Proposed Removal of Temporary Regulations on a Partner's Share of a Partnership Liability for Disguised Sale Purposes, 28397-28401 [2018-13129]

Download as PDF Federal Register / Vol. 83, No. 118 / Tuesday, June 19, 2018 / Proposed Rules CPSA. The only laboratories that are expected to provide such services are those that anticipate receiving sufficient revenue from providing the mandated testing to justify accepting the requirements as a business decision. Laboratories that do not expect to receive sufficient revenue from these services to justify accepting these requirements would not likely pursue accreditation for this purpose. Similarly, amending the part 1112 rule to include the NOR for stationary activity centers would not have a significant adverse impact on small laboratories. Moreover, based upon the number of laboratories in the United States that have applied for CPSC acceptance of the accreditation to test for conformance to other juvenile product standards, we expect that only a few laboratories will seek CPSC acceptance of their accreditation to test for conformance with the stationary activity center standard. Most of these laboratories will have already been accredited to test for conformance to other juvenile product standards and the only costs to them would be the cost of adding the stationary activity center standard to their scope of accreditation. As a consequence, the Commission certifies that the proposed notice requirements for the stationary activity center standard will not have a significant impact on a substantial number of small entities. XIII. Request for Comments This proposed rule begins a rulemaking proceeding under section 104(b) of the CPSIA to issue a consumer product safety standard for stationary activity centers. We invite all interested persons to submit comments on any aspect of the proposed rule. In particular, the Commission invites comments on the necessity of additional requirements pertaining to the potential fraying of the support straps on SACs. Comments should be submitted in accordance with the instructions in the ADDRESSES section at the beginning of this notice. List of Subjects daltland on DSKBBV9HB2PROD with PROPOSALS 16 CFR Part 1112 Administrative practice and procedure, Audit, Consumer protection, Reporting and recordkeeping requirements, Third party conformity assessment body. 16 CFR Part 1238 Consumer protection, Imports, Incorporation by reference, Infants and children, Labeling, Law enforcement, and Toys. VerDate Sep<11>2014 17:28 Jun 18, 2018 Jkt 244001 For the reasons discussed in the preamble, the Commission proposes to amend Title 16 of the Code of Federal Regulations as follows: PART 1112—REQUIREMENTS PERTAINING TO THIRD PARTY CONFORMITY ASSESSMENT BODIES 1. The authority citation for part 1112 continues to read as follows: ■ Authority: 15 U.S.C. 2063; Pub. L. 110– 314, section 3, 122 Stat. 3016, 3017 (2008). 2. Amend § 1112.15 by adding paragraphs (b)(45) through (47) to read as follows: ■ § 1112.15 When can a third party conformity assessment body apply for CPSC acceptance for a particular CPSC rule or test method? 28397 20814, telephone 301–504–7923, or at the National Archives and Records Administration (NARA). For information on the availability of this material at NARA, call 202–741–6030, or go to: http://www.archives.gov/ federal_register/code_of_ federalregulations/ibr_locations.html. Alberta E. Mills, Secretary, Consumer Product Safety Commission. [FR Doc. 2018–13024 Filed 6–18–18; 8:45 am] BILLING CODE 6355–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service * * * * (b) The CPSC has published the requirements for accreditation for third party conformity assessment bodies to assess conformity for the following CPSC rules or test methods: * * * * * (45) [Reserved] (46) [Reserved] (47) 16 CFR part 1238, Safety Standard for Stationary Activity Centers. * * * * * ■ 3. Add part 1238 to read as follows: 26 CFR Part 1 PART 1238—SAFETY STANDARD FOR STATIONARY ACTIVITY CENTERS SUMMARY: * Sec. 1238.1 Scope. 1238.2 Requirements for stationary activity centers. Authority: Sec. 104, Pub. L. 110–314, 122 Stat. 3016 (15 U.S.C. 2056a). § 1238.1 Scope. This part establishes a consumer product safety standard for stationary activity centers. § 1238.2 Requirements for stationary activity centers. Each stationary activity center must comply with all applicable provisions of ASTM F2012–18 ε1, Standard Consumer Safety Specification for Stationary Activity Centers, approved on May 18, 2018. The Director of the Federal Register approves this incorporation by reference in accordance with 5 U.S.C. 552(a) and 1 CFR part 51. You may obtain a copy from ASTM International, 100 Bar Harbor Drive, P.O. Box 0700, West Conshohocken, PA 19428; http:// www.astm.org/cpsc.htm. You may inspect a copy at the Office of the Secretary, U.S. Consumer Product Safety Commission, Room 820, 4330 East West Highway, Bethesda, MD PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 [REG–131186–17] RIN 1545–BO05 Proposed Removal of Temporary Regulations on a Partner’s Share of a Partnership Liability for Disguised Sale Purposes Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking; public hearing; partial withdrawal of notice of proposed rulemaking. AGENCY: This document contains proposed regulations concerning how partnership liabilities are allocated for disguised sale purposes. The proposed regulations, if finalized, would replace existing temporary regulations with final regulations that were in effect prior to the temporary regulations. This document also partially withdraws proposed regulations cross-referencing the temporary regulations. These regulations affect partnerships and their partners. Finally, this document provides notice of a public hearing on these proposed regulations. DATES: Written or electronic comments must be received by July 19, 2018. A public hearing will be held at 10:00 a.m. on August 21, 2018. Outlines of topics to be discussed at the public hearing must be received by August 3, 2018. ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–131186–17), 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–131186– 17), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, or sent electronically, E:\FR\FM\19JNP1.SGM 19JNP1 28398 Federal Register / Vol. 83, No. 118 / Tuesday, June 19, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS via the Federal eRulemaking Portal site at http://www.regulations.gov (indicate IRS and REG–131186–17). The public hearing will be held in the IRS Auditorium, Internal Revenue Service Building, 1111 Constitution Ave. NW, Washington, DC 20224. FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Caroline E. Hay or Deane M. Burke at (202) 317–5279; concerning the submission of comments, the hearing, or to be placed on the building access list to attend the hearing, Regina L. Johnson at (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background This document proposes amendments to the Income Tax Regulations (26 CFR part 1) under section 707 of the Internal Revenue Code (Code) regarding allocations of partnership liabilities for disguised sale purposes. Section 707(a)(2)(B) generally provides that, under regulations prescribed by the Secretary of the Treasury (Secretary), related transfers to and by a partnership that, when viewed together, are more properly characterized as a sale or exchange of property, will be treated either as a transaction between the partnership and one who is not a partner or between two or more partners acting other than in their capacity as partners (generally referred to as ‘‘disguised sales’’). The Department of the Treasury (Treasury Department) and the IRS published a notice of proposed rulemaking (REG–119305–11) in the Federal Register (79 FR 4826) on January 30, 2014, to amend the thenexisting regulations under section 707 relating to disguised sales of property to or by a partnership and under section 752 concerning the treatment of partnership liabilities (2014 Proposed Regulations). The 2014 Proposed Regulations provided certain technical rules intended to clarify the application of the disguised sale rules under section 707 and also contained rules regarding the sharing of partnership recourse and nonrecourse liabilities under section 752. A public hearing on the 2014 Proposed Regulations was not requested or held, but the Treasury Department and the IRS received written comments. Based on a comment received on the 2014 Proposed Regulations requesting that guidance under section 752 regarding a partner’s share of partnership liabilities apply for disguised sale purposes, the Treasury Department and the IRS reconsidered the rules under § 1.707–5(a)(2) of the VerDate Sep<11>2014 17:28 Jun 18, 2018 Jkt 244001 2014 Proposed Regulations for determining a partner’s share of partnership liabilities for purposes of section 707. On October 5, 2016, the Treasury Department and the IRS published in the Federal Register (81 FR 69282) final and temporary regulations (T.D. 9788) implementing a new rule concerning the allocation of liabilities for section 707 purposes. On November 17, 2016, the Treasury Department and the IRS published in the Federal Register (81 FR 80993 and 81 FR 80994) two correcting amendments to T.D. 9788 (the temporary regulations as so corrected, 707 Temporary Regulations). T.D. 9788 also contained rules concerning the treatment of ‘‘bottom dollar payment obligations’’ (752 Temporary Regulations). The 707 Temporary Regulations were incorporated by cross reference in a notice of proposed rulemaking (REG– 122855–15) published on October 5, 2016, in the Federal Register (81 FR 69301) (707 Proposed Regulations). That notice of proposed rulemaking also incorporated by cross reference the 752 Temporary Regulations and included new proposed regulations under sections 704 and 752 (752 Proposed Regulations). Also on October 5, 2016, the Treasury Department and the IRS published final regulations under section 707 and § 1.752–3 (T.D. 9787) in the Federal Register (81 FR 6929). T.D. 9787 was the subject of a correction notice published in the Federal Register (81 FR 80587) on November 16, 2016 (the final regulations as so corrected, 707 Final Regulations). The 707 Temporary Regulations, in response to the comment received on the 2014 Proposed Regulations, adopted an approach that requires a partner to apply the same percentage used to determine the partner’s share of excess nonrecourse liabilities under § 1.752– 3(a)(3) (with certain limitations) in determining the partner’s share of all partnership liabilities for disguised sale purposes. Also in response to the comment, the 707 Temporary Regulations provide that a partner’s share of a partnership liability for section 707 purposes shall not exceed the partner’s share of the partnership liability under section 752 and applicable regulations. The 707 Temporary Regulations reserve on the treatment, for disguised sale purposes, of an obligation that would be treated as a recourse liability under § 1.752–1(a)(1) or a nonrecourse liability under § 1.752– 1(a)(2) if the liability was treated as a partnership liability for purposes of section 752. The Treasury Department and the IRS received comments PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 supporting the approach taken in the 707 Temporary Regulations, but also received comments expressing concern that a new approach was adopted by temporary regulations rather than in proposed regulations, which denied taxpayers the ability to provide comment prior to the 707 Temporary Regulations being effective. On April 21, 2017, the President issued Executive Order 13789 (E.O. 13789), ‘‘Executive Order on Identifying and Reducing Tax Regulatory Burdens’’ (82 FR 19317, April 26, 2017), which directed the Secretary to review all significant tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate the burdens of regulations that (i) impose an undue financial burden on U.S. taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) exceed the statutory authority of the IRS. E.O. 13789 further directed the Secretary to submit to the President within 60 days an interim report identifying regulations that meet these criteria. Notice 2017–38 (2017–30 IRB 147 (July 24, 2017)) included the 707 Temporary Regulations in a list of eight regulations identified by the Secretary in the interim report as meeting at least one of the first two criteria specified in E.O. 13789. E.O. 13789 further directed the Secretary to submit to the President and publish in the Federal Register a report recommending specific actions to mitigate the burden imposed by regulations identified in the interim report. On October 16, 2017, the Secretary published this second report in the Federal Register (82 FR 48013), ‘‘Second Report to the President on Identifying and Reducing Tax Regulatory Burdens’’ (Second Report). The Second Report stated that, while the Treasury Department and the IRS believe that the 707 Temporary Regulations’ novel approach to addressing disguised sale treatment merits further study, the Treasury Department and the IRS agree with commenters that such a change should be studied systematically. The second report further stated that the Treasury Department and the IRS therefore would consider whether the 707 Temporary Regulations and the 707 Proposed Regulations should be removed and withdrawn, respectively, and the prior regulations reinstated. After further consideration, the Treasury Department and the IRS are withdrawing the 707 Proposed Regulations and proposing to remove the 707 Temporary