[Federal Register Volume 89, Number 116 (Friday, June 14, 2024)]
[Rules and Regulations]
[Pages 50524-50526]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-12374]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9945]
RIN 1545-BO81


Guidance Under Section 1061; Correction

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final rule; correction and correcting amendments.

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SUMMARY: This document contains corrections to Treasury Decision 9945 
published in the Federal Register on Tuesday, January 19, 2021. 
Treasury Decision 9945 issued final regulations that recharacterize 
certain net long-term capital gains of a partner that holds one or more 
applicable partnership interests as short-term capital gains.

DATES: These corrections are effective on June 14, 2024 and for dates 
of applicability, see Sec. Sec.  1.702-1(g), 1.704-3(f), 1.1061-1(b), 
1.1061-2(c), 1.1061-3(f), 1.1061-4(d), 1.1061-5(g), 1.1061-6(e), and 
1.1223-3(g).

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Alta Li of 
the Office of Associate Chief Counsel (Passthroughs and Special 
Industries) at (202) 317-5279 (not a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    The final regulations (TD 9945) subject to these corrections are 
issued under section 1061 of the Internal Revenue Code.

Corrections to Publication

    Accordingly, the final regulations (TD 9945) that are the subject 
of FR Doc. 2021-00427, published on Tuesday, January 19, 2021, are 
corrected as follows:
    1. On page 5455, in the first column, in the seventh line of the 
column the language ``make'' is corrected to read ``made''.
    2. On page 5455, in the first column, in the fifteenth line of the 
column the language ``are'' is corrected to read ``at''.
    3. On page 5456, in the first column, the fourteenth line of the 
column is corrected to read ``terms, priority, type and level of 
risk''.
    4. On page 5457, in the first column, in the last line of the 
column the language ``allocation'' is corrected to read 
``allocations''.
    5. On page 5459, in the first column, the thirteenth line from the 
bottom of the column is corrected to read ``other partner, other 
than''.
    6. On page 5459, in the first column, the fifth line from the 
bottom of the column is corrected to read ``advances made by another 
partner in the''.
    7. On page 5459, in the first column, the fourth line from the 
bottom of the column is corrected to read ``partnership (or any Related 
Person with respect to such''.
    8. On page 5459, in the first column, the third line from the 
bottom of the column is corrected to read ``other partner, other than 
the partnership) to a''.
    9. On page 5459, in the second column, the ninth line of the column 
is corrected to read ``loan or advance made by another partner (or''.
    10. On page 5459, in the second column, the tenth line of the 
column is corrected to read ``any Related Person with respect to such 
other partner, other than the''.
    11. On page 5463, in the third column, the second line of the 
second full paragraph is corrected to read ``that once a partnership 
interest qualifies as''.
    12. On page 5465, in the first column, the twelfth line of the 
first full paragraph is corrected to read ``Assets; and (vi) options or 
derivative''.
    13. On page 5465, in the third column, in the twelfth line of the 
second full paragraph the language ``APIs'' is corrected to read 
``API''.
    14. On page 5467, in the first column, in the ninth line from the 
bottom of the column, the language ``API Distributed'' is corrected to 
read ``Distributed API''.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Correction to the Regulations

    Accordingly, 26 CFR part 1 is corrected by making the following 
correcting amendments:

PART 1--INCOME TAXES

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

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


[[Page 50525]]



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Par. 2. Section 1.1061-1(a) is amended by revising the definition for 
``Passthrough Entity'' to read as follows:


Sec.  1.1061-1  Section 1061 definitions.

* * * * *
    Passthrough Entity means a partnership, trust, estate, S 
corporation described in Sec.  1.1061-3(b)(2)(i), or a passive foreign 
investment company described in Sec.  1.1061-3(b)(2)(ii).
* * * * *

0
Par. 3. Section 1.1061-3 is amended by:
0
1. Revising the first sentence of paragraph (c)(3)(v)(A).
0
2. Revising paragraph (c)(3)(v)(B) introductory text.
0
3. Revising the heading of paragraph (c)(6)(i)(C).
0
4. Removing the language ``PRS's'' in the fifth sentence of paragraph 
(c)(6)(i)(C) and adding the language ``PRS'' in its place.
0
5. Revising paragraph (d)(3).
    The revisions read as follows:


Sec.  1.1061-3  Exceptions to the definition of an API.

