Removal of Temporary Regulations on a Partner's Share of a Partnership Liability for Disguised Sale Purposes, 54027-54029 [2019-22030]
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Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9876]
RIN 1545–BO05
Removal of Temporary Regulations on
a Partner’s Share of a Partnership
Liability for Disguised Sale Purposes
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations and removal of
temporary regulations.
AGENCY:
This document contains final
regulations concerning how partnership
liabilities are allocated for disguised
sale purposes. The regulations replace
existing temporary regulations with
final regulations that were in effect prior
to the temporary regulations. These
regulations affect partnerships and their
partners.
DATES:
Effective date: These regulations are
effective on November 8, 2019.
Applicability date: For date of
applicability, see § 1.707–9(a)(4).
FOR FURTHER INFORMATION CONTACT:
Caroline E. Hay at (202) 317–5279 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
SUMMARY:
khammond on DSKJM1Z7X2PROD with RULES
Background
This document contains 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, related transfers of money or
other property 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’’).
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 certain
burdens imposed by the regulations. In
response to E.O. 13789, the Secretary
issued an interim report which
VerDate Sep<11>2014
15:56 Oct 08, 2019
Jkt 250001
identified the final and temporary
regulations (T.D. 9788) (707 Temporary
Regulations) concerning the allocation
of partnership liabilities for section 707
purposes as meeting some of the
regulatory burdens specified in E.O.
13789, and later issued a second report
recommending specific actions to
mitigate the burdens. See Notice 2017–
38 (2017–30 IRB 147 (July 24, 2017))
and Second Report to the President on
Identifying and Reducing Tax
Regulatory Burdens (82 FR 48013,
October 16, 2017).
Following the issuance of the interim
and second reports, on June 19, 2018,
the Department of the Treasury
(Treasury Department) and the IRS
published a notice of proposed
rulemaking (REG–131186–17) in the
Federal Register (83 FR 28397) (2018
Proposed Regulations) proposing to
withdraw the 707 Temporary
Regulations. The 2018 Proposed
Regulations also proposed reinstating
the regulations under § 1.707–5(a)(2) as
in effect prior to the 707 Temporary
Regulations and as contained in 26 CFR
part 1 revised as of April 1, 2016 (Prior
707 Regulations). Finally, the 2018
Proposed Regulations withdrew a notice
of proposed rulemaking (REG–122855–
15) that incorporated by cross reference
the 707 Temporary Regulations. The
Treasury Department and the IRS did
not receive any written public
comments in response to the 2018
Proposed Regulations. A scheduled
public hearing on the 2018 Proposed
Regulations was cancelled because no
one requested to speak.
Therefore, the 2018 Proposed
Regulations proposing to withdraw the
707 Temporary Regulations and
reinstate the Prior 707 Regulations are
adopted by this Treasury decision
without change, except the applicability
date has been revised. To avoid a lapse
in rules for allocating partnership
liabilities for disguised sale purposes,
these final regulations apply to any
transaction with respect to which all
transfers occur on or after October 4,
2019, the date that the 707 Temporary
Regulations expire. Preventing a lapse
in rules benefits the Treasury
Department, the IRS, and taxpayers by
providing certainty regarding the
applicable rules. These final regulations
continue to provide that partnerships
and their partners may apply these
regulations to any transaction with
respect to which all transfers occur on
or after January 3, 2017, the
applicability date of the 707 Temporary
Regulations.
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54027
Special Analyses
These final 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 Treasury Department
and the Office of Management and
Budget regarding review of tax
regulations. Because these final
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, the notice
of proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business, and no
comments were received.
Ongoing Study of Liability Rule for
Disguised Sales
The 707 Temporary Regulations
withdrawn by this Treasury decision
adopted an approach requiring a
partnership to apply the same
percentage used to determine a 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. As was noted
in the preamble to the 2018 Proposed
Regulations, some commenters
supported this approach, but also
expressed concern that it was adopted
in temporary regulations rather than
proposed regulations that would allow
for further comment. The Treasury
Department and the IRS continue to
study the merits of the approach in the
707 Temporary Regulations and other
approaches, including these final
regulations, to determine which results
in the most appropriate treatment of
liabilities in the context of disguised
sales.
Drafting Information
The principal author of these
regulations is 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.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
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09OCR1
54028
Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Rules and Regulations
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:
■ 1. Revising paragraph (a)(2).
■ 2. Designating Examples 1 through 13
of paragraph (f) as paragraphs (f)(1)
through (f)(13), respectively.
■ 3. Revising newly designated
paragraphs (f)(2) and (3).
■ 4. Removing the language ‘‘Example
5’’ in newly designated paragraph
(f)(6)(i) and paragraph (f)(6)(ii)
introductory text and adding the
language ‘‘paragraph (f)(5) of this
section (Example 5)’’ in its place.
