[Federal Register Volume 68, Number 121 (Tuesday, June 24, 2003)]
[Rules and Regulations]
[Pages 37414-37417]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15281]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9062]
RIN 1545-BB83


Assumption of Partner Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations regarding a 
partnership's assumption of a partner's liabilities in a transaction 
occurring after October 18, 1999, and before June 24, 2003. These 
temporary regulations affect partners and partnerships and clarify the 
tax treatment of an assumption by a partnership of a partner's 
liability. The text of these

[[Page 37415]]

temporary regulations also serves as the text of the proposed 
regulations set forth in a notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective June 24, 2003.
    Applicability Date: For date of applicability, see Sec.  1.752-
6T(d).

FOR FURTHER INFORMATION CONTACT: Horace Howells (202) 622-3050 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    With certain exceptions, no gain or loss is recognized if property 
is transferred to a corporation solely in exchange for stock of the 
corporation, and, immediately after the exchange, the transferors 
control the corporation. If, however, the transferee corporation 
assumes a liability of the transferor, then, under section 358(d), the 
transferor's basis in the stock received in the exchange is reduced by 
the amount of that liability. If the amount of the liability exceeds 
the transferor's basis in the property transferred to the corporation, 
then the transferor recognizes gain under section 357(c)(1). Under 
section 357(c)(3), a liability the payment of which would give rise to 
a deduction or that would be described in section 736(a) (regarding 
payments to a retiring partner) is not taken into account in applying 
section 357(c)(1), unless the incurrence of the liability resulted in 
the creation of, or an increase in, the basis of any property.
    Under section 752(a) and (b), similar rules apply where a 
partnership assumes a liability from a partner or a partner contributes 
property to a partnership subject to a liability. The difference 
between the amount of the liability and the partner's share of that 
liability after the partnership's assumption is treated as a 
distribution of money, which reduces the partner's basis in the 
partnership interest and may cause the partner to recognize gain. There 
is no statutory or regulatory definition of liabilities for purposes of 
section 752. Case law and revenue rulings, however, have established 
that, as under section 357(c)(3), the term liabilities for this purpose 
does not include liabilities the payment of which would give rise to a 
deduction, unless the incurrence of the liability resulted in the 
creation of, or an increase in, the basis of property. Rev. Rul. 88-77 
(1988-2 C.B. 128); Salina Partnership LP, FPL Group, Inc. v. 
Commissioner, T.C. Memo 2000-352.
    On December 21, 2000, as part of the Community Renewal Tax Relief 
Act of 2000 (Appendix G of H.R. 4577, Consolidated Appropriations Act, 
2001) Public Law 106-554, 114 Stat. 2763, 2763A-638 (2001) (the Act), 
Congress enacted section 358(h) to address certain situations where 
property was transferred to a corporation in exchange for both stock 
and the corporation's assumption of certain obligations of the 
transferor. In these situations, transferors took the position that the 
obligations were not liabilities within the meaning of section 357(c) 
or that they were described in section 357(c)(3), and, therefore, the 
obligations did not reduce the basis of the transferor's stock. These 
assumed obligations, however, did reduce the value of the stock. The 
transferors then sold the stock and claimed a loss. In this way, 
taxpayers attempted to duplicate a loss in corporate stock and to 
accelerate deductions that typically are allowed only on the economic 
performance of these types of obligations.
    Section 358(h) addresses these transactions by requiring that, 
after application of section 358(d), the basis in stock received in an 
exchange to which section 351, 354, 355, 356, or 361 applies be reduced 
(but not below the fair market value of the stock) by the amount of any 
liability assumed in the exchange. Exceptions to section 358(h) are 
provided where: (1) The trade or business with which the liability is 
associated is transferred to the person assuming the liability as part 
of the exchange; or (2) substantially all of the assets with which the 
liability is associated are transferred to the person assuming the 
liability as part of the exchange. The term liability for purposes of 
section 358(h) includes any fixed or contingent obligation to make 
payment without regard to whether the obligation is otherwise taken 
into account for purposes of the Internal Revenue Code (Code).
    Congress recognized that taxpayers were attempting to use 
partnerships to carry out the same types of abuses that section 358(h) 
was designed to deter. Therefore, in section 309(c) and (d)(2) of the 
Act, Congress directed the Secretary to prescribe rules to provide 
``appropriate adjustments under subchapter K of chapter 1 of the Code 
to prevent the acceleration or duplication of losses through the 
assumption of (or transfer of assets subject to) liabilities described 
in section 358(h)(3) * * * in transactions involving partnerships.'' 
This statutory provision does not specify whether the exceptions in 
section 358(h)(2) should apply. The only cross-reference to section 
358(h) in this statutory provision is to section 358(h)(3), which 
defines the term liability. Under the statute, these rules are to 
``apply to assumptions of liability after October 18, 1999, or such 
later date as may be prescribed in such rules.''
    In response to this directive, these temporary regulations provide 
rules to prevent the duplication and acceleration of loss through the 
assumption by a partnership of a liability of a partner in a 
nonrecognition transaction. Section 1.752-6T adopts the approach of 
section 358(h), with some modifications, for transactions involving 
partnership assumptions of partners' liabilities occurring after 
October 18, 1999, and before June 24, 2003. The modifications made to 
the approach of section 358(h) were to provide rules to conform the 
application of section 358(h) to partnerships and, as discussed below, 
to prevent abuse.
    Prior to the enactment of Code section 358(h) and section 309(c) 
and (d)(2) of the Act, the lack of specific rules addressing the 
treatment of liabilities upon the transfer of property to a corporation 
or a partnership led to interpretations of then existing law that 
failed to reflect the true economics of certain transactions. In some 
cases, taxpayers continued to assert these interpretations even after 
the enactment of these statutory provisions. For example, in a 
transaction addressed in Notice 2000-44 (2000-2 C.B. 255), a taxpayer 
purchases and writes economically offsetting options and then purports 
to create substantial positive basis by transferring those option 
positions to a partnership. On the disposition of the partnership 
interest, the liquidation of the partner's interest in the partnership, 
or the taxpayer's sale or depreciation of distributed partnership 
assets, the taxpayer claims a tax loss, even though the taxpayer has 
incurred no corresponding economic loss.
    Treasury and the IRS believe that it is appropriate to prohibit 
partners and partnerships engaging in transactions described in, or 
transactions that are substantially similar to the transactions 
described in, Notice 2000-44 from relying on the exception in section 
358(h)(2)(B). The exceptions to section 358(h) were intended to exclude 
from the application of section 358(h) ordinary business transactions. 
They were not intended to allow taxpayers to engage in transactions 
that create noneconomic tax losses.
    The text of the temporary regulations also serves as the text of 
the proposed regulations set forth in the notice of proposed rulemaking 
on this subject in

