[Federal Register Volume 68, Number 87 (Tuesday, May 6, 2003)]
[Proposed Rules]
[Pages 23931-23935]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11212]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-100818-01]
RIN 1545-AY74


Liabilities Assumed in Certain Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The IRS and Treasury are considering publishing a notice of 
proposed rulemaking proposing rules regarding the amount of a liability 
a transferee of property is treated as assuming in connection with a 
transfer of property and certain tax consequences that result from the 
transferee's assumption of such a liability. This document describes 
and explains the issues that the IRS and Treasury are considering 
addressing in the notice of proposed rulemaking and the rules that the 
IRS and Treasury might propose to address some of these issues. This 
document also invites comments regarding these issues and rules.

DATES: Written or electronic comments must be received by August 4, 
2003.

ADDRESSES: Send submissions to: CC:PA:RU (REG-100818-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand-delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to CC:PA:RU (REG-100818-01), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit comments 
electronically directly to the IRS Internet site at www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning the proposals, please 
contact Douglas Bates, (202) 622-7550 (not a toll-free number). 
Concerning submissions, please contact Treena Garrett, (202) 622-7180 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Sections 357(d) and 362(d) of the Internal Revenue Code (Code) were 
enacted as part of the Miscellaneous Trade and Technical Corrections 
Act of 1999 (Public Law 106-36) and are effective for transfers after 
October 18, 1998. Section 357(d) provides rules for determining the 
amount of liability treated as assumed for purposes of sections 357, 
358(d), 358(h), 362(d), 368(a)(1)(C), and 368(a)(2)(B). Section 357(d) 
was enacted to clarify the amount of liability treated as assumed where 
multiple assets secure a single liability and some, but not all, of 
those assets are transferred to a transferee corporation. Section 
362(d) was enacted to clarify and limit the amount of the transferee's 
basis in the transferred property in certain cases. The legislative 
history of sections 357(d) and 362(d) indicates that Congress was 
concerned that if multiple transferees were treated as assuming the 
same liability, taxpayers might assert that the basis of multiple 
assets reflects the assumption of the same liability, resulting in 
assets having a basis in excess of their value and, thus, excessive 
depreciation deductions and mismeasurement of income. Section 357(d) 
was intended to eliminate the uncertainty of the tax treatment for such 
liabilities and to prescribe the tax treatment of such liabilities in a 
manner that better reflects the underlying economics of the transfer. 
The legislative history of section 357(d) also reflects that Congress 
intended to eliminate the distinction between the assumption of a 
liability and the acquisition of an asset that is subject to a 
liability. See S. Rep. No. 106-2 at 75 (1999).
    Section 357(d)(1)(A) provides that, except as provided in 
regulations, a recourse liability will be treated as assumed if the 
transferee has agreed, and is expected, to satisfy it, regardless of 
whether the transferor is relieved of the liability. In addition, 
section 357(d)(1)(B) provides that a nonrecourse liability is treated 
as assumed by the

[[Page 23932]]

transferee of any asset subject to such liability. Section 357(d)(2), 
however, reduces the amount of nonrecourse liability treated as assumed 
pursuant to section 357(d)(1)(B) by the lesser of (1) the amount of 
such liability that the owner of assets not transferred to the 
transferee and also subject to such liability has agreed, and is 
expected, to satisfy or (2) the fair market value of such other assets 
(determined without regard to section 7701(g)). Section 357(d)(3) 
directs the Secretary to prescribe such regulations as may be necessary 
to carry out the purposes of sections 357(d) and 362(d), and to 
prescribe regulations providing that the manner in which a liability is 
treated as assumed under section 357(d) is applied, where appropriate, 
elsewhere in the Code. The rules of section 357(d) apply to determine 
the amount of liability treated as assumed for purposes of not only 
those Code provisions listed in section 357(d), but also certain other 
Code provisions, including sections 584 and 1031.
    Section 362(d)(1) provides that in no event will the basis of any 
property be increased under section 362(a) or (b) above the fair market 
value of such property (determined without regard to section 7701(g)) 
by reason of any gain recognized to the transferor as a result of the 
assumption of a liability. Section 362(d)(2) provides that, except as 
provided in regulations, if gain is recognized to the transferor as a 
result of an assumption of a nonrecourse liability by a transferee 
which is also secured by assets not transferred to such transferee and 
no person is subject to tax under the Code on such gain, then, for 
purposes of determining basis under section 362(a) and (b), the amount 
of gain recognized by the transferor as a result of the assumption of 
the liability will be determined as if the liability assumed by the 
transferee equaled such transferee's ratable portion of such liability 
determined on the basis of the relative fair market values (determined 
without regard to section 7701(g)) of all of the assets subject to such 
liability.

