[Federal Register Volume 84, Number 196 (Wednesday, October 9, 2019)]
[Rules and Regulations]
[Pages 54027-54029]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-22030]



[[Page 54027]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9876]
RIN 1545-BO05


Removal of Temporary Regulations on a Partner's Share of a 
Partnership Liability for Disguised Sale Purposes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations concerning how 
partnership liabilities are allocated for disguised sale purposes. The 
regulations replace existing temporary regulations with final 
regulations that were in effect prior to the temporary regulations. 
These regulations affect partnerships and their partners.

DATES: 
    Effective date: These regulations are effective on November 8, 
2019.
    Applicability date: For date of applicability, see Sec.  1.707-
9(a)(4).

FOR FURTHER INFORMATION CONTACT: Caroline E. Hay at (202) 317-5279 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to the Income Tax Regulations (26 
CFR part 1) under section 707 of the Internal Revenue Code (Code) 
regarding allocations of partnership liabilities for disguised sale 
purposes. Section 707(a)(2)(B) generally provides that, under 
regulations prescribed by the Secretary, related transfers of money or 
other property to and by a partnership that, when viewed together, are 
more properly characterized as a sale or exchange of property, will be 
treated either as a transaction between the partnership and one who is 
not a partner or between two or more partners acting other than in 
their capacity as partners (generally referred to as ``disguised 
sales'').
    On April 21, 2017, the President issued Executive Order 13789 (E.O. 
13789), ``Executive Order on Identifying and Reducing Tax Regulatory 
Burdens'' (82 FR 19317, April 26, 2017), which directed the Secretary 
to review all significant tax regulations issued on or after January 1, 
2016, and to take concrete action to alleviate certain burdens imposed 
by the regulations. In response to E.O. 13789, the Secretary issued an 
interim report which identified the final and temporary regulations 
(T.D. 9788) (707 Temporary Regulations) concerning the allocation of 
partnership liabilities for section 707 purposes as meeting some of the 
regulatory burdens specified in E.O. 13789, and later issued a second 
report recommending specific actions to mitigate the burdens. See 
Notice 2017-38 (2017-30 IRB 147 (July 24, 2017)) and Second Report to 
the President on Identifying and Reducing Tax Regulatory Burdens (82 FR 
48013, October 16, 2017).
    Following the issuance of the interim and second reports, on June 
19, 2018, the Department of the Treasury (Treasury Department) and the 
IRS published a notice of proposed rulemaking (REG-131186-17) in the 
Federal Register (83 FR 28397) (2018 Proposed Regulations) proposing to 
withdraw the 707 Temporary Regulations. The 2018 Proposed Regulations 
also proposed reinstating the regulations under Sec.  1.707-5(a)(2) as 
in effect prior to the 707 Temporary Regulations and as contained in 26 
CFR part 1 revised as of April 1, 2016 (Prior 707 Regulations). 
Finally, the 2018 Proposed Regulations withdrew a notice of proposed 
rulemaking (REG-122855-15) that incorporated by cross reference the 707 
Temporary Regulations. The Treasury Department and the IRS did not 
receive any written public comments in response to the 2018 Proposed 
Regulations. A scheduled public hearing on the 2018 Proposed 
Regulations was cancelled because no one requested to speak.
    Therefore, the 2018 Proposed Regulations proposing to withdraw the 
707 Temporary Regulations and reinstate the Prior 707 Regulations are 
adopted by this Treasury decision without change, except the 
applicability date has been revised. To avoid a lapse in rules for 
allocating partnership liabilities for disguised sale purposes, these 
final regulations apply to any transaction with respect to which all 
transfers occur on or after October 4, 2019, the date that the 707 
Temporary Regulations expire. Preventing a lapse in rules benefits the 
Treasury Department, the IRS, and taxpayers by providing certainty 
regarding the applicable rules. These final regulations continue to 
provide that partnerships and their partners may apply these 
regulations to any transaction with respect to which all transfers 
occur on or after January 3, 2017, the applicability date of the 707 
Temporary Regulations.

Special Analyses

    These final regulations are not subject to review under section 
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement 
(April 11, 2018) between the Treasury Department and the Office of 
Management and Budget regarding review of tax regulations. Because 
these final 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 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, and no comments were received.

