Aggregation of Basis for Partnership Distributions Involving Equity Interests of a Partner, 33452-33456 [2015-14404]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 113 (Friday, June 12, 2015)]
[Proposed Rules]
[Pages 33452-33456]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-14404]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-138759-14]
RIN 1545-BM48


Aggregation of Basis for Partnership Distributions Involving 
Equity Interests of a Partner

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that would allow 
consolidated group members that are partners in the same partnership to 
aggregate their bases in stock distributed by the partnership for the 
purpose of limiting the application of rules that might otherwise cause 
basis reduction or gain recognition. The proposed regulations would 
also require certain corporations that engage in gain elimination 
transactions to reduce the basis of corporate assets or to recognize 
gain. The proposed regulations affect partnerships and their partners.

DATES: Comments and requests for a public hearing must be received by 
September 10, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138759-14), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
138759-

[[Page 33453]]

14), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue 
NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-138759-14).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Kevin I. Babitz, (202) 317-6852; concerning submission of comments or 
to request a public hearing, Oluwafunmilayo Taylor at (202) 317-6901.

SUPPLEMENTARY INFORMATION:

Background

1. Section 337(d) and the Repeal of the General Utilities Doctrine

    In General Utilities & Operating Co. v. Helvering, 296 U.S. 200 
(1935), the Supreme Court held that corporations generally could 
distribute appreciated property to their shareholders without the 
recognition of any corporate level gain (the General Utilities 
doctrine). Beginning in 1969 and ending with the Tax Reform Act of 
1986, Public Law 99-514, 100 Stat. 2085, (the Act), Congress enacted a 
series of statutory changes that limited and ultimately repealed the 
General Utilities doctrine. Under current law, sections 311(b) and 
336(a) of the Internal Revenue Code (Code) require a corporation that 
distributes appreciated property to its shareholders to recognize gain 
determined as if the property were sold to the shareholders for its 
fair market value. Additionally, section 631 of the Act added section 
337(d) to the Code to permit the Secretary to prescribe regulations 
that are necessary or appropriate to carry out the purposes of the 
General Utilities repeal, ``including regulations to ensure that [the 
repeal of the General Utilities doctrine] may not be circumvented 
through the use of any provision of law or regulations.''

2. Section 732(f)

    Section 538 of the Ticket to Work and Work Incentives Improvement 
Act of 1999, Public Law 106-170, 113 Stat. 1860, (the Ticket to Work 
Act), enacted section 732(f) on December 17, 1999. Section 732(f) 
provides that if: (1) A corporate partner receives a distribution from 
a partnership of stock in another corporation (distributed 
corporation), (2) the corporate partner has control of the distributed 
corporation (ownership of stock meeting the requirements of section 
1504(a)(2)) immediately after the distribution or at any time 
thereafter (the ``control requirement''), and (3) the partnership's 
basis in the stock immediately before the distribution exceeded the 
corporate partner's basis in the stock immediately after the 
distribution, then the basis of the distributed corporation's property 
must be reduced by this excess. The amount of this reduction is limited 
to the amount by which the sum of the aggregate adjusted basis of 
property and the amount of money of the distributed corporation exceeds 
the corporate partner's adjusted basis in the stock of the distributed 
corporation. The corporate partner must recognize gain to the extent 
that the basis of the distributed corporation's property cannot be 
reduced.
    Congress enacted section 732(f) due to concerns that a corporate 
partner could otherwise negate the effects of a basis step-down to 
distributed property required under section 732(b) by applying the 
step-down against the basis of distributed stock of a corporation 
(distributed corporation). The Senate Finance Committee stated that:

    The Committee is concerned that the downward adjustment to the 
basis of property distributed by a partnership may be nullified if 
the distributed property is corporate stock. The distributed 
corporation can be liquidated by the corporate partner, so that the 
stock basis adjustment has no effect. Similarly, if the corporations 
file a consolidated return, their taxable income may be computed 
without reference to the downward adjustment to the basis of the 
stock. These results can occur either if the partnership has 
contributed property to the distributed corporation, or if the 
property was held by the corporation before the distribution. 
Therefore, the provision requires a basis reduction to the property 
of the distributed corporation.