Special Analyses

    It has been determined that this advance notice of proposed 
rulemaking is not a significant regulatory action as defined in 
Executive Order 12866. Therefore, a regulatory assessment is not 
required.

Request for Comments

    The IRS and Treasury have been studying these and other rules 
governing the amount of a liability a transferee of property is treated 
as assuming in connection with a transfer of property. The IRS and 
Treasury are concerned that some of these rules do not always produce 
appropriate results and that it might be desirable to modify certain 
rules by regulation. The following sections describe and explain the 
issues the IRS and Treasury are studying in this regard. In addition, 
they describe and explain the rules the IRS and Treasury are 
considering proposing in a notice of proposed rulemaking.

A. Assumptions of Nonrecourse Liabilities Generally

    Section 357(d) sets forth one set of criteria that is applied to 
determine whether a transferee is treated as assuming a recourse 
liability and a different set of criteria that is applied to determine 
whether a transferee is treated as assuming a nonrecourse liability. 
The statute's distinction between the assumption of recourse and 
nonrecourse liabilities appears to be based on the premise that in the 
case of recourse liabilities, the parties' agreement and expectation 
regarding the satisfaction of the liability is a reliable predictor of 
which party will bear the burden of the liability. In the case of 
nonrecourse liabilities, the statute presumes that the transferee of 
assets subject to the liability assumes the entire liability. That 
amount, however, is reduced by the amount that an owner of other assets 
subject to that liability has agreed, and is expected, to satisfy, but 
only up to the amount of the fair market value of the assets that are 
subject to such liability that are owned by such other owner.
    Section 357(d)(1)(B) is consistent with the principles of Crane v. 
Commissioner, 331 U.S. 1 (1947), and Tufts v. Commissioner, 461 U.S. 
300 (1983). Section 357(d)(2) is consistent with the principle that a 
party other than the transferee will be responsible for the 
satisfaction of a nonrecourse liability only to the extent of the fair 
market value of the property that it owns that is subject to that 
liability.
    The rules that apply to nonrecourse liabilities raise a number of 
issues that the IRS and Treasury are considering. First, the IRS and 
Treasury are considering whether the presumption that a transferee of 
assets subject to a nonrecourse liability is treated as assuming the 
entire nonrecourse liability absent an agreement is appropriate. 
Second, the IRS and Treasury are considering whether agreements between 
the transferor and the transferee regarding the satisfaction of 
nonrecourse liabilities, other than the agreements described in section 
357(d)(2), should be respected. Finally, the IRS and Treasury are 
considering whether the rules regarding the amount of a nonrecourse 
liability treated as assumed by a transferee should be based solely on 
the agreement of the parties and their expectations as to which party 
will satisfy the nonrecourse liability. Central to these last two 
issues is the question of whether the rules that apply to assumptions 
of nonrecourse liabilities should more closely conform to those that 
apply to assumptions of recourse liabilities. The following sections 
describe these issues more fully.
1. Amount of Nonrecourse Liability Assumed Absent an Agreement
    As described above, pursuant to section 357(d)(1)(B), where some 
(but not all) of the assets that secure a nonrecourse liability are 
transferred to a transferee, and the owner of other assets that are 
subject to such liability does not agree, or agrees but is not 
expected, to satisfy any of the liability, the transferee is treated as 
assuming the entire amount of the liability. For example, suppose P 
owns Asset A, with a basis of $0 and a value of $100, and Asset B, with 
a basis of $0 and a value of $400, both of which secure a nonrecourse 
liability in the amount of $500. P also owns Asset C with a basis of $0 
and a value of $500. P transfers Asset A and Asset C to S, a newly 
formed corporation, in exchange for 100 percent of the stock of S in a 
transfer to which section 351 applies. P and S have no agreement 
regarding the satisfaction of the nonrecourse liability to which Asset 
A and Asset B are subject. Pursuant to section 357(d)(1)(B), S is 
treated as assuming the entire nonrecourse liability. As a result, P 
recognizes gain in the amount of $500 pursuant to section 357(c).
    The IRS and Treasury are concerned that treating S as assuming the 
entire $500 of the nonrecourse liability in this case does not reflect 
the underlying economics of the transfer of property. That is, suppose 
P defaults on the nonrecourse liability and the lender moves to 
foreclose on Asset A. Absent compensation from P, S may have no 
incentive to satisfy more than $100 of the nonrecourse liability 
(either by surrendering Asset A to the lender or by paying the lender 
$100 in exchange for the release of Asset A from the liability). To 
address these cases, the IRS and Treasury are considering adopting a 
rule that would modify the rule of section 357(d)(1)(B) such that, in 
certain cases where the transferor and the transferee have no agreement 
regarding the satisfaction of a nonrecourse liability, the transferee 
will not be treated as assuming the entire amount of the nonrecourse 
liability. A proposed rule might provide that if one or more of the

