[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Rules and Regulations]
[Pages 715-723]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-202]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8925]
RIN 1545-AX32


Partnership Mergers and Divisions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations on the tax 
consequences of partnership mergers and divisions. The final 
regulations affect partnerships and their partners.

DATES: Effective Date: These regulations are effective January 4, 2001.
    Applicability Date: For dates of applicability of these 
regulations, see Secs. 1.708-1(c)(7), 1.708-1(d)(7), and 1.752-5(a).

FOR FURTHER INFORMATION CONTACT: Mary Beth Collins or Dan Carmody, 
(202) 622-3080 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document amends sections 708 and 752 of the Income Tax 
Regulations (26 CFR part 1) regarding partnership mergers and 
divisions.
    On January 11, 2000, a notice of proposed rulemaking and a notice 
of public hearing (REG-111119-99, 2000-5 I.R.B. 455) were published in 
the Federal Register (65 FR 1572) regarding sections 708, 743, and 752 
of the Internal Revenue Code. No one requested to speak at the public 
hearing. Accordingly, the public hearing scheduled for May 4, 2000, was 
canceled in the Federal Register (65 FR 24897) on April 28, 2000. 
Comments responding to the proposed regulations were received. After 
consideration of the comments, the proposed regulations are adopted as 
revised by this Treasury decision.

I. Partnership Mergers

    Section 708(b)(2)(A) provides that in the case of a merger or 
consolidation of two or more partnerships, the resulting partnership 
is, for purposes of section 708, considered the continuation of any 
merging or consolidating partnership whose members own an interest of 
more than 50 percent in the capital and profits of the resulting 
partnership. Section 1.708-1(b)(2)(i) of the Income Tax Regulations 
provides that if the resulting partnership can be considered a 
continuation of more than one of the merging partnerships, the 
resulting

[[Page 716]]

partnership is the continuation of the partnership that is credited 
with the contribution of the greatest dollar value of assets to the 
resulting partnership. If the members of none of the merging 
partnerships own more than a 50 percent interest in the capital and 
profits of the resulting partnership, all of the merged partnerships 
are considered terminated, and a new partnership results. The taxable 
years of the merging partnerships that are considered terminated are 
closed under section 706(c).

II. Partnership Divisions

    Section 708(b)(2)(B) provides that, in the case of a division of a 
partnership into two or more partnerships, the resulting partnerships 
(other than any resulting partnership the members of which had an 
interest of 50 percent or less in the capital and profits of the prior 
partnership) are considered a continuation of the prior partnership. 
Section 1.708-1(b)(2)(ii) provides that any other resulting partnership 
is not considered a continuation of the prior partnership but is 
considered a new partnership. If the members of none of the resulting 
partnerships owned an interest of more than 50 percent in the capital 
and profits of the prior partnership, the prior partnership is 
terminated. Where members of a partnership that has been divided do not 
become members of a resulting partnership that is considered a 
continuation of the prior partnership, such members' interests are 
considered liquidated as of the date of the division.

Explanation of Revisions and Summary of Comments

I. Assets-Up Form for Partnership Mergers and Divisions

    The proposed regulations provide that the form of a partnership 
merger or division accomplished under laws of the applicable 
jurisdiction will be respected if the partnership undertakes the steps 
of one of two prescribed forms. Generally, for partnership mergers, a 
terminating partnership contributes its assets and liabilities to the 
resulting partnership in exchange for interests in the resulting 
partnership, and immediately thereafter, the terminated partnership 
distributes interests in the resulting partnership to its partners in 
liquidation of the terminating partnership (Assets-Over Form). 
Alternatively, for partnership mergers, the terminating partnership 
liquidates by distributing its assets and liabilities to its partners 
who then contribute the assets and liabilities to the resulting 
partnership (Assets-Up Form). The default rule for partnership mergers 
is the Assets-Over Form, so that if a transaction is not characterized 
under the Assets-Up Form, it will be characterized under the Assets-
Over Form regardless of whether that form is followed.
    In general, for partnership divisions, a prior partnership 
transfers certain assets and liabilities to a resulting partnership in 
exchange for interests in the resulting partnership, and immediately 
thereafter, the prior partnership distributes the resulting partnership 
interests to partners who are designated to receive interests in the 
resulting partnership (Assets-Over Form). Alternatively, for 
partnership divisions, the prior partnership distributes certain assets 
and liabilities to some or all of its partners who then contribute the 
assets and liabilities to a resulting partnership in exchange for 
interests in the resulting partnership (Assets-Up Form). As with 
partnership mergers, the default rule for partnership divisions is the 
Assets-Over Form, so that if a transaction is not characterized under 
the Assets-Up Form, it will be characterized under the Assets-Over Form 
regardless of whether that form is followed.
    One commentator expressed concern that where the assets of an 
operating business are distributed to the partners as joint owners, and 
the partners continue to operate the business, the owners of the assets 
may be considered to remain partners for federal income tax purposes. 
Under the proposed regulations, it was intended that the Assets-Up Form 
would be respected where the assets are conveyed to the partners under 
the laws of the applicable jurisdiction and then reconveyed to the 
resulting partnership. An example has been added to the final 
regulations to confirm this result. The example also confirms that a 
partnership can use the Assets-Up Form for partnership mergers and 
divisions regardless of whether the partners could otherwise generally 
hold certain assets, such as undivided interests in goodwill, outside 
of a partnership.
    The same commentator suggested that the Assets-Up Form should be 
respected if, rather than actually conveying ownership of the assets 
under applicable jurisdictional law, the partners assign their rights 
to receive title to the assets in liquidation of the partnership, or 
direct the partnership to transfer title to the assets to the resulting 
partnership. In providing that the Assets-Up Form would be respected in 
accomplishing partnership mergers and divisions, the IRS and Treasury 
did not intend to establish a regime whereby partners essentially could 
elect between the Assets-Up Form and the Assets-Over Form by creating 
different documents that have the same legal effect. The IRS and 
Treasury believe that if the Assets-Up Form is to be respected, a 
partnership must actually undertake the steps that are necessary, under 
the laws of the applicable jurisdiction, to convey ownership of the 
assets that are distributed to the partners. For most types of assets, 
this will not require the actual transfer and recording of a deed or 
certificate of title.
    While the IRS and Treasury believe that it should be necessary for 
a partnership to actually convey ownership of the partnership's assets 
to its partners in order to follow the Assets-Up Form, it should not be 
necessary for the partners to actually assume the liabilities of the 
partnership in order to follow such form. Pursuant to section 752 and 
the regulations thereunder, a partner essentially is deemed to have 
directly incurred a share of the partnership's liabilities. Requiring 
the partners to actually assume debt that they already are deemed to 
have incurred is unnecessary. Such a requirement also could create a 
trap for the unwary. If a partner momentarily assumes an amount of the 
partnership's debt that is less than the partner's share of such debt 
under section 752 (and other partners momentarily assume an amount of 
debt in excess of their shares), the partner could inappropriately 
recognize gain as a result of the deemed distribution.