S. Rep. No. 106-201, 106th Cong., 1st Sess. 50 (1999).
    For example, assume a corporate partner has a partnership interest 
with zero basis and receives a partnership distribution of high-basis 
stock in a corporation. The corporate partner's basis in the 
distributed corporation's stock is reduced to zero under section 732(a) 
or section 732(b). If the partnership has elected under section 754, 
then the basis of other partnership property is increased by an equal 
amount under section 734(b). The effects of the section 732 basis 
decrease and the section 734(b) basis increase generally offset each 
other. However, if the corporate partner owned stock in the distributed 
corporation that satisfied the control requirement, the corporate 
partner could liquidate the distributed corporation under section 332, 
and section 334(b) would generally provide for a carryover basis in the 
distributed corporation's property received by the corporate partner in 
the liquidation. Taken together, these rules could permit the 
partnership to increase the basis of its retained property without an 
equivalent basis reduction following the liquidation of the distributed 
corporation. Section 732(f) generally precludes this result by 
requiring that either the distributed corporation must reduce the basis 
of its property or the corporate partner must recognize gain (to the 
extent the distributed corporation is unable to reduce the basis of its 
property). Thus, section 732(f) generally ensures that any basis 
increase under section 734(b) is ultimately offset.
    Section 732(f) applies if the corporate partner either has control 
of the distributed corporation following the distribution or if the 
corporate partner subsequently acquires control of the distributed 
corporation at any time thereafter. Section 732(f) does not apply if 
the corporate partner does not have control of the distributed 
corporation immediately following the distribution and the corporate 
partner establishes to the satisfaction of the Secretary that the 
distribution was not part of a plan or arrangement to acquire control 
of the distributed corporation.
    In its discussion of the control requirement of section 
732(f)(1)(B), the Conference Report to the Ticket to Work Act explains 
that ``[t]his provision also calls for regulations, including 
regulations to avoid double counting and to prevent the abuse of the 
purposes of this provision.'' H.R. Conf. Rep. No. 106-478, 106th Cong., 
1st Sess. 174 (1999). This grant of regulatory authority is codified at 
section 732(f)(8), which provides that ``[t]he Secretary shall 
prescribe such regulations as may be necessary to carry out the 
purposes of this subsection, including regulations to avoid double 
counting and to prevent the abuse of such purposes.''
    Simultaneous with this notice of proposed rulemaking, the Treasury 
Department and the IRS are issuing final and temporary regulations 
under section 337(d) (Sec.  1.337(d)-3T) that prevent a corporate 
partner from using a partnership to avoid corporate-level gain required 
to be recognized under section 311(b) or section 336(a) following the 
repeal of the General Utilities doctrine. Those final and temporary 
regulations address partnership acquisitions, ownership, and 
distributions of stock and other equity interests in a corporate 
partner. Sections 732(f) and 337(d) share a common purpose of 
preserving corporate-level gains. Given this shared purpose, these 
proposed regulations are issued under the combined authority of 
sections 337(d) and 732(f).

[[Page 33454]]

Explanation of Provisions

    As described in this preamble, Congress provided the Treasury 
Department and the IRS with a broad grant of statutory authority to 
carry out the purposes of sections 337(d) and 732(f). The Treasury 
Department and the IRS believe that as currently applied, section 
732(f) may be too broad in some circumstances and too narrow in others. 
Specifically, section 732(f) may require basis reduction or gain 
recognition even though that basis reduction or gain recognition does 
not further the purposes of section 732(f). In other circumstances, 
corporate partners may inappropriately avoid the purposes of section 
732(f) by engaging in transactions that allow corporate partners to 
receive property held by a distributed corporation without reducing the 
basis of that property to account for basis reductions under section 
732(b) made when the partnership distributed stock of the distributed 
corporation to the corporate partner. These proposed regulations add 
rules to conform the application of section 732(f) with Congress's 
identified purposes for enacting sections 337(d) and 732(f) in these 
situations.

1. Aggregation of Section 732(b) Basis Adjustments

    Section 732(f) generally applies on a partner-by-partner basis. 
However, the Treasury Department and the IRS believe that in certain 
circumstances, it is appropriate to aggregate the bases of consolidated 
group members in a partnership for purposes of applying section 732(f). 
For example, basis aggregation may be appropriate when two or more 
corporate partners in the same consolidated group (member-partners) 
receive a deemed distribution of stock in a distributed corporation 
either because (a) the partnership elects to be treated as an 
association taxable as a corporation under Sec.  301.7701-3 or (b) one 
corporate partner acquires all of the interests in the partnership 
causing the partnership to liquidate. In these instances, section 
732(b) may cause one member-partner to increase the basis of 
distributed stock while another member-partner reduces the basis of 
distributed stock by an equivalent amount. Under current law, section 
732(f) may require the member-partner whose basis is reduced to 
recognize gain or to reduce the basis of the distributed corporation's 
property, with no offsetting loss or increase to the basis of the 
distributed corporation's property with respect to the member-partner 
whose basis is increased. The Treasury Department and the IRS do not 
believe that prohibiting member-partners from consolidating their bases 
in a partnership for purposes of applying section 732(f) in these 
situations furthers Congress's intent to sustain the effect of the 
basis reduction to distributed property.
    These proposed regulations provide for the aggregation of basis 
within the same consolidated group (as defined in Sec.  1.1502-1(h)), 
for purposes of section 732(f), when two conditions are met. First, two 
or more of the corporate partners receive a distribution of stock in a 
distributed corporation. Second, the distributed corporation is or 
becomes a member of the distributee partners' consolidated group 
following the distribution.
    Under this rule, section 732(f) only applies to the extent that the 
partnership's adjusted basis in the distributed stock immediately 
before the distribution exceeds the aggregate basis of the distributed 
stock in the hands of all members of the distributee corporate 
partner's consolidated group immediately after the distribution. The 
requirement that the distributed corporation be a member of the 
consolidated group is intended to avoid unintended consequences that 
could result if that corporation was a controlled foreign corporation. 
However, the Treasury Department and the IRS request comments on 
whether this proposed rule should apply more broadly.