[[Page 23933]]

assets that secure a nonrecourse liability are transferred to a 
transferee, then the transferee would be treated as assuming a pro rata 
amount of such nonrecourse liability that is a liability of the 
transferor, determined on the basis of the fair market value of those 
assets that secure the liability that are transferred to the transferee 
as compared to the total fair market value of all of the assets that 
secure the liability that are owned by the transferor immediately 
before the transfer. The IRS and Treasury invite comments regarding 
whether the rule of section 357(d)(1)(B) should be modified by 
regulation and whether the rule described above should be proposed.
2. Agreements to Satisfy Nonrecourse Liabilities
a. Agreement by the Transferee Regarding Satisfaction of a Nonrecourse 
Liability in the Absence of a Transfer of Assets Subject to That 
Liability
    Section 357(d) contemplates that a transferee may be treated as 
assuming all or a portion of a nonrecourse liability only if assets 
that are subject to such nonrecourse liability are transferred to it. 
For example, suppose P owns Asset A, with a basis of $0 and a value of 
$100, and Asset B, with a basis of $0 and a value of $400. Asset A is 
subject to a nonrecourse liability in the amount of $50. P transfers 
Asset B to S, a newly formed corporation, in exchange for 100 percent 
of the stock of S and S's agreement with P to satisfy the nonrecourse 
liability to which Asset A is subject. For purposes of section 357(d), 
it appears that S is not treated as assuming the $50 nonrecourse 
liability.
    The IRS and Treasury are concerned that there may not be a 
sufficient distinction between recourse and nonrecourse liabilities to 
warrant treating a transferee as assuming a nonrecourse liability for 
purposes of section 357(d) only if assets subject to that liability are 
transferred to it. Accordingly, the IRS and Treasury are considering 
whether a transferee that agrees, and is expected, to satisfy all or a 
portion of a nonrecourse liability should be treated as assuming the 
nonrecourse liability to the extent of such agreement, even if no 
assets that are subject to such liability are transferred to the 
transferee. The IRS and Treasury request comments on this matter.
b. Effect of Agreement by Owner of Nontransferred Property
    As described above, pursuant to section 357(d)(2), the amount of 
the nonrecourse liability that is treated as assumed pursuant to 
section 357(d)(1)(B) by a transferee of assets subject to the 
nonrecourse liability is reduced by the lesser of (i) the amount of 
such liability that the owner of other assets that are subject to such 
liability but not transferred to the transferee has agreed, and is 
expected, to satisfy or (ii) the fair market value of such other assets 
(determined without regard to section 7701(g)). In certain 
circumstances, the limitation of section 357(d)(2) effectively permits 
the amount of the nonrecourse liability treated as assumed by the 
transferee to be reduced only to the extent of the value of other 
assets subject to the nonrecourse liability, even where the owner of 
such assets agrees, and is expected, to satisfy an amount of the 
liability in excess of such value.
    For example, suppose P owns Asset A, with a basis of $0 and a value 
of $100, and Asset B, with a basis of $0 and a value of $400, both of 
which secure a nonrecourse liability in the amount of $250. P also has 
$600 in cash. P transfers Asset B to S, a newly formed corporation, in 
exchange for 100 percent of the stock of S in a transfer to which 
section 351 applies. P agrees with S, and is expected, to satisfy the 
entire $250 nonrecourse liability. Pursuant to section 357(d)(1)(B), S 
is treated as assuming the entire $250 of the nonrecourse liability. 