Regulations and reinstate the regulations under § 1.707–5(a)(2) as in effect prior to the 707 Temporary Regulations and as E:\FR\FM\19JNP1.SGM 19JNP1 Federal Register / Vol. 83, No. 118 / Tuesday, June 19, 2018 / Proposed Rules daltland on DSKBBV9HB2PROD with PROPOSALS contained in 26 CFR part 1 revised as of April 1, 2016 (Prior 707 Regulations). The Second Report also stated that the Treasury Department and the IRS believe that the 752 Temporary Regulations concerning bottom dollar payment obligations should be retained because, consistent with the view of a number of commenters, the 752 Temporary Regulations are needed to prevent abuses and do not meaningfully increase regulatory burdens for the taxpayers affected. The Treasury Department and the IRS will continue to consider these issues and continue to request comments concerning the 752 Proposed Regulations. The Second Report did not identify the 707 Final Regulations, which are not affected by this notice of proposed rulemaking. Explanation of Provisions In addition to withdrawing the 707 Proposed Regulations, this notice of proposed rulemaking proposes to remove the 707 Temporary Regulations and reinstate the Prior 707 Regulations concerning the allocation of liabilities for disguised sale purposes. In determining a partners’ share of a partnership liability for disguised sale purposes, § 1.707–5(a)(2) of the Prior 707 Regulations prescribed separate rules for a partnership’s recourse liability and a partnership’s nonrecourse liability. This notice of proposed rulemaking adopts those same rules. Under § 1.707–5(a)(2)(i) of the Prior 707 Regulations and, if finalized, these proposed regulations, a partner’s share of a partnership’s recourse liability equals the partner’s share of the liability under section 752 and the regulations thereunder. A partnership liability is a recourse liability to the extent that the obligation is a recourse liability under § 1.752–1(a)(1). Under § 1.707–5(a)(2)(ii) of the Prior 707 Regulations and, if finalized, these proposed regulations, a partner’s share of a partnership’s nonrecourse liability is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under § 1.752– 3(a)(3). A partnership liability is a nonrecourse liability of the partnership to the extent that the obligation is a nonrecourse liability under § 1.752– 1(a)(2). The 707 Final Regulations limited the available methods for determining a partner’s share of an excess nonrecourse liability under § 1.752–3(a)(3) for disguised sale purposes. Under the 707 Final Regulations, a partner’s share of an excess nonrecourse liability for disguised sale purposes is determined only in accordance with the partner’s VerDate Sep<11>2014 17:28 Jun 18, 2018 Jkt 244001 share of partnership profits and by taking into account all facts and circumstances relating to the economic arrangement of the partners. Thus, the significant item method, the alternative method, and the additional method as defined in § 1.752–3(a)(3) do not apply for purposes of determining a partner’s share of a partnership’s nonrecourse liability for disguised sale purposes. In addition, § 1.707–5(a)(2)(i) and (ii) of the Prior 707 Regulations provided that a partnership liability is a recourse or nonrecourse liability to the extent that the obligation would be a recourse liability under § 1.752–1(a)(1) or a nonrecourse liability under § 1.752– 1(a)(2), respectively, if the liability was treated as a partnership liability for purposes of section 752 (§ 1.752–7 contingent liabilities). This notice of proposed rulemaking reinstates these rules concerning § 1.752–7 contingent liabilities. However, as noted in the preamble to T.D. 9788, the Treasury Department and the IRS continue to believe additional guidance would be helpful in this area. The preamble to T.D. 9788 explained that, in many cases, § 1.752–7 contingent liabilities may constitute qualified liabilities that would not be taken into account for purposes of determining a disguised sale. Some commenters on the 2014 Proposed Regulations noted that there may be circumstances in which certain transfers of § 1.752–7 contingent liabilities to a partnership may be abusive. The Treasury Department and the IRS continue to study the issue of the effect of contingent liabilities with respect to section 707, as well as other sections of the Code. Finally, this notice of proposed rulemaking reinstates Examples 2, 3, 7, and 8 under § 1.707–5(f) of the Prior 707 Regulations. However, language is added to Example 3 to reflect an amendment to § 1.707–5(a)(3) in the 707 Final Regulations regarding an anticipated reduction in a partner’s share of a liability that is not subject to the entrepreneurial risks of partnership operations. Proposed Applicability Date The 707 Temporary Regulations are proposed to be removed thirty days following the date these regulations are published as final regulations in the Federal Register. The amendments to § 1.707–5 are proposed to apply to any transaction with respect to which all transfers occur on or after thirty days following the date these regulations are published as final regulations in the Federal Register. However, a partnership and its partners may apply all the rules in these proposed PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 28399 regulations in lieu of the 707 Temporary Regulations to any transaction with respect to which all transfers occur on or after January 3, 2017. Special Analyses These proposed regulations are not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. These proposed regulations are expected to be an Executive Order 13771 deregulatory action. Details on the estimated cost savings of these proposed regulations will be provided in the final regulations. Because these proposed regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Public Hearing Comments Concerning These Proposed Regulations 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 http://www.regulations.gov or upon request. A public hearing has been scheduled for August 21, 2018, beginning at 10:00 a.m. in the IRS Auditorium of the Internal Revenue Service Building, 1111 Constitution Avenue NW, Washington, DC 20224. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 15 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble. The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit a signed original and eight E:\FR\FM\19JNP1.SGM 19JNP1 28400 Federal Register / Vol. 83, No. 118 / Tuesday, June 19, 2018 / Proposed Rules (8) copies of written or electronic comments by July 19, 2018 and an outline of the topics to be discussed and the time to be devoted to each topic by August 3, 2018. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. Comments Concerning Approach in the 707 Temporary Regulations As discussed in the Second Report, the Treasury Department and the IRS believe that the 707 Temporary Regulations’ novel approach (treating all liabilities as nonrecourse and allocating in accordance with § 1.752–3(a)(3) for disguised sale purposes) merits further study. The 707 Temporary Regulations explained that this approach reflects the overall economic arrangements of the partners as, in most cases, a partnership will satisfy its liabilities with partnership profits, the partnership’s assets do not become worthless, and the payment obligations of partners or related persons are not called upon. The Treasury Department and the IRS continue to study this issue and request comments on the approach adopted in the 707 Temporary Regulations. The request for comments in this paragraph on the approach of the 707 Temporary Regulations is not the subject of the scheduled public hearing. Drafting Information The principal authors of these proposed regulations are Caroline E. Hay and Deane M. Burke, 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. daltland on DSKBBV9HB2PROD with PROPOSALS Partial Withdrawal of Notice of Proposed Rulemaking Accordingly, under the authority of 26 U.S.C. 7805, §§ 1.707–5 and 1.707–9 of the notice of proposed rulemaking (REG–122855–15) that was published in the Federal Register on October 5, 2016 (81 FR 69301) are withdrawn. Proposed Amendments to the Regulations For the reasons stated in the preamble, 26 CFR part 1 is proposed to be amended as follows: VerDate Sep<11>2014 17:28 Jun 18, 2018 Jkt 244001 PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.707–5 is amended by revising paragraph (a)(2) and Examples 2, 3, 7, and 8 in paragraph (f) to read as follows: ■ § 1.707–5 Disguised sales of property to partnership; special rules relating to liabilities. (a) * * * (2) Partner’s share of liability. A partner’s share of any liability of the partnership is determined under the following rules: (i) Recourse liability. A partner’s share of a recourse liability of the partnership equals the partner’s share of the liability under the rules of section 752 and the regulations thereunder. A partnership liability is a recourse liability to the extent that the obligation is a recourse liability under § 1.752–1(a)(1) or would be treated as a recourse liability under that section if it were treated as a partnership liability for purposes of that section. (ii) Nonrecourse liability. A partner’s share of a nonrecourse liability of the partnership is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under § 1.752– 3(a)(3). A partnership liability is a nonrecourse liability of the partnership to the extent that the obligation is a nonrecourse liability under § 1.752– 1(a)(2) or would be a nonrecourse liability of the partnership under § 1.752–1(a)(2) if it were treated as a partnership liability for purposes of that section. * * * * * (f) * * * Example 2. Partnership’s assumption of recourse liability encumbering transferred property. (i) C transfers property Y to a partnership. At the time of its transfer to the partnership, property Y has a fair market value of $10,000,000 and is subject to an $8,000,000 liability that C incurred, immediately before transferring property Y to the partnership, in order to finance other expenditures. Upon the transfer of property Y to the partnership, the partnership assumed the liability encumbering that property. The partnership assumed this liability solely to acquire property Y. Under section 752 and the regulations thereunder, immediately after the partnership’s assumption of the liability encumbering property Y, the liability is a recourse liability of the partnership and C’s share of that liability is $7,000,000. (ii) Under the facts of this example, the liability encumbering property Y is not a PO 00000 Frm 00011 Fmt 4702 Sfmt 4702 qualified liability. Accordingly, the partnership’s assumption of the liability results in a transfer of consideration to C in connection with C’s transfer of property Y to the partnership in the amount of $1,000,000 (the excess of the liability assumed by the partnership ($8,000,000) over C’s share of the liability immediately after the assumption ($7,000,000)). See paragraphs (a)(1) and (2) of this section. Example 3. Subsequent reduction of transferring partner’s share of liability. (i) The facts are the same as in Example 2. In addition, property Y is a fully leased office building, the rental income from property Y is sufficient to meet debt service, and the remaining term of the liability is ten years. It is anticipated that, three years after the partnership’s assumption of the liability, C’s share of the liability under section 752 will be reduced to zero because of a shift in the allocation of partnership losses pursuant to the terms of the partnership agreement. Under the partnership agreement, this shift in the allocation of partnership losses is dependent solely on the passage of time. (ii) Under paragraph (a)(3) of this section, if the reduction in C’s share of the liability was anticipated at the time of C’s transfer, was not subject to the entrepreneurial risks of partnership operations, and was part of a plan that has as one of its principal purposes minimizing the extent of sale treatment under § 1.707–3 (that is, a principal purpose of allocating a large percentage of losses to C in the first three years when losses were not likely to be realized was to minimize the extent to which C’s transfer would be treated as part of a sale), C’s share of the liability immediately after the assumption is treated as equal to C’s reduced share. * * * * * Example 7. Partnership’s assumptions of liabilities encumbering properties transferred pursuant to a plan. (i) Pursuant to a plan, G and H transfer property 1 and property 2, respectively, to an existing partnership in exchange for interests in the partnership. At the time the properties are transferred to the partnership, property 1 has a fair market value of $10,000 and an adjusted tax basis of $6,000, and property 2 has a fair market value of $10,000 and an adjusted tax basis of $4,000. At the time properties 1 and 2 are transferred to the partnership, a $6,000 nonrecourse liability (liability 1) is secured by property 1 and a $7,000 recourse liability of F (liability 2) is secured by property 2. Properties 1 and 2 are transferred to the partnership, and the partnership takes subject to liability 1 and assumes liability 2. G and H incurred liabilities 1 and 2 immediately prior to transferring properties 1 and 2 to the partnership and used the proceeds for personal expenditures. The liabilities are not qualified liabilities. Assume that G and H are each allocated $2,000 of liability 1 in accordance with § 1.707– 5(a)(2)(ii) (which determines a partner’s share of a nonrecourse