced by the
amount of the pension liabilities. PRS develops the land as a
landfill. Before PRS has economically performed with respect to the
pension liabilities, A transfers A's interest in PRS to Corporation
X, in an exchange to which section 351 applies. At the time of the
exchange, the value of A's PRS interest is $2,000,000, A's basis in
PRS is $4,000,000, and A has no share of partnership liabilities
other than the pension liabilities. For purposes of applying section
358(h), the transfer of the PRS interest to Corporation X is treated
as a transfer to Corporation X of A's share of PRS assets and an
assumption by Corporation X of A's share of the pension liabilities
of PRS ($2,000,000). Because the pension liabilities were not
assumed by PRS from A in an exchange in which the trade or business
associated with the liability was transferred to PRS, the transfer
of the PRS interest to Corporation X is not excepted from section
358(h) under section 358(h)(2). See paragraph (c) of this section.
Under section 358(h), A's basis in the Corporation X stock is
reduced by the $2,000,000 of pension liabilities.
(f) Effective date. This section applies to assumptions of
liabilities by a corporation occurring on or after June 24, 2003.
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Par. 4. Section 1.704-1 is amended as follows:
0
1. Paragraph (b)(1)(ii)(a) is amended by removing the language ``The''
at the beginning of the first sentence and adding ``Except as otherwise
provided in this section, the'' in its place.
0
2. Paragraph (b)(2)(iv)(b) is amended by adding a sentence at the end
of the paragraph.
0
3. Paragraph (b)(2)(iv)(b)(2) is amended by removing the language
``secured by such contributed property'' in the parenthetical.
0
4. Paragraph (b)(2)(iv)(b)(2) is further amended by removing the
language ``under section 752'' in the parenthetical.
0
5. Paragraph (b)(2)(iv)(b)(5) is amended by removing the language
``secured by such distributed property'' in the parenthetical.
0
6. Paragraph (b)(2)(iv)(b)(5) is further amended by removing the
language ``under section 752'' in the parenthetical.
The addition reads as follows:
[[Page 30342]]
Sec. 1.704-1 Partner's distributive share.
* * * * *
(b) * * *
(2) * * *
(iv) * * *
(b) * * * For liabilities assumed before June 24, 2003, references
to liabilities in this paragraph (b)(2)(iv)(b) shall include only
liabilities secured by the contributed or distributed property that are
taken into account under section 752(a) and (b).
* * * * *
Sec. 1.704-2 [Amended]
0
Par. 5. In Sec. 1.704-2, paragraph (b)(3) is amended by adding the
language ``or a Sec. 1.752-7liability (as defined in Sec. 1.752-
7(b)(3)(i)) assumed by the partnership from a partner on or after June
24, 2003'' at the end of the sentence.
0
Par. 6. Section 1.704-3 is amended as follows:
0
1. The paragraph heading for (a)(7) is revised.
0
2. Two sentences are added to the end of paragraph (a)(7).
0
3. Paragraphs (a)(8)(ii) and (iii) are removed and reserved and
paragraph (a)(8)(iv) is added.
0
4. Paragraph (a)(12) is added.
0
5. Two additional sentences are added at the end of paragraph (f).
The revisions and additions read as follows:
Sec. 1.704-3 Contributed property.
(a) * * *
(7) Transfer of a partnership interest. * * * This rule does not
apply to any person who acquired a partnership interest from a Sec.
1.752-7 liability partner in a transaction to which paragraph (e)(1) of
Sec. 1.752-7 applies. See Sec. 1.752-7(c)(1).
(8) * * * (i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized amounts. To the extent that a partnership properly
capitalizes all or a portion of an item as described in paragraph
(a)(12) of this section, then the item or items to which such cost is
properly capitalized is treated as section 704(c) property with the
same amount of built-in loss as corresponds to the amount capitalized.
* * * * *
(12) Sec. 1.752-7 liabilities. Except as otherwise provided in
Sec. 1.752-7, Sec. 1.752-7 liabilities (within the meaning of Sec.