Pursuant to section 357(d)(2), however, this amount is reduced by $100, 
the lesser of the amount of the liability that P has agreed, and is 
expected, to satisfy ($250) and the fair market value of Asset A 
($100). Accordingly, S is treated as assuming $150 of the nonrecourse 
liability and P recognizes gain in the amount of $150 pursuant to 
section 357(c). In this case, given that P is expected to satisfy the 
entire $250 of the nonrecourse liability, the IRS and Treasury are 
considering whether it is appropriate to treat S as assuming no amount 
of the nonrecourse liability. In particular, the IRS and Treasury are 
considering proposing a rule that modifies the rule in section 
357(d)(2) such that the amount of the nonrecourse liability a 
transferee is treated as assuming is reduced to reflect the amount 
another person has agreed, and is expected, to satisfy, even if such 
amount is in excess of the fair market value of the assets subject to 
such liability that such person owns immediately after the transfer. 
The IRS and Treasury, however, are concerned regarding whether such a 
rule is appropriate where the nonrecourse liability exceeds the value 
of the assets securing it.

B. Subsequent Transfers of Property Subject to Nonrecourse Liabilities

    A transferee of property is treated as assuming all or a portion of 
a recourse liability if it has agreed, and is expected, to satisfy that 
liability (or portion). That treatment is not conditioned on any 
arrangement between the transferee and the original lender; it can be 
based entirely on an arrangement between the transferor and transferee 
of the property. The implicit premise underlying this treatment is that 
the transferee's agreement to be personally liable to the transferor is 
equivalent to the transferor's agreement to be personally liable to the 
original lender. This recourse justifies treating the transferee as 
having assumed the recourse liability. (Conversely, the transferee of 
property securing a recourse liability will not be treated as assuming 
the liability without an agreement.)
    As described above, the IRS and Treasury are considering applying 
standards similar to those that apply for purposes of determining 
whether a transferee of property has assumed a recourse liability to 
determine whether a transferee of property has assumed a nonrecourse 
liability where the transferee agrees to satisfy all or a portion of 
the liability. Such an agreement might create the same level of 
recourse against the transferee as would an agreement to assume an 
actual recourse liability. In that case, if property securing the debt 
is transferred again, the IRS and Treasury are considering whether the 
amount treated as assumed by the subsequent transferee should be 
determined with reference to the rules for nonrecourse liabilities 
(because the original lender's rights continue to be nonrecourse) or 
for recourse liabilities (because the first transferee agreed, and was 
expected, to satisfy the liability).
    For example, suppose P owns Asset A, with a value of $50, and Asset 
B, with a value of $100, both of which secure a nonrecourse liability 
in the amount of $100. In Year 1, P transfers Asset A to S1, a newly 
formed corporation, in exchange for 100 percent of the stock of S1 in a 
transfer to which section 351 applies. S1 agrees with P, and is 
expected, to satisfy $20 of the nonrecourse liability. In addition, P 
agrees to indemnify S1 to the extent that it has losses in excess of 
$20 that are attributable to the nonrecourse liability. In Year 2, S1 
transfers Asset A to S2, a newly formed corporation, in exchange for 
100 percent of the stock of S2 in a transfer to which section 351 
applies. S1 and S2 have no agreement regarding the