liability). Assume further that G’s share of liability 2 is $3,500 and H’s share is $0 in accordance with § 1.707– 5(a)(2)(i) (which determines a partner’s share of a recourse liability). (ii) G and H transferred properties 1 and 2 to the partnership pursuant to a plan. E:\FR\FM\19JNP1.SGM 19JNP1 Federal Register / Vol. 83, No. 118 / Tuesday, June 19, 2018 / Proposed Rules Accordingly, the partnership’s taking subject to liability 1 is treated as a transfer of only $500 of consideration to G (the amount by which liability 1 ($6,000) exceeds G’s share of liabilities 1 and 2 ($5,500)), and the partnership’s assumption of liability 2 is treated as a transfer of only $5,000 of consideration to H (the amount by which liability 2 ($7,000) exceeds H’s share of liabilities 1 and 2 ($2,000)). G is treated under the rule in § 1.707–3 as having sold $500 of the fair market value of property 1 in exchange for the partnership’s taking subject to liability 1 and H is treated as having sold $5,000 of the fair market value of property 2 in exchange for the assumption of liability 2. Example 8. Partnership’s assumption of liability pursuant to a plan to avoid sale treatment of partnership assumption of another liability. (i) The facts are the same as in Example 7, except that— (A) H transferred the proceeds of liability 2 to the partnership; and (B) H incurred liability 2 in an attempt to reduce the extent to which the partnership’s taking subject to liability 1 would be treated as a transfer of consideration to G (and thereby reduce the portion of G’s transfer of property 1 to the partnership that would be treated as part of a sale). (ii) Because the partnership assumed liability 2 with a principal purpose of reducing the extent to which the partnership’s taking subject to liability 1 would be treated as a transfer of consideration to G, liability 2 is ignored in applying paragraph (a)(3) of this section. Accordingly, the partnership’s taking subject to liability 1 is treated as a transfer of $4,000 of consideration to G (the amount by which liability 1 ($6,000) exceeds G’s share of liability 1 ($2,000)). On the other hand, the partnership’s assumption of liability 2 is not treated as a transfer of any consideration to H because H’s share of that liability equals $7,000 as a result of H’s transfer of $7,000 in money to the partnership. * * * § 1.707–5T * * [Removed] Par. 3. Section 1.707–5T is removed. Par. 4. Section 1.707–9 is amended by revising paragraph (a)(4) and removing paragraph (a)(5). The revisions read as follows: ■ ■ daltland on DSKBBV9HB2PROD with PROPOSALS § 1.707–9 rules. Effective dates and transitional (a) * * * (4) Section 1.707–5(a)(2) and (f) Examples 2, 3, 7, and 8. (i) Section 1.707–5(a)(2) and (f) Examples 2, 3, 7, and 8, as contained in 26 CFR part 1 revised as of April 1, 2016, apply to any transaction with respect to which any transfers occur before January 3, 2017. (ii) For any transaction with respect to which all transfers occur on or after January 3, 2017, and any of such transfers occurs before the date that is thirty days after the date these regulations are published as final in the Federal Register, see § 1.707–9T(a)(5) as VerDate Sep<11>2014 17:28 Jun 18, 2018 Jkt 244001 contained in 26 CFR part 1 revised as of April 1, 2017. (iii) Section 1.707–5(a)(2) and (f) Examples 2, 3, 7, and 8 apply to any transaction with respect to which all transfers occur on or after the date that is thirty days after the date these regulations are published as final in the Federal Register. * * * * * § 1.707–9T ■ [Removed] Par. 5. Section 1.707–9T is removed. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2018–13129 Filed 6–18–18; 8:45 am] BILLING CODE 4830–01–P ENVIRONMENTAL PROTECTION AGENCY 40 CFR Part 26 [EPA–HQ–ORD–2018–0280; FRL–9977–78] RIN 2080–AA13 Notification of Submission to the Secretary of Agriculture; Harmonization of Regulations Safeguarding Human Test Subjects Environmental Protection Agency (EPA). ACTION: Notification of submission to the Secretary of Agriculture. AGENCY: This document notifies the public as required by the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) that the EPA Administrator has forwarded to the Secretary of the United States Department of Agriculture (USDA) a draft regulatory document concerning ‘‘Harmonize 40 CFR 26 Subparts C, D, and K with Subpart A (the Common Rule)’’. The draft regulatory document is not available to the public until after it has been signed and made available by EPA. DATES: See Unit I. under SUPPLEMENTARY INFORMATION. ADDRESSES: The docket for this action, identified by docket identification (ID) number EPA–HQ–ORD–2018–0280, is available at http://www.regulations.gov or at the Environmental Protection Agency Docket Center (EPA/DC), West William Jefferson Clinton Bldg., Rm. 3334, 1301 Constitution Ave. NW, Washington, DC 20460–0001. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566–1744. Please review the visitor instructions and SUMMARY: PO 00000 Frm 00012 Fmt 4702 Sfmt 9990 28401 additional information about the docket available at http://www.epa.gov/ dockets. Greg Susanke, Office of the Science Advisor, Environmental Protection Agency, 1200 Pennsylvania Ave. NW, Washington, DC 20460–0001; telephone number: (202) 564–0221; email address: staff_osa@ epa.gov. FOR FURTHER INFORMATION CONTACT: SUPPLEMENTARY INFORMATION: I. What action is EPA taking? Section 25(a)(2)(A) of FIFRA requires the EPA Administrator to provide the Secretary of USDA with a copy of any draft proposed rule at least 60 days before signing it in proposed form for publication in the Federal Register. The draft proposed rule is not available to the public until after it has been signed by EPA. If the Secretary of USDA comments in writing regarding the draft proposed rule within 30 days after receiving it, the EPA Administrator shall include the comments of the Secretary of USDA and the EPA Administrator’s response to those comments with the proposed rule that publishes in the Federal Register. If the Secretary of USDA does not comment in writing within 30 days after receiving the draft proposed rule, the EPA Administrator may sign the proposed rule for publication in the Federal Register any time after the 30-day period. II. Do any statutory and Executive Order reviews apply to this notification? No. This document is merely a notification of submission to the Secretary of USDA. As such, none of the regulatory assessment requirements apply to this document. List of Subjects in 40 CFR Part 26 Environmental protection, Administrative practice and procedures, Human research, Pesticides and pests. Dated: June 4, 2018. Richard P. Keigwin, Director, Office of Pesticide Programs. [FR Doc. 2018–12708 Filed 6–18–18; 8:45 am] BILLING CODE 6560–50–P E:\FR\FM\19JNP1.SGM 19JNP1

