[Federal Register Volume 70, Number 54 (Tuesday, March 22, 2005)]
[Rules and Regulations]
[Pages 14394-14395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-5527]



DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9193]
RIN 1545-BB65


Section 704(c), Installment Obligations and Contributed Contracts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under sections 704(c) 
and 737 relating to the tax treatment of installment obligations and 
property acquired pursuant to a contract. The regulations affect 
partners and partnerships and provide guidance necessary to comply with 
the law.

DATES: Effective Date: These regulations are effective November 23, 
2003.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.704-3(f), 1.704-4(g) and 1.737-5.

FOR FURTHER INFORMATION CONTACT: Christopher L. Trump, (202) 622-3070 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under sections 
704 and 737. On November 24, 2003, a notice of proposed rulemaking 
(REG-160330-02) relating to the tax treatment of installment 
obligations and property acquired pursuant to a contract under sections 
704(c) and 737 was published in the Federal Register (68 FR 65864). A 
notice of correction was published in the Federal Register (69 FR 5797) 
on February 6, 2004. No comments were received from the public in 
response to the notice of proposed rulemaking. No public hearing was 
requested, and accordingly, no hearing was held. This Treasury decision 
adopts the language of the proposed regulations without change.

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 the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Internal Revenue Code, the 
proposed regulations preceding these regulations were 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 Christopher L. Trump 
of the Office of the Associate Chief Counsel (Passthroughs & Special 
Industries). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to Regulations

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

PART 1--INCOME TAXES

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

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


0
Par. 2. Section 1.704-3 is amended as follows:
0
1. The paragraph heading for (a)(8) is revised.
0
2. The text of paragraph (a)(8) is redesignated as paragraph (a)(8)(i).
0
3. A paragraph heading for newly designated paragraph (a)(8)(i) is 
added.
0
4. The first sentence of newly designated paragraph (a)(8)(i) is 
amended by removing the language ``in which no gain or loss is 
recognized''.
0
5. Paragraphs (a)(8)(ii) and (a)(8)(iii) are added.
0
6. Paragraph (f) is amended by:
0
a. Revising the paragraph heading.
0
b. Amending the first sentence of paragraph (f) by removing the 
language ``of paragraph (a)(11)'' and adding ``of paragraphs 
(a)(8)(ii), (a)(8)(iii) and (a)(11)'' in its place.
0
c. Adding two sentences at the end of paragraph (f).
0
The revisions and additions read as follows:


Sec.  1.704-3  Contributed property.

    (a) * * *
    (8) Special rules--(i) Disposition in a nonrecognition transaction. 
* * *
    (ii) Disposition in an installment sale. If a partnership disposes 
of section 704(c) property in an installment sale as defined in section 
453(b), the installment obligation received by the partnership is 
treated as the section 704(c) property with the same amount

[[Page 14395]]

of built-in gain as the section 704(c) property disposed of by the 
partnership (with appropriate adjustments for any gain recognized on 
the installment sale). The allocation method for the installment 
obligation must be consistent with the allocation method chosen for the 
original property.
    (iii) Contributed contracts. If a partner contributes to a 
partnership a contract that is section 704(c) property, and the 
partnership subsequently acquires property pursuant to that contract in 
a transaction in which less than all of the gain or loss is recognized, 
then the acquired property is treated as the section 704(c) property 
with the same amount of built-in gain or loss as the contract (with 
appropriate adjustments for any gain or loss recognized on the 
acquisition). For this purpose, the term contract includes, but is not 
limited to, options, forward contracts, and futures contracts. The 
allocation method for the acquired property must be consistent with the 
allocation method chosen for the contributed contract.
* * * * *
    (f) Effective dates. * * * Paragraph (a)(8)(ii) applies to 
installment obligations received by a partnership in exchange for 
section 704(c) property on or after November 24, 2003. Paragraph 
(a)(8)(iii) applies to property acquired on or after November 24, 2003, 
by a partnership pursuant to a contract that is section 704(c) 
property.

0
Par. 3. Section 1.704-4 is amended as follows:
0
1. The paragraph heading for (d)(1) is revised.
0
2. The text of paragraph (d)(1) is redesignated as paragraph (d)(1)(i).
0
3. A paragraph heading for newly designated paragraph (d)(1)(i) is 
added.
0
4. Paragraphs (d)(1)(ii) and (d)(1)(iii) are added.
0
5. Revising paragraph (g).
    The revisions and additions read as follows:


Sec.  1.704-4  Distribution of contributed property.

* * * * *
    (d) Special rules--(1) Nonrecognition transactions, installment 
obligations and contributed contracts--(i) Nonrecognition transactions. 
* * *
    (ii) Installment obligations. An installment obligation received by 
the partnership in an installment sale (as defined in section 453(b)) 
of section 704(c) property is treated as the section 704(c) property 
for purposes of section 704(c)(1)(B) and this section to the extent 
that the installment obligation received is treated as section 704(c) 
property under Sec.  1.704-3(a)(8). See Sec.  1.737-2(d)(3) for a 
similar rule in the context of section 737.
    (iii) Contributed contracts. Property acquired by the partnership 
pursuant to a contract that is section 704(c) property is treated as 
the section 704(c) property for purposes of section 704(c)(1)(B) and 
this section, to the extent that the acquired property is treated as 
section 704(c) property under Sec.  1.704-3(a)(8). See Sec.  1.737-
2(d)(3) for a similar rule in the context of section 737.
* * * * *
    (g) Effective dates. This section applies to distributions by a 
partnership to a partner on or after January 9, 1995, except that 
paragraphs (d)(1)(ii) and (iii) apply to distributions by a partnership 
to a partner on or after November 24, 2003.

0
Par. 4. Section 1.737-2 is amended as follows:
0
1. The paragraph heading for (d)(3) is revised.
0
2. The text of paragraph (d)(3) is redesignated (d)(3)(i).
0
3. A paragraph heading for newly designated (d)(3)(i) is added.
0
4. Paragraphs (d)(3)(ii) and (d)(3)(iii) are added.


Sec.  1.737-2  Exceptions and special rules.

* * * * *
    (d) * * *
    (3) Nonrecognition transactions, installment sales and contributed 
contracts--(i) Nonrecognition transactions. * * *
    (ii) Installment sales. An installment obligation received by the 
partnership in an installment sale (as defined in section 453(b)) of 
section 704(c) property is treated as the contributed property with 
regard to the contributing partner for purposes of section 737 to the 
extent that the installment obligation received is treated as section 
704(c) property under Sec.  1.704-3(a)(8). See Sec.  1.704-4(d)(1) for 
a similar rule in the context of section 704(c)(1)(B).
    (iii) Contributed contracts. Property acquired by a partnership 
pursuant to a contract that is section 704(c) property is treated as 
the contributed property with regard to the contributing partner for 
purposes of section 737 to the extent that the acquired property is 
treated as section 704(c) property under Sec.  1.704-3(a)(8). See Sec.  
1.704-4(d)(1) for a similar rule in the context of section 
704(c)(1)(B).
* * * * *

0
Par. 5. Section 1.737-5 is revised to read as follows:


Sec.  1.737-5  Effective dates.

    Sections 1.737-1, 1.737-2, 1.737-3, and 1.737-4 apply to 
distributions by a partnership to a partner on or after January 9, 
1995, except that Sec.  1.737-2(d)(3)(ii) and (iii) apply to 
distributions by a partnership to a partner on or after November 24, 
2003.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

    Approved: March 15, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-5527 Filed 3-21-05; 8:45 am]
BILLING CODE 4830-01-P