II. Bifurcation of Assets-Over Form and Assets-Up Form

    The proposed regulations provide that the form of a partnership 
merger or division accomplished under laws of the applicable 
jurisdiction will be respected if the partnership undertakes the steps 
of either the Assets-Over Form or the Assets-Up Form. One commentator 
recommended that a single partnership merger or division be respected 
if the partnership undertakes the steps of the Assets-Over Form with 
respect to some assets and the Assets-Up Form with respect to others. 
For example, in a partnership merger, the terminating partnership could 
distribute some assets to certain partners who then contribute the 
assets to the resulting partnership in exchange for interests in the 
resulting partnership (Assets-Up Form), and simultaneously, the 
terminating partnership could transfer the remaining assets to the 
resulting partnership in exchange for interests in the resulting 
partnership and then distribute the interests to the remaining partners 
in liquidation of their interests

[[Page 717]]

in the terminating partnership (Assets-Over Form).
    In the preamble to the proposed regulations, the IRS and Treasury 
recognized that there are numerous transactions that may be undertaken 
pursuant to local jurisdictional law to accomplish the result of a 
partnership merger or division. The rules set forth in the proposed 
regulations were not intended to provide unlimited flexibility among 
the various structural alternatives for accomplishing these 
transactions. Instead, the proposed regulations were intended to 
provide a set of administrable rules that taxpayers and the IRS could 
apply in characterizing these transactions.
    In view of this purpose, the IRS and Treasury do not believe it is 
appropriate for a partnership merger to be accomplished using both the 
Assets-Over Form and the Assets-Up Form when all the assets and 
liabilities of the terminated partnership are transferred to a single 
resulting partnership. While a partnership merger may be accomplished 
by using any number of transactional structures, the result is a single 
transaction that combines two partnerships. In the two alternatives set 
forth in the proposed regulations, and adopted in these final 
regulations, each partner must participate (or will be deemed to 
participate) in the partnership merger in the same manner (with the 
exception of those partners who are subject to the buy-out rule). 
Therefore, if the partners wish for a partnership merger to be 
characterized under the Assets-Up Form, the terminated partnership must 
undertake the steps of the Assets-Up Form for all of its assets when it 
distributes the assets to its partners. Otherwise, the transaction will 
be characterized under the Assets-Over Form. However, where more than 
two partnerships are combined, each combination will be viewed as a 
separate merger so that the characterization of a merger of one 
partnership into the resulting partnership under the Assets-Over Form 
will not prevent a simultaneous merger of another partnership into the 
same resulting partnership from being characterized under the Assets-Up 
Form.
    For the same reasons, with respect to partnership divisions, the 
IRS and Treasury believe that it is appropriate to require consistency 
in applying either the Assets-Over Form or the Assets-Up Form to 
characterize a transfer of assets to a resulting partnership. However, 
where a single partnership is divided in a transaction that involves a 
transfer of assets (either actual or deemed) to multiple partnerships, 
the transfer to each resulting partnership should be viewed separately. 
As with mergers involving more than two partnerships, it is consistent 
with the purposes of these regulations, in the context of divisions, to 
allow the transfer to one resulting partnership to be characterized 
under the Assets-Over Form while characterizing the transfer to another 
resulting partnership under the Assets-Up Form. The proposed 
regulations provided an example that illustrates when such a division 
accomplished under both the Assets-Over Form and the Assets-Up Form 
will be respected. The final regulations do not change the example. See 
Sec. 1.708-1(d)(5) Example 7 of the final regulations. The final 
regulations also add an example to illustrate when a division 
accomplished under both the Assets-Over Form and the Assets-Up Form 
will not be respected.

III. Clarification of Partnership Merger Buy-Out Rule

    The proposed regulations contain a special buy-out rule that allows 
a resulting partnership in a merger to fund the purchase of one or more 
partners' interests in a terminating partnership without triggering the 
disguised sale rules, which otherwise would cause all of the partners 
in the terminating partnership to recognize gain or loss as a result of 
the purchase. Specifically, the proposed regulations provide that if 
the merger agreement (or similar document) specifies that the resulting 
partnership is purchasing the exiting partner's interest in the 
terminating partnership and the amount paid for the interest, the 
transaction will be treated as a sale of the exiting partner's interest 
to the resulting partnership.
    Because the transaction described in the proposed regulations is 
treated as a sale of a partnership interest, the resulting partnership 
inherits the exiting partner's capital account in the terminating 
partnership and any section 704(c) liability of the exiting partner. 
Additionally, if the terminating partnership has an election in effect 
under section 754 (or makes an election under section 754), the 
resulting partnership will have a special basis adjustment regarding 
the terminating partnership's property under section 743. The proposed 
regulations provide that the resulting partnership's basis adjustments 
under section 743 must be allocated solely to the partners who were 
partners in the resulting partnership immediately before the merger.
    Commentators questioned whether the exiting partner must be a party 
to the merger agreement in order to obtain the benefit of the special 
buy-out rule contained in the proposed regulations. Another commentator 
asked whether the exiting partner must consent to the sale treatment. 
The commentator explained that it may be difficult to receive consent 
from small investors in a large partnership whose interests are being 
sold to the resulting partnership.
    The IRS and Treasury believe that the exiting partner does not have 
to be a party to the merger agreement in order to obtain the benefit of 
the special buy-out rule. However, to ensure that all partners to the 
transaction treat the transaction consistently when filing their 
returns, the final regulations require that, prior to or 
contemporaneous with the transfer, the exiting partner must consent to 
the sale treatment provided in the special rule.
    Commentators noted that the resulting partnership's basis 
adjustments under section 743 should not be allocated solely to the 
partners who were partners in the resulting partnership immediately 
before the merger. As indicated in Sec. 1.708-1(c)(4) Example 4 of the 
proposed regulations, where the resulting partnership has acquired an 
interest in the terminating partnership in accordance with the special 
buy-out rule, the terminating partnership, as part of the merger, 
distributes assets to the resulting partnership in liquidation of the 
resulting partnership's interest in the terminating partnership. 
Accordingly, the resulting partnership should take an exchanged basis 
in the distributed assets under section 732(b), rather than a 
transferred basis that includes the basis adjustment under section 
743(b). In response to these comments, the IRS and Treasury have 
removed the proposed regulations under section 743 and have clarified 
the example to indicate that the basis rules under section 732(b) 
apply.
    Commentators also asked whether a partnership termination under 
section 708(b)(1)(B) occurs immediately before a merger if exiting 
partners sell 50 percent or more of the total interests in the 
terminating partnership under the buy-out provision. Although not 
discussed in the final regulations, it follows from treating the buyout 
as occurring immediately prior to the merger that, if exiting partners 
sell 50 percent or more of the total interest in the terminating 
partnership's capital and profits as part of a merger, then a 
partnership termination under section 708(b)(1)(B) will occur 
immediately before the merger.