Ongoing Study of Liability Rule for Disguised Sales

    The 707 Temporary Regulations withdrawn by this Treasury decision 
adopted an approach requiring a partnership to apply the same 
percentage used to determine a partner's share of excess nonrecourse 
liabilities under Sec.  1.752-3(a)(3) (with certain limitations) in 
determining the partner's share of all partnership liabilities for 
disguised sale purposes. As was noted in the preamble to the 2018 
Proposed Regulations, some commenters supported this approach, but also 
expressed concern that it was adopted in temporary regulations rather 
than proposed regulations that would allow for further comment. The 
Treasury Department and the IRS continue to study the merits of the 
approach in the 707 Temporary Regulations and other approaches, 
including these final regulations, to determine which results in the 
most appropriate treatment of liabilities in the context of disguised 
sales.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income Taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

[[Page 54028]]

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 1.707-5 is amended by:
0
1. Revising paragraph (a)(2).
0
2. Designating Examples 1 through 13 of paragraph (f) as paragraphs 
(f)(1) through (f)(13), respectively.
0
3. Revising newly designated paragraphs (f)(2) and (3).
0
4. Removing the language ``Example 5'' in newly designated paragraph 
(f)(6)(i) and paragraph (f)(6)(ii) introductory text and adding the 
language ``paragraph (f)(5) of this section (Example 5)'' in its place.
0
5. Revising newly designated paragraphs (f)(7) and (8).
0
6. Removing the language ``Example 10'' in newly designated paragraph 
(f)(11)(i) and adding the language ``paragraph (f)(10) of this section 
(Example 10)'' in its place.
    The revisions read as follows:


Sec.  1.707-5  Disguised sales of property to partnership; special 
rules relating to liabilities.

    (a) * * *
    (2) Partner's share of liability. A partner's share of any 
liability of the partnership is determined under the following rules:
    (i) Recourse liability. A partner's share of a recourse liability 
of the partnership equals the partner's share of the liability under 
the rules of section 752 and the regulations in this part under section 
752. A partnership liability is a recourse liability to the extent that 
the obligation is a recourse liability under Sec.  1.752-1(a)(1) or 
would be treated as a recourse liability under that section if it were 
treated as a partnership liability for purposes of that section.
    (ii) Nonrecourse liability. A partner's share of a nonrecourse 
liability of the partnership is determined by applying the same 
percentage used to determine the partner's share of the excess 
nonrecourse liability under Sec.  1.752-3(a)(3). A partnership 
liability is a nonrecourse liability of the partnership to the extent 
that the obligation is a nonrecourse liability under Sec.  1.752-
1(a)(2) or would be a nonrecourse liability of the partnership under 
Sec.  1.752-1(a)(2) if it were treated as a partnership liability for 
purposes of that section.
* * * * *
    (f) * * *
     (2) Example 2. Partnership's assumption of recourse liability 
encumbering transferred property. (i) C transfers property Y to a 
partnership. At the time of its transfer to the partnership, 
property Y has a fair market value of $10,000,000 and is subject to 
an $8,000,000 liability that C incurred, immediately before 
transferring property Y to the partnership, in order to finance 
other expenditures. Upon the transfer of property Y to the 
partnership, the partnership assumed the liability encumbering that 
property. The partnership assumed this liability solely to acquire 
property Y. Under section 752 and the regulations in this part under 
section 752, immediately after the partnership's assumption of the 
liability encumbering property Y, the liability is a recourse 
liability of the partnership and C's share of that liability is 
$7,000,000.
    (ii) Under the facts of paragraph (f)(2)(i) of this section 
(Example 2), the liability encumbering property Y is not a qualified 
liability. Accordingly, the partnership's assumption of the 
liability results in a transfer of consideration to C in connection 
with C's transfer of property Y to the partnership in the amount of 
$1,000,000 (the excess of the liability assumed by the partnership 
($8,000,000) over C's share of the liability immediately after the 
assumption ($7,000,000)). See paragraphs (a)(1) and (2) of this 
section.
    (3) Example 3.  Subsequent reduction of transferring partner's 
share of liability. (i) The facts are the same as in paragraph 
(f)(2) of this section (Example 2). In addition, property Y is a 
fully leased office building, the rental income from property Y is 
sufficient to meet debt service, and the remaining term of the 
liability is ten years. It is anticipated that, three years after 
the partnership's assumption of the liability, C's share of the 
liability under section 752 will be reduced to zero because of a 
shift in the allocation of partnership losses pursuant to the terms 
of the partnership agreement. Under the partnership agreement, this 
shift in the allocation of partnership losses is dependent solely on 
the passage of time.
    (ii) Under paragraph (a)(3) of this section, if the reduction in 
C's share of the liability was anticipated at the time of C's 
transfer, was not subject to the entrepreneurial risks of 
partnership operations, and was part of a plan that has as one of 
its principal purposes minimizing the extent of sale treatment under 
Sec.  1.707-3 (that is, a principal purpose of allocating a large 
percentage of losses to C in the first three years when losses were 
not likely to be realized was to minimize the extent to which C's 
transfer would be treated as part of a sale), C's share of the 
liability immediately after the assumption is treated as equal to 
C's reduced share.
* * * * *
    (7) Example 7.  Partnership's assumptions of liabilities 
encumbering properties transferred pursuant to a plan. (i) Pursuant 
to a plan, G and H transfer property 1 and property 2, respectively, 
to an existing partnership in exchange for interests in the 
partnership. At the time the properties are transferred to the 
partnership, property 1 has a fair market value of $10,000 and an 
adjusted tax basis of $6,000, and property 2 has a fair market value 
of $10,000 and an adjusted tax basis of $4,000. At the time 
properties 1 and 2 are transferred to the partnership, a $6,000 
nonrecourse liability (liability 1) is secured by property 1 and a 
$7,000 recourse liability of F (liability 2) is secured by property 
2. Properties 1 and 2 are transferred to the partnership, and the 
partnership takes subject to liability 1 and assumes liability 2. G 
and H incurred liabilities 1 and 2 immediately prior to transferring 
properties 1 and 2 to the partnership and used the proceeds for 
personal expenditures. The liabilities are not qualified 
liabilities. Assume that G and H are each allocated $2,000 of 
liability 1 in accordance with paragraph (a)(2)(ii) of this section 
(which determines a partner's share of a nonrecourse liability). 
Assume further that G's share of liability 2 is $3,500 and H's share 
is $0 in accordance with paragraph (a)(2)(i) of this section (which 
determines a partner's share of a recourse liability).
    (ii) G and H transferred properties 1 and 2 to the partnership 
pursuant to a plan. Accordingly, the partnership's taking subject to 
liability 1 is treated as a transfer of only $500 of consideration 
to G (the amount by which liability 1 ($6,000) exceeds G's share of 
liabilities 1 and 2 ($5,500)), and the partnership's assumption of 
liability 2 is treated as a transfer of only $5,000 of consideration 
to H (the amount by which liability 2 ($7,000) exceeds H's share of 
liabilities 1 and 2 ($2,000)). G is treated under the rule in Sec.  
1.707-3 as having sold $500 of the fair market value of property 1 
in exchange for the partnership's taking subject to liability 1 and 
H is treated as having sold $5,000 of the fair market value of 
property 2 in exchange for the assumption of liability 2.
    (8) Example 8. Partnership's assumption of liability pursuant to 
a plan to avoid sale treatment of partnership assumption of another 
liability. (i) The facts are the same as in paragraph (f)(7) of this 
section (Example 7), except that--
    (A) H transferred the proceeds of liability 2 to the 
partnership; and
    (B) H incurred liability 2 in an attempt to reduce the extent to 
which the partnership's taking subject to liability 1 would be 
treated as a transfer of consideration to G (and thereby reduce the 
portion of G's transfer of property 1 to the partnership that would 
be treated as part of a sale).
    (ii) Because the partnership assumed liability 2 with a 
principal purpose of reducing the extent to which the partnership's 
taking subject to liability 1 would be treated as a transfer of 
consideration to G, liability 2 is ignored in applying paragraph 
(a)(3) of this section. Accordingly, the partnership's taking 
subject to liability 1 is treated as a transfer of $4,000 of 
consideration to G (the amount by which liability 1 ($6,000) exceeds 
G's share of liability 1 ($2,000)). On the other hand, the 
partnership's assumption of liability 2 is not treated as a transfer 
of any consideration to H because H's share of that liability equals 
$7,000 as a result of H's transfer of $7,000 in money to the 
partnership.
* * * * *


