[Federal Register Volume 65, Number 9 (Thursday, January 13, 2000)]
[Proposed Rules]
[Pages 2081-2084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-275]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-103831-99]
RIN 1545-AX09
Allocation of Partnership Debt
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations relating to the
allocation of nonrecourse liabilities by a partnership. The proposed
regulations revise tier three of the three-tiered allocation structure
contained in the current nonrecourse liability regulations, and also
provide guidance regarding the allocation of a single nonrecourse
liability secured by multiple properties. This document also contains a
notice of public hearing on these proposed regulations.
DATES: Written comments must be received by April 12, 2000. Requests to
speak (with outlines of oral comments) at a public hearing scheduled
for May 3, 2000, at 10 a.m., must be received by April 12, 2000.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-103831-99), room
5228, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R
(REG-103831-99), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may
submit comments electronically via the Internet by selecting the ``Tax
Regs'' option of the IRS Home Page, or by submitting comments directly
to the IRS Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The public hearing will be held in Room 2615, Internal
Revenue Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations,
Christopher Kelley, (202) 622-3070; concerning submissions of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Guy Traynor, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Introduction
This document proposes to revise Secs. 1.752-3 and 1.752-5 of the
Income Tax Regulations (26 CFR part 1) relating to the allocation by a
partnership of nonrecourse liabilities.
Background
Treasury regulation Sec. 1.752-3 currently provides a three-tiered
system for allocating nonrecourse liabilities. The three-tiered system
applies sequentially. Thus, as a portion of a liability is allocated to
a partner under the first tier, that portion is not available to be
allocated under the second tier. Similarly, as a portion of a liability
is allocated to a partner under the second tier, that portion is not
available to be allocated in the third tier.
Under the first tier, a partner is allocated an amount of the
liability equal to that partner's share of partnership minimum gain
under section 704(b). See Sec. 1.704-2(g)(1).
Under the second tier, to the extent the entire liability has not
been allocated under the first tier, a partner will be allocated an
amount of liability equal to the gain that partner would be allocated
under section 704(c) if the partnership disposed of all partnership
property subject to one or more nonrecourse liabilities in full
satisfaction of the liabilities (section 704(c) minimum gain). Under
the third tier, a partner is allocated any excess nonrecourse
liabilities under one of several methods that the partnership may
choose. One allocation method is based on the partner's share of
partnership profits. The partnership may specify in its partnership
agreement the partners' interests in partnership profits for purposes
of allocating excess nonrecourse liabilities provided the specified
interests are reasonably consistent with allocations of some other
significant item of partnership income or gain. The partnership also
may allocate excess nonrecourse liabilities in accordance with the
manner in which it is reasonably expected that the deductions
attributable to those nonrecourse liabilities will be allocated. The
partnership may change its allocation method under the third tier from
year to year.
In Rev. Rul. 95-41, 1995-1 C.B. 132, the IRS and Treasury addressed
the effect of the three section 704(c) allocation methods under
Sec. 1.704-3 upon the three tiers of Sec. 1.752-3(a). Rev. Rul. 95-41
also stated that in determining the partners' interests in partnership
profits, solely for purposes of the third tier, section 704(c) built-in
gain (i.e., the excess of a property's book value over the contributing
partner's adjusted tax basis in the property upon contribution) that
was not taken into account under Sec. 1.752-3(a)(2) (the second tier)
is one factor, but not the only factor, to be considered. This gain
(excess section 704(c) gain) is equal to the excess of the amount of
section 704(c) built-in gain attributable to an item of property over
the amount of section 704(c) minimum gain on that property.
[[Page 2082]]
Explanation of Provisions
Modifications to Third Tier
The three tiers of Sec. 1.752-3(a) are structured to allocate
liabilities to those partners who generally would be allocated income
or gain upon the relief of those liabilities. Under section 752(b), any
decrease in a partner's share of the liabilities of a partnership will
be considered a distribution of money to the partner by the
partnership.
Under section 731(a), a partner will recognize gain on the
distribution of money by the partnership to the extent that the
distribution exceeds the partner's adjusted basis in its partnership
interest. Section 704(c) generally ensures that any built-in gain on
contributed property will be recognized by the contributing partner
upon the disposition of the property by the partnership. The
partnership liability allocation rules arguably should not accelerate
the contributing partner's recognition of that gain when the amount of
the partnership's liability attributable to such property is
sufficient, if allocated to the contributing partner, to prevent such
partner from recognizing gain.