[[Page 718]]

IV. Partnership Division Tax Consequences

    The proposed regulations provide that the resulting partnership 
that is regarded as continuing shall file a return for the taxable year 
of the partnership that has been divided. Commentators requested that 
the final regulations clarify the tax consequences of a partnership 
that is regarded as continuing. For instance, commentators asked how a 
partnership files a return and which partnership retains the prior 
partnership's employer identification number (EIN) when more than one 
resulting partnership is considered a continuation of the prior 
partnership. Additionally, commentators asked whether subsequent 
elections by one resulting partnership that is regarded as continuing 
binds all resulting partnerships that are regarded as continuing.
    In response to these comments, the final regulations clarify 
certain tax consequences that follow from a partnership division when 
more than one resulting partnership is regarded as continuing. 
Specifically, the final regulations provide that when more than one 
resulting partnership is regarded as continuing, the resulting 
partnership that is treated as the divided partnership will file a 
return for the taxable year of the partnership that has been divided 
and retain the EIN of the prior partnership. All other resulting 
partnerships that are regarded as continuing and all new partnerships 
(i.e., resulting partnerships that are not considered continuing) will 
file separate returns for the taxable year beginning on the day after 
the date of the division with new EINs for each partnership.
    The final regulations also provide that all resulting partnerships 
that are continuing partnerships are subject to preexisting elections 
that were made by the prior partnership. However, a post-division 
election that is made by a resulting partnership will not bind any of 
the other resulting partnerships.

V. Definition of Partnership Mergers and Divisions

    The proposed regulations do not define what constitutes a 
partnership merger or division. Some commentators have requested that 
these terms be defined in the final regulations. Other practitioners 
have stated that the selectivity that would be created by attempting to 
draw lines in such definitions could lead to planning opportunities 
that would be adverse to the government's interest. The IRS and 
Treasury have decided not to provide comprehensive definitions of what 
is a partnership merger or division in these final regulations.
    In addition to requesting guidance as to the general definitions of 
a partnership merger and division, some commentators have asked more 
narrowly whether a partnership division can occur when only one partner 
from the prior partnership is a partner in a resulting partnership. 
Consider the following example: ABC partnership owns X business and Y 
business. A and B each own a 20-percent interest, and C owns a 60-
percent interest in the ABC partnership. C does not want to continue in 
the partnership with A and B and would like to operate X business with 
D. Accordingly, ABC partnership distributes X business to C in 
liquidation of C's interest in partnership ABC. Subsequently, C forms a 
partnership with D and contributes X business to the CD partnership. 
After the distribution and contribution of X business, AB partnership 
owns Y business and CD partnership owns X business.
    The IRS and Treasury believe that the above transaction does not 
constitute a division. To have a division, at least two members of the 
prior partnership must be members of each resulting partnership that 
exists after the transaction. In the above example, C is the only 
member of the ABC partnership in the CD partnership. Accordingly, this 
transaction would not be treated as a division for Federal income tax 
purposes. The final regulations modify the proposed regulations to 
clarify this result.

VI. Application of Sections 704(c) and 737 in Partnership Divisions

    In the preamble to the proposed regulations, the IRS and Treasury 
requested comments as to whether expanded exceptions under sections 
704(c)(1)(B) and 737 would be appropriate in the context of partnership 
divisions. Most commentators agreed that it would not be wise to expand 
the current exceptions. In a related point, some commentators stated 
that the contribution of assets in a division should not create new 
section 704(c) property or section 737 net precontribution gain.
    To the extent that a partnership division merely affects a 
restructuring of the form in which the partners hold property (that is, 
each partner's overall interest in each partnership property does not 
change), the IRS and Treasury agree that a partnership division should 
not create new section 704(c) property or section 737 net 
precontribution gain. However, it is not clear that this result is 
necessarily appropriate where a division is non-pro rata as to the 
partners, where some property is extracted from or added to the 
partnerships in connection with the division, or where new partners are 
added to the ownership group in connection with the division. The IRS 
and Treasury intend to study this issue and request comments in this 
regard.

VII. Effective Date

    The proposed regulations apply to mergers and divisions occurring 
on or after the date final regulations are published in the Federal 
Register. Commentators requested that the final regulations allow 
partnerships to apply the regulations to mergers and divisions 
occurring on or after January 11, 2000, (the date the proposed 
regulations were published in the Federal Register). The commentators 
explained that the regulations provide needed clarity in an area that 
has lacked guidance.
    The IRS and Treasury believe it is appropriate to allow 
partnerships to apply the final regulations retroactively to the 
publication date of the proposed regulations. Therefore, the final 
regulations apply to mergers and divisions occurring on or after 
January 4, 2001. However, a partnership may apply the rules in the 
final regulations for mergers and divisions occurring on or after 
January 11, 2000.

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. 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 
these regulations do not impose on small entities a collection of 
information requirement, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis 
is not required. Pursuant to section 7805(f) of the Internal Revenue 
Code, the notice of proposed rulemaking that preceded these regulations 
was submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Mary Beth Collins, 
Office of Chief Counsel (Passthroughs and Special Industries). However, 
other personnel from the IRS and Treasury participated in their 
development.

[[Page 719]]

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:

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 * * *


Sec. 1.708-1  [Amended]

    Par. 2. Section 1.708-1 is amended as follows:
    1. Paragraph (b) is amended by removing paragraph (b)(2) and by 
redesignating each paragraph listed in the first column of the 
following table as the paragraph listed in the second column as 
indicated in the following table:

------------------------------------------------------------------------
               Old paragraph                   Redesignated  paragraph
------------------------------------------------------------------------
(b)(1)(i).................................  (b)(1)
(b)(1)(i)(a)..............................  (b)(1)(i)
(b)(1)(i)(b)..............................  (b)(1)(ii)
(b)(1)(ii)................................  (b)(2)
(b)(1)(iii)...............................  (b)(3)
(b)(1)(iii)(a)............................  (b)(3)(i)
(b)(1)(iii)(b)............................  (b)(3)(ii)
(b)(1)(iv)................................  (b)(4)
(b)(1)(v).................................  (b)(5)
------------------------------------------------------------------------

    2. Paragraphs (c) and (d) are added to read as follows:


Sec. 1.708-1  Continuation of partnership.