[[Page 37416]]

the Proposed Rules section of this issue of the Federal Register (Sec.  
1.752-6 of the proposed Income Tax Regulations). As part of that notice 
of proposed rulemaking, Sec.  1.752-7 of the proposed Income Tax 
Regulations is being issued to carry out the directive of section 
309(c) of the Act with respect to assumptions of liabilities occurring 
on or after June 24, 2003. The proposed regulations conform the 
application of section 358(h) to partnerships by providing a basis 
reduction upon an event that separates the partner from the liability 
rather than on assumption of the liability by the partnership and by 
adopting certain exceptions. Section 1.752-7(j) of the proposed Income 
Tax Regulations allows a partnership to elect to apply Sec.  1.752-7 of 
the proposed Income Tax Regulations and related proposed provisions to 
assumptions of liabilities occurring after October 18, 1999, and before 
June 24, 2003 in lieu of applying Sec.  1.752-6T of the temporary 
Income Tax Regulations to this period.

Explanation of Provisions

    Under these temporary regulations, if a partnership assumes a 
liability of a partner (other than a liability to which section 752(a) 
and (b) apply) in a transaction described in section 721(a), then, 
after application of section 752(a) and (b), the partner's basis in the 
partnership is reduced (but not below the adjusted value of such 
interest) by the amount (determined as of the date of the exchange) of 
the liability. For this purpose, the term liability includes any fixed 
or contingent obligation to make payment, without regard to whether the 
obligation is otherwise taken into account for Federal tax purposes. 
The adjusted value of a partner's interest in a partnership is the fair 
market value of that interest increased by the partner's share of 
partnership liabilities under Sec. Sec.  1.752-1 through 1.752-5.
    The exceptions under section 358(h) applicable to corporate 
assumptions of shareholder liabilities generally apply for purposes of 
these temporary regulations. Therefore, a reduction in a partner's 
basis generally is not required, under these regulations, after an 
assumption of a liability by a partnership from that partner if: (1) 
The trade or business with which the liability is associated is 
transferred to the partnership assuming the liability as part of the 
transaction, or (2) substantially all of the assets with which the 
liability is associated are contributed to the partnership assuming the 
liability.
    However, in the case of a partnership transaction described in, or 
a partnership transaction that is substantially similar to the 
transactions described in, Notice 2000-44, the exception for 
contributions of ``substantially all of the assets with which the 
liability is associated'' does not apply.