In response to comments received, the proposed regulations modify
the third tier to allow a partnership to allocate the portion of a
nonrecourse liabilities in excess of the portions allocated in tiers
one and two (excess nonrecourse liabilities) based on the excess
section 704(c) gain attributable to the property securing the
liability. Thus, to the extent a portion of a partnership nonrecourse
liability is available to be allocated in the third tier, the
partnership may allocate that portion to the contributing partner based
on the excess section 704(c) gain inherent in the property.
Under Sec. 1.704-3(a)(2), section 704(c) generally applies on a
property-by-property basis. Therefore, in determining the amount of
excess section 704(c) gain, the built-in gains and losses on items of
contributed property cannot be aggregated.
Section 1.704-3(a)(3)(i) provides that the book value of
contributed property is equal to its fair market value at the time of
contribution and is subsequently adjusted for cost recovery and other
events that affect the basis of the property. Section 1.704-3(a)(3)(ii)
provides that the section 704(c) built-in gain with respect to a
property is the excess of the property's book value over the
contributing partner's adjusted tax basis in the property upon
contribution. The built-in gain is thereafter reduced by decreases in
the difference between the property's book value and adjusted tax
basis. Similarly, the excess section 704(c) gain will decline as the
difference between the property's fair market value and tax basis
declines.
If a partnership holds section 704(c) property subject to the
ceiling rule of Sec. 1.704-3(b)(1), in certain situations, the first
tier of Sec. 1.752-3(a) can gradually shift the allocation of
liabilities away from the partner that contributed the property (the
contributing partner) to a non-contributing partner who does not
necessarily need, for tax purposes, the entire amount of the liability
allocated to the non-contributing partner in the first tier. This can
give rise to deemed distributions to the contributing partner,
resulting in gain recognition under section 731(a)(1) at a time that
arguably is earlier than appropriate. The IRS and Treasury considered
other alternatives for amending Sec. 1.752-3 that would address these
liability shifts caused by the ceiling rule, but rejected them because
of their complexity. The proposed alternative was adopted because it is
simple and seems to address the predominant concerns raised by
practitioners regarding the contribution of section 704(c) property.
The IRS and Treasury request comments on whether further modifications
to the three-tiered structure of Sec. 1.752-3(a) are necessary to more
appropriately allocate nonrecourse liabilities among partners and, if
so, what type of modifications would be appropriate.
The holding in Rev. Rul. 95-41, 1995-1 C.B. 132, that excess
section 704(c) gain is one factor to consider in determining a
partner's interest in partnership profits will remain relevant where a
partner does not allocate nonrecourse debt under the third tier based
on the excess section 704(c) gain attributable to the property that is
subject to the debt. However, once a partner has allocated nonrecourse
indebtedness pursuant to the rule in these proposed regulations based
upon excess section 704(c) gain, that excess section 704(c) gain cannot
again be considered in determining a partner's interest in partnership
profits.
Allocation of Single Liability Among Multiple Properties
Several commentators have requested that the IRS and Treasury issue
guidance regarding the calculation of section 704(c) minimum gain under
the second tier when a partnership holds multiple properties subject to
a single nonrecourse liability. This situation typically arises when a
partnership that holds several properties, each subject to an
individual liability, refinances the individual liabilities with a
single nonrecourse liability.
To apply the second tier, partnerships must determine the amount of
the liability that encumbers each asset. This allows the partnerships
to determine the section 704(c) minimum gain in each asset. See
Sec. 1.704-3(a)(2).
The proposed regulations provide that if a partnership holds
multiple properties subject to a single liability, the liability may be
allocated among the properties based on any reasonable method. Under
the proposed regulations, a method is not reasonable if it allocates to
any property an amount that exceeds the fair market value of the
property. Thus, for example, the liability may be allocated to the
properties based on the relative fair market value of each property.
The portion of the nonrecourse liability allocated to each item of
partnership property is treated as a separate loan under Sec. 1.752-
3(a)(2). The proposed regulations provide that once a liability is
allocated among the properties, a partnership may not change the method
for allocating the liability. However, if one of the properties is no
longer subject to the liability, the portion of the liability allocated
to that property must be reallocated to the properties still subject to
the liability so that the amount allocated to any property does not
exceed the fair market value of such property at the time of the
reallocation.
If the outstanding principal of a liability is reduced, the
reduction will affect the amount of section 704(c) minimum gain under
the second tier. The proposed regulations provide that as the
outstanding principal of a liability is reduced, the reduction in
principal outstanding is allocated among the properties in the same
proportion that the principal originally was allocated to the
properties.
These rules affect only the calculation of section 704(c) minimum
gain under the second tier of Sec. 1.752-3(a).