* * * * *
    (c) Merger or consolidation--(1) General rule. If two or more 
partnerships merge or consolidate into one partnership, the resulting 
partnership shall be considered a continuation of the merging or 
consolidating partnership the members of which own an interest of more 
than 50 percent in the capital and profits of the resulting 
partnership. If the resulting partnership can, under the preceding 
sentence, be considered a continuation of more than one of the merging 
or consolidating partnerships, it shall, unless the Commissioner 
permits otherwise, be considered the continuation solely of that 
partnership which is credited with the contribution of assets having 
the greatest fair market value (net of liabilities) to the resulting 
partnership. Any other merging or consolidating partnerships shall be 
considered as terminated. If the members of none of the merging or 
consolidating partnerships have an interest of more than 50 percent in 
the capital and profits of the resulting partnership, all of the merged 
or consolidated partnerships are terminated, and a new partnership 
results.
    (2) Tax returns. The taxable years of any merging or consolidating 
partnerships which are considered terminated shall be closed in 
accordance with the provisions of section 706(c) and the regulations 
thereunder, and such partnerships shall file their returns for a 
taxable year ending upon the date of termination, i.e., the date of 
merger or consolidation. The resulting partnership shall file a return 
for the taxable year of the merging or consolidating partnership that 
is considered as continuing. The return shall state that the resulting 
partnership is a continuation of such merging or consolidating 
partnership, shall retain the employer identification number (EIN) of 
the partnership that is continuing, and shall include the names, 
addresses, and EINs of the other merged or consolidated partnerships. 
The respective distributive shares of the partners for the periods 
prior to and including the date of the merger or consolidation and 
subsequent to the date of merger or consolidation shall be shown as a 
part of the return.
    (3) Form of a merger or consolidation--(i) Assets-over form. When 
two or more partnerships merge or consolidate into one partnership 
under the applicable jurisdictional law without undertaking a form for 
the merger or consolidation, or undertake a form for the merger or 
consolidation that is not described in paragraph (c)(3)(ii) of this 
section, any merged or consolidated partnership that is considered 
terminated under paragraph (c)(1) of this section is treated as 
undertaking the assets-over form for Federal income tax purposes. Under 
the assets-over form, the merged or consolidated partnership that is 
considered terminated under paragraph (c)(1) of this section 
contributes all of its assets and liabilities to the resulting 
partnership in exchange for an interest in the resulting partnership, 
and immediately thereafter, the terminated partnership distributes 
interests in the resulting partnership to its partners in liquidation 
of the terminated partnership.
    (ii) Assets-up form. Despite the partners' transitory ownership of 
the terminated partnership's assets, the form of a partnership merger 
or consolidation will be respected for Federal income tax purposes if 
the merged or consolidated partnership that is considered terminated 
under paragraph (c)(1) of this section distributes all of its assets to 
its partners (in a manner that causes the partners to be treated, under 
the laws of the applicable jurisdiction, as the owners of such assets) 
in liquidation of the partners' interests in the terminated 
partnership, and immediately thereafter, the partners in the terminated 
partnership contribute the distributed assets to the resulting 
partnership in exchange for interests in the resulting partnership.
    (4) Sale of an interest in the merging or consolidating 
partnership. In a transaction characterized under the assets-over form, 
a sale of all or part of a partner's interest in the terminated 
partnership to the resulting partnership that occurs as part of a 
merger or consolidation under section 708(b)(2)(A), as described in 
paragraph (c)(3)(i) of this section, will be respected as a sale of a 
partnership interest if the merger agreement (or another document) 
specifies that the resulting partnership is purchasing interests from a 
particular partner in the merging or consolidating partnership and the 
consideration that is transferred for each interest sold, and if the 
selling partner in the terminated partnership, either prior to or 
contemporaneous with the transaction, consents to treat the transaction 
as a sale of the partnership interest. See section 741 and Sec. 1.741-1 
for determining the selling partner's gain or loss on the sale or 
exchange of the partnership interest.
    (5) Examples. The following examples illustrate the rules in 
paragraphs (c)(1) through (4) of this section:

    Example 1. Partnership AB, in whose capital and profits A and B 
each own a 50-percent interest, and partnership CD, in whose capital 
and profits C and D each own a 50-percent interest, merge on 
September 30, 1999, and form partnership ABCD. Partners A, B, C, and 
D are on a calendar year, and partnership AB and partnership CD also 
are on a calendar year. After the merger, the partners have capital 
and profits interests as follows: A, 30 percent; B, 30 percent; C, 
20 percent; and D, 20 percent. Since A and B together own an 
interest of more than 50 percent in the capital and profits of 
partnership ABCD, such partnership shall be considered a 
continuation of partnership AB and shall continue to file returns on 
a calendar year basis. Since C and D own an interest of less than 50 
percent in the capital and profits of partnership ABCD, the taxable 
year of partnership CD closes as of September 30, 1999, the date of 
the merger, and partnership CD is terminated as of that date. 
Partnership ABCD is required to file a return for the taxable year 
January 1 to December 31, 1999, indicating thereon that, until 
September 30, 1999, it was partnership AB. Partnership CD is 
required to file a return for