2. Gain Elimination Transactions

    As described in the Background section of this Preamble, Congress 
enacted section 732(f) to address concerns that a corporate partner 
could otherwise negate the effects of a basis step-down to distributed 
property required under section 732(b) by applying the step-down 
against stock of a distributed corporation. Congress indicated that it 
intended for the control requirement to apply expansively by requiring 
corporate partners to apply section 732(f) whenever the corporate 
partner acquires control (as defined in section 732(f)(5)) of the 
distributed corporation as part of a plan or arrangement. The 
formalistic definition of control, however, fails to anticipate other 
scenarios in which a corporate partner's acquisition of the property of 
a distributed corporation has the same effect. To address these 
scenarios, Congress granted the Secretary authority to promulgate 
regulations necessary to carry out the purposes of section 732(f).
    The Treasury Department and the IRS are concerned that some 
corporate partners might eliminate gain in the stock of a distributed 
corporation while avoiding the effects of a basis step-down in 
transactions in which the corporate partner's ownership of the 
distributed corporation does not satisfy the control requirement. For 
example, a distributed corporation not controlled by a corporate 
partner might subsequently merge into the corporate partner in a 
reorganization under section 368(a) in which gain is not recognized as 
part of a plan or arrangement. In this situation, the gain inherent in 
the stock of the distributed corporation is eliminated, but the basis 
of the distributed corporation's property is not reduced. If section 
732(f) does not apply to this transaction, then the basis step-down is 
negated, contravening the purposes of section 732(f) and General 
Utilities repeal.
    Accordingly, these proposed regulations provide that, in the event 
of a gain elimination transaction, section 732(f) shall apply as though 
the corporate partner acquired control (as defined in section 
732(f)(5)) of the distributed corporation immediately before the gain 
elimination transaction.
    The proposed regulations define several terms for purposes of 
applying this rule. The term ``Corporate Partner'' means a person that 
is classified as a corporation for federal income tax purposes and that 
holds or acquires an interest in a partnership. The term ``Stock'' 
includes other equity interests, including options, warrants and 
similar interests. The term ``Distributed Stock'' means Stock 
distributed by a partnership to a Corporate Partner, or Stock the basis 
of which is determined by reference to the basis of such Stock. 
Distributed Stock also includes Stock owned directly or indirectly by a 
Distributed Corporation if the basis of such Stock has been reduced 
pursuant to section 732(f)(7). The term ``Distributed Corporation'' 
means the issuer of Distributed Stock (or, in the case of an option, 
the issuer of the Stock into which the option is exercisable). The term 
``Gain Elimination Transaction'' means a transaction in which 
Distributed Stock is disposed of and less than all of the gain is 
recognized, unless (1) the transferor of the Distributed Stock receives 
in exchange Stock or a partnership interest that is exchanged basis 
property (as defined in section 7701(a)(44)) with respect to the 
Distributed Stock, or (2) a transferee corporation holds the 
Distributed Stock as transferred basis property (as defined in section 
7701(a)(43)) with respect to a transferor corporation's gain. Examples 
of Gain Elimination Transactions include (without limitation) a 
reorganization under section 368(a) in which the

[[Page 33455]]

Corporate Partner and the Distributed Corporation combine, and a 
distribution of the Distributed Stock by the Corporate Partner to which 
section 355(c)(1) or 361(c)(1) applies.