1.752-7(b)(2)) are section 704(c) property (built-in loss property that
at the time of contribution has a book value that differs from the
contributing partner's adjusted tax basis) for purposes of applying the
rules of this section. See Sec. 1.752-7(c). To the extent that the
built-in loss associated with the Sec. 1.752-7 liability exceeds the
cost of satisfying the Sec. 1.752-7 liability (as defined in Sec.
1.752-7(b)(3)), the excess creates a ``ceiling rule'' limitation,
within the meaning of Sec. 1.704-3(b)(1), subject to the methods of
allocation set forth in Sec. 1.704-3(b), (c) and (d).
* * * * *
(f) * * * Except as otherwise provided in Sec. 1.752-7(k),
paragraphs (a)(8)(iv) and (a)(12) apply to Sec. 1.752-7 liability
transfers, as defined in Sec. 1.752-7(b)(4), occurring on or after
June 24, 2003. See Sec. 1.752-7(k).
0
Par. 7. Section 1.704-4 is amended as follows:
0
1. The paragraph heading for (d)(1) is revised.
0
2. Paragraphs (d)(1)(ii) and (iii) are removed and reserved and
paragraph (d)(1)(iv) is added.
0
3. Paragraph (g) is revised.
The additions and revisions read as follows:
Sec. 1.704-4 Distribution of contributed property.
(d) Special rules--(1) Nonrecognition transactions, installment
obligations, contributed contracts, and capitalized costs--(i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to which the cost of section
704(c) property is properly capitalized is treated as section 704(c)
property for purposes of section 704(c)(1)(B) and this section to the
extent that such property is treated as section 704(c) property under
Sec. 1.704-3(a)(8)(iv). See Sec. 1.737-2(d)(3) for a similar rule in
the context of section 737.
* * * * *
(g) Effective dates. This section applies to distributions by a
partnership to a partner on or after January 9, 1995, except that
paragraph (d)(1)(iv) applies to distributions by a partnership to a
partner on or after June 24, 2003.
0
Par. 8. Section 1.705-1 is amended by adding paragraph (a)(8) to read
as follows:
Sec. 1.705-1 Determination of basis of partner's interest.
(a) * * *
(8) For basis adjustments necessary to coordinate sections 705 and
358(h), see Sec. 1.358-7(b). For certain basis adjustments with
respect to a Sec. 1.752-7 liability assumed by a partnership from a
partner, see Sec. 1.752-7.
* * * * *
0
Par. 9. Section 1.737-2 is amended as follows:
0
1. The paragraph heading for (d)(3) is revised.
0
2. Paragraphs (d)(3)(ii) and (iii) are removed and reserved and
paragraph (d)(3)(iv) is added.
The additions and revisions read as follows:
Sec. 1.737-2 Exceptions and special rules.
(d) * * *
(3) Nonrecognition transactions, installment sales, contributed
contracts, and capitalized costs--(i) * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to which the cost of section
704(c) property is properly capitalized is treated as section 704(c)
property for purposes of section 737 to the extent that such property
is treated as section 704(c) property under Sec. 1.704-3(a)(8)(iv).
See Sec. 1.704-4(d)(1) for a similar rule in the context of section
704(c)(1)(B).
* * * * *
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Par. 10. Section 1.737-5 is revised to read as follows:
Sec. 1.737-5 Effective dates.
Sections 1.737-1, 1.737-2, 1.737-3, and 1.737-4 apply to
distributions by a partnership to a partner on or after January 9,
1995, except that Sec. 1.737-2(d)(3)(iv) applies to distributions by a
partnership to a partner on or after June 24, 2003.
0
Par. 11. Section 1.752-0 is amended as follows:
0
1. The section heading and introductory text of Sec. 1.752-0 are
revised.
0
2. An entry for Sec. 1.752-1(a)(4) is added.
0
3. Entries for Sec. 1.752-1(a)(4)(i), (ii), (iii), and (iv) are added.
0
4. Entries for Sec. 1.752-6 and Sec. 1.752-7 are added.
The revision and additions read as follows:
Sec. 1.752-0 Table of contents.