■ 5. Revising newly designated
paragraphs (f)(7) and (8).
■ 6. Removing the language ‘‘Example
10’’ in newly designated paragraph
(f)(11)(i) and adding the language
‘‘paragraph (f)(10) of this section
(Example 10)’’ in its place.
The revisions read as follows:
■
khammond on DSKJM1Z7X2PROD with RULES
§ 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 in this part under section
752. 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) * * *
(2) Example 2. Partnership’s assumption of
recourse liability encumbering transferred
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15:56 Oct 08, 2019
Jkt 250001
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 in this part
under section 752, 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 paragraph (f)(2)(i) of
this section (Example 2), 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.
(3) Example 3. Subsequent reduction of
transferring partner’s share of liability. (i)
The facts are the same as in paragraph (f)(2)
of this section (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.
*
*
*
*
*
(7) 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
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Frm 00034
Fmt 4700
Sfmt 4700
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 paragraph (a)(2)(ii) of this
section (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 paragraph
(a)(2)(i) of this section (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.
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.
(8) 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 paragraph (f)(7) of this section (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.
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09OCR1
54029
Federal Register / Vol. 84, No. 196 / Wednesday, October 9, 2019 / Rules and Regulations
■ Par. 4. Section 1.707–9 is amended
by revising paragraph (a)(4) and
removing paragraph (a)(5).
The revision reads as follows:
§ 1.707–9
rules.
Effective dates and transitional
(a) * * *
(4) Applicability date of § 1.707–
5(a)(2) and (f)(2), (3), (7), and (8). (i)
Section 1.707–5(a)(2) and (f)(2), (3), (7),
and (8) apply to any transaction with
respect to which all transfers occur on
or after October 4, 2019. However, a
partnership and its partners may apply
§ 1.707–5(a)(2) and (f)(2), (3), (7), and (8)
to any transaction with respect to which
all transfers occur on or after January 3,
2017.
(ii) For any transaction with respect to
which any transfers occur before
January 3, 2017, § 1.707–5(a)(2) and (f),
as contained in 26 CFR part 1 revised as
of April 1, 2016, apply.
(iii) For any transaction with respect
to which all transfers occur on or after
January 3, 2017, and any of such
transfers occurs before October 4, 2019,
see § 1.707–9T(a)(5) as contained in 26
CFR part 1 revised as of April 1, 2019.
*
*
*
*
*
§ 1.707–9T
■
[Removed]
Par. 5. Section 1.707–9T is removed.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: October 1, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2019–22030 Filed 10–4–19; 4:15 pm]
BILLING CODE 4830–01–P
through October 13, 2019. This action is
necessary to ensure the safety of event
participants and spectators. During the
enforcement period, unauthorized
persons or vessels are prohibited from
entering into, transiting through, or
anchoring in the regulated area, unless
authorized by the Patrol Commander
(PATCOM).
DATES: The regulations in 33 CFR
100.1105 will be enforced from 12:30
p.m. until 5 p.m. on October 10, 2019;
from 10:30 a.m. until 4 p.m. on October
11, 2019; and from 11:30 p.m. until 4
p.m. on each of two days, October 12
and October 13, 2019, as identified in
the SUPPLEMENTARY INFORMATION section
below.
FOR FURTHER INFORMATION CONTACT: If
you have questions about this notice of
enforcement, call or email Lieutenant
Jennae Cotton, Waterways Management,
U.S. Coast Guard; telephone (415) 399–
3585, email SFWaterways@uscg.mil.
SUPPLEMENTARY INFORMATION: The Coast
Guard will enforce the special local
regulation for the annual San Francisco
Bay Navy Fleet Week Parade of Ships
and Blue Angels Demonstration in 33
CFR 100.1105.
Regulations for the Navy Parade of
Ships will be enforced from 10:30 a.m.
until 12 p.m. on October 11, 2019; the
U.S. Navy Blue Angels Activities will be
enforced from 12:30 p.m. until 5 p.m. on
October 10, 2019, from 12 p.m. until 4
p.m. on October 11, 2019, and from
11:30 p.m. until 4 p.m. on each of two
days, October 12 and October 13, 2019.
Regulated area ‘‘Alpha’’ will be
enforced during the Navy Parade of
Ships and is bounded by a line
connecting the following points:
Latitude
DEPARTMENT OF HOMELAND
SECURITY
37°48′40″
37°49′10″
37°49′31″
37°49′06″
37°47′53″
37°46′00″
37°46′00″
Coast Guard
33 CFR Part 100
[Docket No. USCG–2019–0763]
Special Local Regulations for Marine
Events; San Francisco Bay Navy Fleet
Week Parade of Ships and Blue Angels
Demonstration, San Francisco, CA
Coast Guard, DHS.
ACTION: Notice of enforcement of
regulation.