Agencies

[Federal Register Volume 83, Number 118 (Tuesday, June 19, 2018)]
[Proposed Rules]
[Pages 28397-28401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-13129]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-131186-17]
RIN 1545-BO05


Proposed Removal of Temporary Regulations on a Partner's Share of 
a Partnership Liability for Disguised Sale Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; public hearing; partial 
withdrawal of notice of proposed rulemaking.

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

SUMMARY: This document contains proposed regulations concerning how 
partnership liabilities are allocated for disguised sale purposes. The 
proposed regulations, if finalized, would replace existing temporary 
regulations with final regulations that were in effect prior to the 
temporary regulations. This document also partially withdraws proposed 
regulations cross-referencing the temporary regulations. These 
regulations affect partnerships and their partners. Finally, this 
document provides notice of a public hearing on these proposed 
regulations.

DATES: Written or electronic comments must be received by July 19, 
2018.
    A public hearing will be held at 10:00 a.m. on August 21, 2018. 
Outlines of topics to be discussed at the public hearing must be 
received by August 3, 2018.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-131186-17), 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-
131186-17), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC, or sent electronically,

[[Page 28398]]

via the Federal eRulemaking Portal site at http://www.regulations.gov 
(indicate IRS and REG-131186-17). The public hearing will be held in 
the IRS Auditorium, Internal Revenue Service Building, 1111 
Constitution Ave. NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Caroline E. Hay or Deane M. Burke at (202) 317-5279; concerning the 
submission of comments, the hearing, or to be placed on the building 
access list to attend the hearing, Regina L. Johnson at (202) 317-6901 
(not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document proposes amendments to the Income Tax Regulations (26 
CFR part 1) under section 707 of the Internal Revenue Code (Code) 
regarding allocations of partnership liabilities for disguised sale 
purposes. Section 707(a)(2)(B) generally provides that, under 
regulations prescribed by the Secretary of the Treasury (Secretary), 
related transfers to and by a partnership that, when viewed together, 
are more properly characterized as a sale or exchange of property, will 
be treated either as a transaction between the partnership and one who 
is not a partner or between two or more partners acting other than in 
their capacity as partners (generally referred to as ``disguised 
sales'').
    The Department of the Treasury (Treasury Department) and the IRS 
published a notice of proposed rulemaking (REG-119305-11) in the 
Federal Register (79 FR 4826) on January 30, 2014, to amend the then-
existing regulations under section 707 relating to disguised sales of 
property to or by a partnership and under section 752 concerning the 
treatment of partnership liabilities (2014 Proposed Regulations). The 
2014 Proposed Regulations provided certain technical rules intended to 
clarify the application of the disguised sale rules under section 707 
and also contained rules regarding the sharing of partnership recourse 
and nonrecourse liabilities under section 752. A public hearing on the 
2014 Proposed Regulations was not requested or held, but the Treasury 
Department and the IRS received written comments. Based on a comment 
received on the 2014 Proposed Regulations requesting that guidance 
under section 752 regarding a partner's share of partnership 
liabilities apply for disguised sale purposes, the Treasury Department 
and the IRS reconsidered the rules under Sec.  1.707-5(a)(2) of the 
2014 Proposed Regulations for determining a partner's share of 
partnership liabilities for purposes of section 707.
    On October 5, 2016, the Treasury Department and the IRS published 
in the Federal Register (81 FR 69282) final and temporary regulations 
(T.D. 9788) implementing a new rule concerning the allocation of 
liabilities for section 707 purposes. On November 17, 2016, the 
Treasury Department and the IRS published in the Federal Register (81 
FR 80993 and 81 FR 80994) two correcting amendments to T.D. 9788 (the 
temporary regulations as so corrected, 707 Temporary Regulations). T.D. 
9788 also contained rules concerning the treatment of ``bottom dollar 
payment obligations'' (752 Temporary Regulations). The 707 Temporary 
Regulations were incorporated by cross reference in a notice of 
proposed rulemaking (REG-122855-15) published on October 5, 2016, in 
the Federal Register (81 FR 69301) (707 Proposed Regulations). That 
notice of proposed rulemaking also incorporated by cross reference the 
752 Temporary Regulations and included new proposed regulations under 
sections 704 and 752 (752 Proposed Regulations). Also on October 5, 
2016, the Treasury Department and the IRS published final regulations 
under section 707 and Sec.  1.752-3 (T.D. 9787) in the Federal Register 
(81 FR 6929). T.D. 9787 was the subject of a correction notice 
published in the Federal Register (81 FR 80587) on November 16, 2016 
(the final regulations as so corrected, 707 Final Regulations).
    The 707 Temporary Regulations, in response to the comment received 
on the 2014 Proposed Regulations, adopted an approach that requires a 
partner to apply the same percentage used to determine the partner's 
share of excess nonrecourse liabilities under Sec.  1.752-3(a)(3) (with 
certain limitations) in determining the partner's share of all 
partnership liabilities for disguised sale purposes. Also in response 
to the comment, the 707 Temporary Regulations provide that a partner's 
share of a partnership liability for section 707 purposes shall not 
exceed the partner's share of the partnership liability under section 
752 and applicable regulations. The 707 Temporary Regulations reserve 
on the treatment, for disguised sale purposes, of an obligation that 
would be treated as a recourse liability under Sec.  1.752-1(a)(1) or a 
nonrecourse liability under Sec.  1.752-1(a)(2) if the liability was 
treated as a partnership liability for purposes of section 752. The 
Treasury Department and the IRS received comments supporting the 
approach taken in the 707 Temporary Regulations, but also received 
comments expressing concern that a new approach was adopted by 
temporary regulations rather than in proposed regulations, which denied 
taxpayers the ability to provide comment prior to the 707 Temporary 
Regulations being effective.
    On April 21, 2017, the President issued Executive Order 13789 (E.O. 
13789), ``Executive Order on Identifying and Reducing Tax Regulatory 
Burdens'' (82 FR 19317, April 26, 2017), which directed the Secretary 
to review all significant tax regulations issued on or after January 1, 
2016, and to take concrete action to alleviate the burdens of 
regulations that (i) impose an undue financial burden on U.S. 
taxpayers; (ii) add undue complexity to the Federal tax laws; or (iii) 
exceed the statutory authority of the IRS. E.O. 13789 further directed 
the Secretary to submit to the President within 60 days an interim 
report identifying regulations that meet these criteria. Notice 2017-38 
(2017-30 IRB 147 (July 24, 2017)) included the 707 Temporary 
Regulations in a list of eight regulations identified by the Secretary 
in the interim report as meeting at least one of the first two criteria 
specified in E.O. 13789.
    E.O. 13789 further directed the Secretary to submit to the 
President and publish in the Federal Register a report recommending 
specific actions to mitigate the burden imposed by regulations 
identified in the interim report. On October 16, 2017, the Secretary 
published this second report in the Federal Register (82 FR 48013), 
``Second Report to the President on Identifying and Reducing Tax 
Regulatory Burdens'' (Second Report). The Second Report stated that, 
while the Treasury Department and the IRS believe that the 707 
Temporary Regulations' novel approach to addressing disguised sale 
treatment merits further study, the Treasury Department and the IRS 
agree with commenters that such a change should be studied 
systematically. The second report further stated that the Treasury 
Department and the IRS therefore would consider whether the 707 
Temporary Regulations and the 707 Proposed Regulations should be 
removed and withdrawn, respectively, and the prior regulations 
reinstated. After further consideration, the Treasury Department and 
the IRS are withdrawing the 707 Proposed Regulations and proposing to 
remove the 707 Temporary Regulations and reinstate the regulations 
under Sec.  1.707-5(a)(2) as in effect prior to the 707 Temporary 
Regulations and as

[[Page 28399]]

contained in 26 CFR part 1 revised as of April 1, 2016 (Prior 707 
Regulations).
    The Second Report also stated that the Treasury Department and the 
IRS believe that the 752 Temporary Regulations concerning bottom dollar 
payment obligations should be retained because, consistent with the 
view of a number of commenters, the 752 Temporary Regulations are 
needed to prevent abuses and do not meaningfully increase regulatory 
burdens for the taxpayers affected. The Treasury Department and the IRS 
will continue to consider these issues and continue to request comments 
concerning the 752 Proposed Regulations. The Second Report did not 
identify the 707 Final Regulations, which are not affected by this 
notice of proposed rulemaking.