3. Tiered Partnerships

    The IRS and the Treasury Department are concerned that taxpayers 
could use tiered partnerships to circumvent these regulations and 
section 732(f) generally. Congress specified in the Conference Report 
to the Ticket to Work Act that taxpayers should not be permitted to 
avoid the purposes of section 732(f) through the use of tiered 
partnerships. H.R. Conf. Rep. No. 106-478, 106th Cong., 1st Sess. 174 
(1999). Therefore, these regulations require taxpayers to apply these 
regulations to tiered partnerships in a manner consistent with the 
purpose of section 732(f).
Effective/Applicability Date
    The rules governing aggregation of basis apply to distributions 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register. The rules governing gain 
elimination transactions apply to transactions occurring on or after 
the date these regulations are published as final regulations in the 
Federal Register. The rules governing tiered partnerships apply to 
distributions and transactions occurring on or after the date these 
regulations are published as final regulations in the Federal Register. 
No inference is expressed or implied with respect to distributions or 
transactions occurring before the date these regulations are published 
as final regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. These proposed regulations do 
not impose a collection of information on small entities. Further, 
pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is 
hereby certified that these proposed regulations would not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these proposed regulations 
would primarily affect sophisticated ownership structures with 
interlocking ownership of corporations, partnerships and corporate 
stock. Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Code, these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

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

Drafting Information

    The principal authors of these regulations are Kevin I. Babitz and 
Joseph R. Worst, Office of the Associate Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

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

PART I--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.732-3 also issued under 26 U.S.C. 337(d), 732(f), and 
1502. * * *

0
Par. 2. Section 1.732-3 is revised to read as follows:


Sec.  1.732-3  Corresponding adjustment to basis of assets of a 
distributed corporation controlled by a corporate partner.

    (a) Determination of control. The determination of whether a 
corporate partner that is a member of a consolidated group has control 
of a distributed corporation for purposes of section 732(f) shall be 
made by applying the special aggregate stock ownership rules of Sec.  
1.1502-34.
    (b) Aggregation of basis within consolidated group. With respect to 
distributed stock of a corporation, if the following two conditions are 
met, then section 732(f) shall apply only to the extent that the 
partnership's adjusted basis in the distributed stock immediately 
before the distribution exceeds the aggregate basis of the distributed 
stock of the corporation in the hands of corporate partners that are 
members of the same consolidated group (as defined in Sec.  1.1502-
1(h)) immediately after the distribution:
    (1) Two or more of the corporate partners receive a distribution of 
stock in another corporation; and
    (2) The corporation, the stock of which was distributed by the 
partnership, is or becomes a member of the distributee partners' 
consolidated group following the distribution.
    (c) Application of section 732(f) to Gain Elimination 
Transactions--(1) General rule. In the event of a Gain Elimination 
Transaction, section 732(f) shall apply as though the Corporate Partner 
acquired control (as defined in section 732(f)(5)) of the Distributed 
Corporation immediately before the Gain Elimination Transaction.
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (c):
    (i) Corporate Partner. The term Corporate Partner means a person 
that is classified a corporation for federal income tax purposes and 
that holds or acquires an interest in a partnership.
    (ii) Stock. The term Stock includes other equity interests, 
including options, warrants and similar interests.
    (iii) Distributed Stock. The term Distributed Stock means Stock 
distributed by a partnership to a Corporate Partner, or Stock the basis 
of which is determined by reference to the basis of such Stock. 
Distributed Stock also includes Stock owned directly or indirectly by a 
Distributed Corporation if the basis of such Stock has been reduced 
pursuant to section 732(f).
    (iv) Distributed Corporation. The term Distributed Corporation 
means the issuer of Distributed Stock (or, in the case of an option, 
the issuer of the Stock into which the option is exercisable).
    (v) Gain Elimination Transaction. The term Gain Elimination 
Transaction means a transaction in which Distributed Stock is disposed 
of and less than all of the gain is recognized unless--
    (A) The transferor of the Distributed Stock receives in exchange 
Stock or a partnership interest that is exchanged basis property (as 
defined in section 7701(a)(44)) with respect to the Distributed Stock, 
or
    (B) A transferee corporation holds the Distributed Stock as 
transferred basis property (as defined in section

[[Page 33456]]

7701(a)(43)) with respect to the transferor corporation's gain. A Gain 
Elimination Transaction includes (without limitation) a reorganization 
under section 368(a) in which the Corporate Partner and the Distributed 
Corporation combine, and a distribution of the Distributed Stock by the 
Corporate Partner to which section 355(c)(1) or 361(c)(1) applies.
    (d) Tiered partnerships. The rules of this section shall apply to 
tiered partnerships in a manner that is consistent with the purposes of 
section 732(f).
    (e) Effective/applicability date. The rules governing aggregation 
of basis in paragraph (b) of these regulations apply to distributions 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register. The rules governing gain 
elimination transactions in paragraph (c) of this section apply to 
transactions occurring on or after the date these regulations are 
published as final regulations in the Federal Register. The rules 
governing tiered partnerships in paragraph (d) of this section apply to 
distributions and transactions occurring on or after the date these 
regulations are published as final regulations in the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-14404 Filed 6-11-15; 8:45 am]
 BILLING CODE 4830-01-P