[Federal Register Volume 74, Number 12 (Wednesday, January 21, 2009)]
[Proposed Rules]
[Pages 3508-3509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1101]


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

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-149519-03]
RIN 1545-BC63


Section 707 Regarding Disguised Sales, Generally

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of notice of proposed rulemaking.

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

SUMMARY: This document withdraws proposed regulations relating to the 
treatment of transactions between a partnership and its partners as 
disguised sales of partnership interests between the partners under 
section 707(a)(2)(B) of the Internal Revenue Code. The withdrawal 
affects partnerships and their partners.

FOR FURTHER INFORMATION CONTACT: Deane M. Burke or Allison R. Carmody, 
(202) 622-3070 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 707(a)(2)(B) provides that, under regulations prescribed by 
the Secretary, if transfers of property between a partner or partners 
and a partnership, when viewed together, are properly characterized as 
a sale or exchange of property, such transfers shall be treated as 
either transactions between the partnership and one who is not a 
partner or between two or more partners acting other than in their 
capacity as partners. The legislative history of section 707(a)(2)(B) 
indicates the provision was adopted as a result of Congressional 
concern that taxpayers were deferring or avoiding tax on sales of 
partnership property, including sales of partnership interests, by 
characterizing sales as contributions of property, including money, 
followed or preceded by related partnership distributions. See H.R. 
Rep. No. 861, 98th Cong. 2nd Sess. 861 (1984), 1984-3 (Vol. 2) CB 115. 
Specifically, Congress was concerned about court decisions that allowed 
tax-free treatment in cases that were economically

[[Page 3509]]

indistinguishable from sales of property to a partnership or another 
partner, and believed that these transactions should be treated for tax 
purposes in a manner consistent with their underlying economic 
substance. See H.R. Rep. No. 432, 98th Cong. 2nd Sess. 1218 (1984) 
(H.R. Rep.), and S. Prt. No. 169 (Vol. I), 98th Cong. 2nd Sess. 225 
(1984) (S. Prt.) (discussing Communications Satellite Corp. v. United 
States, 625 F.2d 997 (Ct. Cl. 1980), and Jupiter Corp. v. United 
States, 2 Cl. Ct. 58 (1983), both of which involved disguised sales of 
a partnership interest).
    On October 9, 2001, the IRS and the Treasury Department issued 
Notice 2001-64 (2001-2 CB 316), (see Sec.  601.601(d)(2)(ii)(b)), 
announcing that the IRS and the Treasury Department were considering 
issuing proposed regulations under section 707(a)(2)(B), relating to 
disguised sales of partnership interests. The IRS and the Treasury 
Department requested comments on the scope and substance of guidance 
concerning disguised sales of partnership interests, including any 
applicable safe harbors or exceptions. Written comments in response to 
Notice 2001-64 were received and considered in drafting proposed 
regulations.
    In response to requests, on November 26, 2004, the Treasury 
Department and the IRS published in the Federal Register (69 FR 68838) 
a notice of proposed rulemaking under section 707(a)(2)(B), (REG-
149519-03) relating to disguised sales of partnership interests. The 
proposed regulations sought to amend the existing regulations for 
disguised sales of property (existing property regulations) by adding 
rules for disguised sales of partnership interests and by revising the 
rules relating to disguised sales of property. The proposed regulations 
for disguised sales of partnership interests include a framework 
similar to that in the existing property regulations, with a general 
rule that would apply based on all of the facts and circumstances.
    The Treasury Department and the IRS received written comments on 
the proposed regulations from interested parties. The Treasury 
Department and the IRS, having now thoroughly considered those 
comments, have decided to withdraw the proposed regulations. The 
Treasury Department and the IRS will continue to study this area and 
may issue guidance in the future. Until new guidance is issued, any 
determination of whether transfers between a partner or partners and a 
partnership is a transfer of a partnership interest will be based on 
the statutory language, guidance provided in legislative history, and 
case law.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Withdrawal of Notice of Proposed Rulemaking

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking (REG-149519-03) that was published in the Federal 
Register on November 26, 2004 (69 FR 68838) is withdrawn.

L.E. Stiff,
Deputy Commissioner for Services and Enforcement.
 [FR Doc. E9-1101 Filed 1-16-09; 8:45 am]
BILLING CODE 4830-01-P