[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Rules and Regulations]
[Pages 723-725]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-200]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8924]
RIN 1545-AY63


Liabilities Assumed in Certain Corporate Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary and final regulations.

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SUMMARY: These temporary and final regulations relate to the assumption 
of liabilities in certain corporate transactions under section 301 of 
the Internal Revenue Code. The temporary and final regulations affect 
corporations and their shareholders. Changes to the applicable law were 
made by the Miscellaneous Trade and Technical Corrections Act of 1999, 
Public Law 106-36 (113 Stat. 127). The text of these temporary 
regulations also serves as the text of the proposed regulations set 
forth in the notice of proposed rulemaking on this subject in the 
Proposed Rules section of this issue of the Federal Register.

DATES: Effective Date: These regulations are effective January 4, 2001.
    Applicability Date: For dates of applicability, see the Effective 
Dates portion of the preamble under SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT: Mary Dean, (202) 622-7550 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Background

A. State of the Law Before the Miscellaneous Trade and Technical 
Corrections Act of 1999

    Section 301(b)(2) of the Internal Revenue Code (Code) provides that 
in a distribution of property made by a corporation to a shareholder 
with respect to its stock, the amount of the distribution shall be 
reduced (but now below zero) by (A) the amount of any liability of the 
corporation assumed by the shareholder in connection with the 
distribution and (B) the amount of any liability to which the property 
was subject immediately before, and after, the distribution. See also 
Sec. 1.301-1(g) of the regulations.
    Section 357 of the Code generally provides rules for the treatment 
of the assumption of liabilities in connection with transfers of 
property to which section 351 or 361 of the Code applies.

[[Page 724]]

Prior to the Miscellaneous Trade and Technical Corrections Act of 1999 
(the Act), section 357(a) provided that, except as otherwise provided, 
in such transfers the assumption of the transferor's liability or 
acquisition of property subject to a liability is not treated as money 
or other property, i.e., is not treated as boot received by the 
transferor.
    Prior to the Act, section 357(c) provided that in an exchange to 
which section 351 applies or section 361 applies by reason of a section 
368(a)(1)(D) reorganization, if the sum of the amount of the 
liabilities assumed plus the amount of the liabilities to which the 
property transferred is subject exceeds the total of the adjusted basis 
of the property transferred pursuant to such exchange, then such excess 
is considered as a gain from the sale or exchange of a capital asset or 
of property which is not a capital asset, as the case may be.

B. Enactment of Amendments to Section 357

    The Act amended the language in section 357(a) and (c) and added 
new section 357(d). Under the amendment to section 357(a) and (c), the 
reference to the acquisition of an asset subject to a liability was 
eliminated. Section 357(c) gain will be realized only on the excess of 
the amount of liabilities assumed over the adjusted basis of the 
property transferred in the transaction. New section 357(d) sets forth 
the rules for determining the amount of both recourse and nonrecourse 
liabilities assumed. Section 357(d) states that except as provided in 
regulations, a recourse liability (or portion thereof) is treated as 
having been assumed if, based on all the facts and circumstances, the 
transferee has agreed to, and is expected to, satisfy such liability, 
whether or not the transferor has been relieved of such liability. A 
nonrecourse liability is treated as having been assumed by the 
transferee of any asset subject to such liability, except that the 
amount of nonrecourse liability treated as having been assumed is 
reduced by the lesser of (A) the amount of such liability which an 
owner of other assets not transferred to the transferee and also 
subject to such liability has agreed with the transferee to, and is 
expected to, satisfy, or (B) the fair market value of such other 
assets. Congress provided these clarifications because certain 
interpretations of the existing law failed to adequately reflect the 
true economics of many transactions, resulting in inappropriate 
positions claimed by taxpayers. See S. Rep. No. 106-2, at 75 (1999).
    Section 357(d)(3) directs the Secretary to prescribe regulations 
necessary to carry out the purposes of subsection (d). It also 
authorizes the Secretary to prescribe regulations which provide that 
the manner in which a liability is treated as assumed under subsection 
(d) is applied, where appropriate, elsewhere in the Code.

C. Application of Regulatory Authority to Section 301

    The Treasury and the IRS have determined that it is appropriate to 
apply the rules of section 357(d), relating to the manner in which a 
liability is treated as assumed, to distributions of property under 
section 301 of the Code. Section 301(b)(2)(A) provides that the amount 
of the distribution will be reduced if the transferee assumes a 
liability of the corporation. Section 301(b)(2)(B) provides that the 
amount of the distribution will be reduced if the transferee receives 
property subject to a liability. These two sections do not provide 
specific rules for determining the amount of liabilities assumed, as 
contained in section 357(d). The lack of specific rules has led to 
interpretations of existing law that fail to reflect the true economics 
of certain transactions. For reasons similar to those that motivated 
the enactment of section 357(d), these interpretations are 
inappropriate for purposes of section 301. Notice 99-59, 1999-52 I.R.B. 
761, illustrates one such case. In the transaction addressed in Notice 
99-59, a corporation distributes property subject to a recourse 
liability, with the expectation that the distributee will take the 
position that it receives little or no net distribution, even though it 
is anticipated that the distributor will later satisfy its continuing 
primary liability on the debt.