Explanation of Provisions

    In addition to withdrawing the 707 Proposed Regulations, this 
notice of proposed rulemaking proposes to remove the 707 Temporary 
Regulations and reinstate the Prior 707 Regulations concerning the 
allocation of liabilities for disguised sale purposes. In determining a 
partners' share of a partnership liability for disguised sale purposes, 
Sec.  1.707-5(a)(2) of the Prior 707 Regulations prescribed separate 
rules for a partnership's recourse liability and a partnership's 
nonrecourse liability. This notice of proposed rulemaking adopts those 
same rules.
    Under Sec.  1.707-5(a)(2)(i) of the Prior 707 Regulations and, if 
finalized, these proposed regulations, a partner's share of a 
partnership's recourse liability equals the partner's share of the 
liability under section 752 and the regulations thereunder. A 
partnership liability is a recourse liability to the extent that the 
obligation is a recourse liability under Sec.  1.752-1(a)(1).
    Under Sec.  1.707-5(a)(2)(ii) of the Prior 707 Regulations and, if 
finalized, these proposed regulations, a partner's share of a 
partnership's nonrecourse liability is determined by applying the same 
percentage used to determine the partner's share of the excess 
nonrecourse liability under Sec.  1.752-3(a)(3). A partnership 
liability is a nonrecourse liability of the partnership to the extent 
that the obligation is a nonrecourse liability under Sec.  1.752-
1(a)(2).
    The 707 Final Regulations limited the available methods for 
determining a partner's share of an excess nonrecourse liability under 
Sec.  1.752-3(a)(3) for disguised sale purposes. Under the 707 Final 
Regulations, a partner's share of an excess nonrecourse liability for 
disguised sale purposes is determined only in accordance with the 
partner's share of partnership profits and by taking into account all 
facts and circumstances relating to the economic arrangement of the 
partners. Thus, the significant item method, the alternative method, 
and the additional method as defined in Sec.  1.752-3(a)(3) do not 
apply for purposes of determining a partner's share of a partnership's 
nonrecourse liability for disguised sale purposes.
    In addition, Sec.  1.707-5(a)(2)(i) and (ii) of the Prior 707 
Regulations provided that a partnership liability is a recourse or 
nonrecourse liability to the extent that the obligation would be a 
recourse liability under Sec.  1.752-1(a)(1) or a nonrecourse liability 
under Sec.  1.752-1(a)(2), respectively, if the liability was treated 
as a partnership liability for purposes of section 752 (Sec.  1.752-7 
contingent liabilities). This notice of proposed rulemaking reinstates 
these rules concerning Sec.  1.752-7 contingent liabilities. However, 
as noted in the preamble to T.D. 9788, the Treasury Department and the 
IRS continue to believe additional guidance would be helpful in this 
area. The preamble to T.D. 9788 explained that, in many cases, Sec.  
1.752-7 contingent liabilities may constitute qualified liabilities 
that would not be taken into account for purposes of determining a 
disguised sale. Some commenters on the 2014 Proposed Regulations noted 
that there may be circumstances in which certain transfers of Sec.  
1.752-7 contingent liabilities to a partnership may be abusive. The 
Treasury Department and the IRS continue to study the issue of the 
effect of contingent liabilities with respect to section 707, as well 
as other sections of the Code.
    Finally, this notice of proposed rulemaking reinstates Examples 2, 
3, 7, and 8 under Sec.  1.707-5(f) of the Prior 707 Regulations. 
However, language is added to Example 3 to reflect an amendment to 
Sec.  1.707-5(a)(3) in the 707 Final Regulations regarding an 
anticipated reduction in a partner's share of a liability that is not 
subject to the entrepreneurial risks of partnership operations.

Proposed Applicability Date

    The 707 Temporary Regulations are proposed to be removed thirty 
days following the date these regulations are published as final 
regulations in the Federal Register. The amendments to Sec.  1.707-5 
are proposed to apply to any transaction with respect to which all 
transfers occur on or after thirty days following the date these 
regulations are published as final regulations in the Federal Register. 
However, a partnership and its partners may apply all the rules in 
these proposed regulations in lieu of the 707 Temporary Regulations to 
any transaction with respect to which all transfers occur on or after 
January 3, 2017.

Special Analyses

    These proposed regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Department of the Treasury and the Office 
of Management and Budget regarding review of tax regulations. These 
proposed regulations are expected to be an Executive Order 13771 
deregulatory action. Details on the estimated cost savings of these 
proposed regulations will be provided in the final regulations.
    Because these proposed regulations do not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, 
this notice of proposed rulemaking has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Comments and Public Hearing

Comments Concerning These Proposed Regulations

    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 http://www.regulations.gov or upon request.
    A public hearing has been scheduled for August 21, 2018, beginning 
at 10:00 a.m. in the IRS Auditorium of the Internal Revenue Service 
Building, 1111 Constitution Avenue NW, Washington, DC 20224. Due to 
building security procedures, visitors must enter at the Constitution 
Avenue entrance. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit a signed 
original and eight

[[Page 28400]]

(8) copies of written or electronic comments by July 19, 2018 and an 
outline of the topics to be discussed and the time to be devoted to 
each topic by August 3, 2018. A period of 10 minutes will be allotted 
to each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Comments Concerning Approach in the 707 Temporary Regulations

    As discussed in the Second Report, the Treasury Department and the 
IRS believe that the 707 Temporary Regulations' novel approach 
(treating all liabilities as nonrecourse and allocating in accordance 
with Sec.  1.752-3(a)(3) for disguised sale purposes) merits further 
study. The 707 Temporary Regulations explained that this approach 
reflects the overall economic arrangements of the partners as, in most 
cases, a partnership will satisfy its liabilities with partnership 
profits, the partnership's assets do not become worthless, and the 
payment obligations of partners or related persons are not called upon. 
The Treasury Department and the IRS continue to study this issue and 
request comments on the approach adopted in the 707 Temporary 
Regulations. The request for comments in this paragraph on the approach 
of the 707 Temporary Regulations is not the subject of the scheduled 
public hearing.

Drafting Information

    The principal authors of these proposed regulations are Caroline E. 
Hay and Deane M. Burke, 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.

Partial Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, Sec. Sec.  
1.707-5 and 1.707-9 of the notice of proposed rulemaking (REG-122855-
15) that was published in the Federal Register on October 5, 2016 (81 
FR 69301) are withdrawn.

Proposed Amendments to the Regulations

    For the reasons stated in the preamble, 26 CFR part 1 is proposed 
to be amended as follows:

PART 1--INCOME TAXES

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

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

0
Par. 2. Section 1.707-5 is amended by revising paragraph (a)(2) and 
Examples 2, 3, 7, and 8 in paragraph (f) to read as follows:


Sec.  1.707-5  Disguised sales of property to partnership; special 
rules relating to liabilities.

    (a) * * *
    (2) Partner's share of liability. A partner's share of any 
liability of the partnership is determined under the following rules:
    (i) Recourse liability. A partner's share of a recourse liability 
of the partnership equals the partner's share of the liability under 
the rules of section 752 and the regulations thereunder. A partnership 
liability is a recourse liability to the extent that the obligation is 
a recourse liability under Sec.  1.752-1(a)(1) or would be treated as a 
recourse liability under that section if it were treated as a 
partnership liability for purposes of that section.
    (ii) Nonrecourse liability. A partner's share of a nonrecourse 
liability of the partnership is determined by applying the same 
percentage used to determine the partner's share of the excess 
nonrecourse liability under Sec.  1.752-3(a)(3). A partnership 
liability is a nonrecourse liability of the partnership to the extent 
that the obligation is a nonrecourse liability under Sec.  1.752-
1(a)(2) or would be a nonrecourse liability of the partnership under 
Sec.  1.752-1(a)(2) if it were treated as a partnership liability for 
purposes of that section.
* * * * *
    (f) * * *