[[Page 720]]

its final taxable year, January 1 through September 30, 1999.
    Example 2. (i) Partnership X, in whose capital and profits A 
owns a 40-percent interest and B owns a 60-percent interest, and 
partnership Y, in whose capital and profits B owns a 60-percent 
interest and C owns a 40-percent interest, merge on September 30, 
1999. The fair market value of the partnership X assets (net of 
liabilities) is $100X, and the fair market value of the partnership 
Y assets (net of liabilities) is $200X. The merger is accomplished 
under state law by partnership Y contributing its assets and 
liabilities to partnership X in exchange for interests in 
partnership X, with partnership Y then liquidating, distributing 
interests in partnership X to B and C.
    (ii) B, a partner in both partnerships prior to the merger, owns 
a greater than 50-percent interest in the resulting partnership 
following the merger. Accordingly, because the fair market value of 
partnership Y's assets (net of liabilities) was greater than that of 
partnership X's, under paragraph (c)(1) of this section, partnership 
X will be considered to terminate in the merger. As a result, even 
though, for state law purposes, the transaction was undertaken with 
partnership Y contributing its assets and liabilities to partnership 
X and distributing interests in partnership X to its partners, 
pursuant to paragraph (c)(3)(i) of this section, for Federal income 
tax purposes, the transaction will be treated as if partnership X 
contributed its assets to partnership Y in exchange for interests in 
partnership Y and then liquidated, distributing interests in 
partnership Y to A and B.
    Example 3. (i) The facts are the same as in Example 2, except 
that partnership X is engaged in a trade or business and has, as one 
of its assets, goodwill. In addition, the merger is accomplished 
under state law by having partnership X convey an undivided 40-
percent interest in each of its assets to A and an undivided 60-
percent interest in each of its assets to B, with A and B then 
contributing their interests in such assets to partnership Y. 
Partnership Y also assumes all of the liabilities of partnership X.
    (ii) Under paragraph (c)(3)(ii) of this section, the form of the 
partnership merger will be respected so that partnership X will be 
treated as following the assets-up form for Federal income tax 
purposes.
    Example 4. (i) Partnership X and partnership Y merge when the 
partners of partnership X transfer their partnership X interests to 
partnership Y in exchange for partnership Y interests. Immediately 
thereafter, partnership X liquidates into partnership Y. The 
resulting partnership is considered a continuation of partnership Y, 
and partnership X is considered terminated.
    (ii) The partnerships are treated as undertaking the assets-over 
form described in paragraph (c)(3)(i) of this section because the 
partnerships undertook a form that is not the assets-up form 
described in paragraph (c)(3)(ii) of this section. Accordingly, for 
Federal income tax purposes, partnership X is deemed to contribute 
its assets and liabilities to partnership Y in exchange for 
interests in partnership Y, and, immediately thereafter, partnership 
X is deemed to have distributed the interests in partnership Y to 
its partners in liquidation of their interests in partnership X.
    Example 5. (i) A, B, and C are partners in partnership X. D, E, 
and F are partners in Partnership Y. Partnership X and partnership Y 
merge, and the resulting partnership is considered a continuation of 
partnership Y. Partnership X is considered terminated. Under state 
law, partnerships X and Y undertake the assets-over form of 
paragraph (c)(3)(i) of this section to accomplish the partnership 
merger. C does not want to become a partner in partnership Y, and 
partnership X does not have the resources to buy C's interest before 
the merger. C, partnership X, and partnership Y enter into an 
agreement specifying that partnership Y will purchase C's interest 
in partnership X for $150 before the merger, and as part of the 
agreement, C consents to treat the transaction in a manner that is 
consistent with the agreement. As part of the merger, partnership X 
receives from partnership Y $150 that will be distributed to C 
immediately before the merger, and interests in partnership Y in 
exchange for partnership X's assets and liabilities.
    (ii) Because the merger agreement satisfies the requirements of 
paragraph (c)(4) of this section and C provides the necessary 
consent, C will be treated as selling its interest in partnership X 
to partnership Y for $150 before the merger. See section 741 and 
Sec. 1.741-1 to determine the amount and character of C's gain or 
loss on the sale or exchange of its interest in partnership X.
    (iii) Because the merger agreement satisfies the requirements of 
paragraph (c)(4) of this section, partnership Y is considered to 
have purchased C's interest in partnership X for $150 immediately 
before the merger. See Sec. 1.704-1(b)(2)(iv)(l) for determining 
partnership Y's capital account in partnership X. Partnership Y's 
adjusted basis of its interest in partnership X is determined under 
section 742 and Sec. 1.742-1. To the extent any built-in gain or 
loss on section 704(c) property in partnership X would have been 
allocated to C (including any allocations with respect to property 
revaluations under section 704(b) (reverse section 704(c) 
allocations)), see section 704 and Sec. 1.704-3(a)(7) for 
determining the built-in gain or loss or reverse section 704(c) 
allocations apportionable to partnership Y. Similarly, after the 
merger is completed, the built-in gain or loss and reverse section 
704(c) allocations attributable to C's interest are apportioned to 
D, E, and F under section 704(c) and Sec. 1.704-3(a)(7).
    (iv) Under paragraph (c)(3)(i) of this section, partnership X 
contributes its assets and liabilities attributable to the interests 
of A and B to partnership Y in exchange for interests in partnership 
Y; and, immediately thereafter, partnership X distributes the 
interests in partnership Y to A and B in liquidation of their 
interests in partnership X. At the same time, partnership X 
distributes assets to partnership Y in liquidation of partnership 
Y's interest in partnership X. Partnership Y's bases in the 
distributed assets are determined under section 732(b).

    (6) Prescribed form not followed in certain circumstances. (i) If 
any transactions described in paragraph (c)(3) or (4) of this section 
are part of a larger series of transactions, and the substance of the 
larger series of transactions is inconsistent with following the form 
prescribed in such paragraph, the Commissioner may disregard such form, 
and may recast the larger series of transactions in accordance with 
their substance.
    (ii) Example. The following example illustrates the rules in 
paragraph (c)(6) of this section:

    Example. A, B, and C are equal partners in partnership ABC. ABC 
holds no section 704(c) property. D and E are equal partners in 
partnership DE. B and C want to exchange their interests in ABC for 
all of the interests in DE. However, rather than exchanging 
partnership interests, DE merges with ABC by undertaking the assets-
up form described in paragraph (c)(3)(ii) of this section, with D 
and E receiving title to the DE assets and then contributing the 
assets to ABC in exchange for interests in ABC. As part of a 
prearranged transaction, the assets acquired from DE are contributed 
to a new partnership, and the interests in the new partnership are 
distributed to B and C in complete liquidation of their interests in 
ABC. The merger and division in this example represent a series of 
transactions that in substance are an exchange of interests in ABC 
for interests in DE. Even though paragraph (c)(3)(ii) of this 
section provides that the form of a merger will be respected for 
Federal income tax purposes if the steps prescribed under the 
assets-up form are followed, and paragraph (d)(3)(i) of this section 
provides a form that will be followed for Federal income tax 
purposes in the case of partnership divisions, these forms will not 
be respected for Federal income tax purposes under these facts, and 
the transactions will be recast in accordance with their substance 
as a taxable exchange of interests in ABC for interests in DE.