Explanation of Provisions

Liabilities Assumed in Connection With Distributions to Shareholders

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 301 relating to liabilities assumed in 
connection with distributions made by a corporation to shareholders 
with respect to their stock. The regulations provide that the amount of 
a distribution under section 301 will be reduced by the amount of any 
liability that is treated as assumed by the distributee within the 
meaning of section 357(d)(1) and (2).
    The Treasury and the IRS intend to propose regulations under 
sections 357(d) and 301 clarifying the treatment of the subsequent 
payment of assumed liabilities. Prior to the issuance of such 
regulations, the Treasury and the IRS believe that such payments 
generally should be treated in a manner consistent with the treatment 
of the liabilities assumed. Thus, in a situation where a liability is 
treated as assumed by the transferee under the rules of section 357(d), 
a later payment by the party whose liability was treated as assumed 
should be treated in accordance with the relationship of the parties 
(e.g., a distribution or capital contribution). See, e.g., Enoch v. 
Commissioner, 57 T.C. 781 (1972), acq. in part, 1974-2 C.B. 2, 4, 
nonacq., 1984-2 C.B. 5.

Effective Date

    The regulations apply generally to distributions occurring after 
January 4, 2001. The regulations also apply to distributions occurring 
on or prior to January 4, 2001, if the distribution is made as part of 
a transaction described in, or substantially similar to, the 
transaction in Notice 99-59, including transactions designed to reduce 
gain. Under section 7805(b)(3), the Secretary may provide that any 
regulation may take effect or apply retroactively to prevent abuse. 
These regulations are being applied retroactively to prevent the abuse 
described in Notice 99-59. No inference should be drawn regarding the 
tax treatment of distributions not covered by these regulations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. Because no 
preceding notice of proposed rulemaking is required for this temporary 
regulation, the provisions of the Regulatory Flexibility Analysis do 
not apply.
    This Treasury decision is issued pursuant to the grants of 
authority in sections 357(d)(3) and 7805 of the Internal Revenue Code. 
This Treasury decision provides specific rules for determining the 
amount by which a distribution under section 301(b) will be reduced, by 
applying the rules of section 357(d). Section 357(d) was intended to 
clarify the law because certain interpretations of existing law did not 
reflect the economics of certain transactions. Issuing the regulation 
in proposed form would continue the difficulty in ascertaining the 
appropriate reduction in distributions under section 301(b). Based on 
these considerations, it is determined that this temporary regulation 
will provide taxpayers with the necessary guidance and authority to 
ensure equitable administration of the

[[Page 725]]

tax laws. Therefore, it would be contrary to the public interest to 
issue this Treasury decision with prior notice under section 553(b) or 
subject to the effective date limitation of section 553(d) of title 5 
of the United States Code.
    Pursuant to section 7805(f) of the Internal Revenue Code, these 
temporary regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read in part as follows:

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

    Section 1.301-1 also issued under 26 U.S.C. 357(d)(3).
    Section 1.301-1T also issued under 26 U.S.C. 357(d)(3). * * *


    Par. 2. Section 1.301-1 is amended by adding two new sentences at 
the end of paragraph (g) to read as follows:


Sec. 1.301-1  Rules applicable with respect to distributions of money 
and other property.

* * * * *
    (g) * * * This paragraph (g) applies to distributions occurring on 
or before January 4, 2001. See Sec. 1.301-1T for rules for 
distributions occurring after January 4, 2001, and for distributions 
made on or before January 4, 2001 if the distribution is made as part 
of a transaction described in, or substantially similar to, the 
transaction in Notice 1999-59, 1999-52 I.R.B. 761, including 
transactions designed to reduce gain (see Sec. 601.601(d)(2) of this 
chapter).
* * * * *

    Par. 3. Section 1.301-1T is added to read as follows:


Sec. 1.301-1T  Rules applicable with respect to distributions of money 
and other property (temporary).

    (a) through (f). [Reserved] For further guidance, see Sec. 1.301-
1(a) through (f).
    (g) Reduction for liabilities--(1) General rule. For the purpose of 
section 301, no reduction shall be made for the amount of any 
liability, unless the liability is assumed by the shareholder within 
the meaning of section 357(d)(1) and (2).
    (2) No reduction below zero. Any reduction pursuant to paragraph 
(g)(1) of this section shall not cause the amount of the distribution 
to be reduced below zero.
    (3) Effective dates--(i) In general. This paragraph (g) applies to 
distributions occurring after January 4, 2001.
    (ii) Retroactive application. This paragraph also applies to 
distributions made on or before January 4, 2001 if the distribution is 
made as part of a transaction described in, or substantially similar 
to, the transaction in Notice 1999-59 (1999-52 I.R.B. 761), including 
transactions designed to reduce gain (see Sec. 601.601(d)(2) of this 
chapter).

    Approved: December 20, 2000.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary for Tax Policy.
[FR Doc. 01-200 Filed 1-3-01; 8:45 am]
BILLING CODE 4830-01-U