    Example 2. Partnership's assumption of recourse liability 
encumbering transferred property. (i) C transfers property Y to a 
partnership. At the time of its transfer to the partnership, 
property Y has a fair market value of $10,000,000 and is subject to 
an $8,000,000 liability that C incurred, immediately before 
transferring property Y to the partnership, in order to finance 
other expenditures. Upon the transfer of property Y to the 
partnership, the partnership assumed the liability encumbering that 
property. The partnership assumed this liability solely to acquire 
property Y. Under section 752 and the regulations thereunder, 
immediately after the partnership's assumption of the liability 
encumbering property Y, the liability is a recourse liability of the 
partnership and C's share of that liability is $7,000,000.
    (ii) Under the facts of this example, the liability encumbering 
property Y is not a qualified liability. Accordingly, the 
partnership's assumption of the liability results in a transfer of 
consideration to C in connection with C's transfer of property Y to 
the partnership in the amount of $1,000,000 (the excess of the 
liability assumed by the partnership ($8,000,000) over C's share of 
the liability immediately after the assumption ($7,000,000)). See 
paragraphs (a)(1) and (2) of this section.
    Example 3. Subsequent reduction of transferring partner's share 
of liability. (i) The facts are the same as in Example 2. In 
addition, property Y is a fully leased office building, the rental 
income from property Y is sufficient to meet debt service, and the 
remaining term of the liability is ten years. It is anticipated 
that, three years after the partnership's assumption of the 
liability, C's share of the liability under section 752 will be 
reduced to zero because of a shift in the allocation of partnership 
losses pursuant to the terms of the partnership agreement. Under the 
partnership agreement, this shift in the allocation of partnership 
losses is dependent solely on the passage of time.
    (ii) Under paragraph (a)(3) of this section, if the reduction in 
C's share of the liability was anticipated at the time of C's 
transfer, was not subject to the entrepreneurial risks of 
partnership operations, and was part of a plan that has as one of 
its principal purposes minimizing the extent of sale treatment under 
Sec.  1.707-3 (that is, a principal purpose of allocating a large 
percentage of losses to C in the first three years when losses were 
not likely to be realized was to minimize the extent to which C's 
transfer would be treated as part of a sale), C's share of the 
liability immediately after the assumption is treated as equal to 
C's reduced share.
* * * * *
    Example 7. Partnership's assumptions of liabilities encumbering 
properties transferred pursuant to a plan. (i) Pursuant to a plan, G 
and H transfer property 1 and property 2, respectively, to an 
existing partnership in exchange for interests in the partnership. 
At the time the properties are transferred to the partnership, 
property 1 has a fair market value of $10,000 and an adjusted tax 
basis of $6,000, and property 2 has a fair market value of $10,000 
and an adjusted tax basis of $4,000. At the time properties 1 and 2 
are transferred to the partnership, a $6,000 nonrecourse liability 
(liability 1) is secured by property 1 and a $7,000 recourse 
liability of F (liability 2) is secured by property 2. Properties 1 
and 2 are transferred to the partnership, and the partnership takes 
subject to liability 1 and assumes liability 2. G and H incurred 
liabilities 1 and 2 immediately prior to transferring properties 1 
and 2 to the partnership and used the proceeds for personal 
expenditures. The liabilities are not qualified liabilities. Assume 
that G and H are each allocated $2,000 of liability 1 in accordance 
with Sec.  1.707-5(a)(2)(ii) (which determines a partner's share of 
a nonrecourse liability). Assume further that G's share of liability 
2 is $3,500 and H's share is $0 in accordance with Sec.  1.707-
5(a)(2)(i) (which determines a partner's share of a recourse 
liability).
    (ii) G and H transferred properties 1 and 2 to the partnership 
pursuant to a plan.

[[Page 28401]]

Accordingly, the partnership's taking subject to liability 1 is 
treated as a transfer of only $500 of consideration to G (the amount 
by which liability 1 ($6,000) exceeds G's share of liabilities 1 and 
2 ($5,500)), and the partnership's assumption of liability 2 is 
treated as a transfer of only $5,000 of consideration to H (the 
amount by which liability 2 ($7,000) exceeds H's share of 
liabilities 1 and 2 ($2,000)). G is treated under the rule in Sec.  
1.707-3 as having sold $500 of the fair market value of property 1 
in exchange for the partnership's taking subject to liability 1 and 
H is treated as having sold $5,000 of the fair market value of 
property 2 in exchange for the assumption of liability 2.
    Example 8. Partnership's assumption of liability pursuant to a 
plan to avoid sale treatment of partnership assumption of another 
liability. (i) The facts are the same as in Example 7, except that--
    (A) H transferred the proceeds of liability 2 to the 
partnership; and
    (B) H incurred liability 2 in an attempt to reduce the extent to 
which the partnership's taking subject to liability 1 would be 
treated as a transfer of consideration to G (and thereby reduce the 
portion of G's transfer of property 1 to the partnership that would 
be treated as part of a sale).
    (ii) Because the partnership assumed liability 2 with a 
principal purpose of reducing the extent to which the partnership's 
taking subject to liability 1 would be treated as a transfer of 
consideration to G, liability 2 is ignored in applying paragraph 
(a)(3) of this section. Accordingly, the partnership's taking 
subject to liability 1 is treated as a transfer of $4,000 of 
consideration to G (the amount by which liability 1 ($6,000) exceeds 
G's share of liability 1 ($2,000)). On the other hand, the 
partnership's assumption of liability 2 is not treated as a transfer 
of any consideration to H because H's share of that liability equals 
$7,000 as a result of H's transfer of $7,000 in money to the 
partnership.
* * * * *


Sec.  1.707-5T   [Removed]

0
Par. 3. Section 1.707-5T is removed.
0
Par. 4. Section 1.707-9 is amended by revising paragraph (a)(4) and 
removing paragraph (a)(5). The revisions read as follows:


Sec.  1.707-9  Effective dates and transitional rules.

    (a) * * *
    (4) Section 1.707-5(a)(2) and (f) Examples 2, 3, 7, and 8. (i) 
Section 1.707-5(a)(2) and (f) Examples 2, 3, 7, and 8, as contained in 
26 CFR part 1 revised as of April 1, 2016, apply to any transaction 
with respect to which any transfers occur before January 3, 2017.
    (ii) For any transaction with respect to which all transfers occur 
on or after January 3, 2017, and any of such transfers occurs before 
the date that is thirty days after the date these regulations are 
published as final in the Federal Register, see Sec.  1.707-9T(a)(5) as 
contained in 26 CFR part 1 revised as of April 1, 2017.
    (iii) Section 1.707-5(a)(2) and (f) Examples 2, 3, 7, and 8 apply 
to any transaction with respect to which all transfers occur on or 
after the date that is thirty days after the date these regulations are 
published as final in the Federal Register.
* * * * *


Sec.  1.707-9T   [Removed]

0
Par. 5. Section 1.707-9T is removed.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2018-13129 Filed 6-18-18; 8:45 am]
 BILLING CODE 4830-01-P