    (7) Effective date. This paragraph (c) is applicable to partnership 
mergers occurring on or after January 4, 2001. However, a partnership 
may apply paragraph (c) of this section to partnership mergers 
occurring on or after January 11, 2000.
    (d) Division of a partnership--(1) General rule. Upon the division 
of a partnership into two or more partnerships, any resulting 
partnership (as defined in paragraph (d)(4)(iv) of this section) or 
resulting partnerships shall be considered a continuation of the prior 
partnership (as defined in paragraph (d)(4)(ii) of this section) if the 
members of the resulting partnership or partnerships had an interest of 
more than 50 percent in the capital and profits of the prior 
partnership. Any other resulting partnership will not be considered a 
continuation of the prior partnership but will be considered a new 
partnership. If the members of none

[[Page 721]]

of the resulting partnerships owned an interest of more than 50 percent 
in the capital and profits of the prior partnership, none of the 
resulting partnerships will be considered a continuation of the prior 
partnership, and the prior partnership will be considered to have 
terminated. Where members of a partnership which has been divided into 
two or more partnerships do not become members of a resulting 
partnership which is considered a continuation of the prior 
partnership, such members' interests shall be considered liquidated as 
of the date of the division.
    (2) Tax consequences--(i) Tax returns. The resulting partnership 
that is treated as the divided partnership (as defined in paragraph 
(d)(4)(i) of this section) shall file a return for the taxable year of 
the partnership that has been divided and retain the employer 
identification number (EIN) of the prior partnership. The return shall 
include the names, addresses, and EINs of all resulting partnerships 
that are regarded as continuing. The return shall also state that the 
partnership is a continuation of the prior partnership and shall set 
forth separately the respective distributive shares of the partners for 
the periods prior to and including the date of the division and 
subsequent to the date of division. All other resulting partnerships 
that are regarded as continuing and new partnerships shall file 
separate returns for the taxable year beginning on the day after the 
date of the division with new EINs for each partnership. The return for 
a resulting partnership that is regarded as continuing and that is not 
the divided partnership shall include the name, address, and EIN of the 
prior partnership.
    (ii) Elections. All resulting partnerships that are regarded as 
continuing are subject to preexisting elections that were made by the 
prior partnership. A subsequent election that is made by a resulting 
partnership does not affect the other resulting partnerships.
    (3) Form of a division--(i) Assets-over form. When a partnership 
divides into two or more partnerships under applicable jurisdictional 
law without undertaking a form for the division, or undertakes a form 
that is not described in paragraph (d)(3)(ii) of this section, the 
transaction will be characterized under the assets-over form for 
Federal income tax purposes.
    (A) Assets-over form where at least one resulting partnership is a 
continuation of the prior partnership. In a division under the assets-
over form where at least one resulting partnership is a continuation of 
the prior partnership, the divided partnership (as defined in paragraph 
(d)(4)(i) of this section) contributes certain assets and liabilities 
to a recipient partnership (as defined in paragraph (d)(4)(iii) of this 
section) or recipient partnerships in exchange for interests in such 
recipient partnership or partnerships; and, immediately thereafter, the 
divided partnership distributes the interests in such recipient 
partnership or partnerships to some or all of its partners in partial 
or complete liquidation of the partners' interests in the divided 
partnership.
    (B) Assets-over form where none of the resulting partnerships is a 
continuation of the prior partnership. In a division under the assets-
over form where none of the resulting partnerships is a continuation of 
the prior partnership, the prior partnership will be treated as 
contributing all of its assets and liabilities to new resulting 
partnerships in exchange for interests in the resulting partnerships; 
and, immediately thereafter, the prior partnership will be treated as 
liquidating by distributing the interests in the new resulting 
partnerships to the prior partnership's partners.
    (ii) Assets-up form--(A) Assets-up form where the partnership 
distributing assets is a continuation of the prior partnership. Despite 
the partners' transitory ownership of some of the prior partnership's 
assets, the form of a partnership division will be respected for 
Federal income tax purposes if the divided partnership (which, pursuant 
to Sec. 1.708-1(d)(4)(i), must be a continuing partnership) distributes 
certain assets (in a manner that causes the partners to be treated, 
under the laws of the applicable jurisdiction, as the owners of such 
assets) to some or all of its partners in partial or complete 
liquidation of the partners' interests in the divided partnership, and 
immediately thereafter, such partners contribute the distributed assets 
to a recipient partnership or partnerships in exchange for interests in 
such recipient partnership or partnerships. In order for such form to 
be respected for transfers to a particular recipient partnership, all 
assets held by the prior partnership that are transferred to the 
recipient partnership must be distributed to, and then contributed by, 
the partners of the recipient partnership.
    (B) Assets-up form where none of the resulting partnerships are a 
continuation of the prior partnership. If none of the resulting 
partnerships are a continuation of the prior partnership, then despite 
the partners' transitory ownership of some or all of the prior 
partnership's assets, the form of a partnership division will be 
respected for Federal income tax purposes if the prior partnership 
distributes certain assets (in a manner that causes the partners to be 
treated, under the laws of the applicable jurisdiction, as the owners 
of such assets) to some or all of its partners in partial or complete 
liquidation of the partners' interests in the prior partnership, and 
immediately thereafter, such partners contribute the distributed assets 
to a resulting partnership or partnerships in exchange for interests in 
such resulting partnership or partnerships. In order for such form to 
be respected for transfers to a particular resulting partnership, all 
assets held by the prior partnership that are transferred to the 
resulting partnership must be distributed to, and then contributed by, 
the partners of the resulting partnership. If the prior partnership 
does not liquidate under the applicable jurisdictional law, then with 
respect to the assets and liabilities that, in form, are not 
transferred to a new resulting partnership, the prior partnership will 
be treated as transferring these assets and liabilities to a new 
resulting partnership under the assets-over form described in paragraph 
(d)(3)(i)(B) of this section.
    (4) Definitions--(i) Divided partnership. For purposes of paragraph 
(d) of this section, the divided partnership is the continuing 
partnership which is treated, for Federal income tax purposes, as 
transferring the assets and liabilities to the recipient partnership or 
partnerships, either directly (under the assets-over form) or 
indirectly (under the assets-up form). If the resulting partnership 
that, in form, transferred the assets and liabilities in connection 
with the division is a continuation of the prior partnership, then such 
resulting partnership will be treated as the divided partnership. If a 
partnership divides into two or more partnerships and only one of the 
resulting partnerships is a continuation of the prior partnership, then 
the resulting partnership that is a continuation of the prior 
partnership will be treated as the divided partnership. If a 
partnership divides into two or more partnerships without undertaking a 
form for the division that is recognized under paragraph (d)(3) of this 
section, or if the resulting partnership that had, in form, transferred 
assets and liabilities is not considered a continuation of the prior 
partnership, and more than one resulting partnership is considered a 
continuation of the prior partnership, the continuing resulting 
partnership with the assets having the greatest fair