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AGENCY:
The Coast Guard will enforce
the special local regulations in the
navigable waters of the San Francisco
Bay for the San Francisco Bay Navy
Fleet Week Parade of Ships and Blue
Angels Demonstration from October 10
SUMMARY:
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15:56 Oct 08, 2019
Jkt 250001
N
N
N
N
N
N
N
Longitude
122°28′38″
122°28′41″
122°25′18″
122°24′08″
122°22′42″
122°22′00″
122°23′07″
W
W
W
W
W
W
W
And thence along the shore to the point
of beginning.
Under the provisions of 33 CFR
100.1105, except for persons or vessels
authorized by the PATCOM, in
regulated area ‘‘Alpha’’ no person or
vessel may enter the parade route or
remain within 500 yards of any Navy
parade vessel. No person or vessel shall
anchor, block, loiter in, or impede the
through transit of ship parade
participants or official patrol vessels in
regulated area ‘‘Alpha.’’
Regulated area ‘‘Bravo’’ will be
enforced during the Blue Angels
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Demonstration and is bounded by a line
connecting the following points:
Latitude
37°48′27.5″ N
37°49′31″ N
37°49′00″ N
37°48′19″ N
Longitude
122°24′04″
122°24′18″
122°27′52″
122°27′40″
W
W
W
W
And thence along the pierheads and
bulwarks to the point of beginning.
Except for persons or vessels
authorized by the PATCOM, no person
or vessel may enter or remain within
regulated area ‘‘Bravo.’’
When hailed or signaled by U.S. Coast
Guard patrol personnel by siren, radio,
flashing light, or other means, a person
or vessel shall come to an immediate
stop. Persons or vessels shall comply
with all directions given; failure to do
so may result in expulsion from the
area, citation for failure to comply, or
both. The Coast Guard may be assisted
by other Federal, State, or local law
enforcement agencies in enforcing this
regulation.
The PATCOM shall be designated by
the Commander, Coast Guard Sector San
Francisco, California. The PATCOM is
empowered to forbid and control the
movement of all vessels in the regulated
areas.
This document is issued under
authority of 33 U.S.C. 1233. In addition
to this notification in the Federal
Register, the Coast Guard will provide
the maritime community with extensive
advance notification of the regulated
areas and their enforcement periods via
Notice to Mariners.
Dated: September 30, 2019.
Howard H. Wright,
Captain, U.S. Coast Guard, Alternate Captain
of the Port, San Francisco.
[FR Doc. 2019–21765 Filed 10–8–19; 8:45 am]
BILLING CODE 9110–04–P
DEPARTMENT OF HOMELAND
SECURITY
Coast Guard
33 CFR Part 165
[Docket Number USCG–2019–0571]
RIN 1625–AA00
Safety Zone for Fireworks Display;
Patapsco River, Inner Harbor,
Baltimore, MD
Coast Guard, DHS.
Temporary final rule.
AGENCY:
ACTION:
The Coast Guard is
establishing a temporary safety zone for
certain waters of the Patapsco River.
SUMMARY:
E:\FR\FM\09OCR1.SGM
09OCR1
]]>Agencies
[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Rules and Regulations]
[Pages 54027-54029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22030]
[[Page 54027]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9876]
RIN 1545-BO05
Removal of Temporary Regulations on a Partner's Share of a
Partnership Liability for Disguised Sale Purposes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations concerning how
partnership liabilities are allocated for disguised sale purposes. The
regulations replace existing temporary regulations with final
regulations that were in effect prior to the temporary regulations.
These regulations affect partnerships and their partners.
DATES:
Effective date: These regulations are effective on November 8,
2019.
Applicability date: For date of applicability, see Sec. 1.707-
9(a)(4).
FOR FURTHER INFORMATION CONTACT: Caroline E. Hay at (202) 317-5279 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains 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, related transfers of money or
other property 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'').
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 certain burdens imposed
by the regulations. In response to E.O. 13789, the Secretary issued an
interim report which identified the final and temporary regulations
(T.D. 9788) (707 Temporary Regulations) concerning the allocation of
partnership liabilities for section 707 purposes as meeting some of the
regulatory burdens specified in E.O. 13789, and later issued a second
report recommending specific actions to mitigate the burdens. See
Notice 2017-38 (2017-30 IRB 147 (July 24, 2017)) and Second Report to
the President on Identifying and Reducing Tax Regulatory Burdens (82 FR
48013, October 16, 2017).
Following the issuance of the interim and second reports, on June
19, 2018, the Department of the Treasury (Treasury Department) and the
IRS published a notice of proposed rulemaking (REG-131186-17) in the
Federal Register (83 FR 28397) (2018 Proposed Regulations) proposing to
withdraw the 707 Temporary Regulations. The 2018 Proposed Regulations
also proposed reinstating the regulations under Sec. 1.707-5(a)(2) as
in effect prior to the 707 Temporary Regulations and as contained in 26
CFR part 1 revised as of April 1, 2016 (Prior 707 Regulations).