[[Page 23934]]

satisfaction of the nonrecourse liability to which Asset A is subject.
    The IRS and Treasury are considering two alternatives for 
determining the amount of liability S2 is treated as assuming upon the 
subsequent transfer of Asset A following S1's agreement with P 
regarding the satisfaction of the liability. Under the first 
alternative, the $20 of the nonrecourse liability assumed by S1 would 
be treated as though it were a recourse liability of S1, and thus S2 
would be treated as assuming no portion of the liability in accordance 
with section 357(d)(1)(A). Under the second alternative, the $20 of the 
nonrecourse liability assumed by S1 would be treated as a nonrecourse 
liability of S1, and thus S2 would be treated as assuming $20 of the 
liability in accordance with section 357(d)(1)(B). The IRS and Treasury 
request comments regarding whether the amount of liability (if any) 
assumed by S2 should be determined with reference to the rules 
pertaining to assumptions of nonrecourse liabilities or, given S1's 
agreement with P regarding the satisfaction of the liability, with 
reference to the rules pertaining to assumptions of recourse 
liabilities.
    The IRS and Treasury also request comments regarding the subsequent 
treatment of nonrecourse liabilities that are treated as assumed by a 
transferee where the transferee has not agreed to assume any portion of 
the nonrecourse liability but rather is treated as assuming all or a 
portion of the nonrecourse liability pursuant to section 357(d)(1)(B) 
or a substitute rule that is adopted by regulation.

C. Identifying the Amount of the Agreement

1. Transferee at Risk in Excess of Amount It Agreed To Satisfy
    The IRS and Treasury are concerned that, where the transferee has 
agreed to satisfy an amount of a nonrecourse liability that is less 
than the lesser of (i) the total amount of the nonrecourse liability 
that is a liability of the transferor, or (ii) the fair market value of 
the assets that are subject to the nonrecourse liability that are owned 
by such transferee immediately after the transfer, that agreement may 
not reflect the amount that the transferee is expected to satisfy, 
particularly where neither the transferor nor another person has agreed 
to protect the transferee from liability for any amount of the 
liability in excess of the amount it has agreed to satisfy. For 
example, suppose P owns Asset A, with a basis of $0 and a value of 
$100, and Asset B, with a basis of $0 and a value of $400, both of 
which secure a nonrecourse liability in the amount of $500. P transfers 
Asset A to S, a newly formed corporation, in exchange for 100 percent 
of the stock of S in a transfer to which section 351 applies. S agrees 
with P to satisfy $80 of the nonrecourse liability but S's agreement 
with P does not give S the right to seek indemnification from P in the 
event that S is required to satisfy more than $80 of the liability. 
Accordingly, if the lender of the nonrecourse liability forecloses on 
Asset A immediately after the transfer, S will satisfy $100 rather than 
$80 of the nonrecourse liability.
    The IRS and Treasury request comments as to the proper approach to 
address this situation. One possible approach might be to respect the 
transferee's agreement to the extent of $80 and to treat the transferee 
as assuming the additional amount of the liability, if any, that it is 
expected to satisfy based on the facts and circumstances. Another 
possible approach is to treat the transferor and the transferee as 
having no agreement regarding the extent to which the transferee will 
satisfy the liability.
2. Agreement To Satisfy in Excess of Satisfaction Expectations
    The IRS and Treasury recognize that, in certain cases, a transferee 
may agree to satisfy an amount of a nonrecourse liability that is 
greater than the amount of such liability that it, in fact, is expected 
to satisfy. For example, a transferor of assets subject to a 
nonrecourse liability may require more than one transferee to agree to 
satisfy the same liability so as to ensure that the transferor 
ultimately will not incur any loss resulting from the liability. 
Nonetheless, as described above, the legislative history of section 357 
reflects that Congress intended that where more than one person agrees 
to satisfy a liability or portion thereof, only one would be treated as 
expected to satisfy the liability or portion thereof. The IRS and 
Treasury are considering proposing a rule that would provide that, if 
the transferee has agreed to satisfy an amount of a liability that is 
greater than the amount that it is expected to satisfy, the transferee 
will be treated as having agreed to satisfy the amount of such 
liability that it is expected to satisfy, provided that the transferor, 
the transferee, and each person related to the transferor and 
transferee within the meaning of sections 267(b) and 707(b) treat the 
transferee as having agreed to satisfy the amount of the liability that 
it is expected to satisfy. If this condition were not satisfied, the 
transferor and the transferee might be treated as having no agreement 
regarding the extent to which the transferee will satisfy the 
liability.