Allocation of Single Liability Among Multiple Partnerships
Some commentators also have requested guidance on allocations of a
nonrecourse liability among multiple partnerships. This situation may
arise when a partner contributes multiple properties subject to the
same nonrecourse liability to more than one partnership. It also may
arise in a division of a partnership under section 708. Although the
proposed regulations do not address this issue, the IRS and Treasury
request comments regarding appropriate methods of allocating such
liabilities.
[[Page 2083]]
Proposed Effective Date
These regulations are proposed to apply to any liability incurred
or assumed by a partnership on or after the date final regulations are
published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulations do not impose a collection of information on small
entities, a Regulatory Flexibility Analysis is not required. Pursuant
to section 7805(f) of the Internal Revenue Code, this notice of
proposed rulemaking will be submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on its impact on small
business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and Treasury specifically request comments on the clarity
of the proposed regulations and how they may be made easier to
understand. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for May 3, 2000, at 10 a.m., in
Room 2615, Internal Revenue Building, 1111 Constitution Avenue NW.,
Washington, DC. Due to building security procedures, visitors must
enter at the 10th Street entrance, located between Constitution and
Pennsylvania Avenues, NW. In addition, all visitors must present photo
identification to enter the building. Because of access restrictions,
visitors will not be admitted beyond the Internal Revenue Building
lobby 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
that wish to present oral comments at the hearing must submit timely
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic (preferably a signed original and
eight (8) copies) by April 12, 2000.
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.
Drafting Information: The principal author of these regulations is
Christopher Kelley, Office of Chief Counsel (Passthroughs and Special
Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
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 1.752-3 is amended as follows:
1. Paragraph (a)(3) is amended by adding two sentences immediately
before the last sentence in the paragraph.
2. Paragraph (b) is redesignated as paragraph (c).
3. New paragraph (b) is added.
4. Paragraph (d) is added.
The additions read as follows:
Sec. 1.752-3 Partner's share of nonrecourse liabilities.
(a) * * *
(3) * * * Additionally, the partnership may first allocate an
excess nonrecourse liability to a partner up to the amount of built-in
gain on section 704(c) property (as defined under Sec. 1.704-
3(a)(3)(ii)) that is allocable to the partner on the property subject
to that nonrecourse liability to the extent that such built-in gain
exceeds the gain described in paragraph (a)(2) of this section with
respect to such property. To the extent a partnership uses this
additional method and the entire amount of the excess nonrecourse
liability is not allocated to the contributing partner, the partnership
must allocate the remaining amount of the excess nonrecourse liability
under one of the other methods in this paragraph (a)(3). * * *
(b) Allocation of a single nonrecourse liability among multiple
properties--(1) In general. For purposes of determining the amount of
taxable gain under paragraph (a)(2) of this section, if a partnership
holds multiple properties subject to a single nonrecourse liability,
the partnership may allocate the liability among the multiple
properties under any reasonable method. A method is not reasonable if
it allocates to any item of property an amount of the liability in
excess of the fair market value of the property at the time the
liability is incurred. The portion of the nonrecourse liability
allocated to each item of partnership property is then treated as a
separate loan under paragraph (a)(2) of this section. In general, a
partnership may not change the method of allocating a single
nonrecourse liability under this paragraph (b) while any portion of the
liability is outstanding. However, if one or more of the multiple
properties subject to the liability is no longer subject to the
liability, the portion of the property allocated to that property must
be reallocated among the properties still subject to the liability so
that the amount of the liability allocated to any property does not
exceed the fair market value of such property at the time of
reallocation.
(2) Reductions in principal. For this paragraph (b), when the
outstanding principal of a partnership liability is reduced, the
reduction of outstanding principal is allocated among the multiple
properties in the same proportion that the partnership liability
originally was allocated to the properties under paragraph (b)(1) of
this section.
* * * * *
(d) Effective date. This section applies to partnership liabilities
incurred or assumed on or after the date final regulations are
published in the Federal Register.
Par. 3. The first sentence of paragraph (a) of Sec. 1.752-5 is
revised to read as follows:
Sec. 1.752-5 Effective dates and transition rules.
(a) In general. Except as otherwise provided in Sec. 1.752-3(d),
unless a partnership makes an election under paragraph (b)(1) of this
section to apply the provisions of Secs. 1.752-1 through 1.752-4
earlier, Secs. 1.752-1 through 1.752-4 apply to any liability incurred
or assumed by a partnership on or after December 28, 1991, other than a
liability incurred or assumed by the partnership pursuant to a written
binding contract
[[Page 2084]]
in effect prior to December 28, 1991 and at all times thereafter. * * *
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-275 Filed 1-12-00; 8:45 am]
BILLING CODE 4830-01-P