Sec.  1.707-5T  [Removed]

0
 Par. 3. Section 1.707-5T is removed.

[[Page 54029]]


0
 Par. 4. Section 1.707-9 is amended by revising paragraph (a)(4) and 
removing paragraph (a)(5).
    The revision reads as follows:


Sec.  1.707-9  Effective dates and transitional rules.

    (a) * * *
    (4) Applicability date of Sec.  1.707-5(a)(2) and (f)(2), (3), (7), 
and (8). (i) Section 1.707-5(a)(2) and (f)(2), (3), (7), and (8) apply 
to any transaction with respect to which all transfers occur on or 
after October 4, 2019. However, a partnership and its partners may 
apply Sec.  1.707-5(a)(2) and (f)(2), (3), (7), and (8) to any 
transaction with respect to which all transfers occur on or after 
January 3, 2017.
    (ii) For any transaction with respect to which any transfers occur 
before January 3, 2017, Sec.  1.707-5(a)(2) and (f), as contained in 26 
CFR part 1 revised as of April 1, 2016, apply.
    (iii) For any transaction with respect to which all transfers occur 
on or after January 3, 2017, and any of such transfers occurs before 
October 4, 2019, see Sec.  1.707-9T(a)(5) as contained in 26 CFR part 1 
revised as of April 1, 2019.
* * * * *


Sec.  1.707-9T  [Removed]

0
Par. 5. Section 1.707-9T is removed.

Sunita Lough,
Deputy Commissioner for Services and Enforcement.
    Approved: October 1, 2019.
David J. Kautter,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2019-22030 Filed 10-4-19; 4:15 pm]
 BILLING CODE 4830-01-P