This section lists the major paragraphs that appear in Sec. Sec.
1.752-1 through 1.752-7.
Sec. 1.752-1 Treatment of partnership liabilities.
(a) * * *
(4) Liability defined.
(i) In general.
(ii) Obligation.
(iii) Other liabilities.
(iv) Effective date.
* * * * *
Sec. 1.752-6 Partnership assumption of partner's section 358(h)(3)
liability after October 18, 1999, and before June 24, 2003.
(a) In general.
(b) Exceptions.
(1) In general.
[[Page 30343]]
(2) Transactions described in Notice 2000-44.
(c) Example.
(d) Effective date.
(1) In general.
(2) Election to apply Sec. 1.752-7.
Sec. 1.752-7 Partnership assumption of partner's Sec. 1.752-7
liability on or after June 24, 2003.
(a) Purpose and structure.
(b) Definitions.
(1) Assumption.
(2) Adjusted value.
(3) Sec. 1.752-7 liability.
(i) In general.
(ii) Amount and share of Sec. 1.752-7 liability.
(iii) Example.
(4) Sec. 1.752-7 liability transfer.
(i) In general.
(ii) Terminations under section 708(b)(1)(B).
(5) Sec. 1.752-7 liability partner.
(i) In general.
(ii) Tiered partnerships.
(A) Assumption by a lower-tier partnership.
(B) Distribution of partnership interest.
(6) Remaining built-in loss associated with a Sec. 1.752-7
liability.
(i) In general.
(ii) Partial dispositions and assumptions.
(7) Sec. 1.752-7 liability reduction.
(i) In general.
(ii) Partial dispositions and assumptions.
(8) Satisfaction of Sec. 1.752-7 liability.
(9) Testing date.
(10) Trade or business.
(i) In general.
(ii) Examples.
(c) Application of section 704(b) and (c) to assumed Sec.
1.752-7 liabilities.
(1) In general.
(i) Section 704(c).
(ii) Section 704(b).
(2) Example.
(d) Special rules for transfers of partnership interests,
distributions of partnership assets, and assumptions of the Sec.
1.752-7 liability after a Sec. 1.752-7 liability transfer.
(1) In general.
(2) Exceptions.
(i) In general.
(ii) Examples.
(e) Transfer of Sec. 1.752-7 liability partner's partnership
interest.
(1) In general.
(2) Examples.
(3) Exception for nonrecognition transactions.
(i) In general.
(ii) Examples.
(f) Distribution in liquidation of Sec. 1.752-7 liability
partner's partnership interest.
(1) In general.
(2) Example.
(g) Assumption of Sec. 1.752-7 liability by a partner other
than Sec. 1.752-7 liability partner.
(1) In general.
(2) Consequences to Sec. 1.752-7 liability partner.
(3) Consequences to partnership.
(4) Consequences to assuming partner.
(5) Example.
(h) Notification by the partnership (or successor) of the
satisfaction of the Sec. 1.752-7 liability.
(i) Special rule for amounts that are capitalized prior to the
occurrence of an event described in paragraphs (e), (f), or (g).
(1) In general.
(2) Example.
(j) Tiered partnerships.
(1) Look-through treatment.
(2) Trade or business exception.
(3) Partnership as a Sec. 1.752-7 liability partner.
(4) Transfer of Sec. 1.752-7 liability by partnership to
another partnership or corporation after a transaction described in
paragraphs (e),(f), or (g).
(i) In general.
(ii) Subsequent transfers.
(5) Example.
(k) Effective dates.
(1) In general.
(2) Election to apply this section to assumptions of liabilities
occurring after October 18, 1999 and before June 24, 2003.
(i) In general.
(ii) Manner of making election.
(iii) Filing of amended returns.
(iv) Time for making election.
0
Par. 12. In Sec. 1.752-1, paragraph (a)(4) is added to read as
follows:
Sec. 1.752-1 Treatment of partnership liabilities.
(a) * * *
(4) Liability defined--(i) In general. A