Finally, the 2018 Proposed Regulations withdrew a notice of proposed
rulemaking (REG-122855-15) that incorporated by cross reference the 707
Temporary Regulations. The Treasury Department and the IRS did not
receive any written public comments in response to the 2018 Proposed
Regulations. A scheduled public hearing on the 2018 Proposed
Regulations was cancelled because no one requested to speak.
Therefore, the 2018 Proposed Regulations proposing to withdraw the
707 Temporary Regulations and reinstate the Prior 707 Regulations are
adopted by this Treasury decision without change, except the
applicability date has been revised. To avoid a lapse in rules for
allocating partnership liabilities for disguised sale purposes, these
final regulations apply to any transaction with respect to which all
transfers occur on or after October 4, 2019, the date that the 707
Temporary Regulations expire. Preventing a lapse in rules benefits the
Treasury Department, the IRS, and taxpayers by providing certainty
regarding the applicable rules. These final regulations continue to
provide that partnerships and their partners may apply these
regulations to any transaction with respect to which all transfers
occur on or after January 3, 2017, the applicability date of the 707
Temporary Regulations.
Special Analyses
These final 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 Treasury Department and the Office of
Management and Budget regarding review of tax regulations. Because
these final 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, the notice of
proposed rulemaking preceding these regulations was submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business, and no comments were received.
Ongoing Study of Liability Rule for Disguised Sales
The 707 Temporary Regulations withdrawn by this Treasury decision
adopted an approach requiring a partnership to apply the same
percentage used to determine a 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. As was noted in the preamble to the 2018
Proposed Regulations, some commenters supported this approach, but also
expressed concern that it was adopted in temporary regulations rather
than proposed regulations that would allow for further comment. The
Treasury Department and the IRS continue to study the merits of the
approach in the 707 Temporary Regulations and other approaches,
including these final regulations, to determine which results in the
most appropriate treatment of liabilities in the context of disguised
sales.
Drafting Information
The principal author of these regulations is 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.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
[[Page 54028]]
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:
0
1. Revising paragraph (a)(2).
0
2. Designating Examples 1 through 13 of paragraph (f) as paragraphs
(f)(1) through (f)(13), respectively.
0
3. Revising newly designated paragraphs (f)(2) and (3).
0
4. Removing the language ``Example 5'' in newly designated paragraph
(f)(6)(i) and paragraph (f)(6)(ii) introductory text and adding the
language ``paragraph (f)(5) of this section (Example 5)'' in its place.
0
5. Revising newly designated paragraphs (f)(7) and (8).
0
6. Removing the language ``Example 10'' in newly designated paragraph
(f)(11)(i) and adding the language ``paragraph (f)(10) of this section
(Example 10)'' in its place.
The revisions 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 in this part under section
752. 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) * * *
(2) 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 in this part under
section 752, 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 paragraph (f)(2)(i) of this section
(Example 2), 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.
(3) Example 3. Subsequent reduction of transferring partner's
share of liability. (i) The facts are the same as in paragraph
(f)(2) of this section (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.
* * * * *
(7) 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 paragraph (a)(2)(ii) of this section
(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 paragraph (a)(2)(i) of this section (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. 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.
(8) 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 paragraph (f)(7) of this
section (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.
[[Page 54029]]
0
Par. 4. Section 1.707-9 is amended by revising paragraph (a)(4) and
removing paragraph (a)(5).
The revision reads as follows:
Sec. 1.707-9 Effective dates and transitional rules.
(a) * * *
(4) Applicability date of Sec. 1.707-5(a)(2) and (f)(2), (3), (7),
and (8). (i) Section 1.707-5(a)(2) and (f)(2), (3), (7), and (8) apply
to any transaction with respect to which all transfers occur on or
after October 4, 2019. However, a partnership and its partners may
apply Sec. 1.707-5(a)(2) and (f)(2), (3), (7), and (8) to any
transaction with respect to which all transfers occur on or after
January 3, 2017.
(ii) For any transaction with respect to which any transfers occur
before January 3, 2017, Sec. 1.707-5(a)(2) and (f), as contained in 26
CFR part 1 revised as of April 1, 2016, apply.
(iii) For any transaction with respect to which all transfers occur
on or after January 3, 2017, and any of such transfers occurs before
October 4, 2019, see Sec. 1.707-9T(a)(5) as contained in 26 CFR part 1
revised as of April 1, 2019.
* * * * *
Sec. 1.707-9T [Removed]
0
Par. 5. Section 1.707-9T is removed.
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
Approved: October 1, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-22030 Filed 10-4-19; 4:15 pm]
BILLING CODE 4830-01-P