D. Accounting for Liabilities

    In furtherance of the legislative intent that all or a portion of a 
liability be treated as a liability of only one person, the IRS and 
Treasury are considering proposing two rules. The first rule would 
provide that the amount of a liability treated as assumed by a 
transferee from a transferor will not thereafter be treated as a 
liability of the transferor. The second rule would provide that a 
transferee may not be treated as assuming from a transferor an amount 
of liabilities greater than the amount of the liabilities of the 
transferor. The following example illustrates the operation of these 
two rules.
    Suppose P owns Asset A, with a basis of $0 and a value of $100, and 
Asset B, with a basis of $0 and a value of $400, both of which secure a 
nonrecourse liability in the amount of $400. P also has $600 in cash. 
In Year 1, P transfers Asset A to S1, a newly formed corporation, in 
exchange for 100 percent of the stock of S1 in a transfer to which 
section 351 applies. P agrees, and is expected, to satisfy $350 of the 
nonrecourse liability and agrees to indemnify S1 to the extent that it 
has losses in excess of $50 that are attributable to the nonrecourse 
liability. In Year 2, P transfers Asset B to S2, a newly formed 
corporation, in exchange for 100 percent of the stock of S2 in a 
transfer to which section 351 applies. At that time, Asset A and Asset 
B are subject to the nonrecourse liability and the amount of the 
nonrecourse liability remains $400. P and S2 have no agreement 
regarding the satisfaction of the nonrecourse liability. Assume that 
the presumption of section 357(d)(1)(B) that the transferee assumes the 
entire nonrecourse liability to which the property received is subject 
is not modified by regulation.
    Pursuant to section 357(d)(1)(B), S1 would be treated as assuming 
the entire $400 of the nonrecourse liability. That amount, however, 
would be reduced by $350 to $50 pursuant to section 357(d)(2). Pursuant 
to the first rule described above, immediately after the Year 1 
transfer to S1, $50 of the nonrecourse liability would no longer be 
treated as a liability of P as a result of S1's assumption of that 
amount. Pursuant to the second rule described above, even though Asset 
B may be subject to the $400 nonrecourse liability for purposes of 
state law, S2 cannot be treated as assuming more than $350 of the 
nonrecourse liability, the amount of the nonrecourse liability that is 
treated

[[Page 23935]]

as a liability of P at the time of the Year 2 transfer. In this 
example, because P and S2 had no agreement regarding the satisfaction 
of the nonrecourse liability, S2 would be treated as assuming $350 of 
the nonrecourse liability.

E. Requirements of an Agreement To Satisfy a Liability

    The IRS and Treasury are considering whether proposed rules should 
set forth the requirements of an agreement between the transferor and 
the transferee regarding which party will satisfy a liability, and how 
such an agreement must be evidenced.