[[Page 722]]

market value (net of liabilities) will be treated as the divided 
partnership.
    (ii) Prior partnership. For purposes of paragraph (d) of this 
section, the prior partnership is the partnership subject to division 
that exists under applicable jurisdictional law before the division.
    (iii) Recipient partnership. For purposes of paragraph (d) of this 
section, a recipient partnership is a partnership that is treated as 
receiving, for Federal income tax purposes, assets and liabilities from 
a divided partnership, either directly (under the assets-over form) or 
indirectly (under the assets-up form).
    (iv) Resulting partnership. For purposes of paragraph (d) of this 
section, a resulting partnership is a partnership resulting from the 
division that exists under applicable jurisdictional law after the 
division and that has at least two partners who were partners in the 
prior partnership. For example, where a prior partnership divides into 
two partnerships, both partnerships existing after the division are 
resulting partnerships.
    (5) Examples. The following examples illustrate the rules in 
paragraphs (d)(1), (2), (3), and (4) of this section:

    Example 1. Partnership ABCD is in the real estate and insurance 
businesses. A owns a 40-percent interest, and B, C, and D each owns 
a 20-percent interest, in the capital and profits of the 
partnership. The partnership and the partners report their income on 
a calendar year. On November 1, 1999, they separate the real estate 
and insurance businesses and form two partnerships. Partnership AB 
takes over the real estate business, and partnership CD takes over 
the insurance business. Because members of resulting partnership AB 
owned more than a 50-percent interest in the capital and profits of 
partnership ABCD (A, 40 percent, and B, 20 percent), partnership AB 
shall be considered a continuation of partnership ABCD. Partnership 
AB is required to file a return for the taxable year January 1 to 
December 31, 1999, indicating thereon that until November 1, 1999, 
it was partnership ABCD. Partnership CD is considered a new 
partnership formed at the beginning of the day on November 2, 1999, 
and is required to file a return for the taxable year it adopts 
pursuant to section 706(b) and the applicable regulations.
    Example 2. (i) Partnership ABCD owns properties W, X, Y, and Z, 
and divides into partnership AB and partnership CD. Under paragraph 
(d)(1) of this section, partnership AB is considered a continuation 
of partnership ABCD and partnership CD is considered a new 
partnership. Partnership ABCD distributes property Y to C and titles 
property Y in C's name. Partnership ABCD distributes property Z to D 
and titles property Z in D's name. C and D then contribute 
properties Y and Z, respectively, to partnership CD in exchange for 
interests in partnership CD. Properties W and X remain in 
partnership AB.
    (ii) Under paragraph (d)(3)(ii) of this section, partnership 
ABCD will be treated as following the assets-up form for Federal 
income tax purposes.
    Example 3. (i) The facts are the same as in Example 2, except 
partnership ABCD distributes property Y to C and titles property Y 
in C's name. C then contributes property Y to partnership CD. 
Simultaneously, partnership ABCD contributes property Z to 
partnership CD in exchange for an interest in partnership CD. 
Immediately thereafter, partnership ABCD distributes the interest in 
partnership CD to D in liquidation of D's interest in partnership 
ABCD.
    (ii) Under paragraph (d)(3)(i) of this section, because 
partnership ABCD did not undertake the assets-up form with respect 
to all of the assets transferred to partnership CD, partnership ABCD 
will be treated as undertaking the assets-over form in transferring 
the assets to partnership CD. Accordingly, for Federal income tax 
purposes, partnership ABCD is deemed to contribute property Y and 
property Z to partnership CD in exchange for interests in 
partnership CD, and immediately thereafter, partnership ABCD is 
deemed to distribute the interests in partnership CD to partner C 
and partner D in liquidation of their interests in partnership ABCD.
    Example 4. (i) Partnership ABCD owns three parcels of property: 
property X, with a value of $500; property Y, with a value of $300; 
and property Z, with a value of $200. A and B each own a 40-percent 
interest in the capital and profits of partnership ABCD, and C and D 
each own a 10 percent interest in the capital and profits of 
partnership ABCD. On November 1, 1999, partnership ABCD divides into 
three partnerships (AB1, AB2, and CD) by contributing property X to 
a newly formed partnership (AB1) and distributing all interests in 
such partnership to A and B as equal partners, and by contributing 
property Z to a newly formed partnership (CD) and distributing all 
interests in such partnership to C and D as equal partners in 
exchange for all of their interests in partnership ABCD. While 
partnership ABCD does not transfer property Y, C and D cease to be 
partners in the partnership. Accordingly, after the division, the 
partnership holding property Y is referred to as partnership AB2.
    (ii) Partnerships AB1 and AB2 both are considered a continuation 
of partnership ABCD, while partnership CD is considered a new 
partnership formed at the beginning of the day on November 2, 1999. 
Under paragraph (d)(3)(i)(A) of this section, partnership ABCD will 
be treated as following the assets-over form, with partnership ABCD 
contributing property X to partnership AB1 and property Z to 
partnership CD, and distributing the interests in such partnerships 
to the designated partners.
    Example 5. (i) The facts are the same as in Example 4, except 
that partnership ABCD divides into three partnerships by operation 
of state law, without undertaking a form.
    (ii) Under the last sentence of paragraph (d)(4)(i) of this 
section, partnership AB1 will be treated as the resulting 
partnership that is the divided partnership. Under paragraph 
(d)(3)(i)(A) of this section, partnership ABCD will be treated as 
following the assets-over form, with partnership ABCD contributing 
property Y to partnership AB2 and property Z to partnership CD, and 
distributing the interests in such partnerships to the designated 
partners.
    Example 6. (i) The facts are the same as in Example 4, except 
that partnership ABCD divides into three partnerships by 
contributing property X to newly-formed partnership AB1 and property 
Y to newly-formed partnership AB2 and distributing all interests in 
each partnership to A and B in exchange for all of their interests 
in partnership ABCD.
    (ii) Because resulting partnership CD is not a continuation of 
the prior partnership (partnership ABCD), partnership CD cannot be 
treated, for Federal income tax purposes, as the partnership that 
transferred assets (i.e., the divided partnership), but instead must 
be treated as a recipient partnership. Under the last sentence of 
paragraph (d)(4)(i) of this section, partnership AB1 will be treated 
as the resulting partnership that is the divided partnership. Under 
paragraph (d)(3)(i)(A) of this section, partnership ABCD will be 
treated as following the assets-over form, with partnership ABCD 
contributing property Y to partnership AB2 and property Z to 
partnership CD, and distributing the interests in such partnerships 
to the designated partners.
    Example 7. (i) Partnership ABCDE owns Blackacre, Whiteacre, and 
Redacre, and divides into partnership AB, partnership CD, and 
partnership DE. Under paragraph (d)(1) of this section, partnership 
ABCDE is considered terminated (and, hence, none of the resulting 
partnerships are a continuation of the prior partnership) because 
none of the members of the new partnerships (partnership AB, 
partnership CD, and partnership DE) owned an interest of more than 
50 percent in the capital and profits of partnership ABCDE.
    (ii) Partnership ABCDE distributes Blackacre to A and B and 
titles Blackacre in the names of A and B. A and B then contribute 
Blackacre to partnership AB in exchange for interests in partnership 
AB. Partnership ABCDE will be treated as following the assets-up 
form described in paragraph (d)(3)(ii)(B) of this section for 
Federal income tax purposes.
    (iii) Partnership ABCDE distributes Whiteacre to C and D and 
titles Whiteacre in the names of C and D. C and D then contribute 
Whiteacre to partnership CD in exchange for interests in partnership 
CD. Partnership ABCDE will be treated as following the assets-up 
form described in paragraph (d)(3)(ii)(B) of this section for 
Federal income tax purposes.
    (iv) Partnership ABCDE does not liquidate under state law so 
that, in form, the assets in new partnership DE are not considered 
to have been transferred under state law. Partnership ABCDE will be 
treated as undertaking the assets-over form described in paragraph 
(d)(3)(i)(B) of this section for Federal income tax purposes with 
respect to the assets of partnership DE. Thus, partnership ABCDE 
will be treated as contributing Redacre to partnership DE in