Effective Date

    In accordance with the directive in section 309(c) and (d)(2) of 
the Act, these temporary regulations apply to assumptions of 
liabilities occurring after October 18, 1999, and before June 24, 2003. 
Under section 7805(b)(6), the Secretary may provide that any regulation 
may take effect in accordance with a legislative grant from Congress 
authorizing the Secretary to prescribe the effective date for such 
regulation. In addition, under section 7805(b)(3), the Secretary may 
provide that any regulation may take effect or apply retroactively to 
prevent abuse. The Secretary has determined that a later effective date 
is inappropriate. Therefore, these regulations are being applied 
retroactively in accordance with the directive from Congress in section 
309(d)(2) of the Act and to prevent abuse.

Special Analyses

    These temporary regulations are necessary to prevent abusive 
transactions of the type described in the Notice 2000-44. Accordingly, 
good cause is found for dispensing with notice and public procedure 
pursuant to 5 U.S.C. 553(b)(B) and for dispensing with a delayed 
effective date pursuant to 5 U.S.C. 553(d)(1) and (3).
    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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble to the notice of 
proposed rulemaking on this subject published in the Proposed Rules 
section of this issue of the Federal Register. Pursuant to section 
7805(f) of the Code, these temporary regulations will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these temporary regulations is Horace 
Howells, Office of the Associate Chief Counsel (Passthroughs and 
Special Industries), IRS. However, other personnel from the IRS and 
Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
1. The authority citation for part 1 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.752-6T also issued under Pub. L. 106-554, 114 Stat. 
2763, 2763A-638 (2001) * * *

0
2. Section 1.752-6T is added to read as follows:


1.752-6T  Partnership assumption of partner's section 358(h)(3) 
liability after October 18, 1999, and before June 24, 2003 (temporary).

    (a) In general. If, in a transaction described in section 721(a), a 
partnership assumes a liability (defined in section 358(h)(3)) of a 
partner (other than a liability to which section 752(a) and (b) apply), 
then, after application of section 752(a) and (b), the partner's basis 
in the partnership is reduced (but not below the adjusted value of such 
interest) by the amount (determined as of the date of the exchange) of 
the liability. For purposes of this section, the adjusted value of a 
partner's interest in a partnership is the fair market value of that 
interest increased by the partner's share of partnership liabilities 
under Sec. Sec.  1.752-1 through 1.752-5.
    (b) Exceptions--(1) In general. Except as provided in paragraph 
(b)(2) of this section, the exceptions contained in section 
358(h)(2)(A) and (B) apply to this section.
    (2) Transactions described in Notice 2000-44. The exception 
contained in section 358(h)(2)(B) does not apply to an assumption of a 
liability (defined in section 358(h)(3)) by a partnership as part of a 
transaction described in, or a transaction that is substantially 
similar to the transactions described in, Notice 2000-44 (2000-2 C.B. 
255). See Sec.  601.601(d)(2) of this chapter.
    (c) Example. The following example illustrates the principles of 
paragraph (a) of this section:

    Example. In 1999, A and B form partnership PRS. A contributes 
property with a value and basis of $200, subject to a nonrecourse 
debt obligation of $50 and a fixed or contingent obligation of $100 
that is not a liability to which section 752(a) and (b) applies, in 
exchange for a 50% interest in PRS. Assume that, after the 
contribution, A's share of partnership liabilities under Sec. Sec.  
1.752-1 through 1.752-5 is $25. Also assume that the $100 liability 
is not

[[Page 37417]]

associated with a trade or business contributed by A to PRS or with 
assets contributed by A to PRS. After the contribution, A's basis in 
PRS is $175 (A's basis in the contributed land ($200) reduced by the 
nonrecourse debt assumed by PRS ($50), increased by A's share of 
partnership liabilities under Sec. Sec.  1.752-1 through 1.752-5 
($25)). Because A's basis in the PRS interest is greater than the 
adjusted value of A's interest, $75 (the fair market value of A's 
interest ($50) increased by A's share of partnership liabilities 
($25)), paragraph (a) of this section operates to reduce A's basis 
in the PRS interest (but not below the adjusted value of that 
interest) by the amount of liabilities described in section 
358(h)(3) (other than liabilities to which section 752(a) and (b) 
apply) assumed by PRS. Therefore, A's basis in PRS is reduced to 
$75.

    (d) Effective dates--(1) In general. This section applies to 
assumptions of liabilities occurring after October 18, 1999 and before 
June 24, 2003.
    (2) Election to apply Sec.  1.752-7. The partnership may elect, 
under provisions of REG-106736-00 in 2003-28 I.R.B. (see Sec.  
601.601(d)(2) of this chapter) to apply those provisions and related 
Income Tax Regulations to all assumptions of liabilities by the 
partnership occurring after October 18, 1999, and before June 24, 2003. 
Provisions of REG-106736-00 in 2003-28 I.R.B. (see Sec.  601.601(d)(2) 
of this chapter) describe the manner in which the election is made.

    Approved: May 7, 2003.
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
Gregory Jenner,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 03-15281 Filed 6-23-03; 8:45 am]
BILLING CODE 4830-01-P