F. Acts Constituting Satisfaction of a Liability

    The IRS and Treasury are also considering whether proposed rules 
should provide that, for purposes of determining whether a person is 
expected to satisfy a liability, such person's expected payment (of 
money or property, including property securing the liability) to the 
creditor or to a person indemnified with respect to the liability will 
be considered. The IRS and Treasury request comments regarding whether 
an agreement to indemnify a person with respect to a liability, and any 
other agreement, should be treated as an agreement to satisfy a 
liability.

G. Collateral Consequences of Satisfaction of a Liability

    The IRS and Treasury believe that, if a liability is satisfied by a 
person other than the person that the rules of section 357(d) treat as 
having assumed the liability, the consequences of such satisfaction are 
determined under general Federal income tax principles. For example, 
the satisfaction may be treated as a deemed payment that is 
characterized as a capital contribution or a distribution. The IRS and 
Treasury are considering proposing regulations confirming this result 
in the context of section 357(d).

H. Application of Principles of Section 357(d) Regulations in Other 
Contexts

    As described above, section 357(d) was designed to address the 
amount of a nonrecourse liability that is treated as assumed by a 
transferee of property when multiple properties secure the liability, 
but the transferor either retains or transfers to other transferees 
some of the property securing the liability. The regulations under 
section 1001 provide that the amount realized in connection with a sale 
or other disposition of property includes the amount of liabilities 
from which the transferor is discharged as a result of the sale or 
disposition. Section 1.1001-2(a)(1). The IRS and Treasury request 
comments regarding whether any differences in the amount of liabilities 
treated as assumed are appropriate for exchanges under section 1001 as 
opposed to exchanges under sections 351 and 361, or, alternatively, 
whether the rules adopted under section 357 should also apply for 
purposes of computing amount realized in transactions governed by 
section 1001.
    In addition, section 7701(g) provides that, for purposes of 
subtitle A of the Code, in determining the amount of gain or loss with 
respect to any property, the fair market value of such property is 
treated as being not less than the amount of any nonrecourse 
indebtedness to which such property is subject. Comments are requested 
regarding whether the rule of section 7701(g) should be consistent with 
those of section 357(d) and the regulations thereunder.
    Furthermore, as described above, the rules of section 357(d) also 
apply to certain Code provisions that are not listed in section 357(d), 
including section 1031, which permits the nonrecognition of gain or 
loss on certain exchanges of property of like kind. The IRS and 
Treasury request comments concerning whether the rules described above 
should also apply for purposes of these other provisions that 
specifically invoke section 357(d) as well as other provisions that do 
not specifically invoke section 357(d).
    Finally, certain provisions of the Code, including sections 304 and 
336, continue to distinguish between a liability assumed and a 
liability to which property is subject. Given that the legislative 
history of section 357 reflects that Congress intended to eliminate the 
distinction between the assumption of a liability and the acquisition 
of an asset subject to a liability, the IRS and Treasury are 
considering whether the proposed rules should provide that, for 
purposes of sections 304 and 336, and certain other statutory 
provisions, property is transferred subject to a liability if and only 
if the liability is assumed under the rules proposed under section 357.

I. The Basis of Property Received in Exchange for the Assumption of a 
Liability

    At this time, the IRS and Treasury are not considering modifying 
section 362(d) or displacing general Federal income tax principles that 
apply for purposes of determining basis under section 1012, including 
those principles set forth in Estate of Franklin v. Commissioner, 544 
F.2d 1045 (9th Cir. 1976). Nonetheless, the IRS and Treasury invite 
comments regarding the extent to which those rules or principles should 
be modified to reflect the proposal of rules governing the amount of 
liability treated as assumed in connection with a transfer of property.

    Dated: February 24, 2003.
William D. Alexander,
Associate Chief Counsel (Corporate).
[FR Doc. 03-11212 Filed 5-5-03; 8:45 am]
BILLING CODE 4830-01-P