[[Page 723]]

exchange for interests in partnership DE; and, immediately 
thereafter, partnership ABCDE will be treated as distributing 
interests in partnership DE to D and E in liquidation of their 
interests in partnership ABCDE. Partnership ABCDE then terminates.

    (6) Prescribed form not followed in certain circumstances. If any 
transactions described in paragraph (d)(3) of this section are part of 
a larger series of transactions, and the substance of the larger series 
of transactions is inconsistent with following the form prescribed in 
such paragraph, the Commissioner may disregard such form, and may 
recast the larger series of transactions in accordance with their 
substance.
    (7) Effective date. This paragraph (d) is applicable to partnership 
divisions occurring on or after January 4, 2001. However, a partnership 
may apply paragraph (d) of this section to partnership divisions 
occurring on or after January 11, 2000.

    Par. 3. Section 1.752-1 is amended as follows:
    1. A sentence is added to the end of paragraph (f).
    2. The current Example in paragraph (g) is redesignated as Example 
1.
    3. Example 2 is added in paragraph (g).
    The additions read as follows:


Sec. 1.752-1  Treatment of partnership liabilities.

* * * * *
    (f) * * * When two or more partnerships merge or consolidate under 
section 708(b)(2)(A), as described in Sec. 1.708-1(c)(3)(i), increases 
and decreases in partnership liabilities associated with the merger or 
consolidation are netted by the partners in the terminating partnership 
and the resulting partnership to determine the effect of the merger 
under section 752.
    (g) * * *

    Example 1. * * *
    Example 2. Merger or consolidation of partnerships holding 
property encumbered by liabilities. (i) B owns a 70 percent interest 
in partnership T. Partnership T's sole asset is property X, which is 
encumbered by a $900 liability. Partnership T's adjusted basis in 
property X is $600, and the value of property X is $1,000. B's 
adjusted basis in its partnership T interest is $420. B also owns a 
20 percent interest in partnership S. Partnership S's sole asset is 
property Y, which is encumbered by a $100 liability. Partnership S's 
adjusted basis in property Y is $200, the value of property Y is 
$1,000, and B's adjusted basis in its partnership S interest is $40.
    (ii) Partnership T and partnership S merge under section 
708(b)(2)(A). Under section 708(b)(2)(A) and Sec. 1.708-1(c)(1), 
partnership T is considered terminated and the resulting partnership 
is considered a continuation of partnership S. Partnerships T and S 
undertake the form described in Sec. 1.708-1(c)(3)(i) for the 
partnership merger. Under Sec. 1.708-1(c)(3)(i), partnership T 
contributes property X and its $900 liability to partnership S in 
exchange for an interest in partnership S. Immediately thereafter, 
partnership T distributes the interests in partnership S to its 
partners in liquidation of their interests in partnership T. B owns 
a 25 percent interest in partnership S after partnership T 
distributes the interests in partnership S to B.
    (iii) Under paragraph (f) of this section, B nets the increases 
and decreases in its share of partnership liabilities associated 
with the merger of partnership T and partnership S. Before the 
merger, B's share of partnership liabilities was $650 (B had a $630 
share of partnership liabilities in partnership T and a $20 share of 
partnership liabilities in partnership S immediately before the 
merger). B's share of S's partnership liabilities after the merger 
is $250 (25 percent of S's total partnership liabilities of $1,000). 
Accordingly, B has a $400 net decrease in its share of S's 
partnership liabilities. Thus, B is treated as receiving a $400 
distribution from partnership S under section 752(b). Because B's 
adjusted basis in its partnership S interest before the deemed 
distribution under section 752(b) is $460 ($420 + $40), B will not 
recognize gain under section 731. After the merger, B's adjusted 
basis in its partnership S interest is $60.
* * * * *

    Par. 4. In Sec. 1.752-5, paragraph (a) is amended by adding two 
sentences after the third sentence.


Sec. 1.752-5  Effective dates and transition rules.

    (a) In general. * * * In addition, Sec. 1.752-1(f) last sentence 
and (g) Example 2, do not apply to any liability incurred or assumed by 
a partnership prior to January 4, 2001. Nevertheless, Sec. 1.752-1(f) 
last sentence and (g) Example 2, may be relied on for any liability 
incurred or assumed by a partnership prior to January 4, 2001 and, 
unless the partnership makes an election under paragraph (b)(1) of this 
section, on or after December 28, 1991, other than a liability incurred 
or assumed by the partnership pursuant to a written binding contract in 
effect prior to December 28, 1991 and at all times thereafter. * * *
* * * * *

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.

    Approved: December 20, 2000.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 01-202 Filed 1-3-01; 8:45 am]
BILLING CODE 4830-01-P