[Federal Register Volume 73, Number 91 (Friday, May 9, 2008)]
[Rules and Regulations]
[Pages 26321-26322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-10454]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9397]
RIN 1545-BH95


Assumption of Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
assumption of liabilities under section 358(h) of the Internal Revenue 
Code (Code). Section 358(h) provides that, after application of section 
358(d), the basis in stock received in a nonrecognition transaction 
shall be reduced to the fair market value of the stock by the amount of 
any liability assumed in the exchange. The Treasury Department and the 
IRS have determined that removing an exception to section 358(h) is 
necessary to prevent abuse. These regulations affect corporations and 
their shareholders.

DATES: Effective Date: These regulations are effective on May 9, 2008.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.358-5(a) and (b).

FOR FURTHER INFORMATION CONTACT: Robert M. Rhyne (202) 622-7550 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1 under section 
358(h) of the Code. As part of the Consolidated Appropriations Act of 
2001 (Pub. L. 106-554, 114 Stat. 2763), Congress enacted, on December 
21, 2000, section 358(h), applicable to assumptions of liability after 
October 18, 1999, to address certain transactions in which property is 
transferred to a corporation in exchange for both stock and the 
corporation's assumption of certain obligations of the transferor. In 
these transactions, 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 stock received by transferor. 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)(1) 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. Section 358(h)(2) provides 
exceptions to section 358(h)(1) where: (A) The trade or business with 
which the liability is associated is transferred to the person assuming 
the liability as part of the exchange; or (B) 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 ``Asset 
Exception''). The Secretary, however, has the authority to limit these 
exceptions. Section 358(h)(3) provides that 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 Code.
    On May 26, 2005, temporary regulations (TD 9207) were published in 
the Federal Register (70 FR 30334) making unavailable the exception of 
section 358(h)(2)(B), the Asset Exception. A notice of proposed 
rulemaking (REG-106736-00) cross-referencing those temporary 
regulations was published in the Federal Register (71 FR 30380) on the 
same day.
    The IRS and the Treasury Department received no comments responding 
to the proposed and temporary regulations. No public hearing was 
requested or held. The IRS and the Treasury Department have determined 
that making the exception of section 358(h)(2)(B) unavailable is 
necessary to prevent abuse; therefore, this document contains final 
regulations adopting the provisions of the proposed regulations with no 
change and the corresponding temporary regulations are removed.

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. Pursuant to 5 
U.S.C. 553(d)(3) it has been determined that a delayed effective

[[Page 26322]]

date is unnecessary because this rule finalizes, without change, 
currently effective temporary rules regarding the assumption of 
liabilities. It is hereby certified that these regulations will not 
have a significant economic impact on a substantial number of small 
entities. This certification is based upon the fact that the only 
impact of the regulations is to require taxpayers to calculate the 
basis of stock received in certain transactions more accurately. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the notice of proposed rulemaking 
preceding 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 Robert M. Rhyne of the 
Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and the 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
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec.  1.358-5 also issued under 26 U.S.C. 358(h)(2). * * *


0
Par. 2. Section 1.358-5 is added to read as follows:


Sec.  1.358-5  Special rules for assumption of liabilities.

    (a) In general. Section 358(h)(2)(B) does not apply to an exchange 
occurring on or after May 9, 2008.
    (b) Effective/Applicability date. For exchanges occurring on or 
after June 24, 2003, and before May 9, 2008, see Sec.  1.358-5T as 
contained in 26 CFR part 1 in effect on April 1, 2007.


Sec.  1.358-5T  [Removed]

0
Par. 3. Section 1.358-5T is removed.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: April 28, 2008.
Eric Solomon,
Assistant Secretary of the Treasury(Tax Policy).
[FR Doc. E8-10454 Filed 5-8-08; 8:45 am]
BILLING CODE 4830-01-P