* * * * *
    (c) * * *
    (3) * * *
    (v) * * *
    (A) * * * For purposes of the Section 1061 Regulations, an 
allocation is not a Capital Interest Allocation to the extent the 
allocation is attributable to the contribution of an amount of capital 
to a partnership that, directly or indirectly, results from, or is 
attributable to, any loan or other advance made or guaranteed, directly 
or indirectly, by the partnership or another partner in the partnership 
(or any Related Person with respect to such persons), except to the 
extent a loan or advance is described in paragraph (c)(3)(v)(B) of this 
section.* * *
    (B) * * * Paragraph (c)(3)(v)(A) of this section does not apply 
with respect to an allocation attributable to a contribution made by an 
individual service provider that, directly or indirectly, results from, 
or is attributable to, a loan or advance from another partner in the 
partnership (or any Related Person with respect to such other partner, 
other than the partnership) to such individual service provider if the 
individual service provider is personally liable for the repayment of 
such loan or advance. A contribution made by an individual service 
provider includes a contribution made by an entity that is wholly owned 
by, and disregarded as separate from, the individual service provider 
as described in Sec.  1.1061-2(a)(1)(v), including a contribution 
attributable to a loan or advance made to the disregarded entity by 
another partner in the partnership (or any Related Person with respect 
to such other partner, other than the partnership) if the individual 
service provider is personally liable for the repayment of any and all 
borrowed amounts that are not repaid by the disregarded entity. For 
purposes of this paragraph (c)(3)(v)(B), an individual service provider 
is personally liable for the repayment of a loan or advance made by 
another partner (or any Related Person with respect to such other 
partner, other than the partnership) if--
* * * * *
    (6) * * *
    (i) * * *
    (C) GP's Capital Interest Allocation Analysis.* * *
* * * * *
    (d) * * *
    (3) Acquirer not a service provider. At the time of the purchase, 
the acquirer has not provided, does not provide, and does not 
anticipate providing services to, or for the benefit of, the target 
partnership, directly or indirectly, or any lower-tier partnership in 
which the target partnership directly or indirectly holds an interest.
* * * * *

0
Par. 4. Section 1.1061-4 is amended by:
0
1. Removing the language ``Share amount'' in the first sentence of 
paragraph (b)(5)(ii) and adding the language ``Share Amount'' in its 
place.
0
2. Revising paragraph (b)(9)(i)(B).
0
3. Removing the language ``applying'' in paragraph (b)(9)(ii) 
introductory text and adding the language ``computing'' in its place.
0
4. Removing the language ``Three Year API'' in paragraph 
(c)(1)(i)(C)(2) and adding the language ``API Three Year'' in its 
place.
0
5. Removing the language ``Gain amount'' in the first sentence of 
paragraph (c)(1)(i)(D) and adding the language ``Gain Amount'' in its 
place.
0
6. Revising the third sentence of paragraph (c)(1)(ii)(B).
0
7. Revising paragraph (c)(1)(iii)(B).
0
8. Removing the language ``Gain of $300'' in the first sentence of 
paragraph (c)(1)(iii)(C) and adding the language ``of $300'' in its 
place.
0
9. Removing the language ``year causing'' in the third sentence of 
paragraph (c)(2)(ii) and adding the language ``year, causing'' in its 
place.
0
10. Removing the language ``the $1000'' in the fifth sentence of 
paragraph (c)(2)(iii) and adding the language ``the $1,000'' in its 
place.
    The revisions read as follows:


Sec.  1.1061-4  Section 1061 Computations.

* * * * *
    (b) * * *
    (9) * * *
    (i) * * *
    (B) Determination that the Lookthrough Rule applies to the 
disposition of a Passthrough Interest. Paragraph (b)(9)(i)(A) of this 
section similarly applies with respect to a Passthrough Interest issued 
by an S corporation or a PFIC to the extent that the Passthrough 
Interest is treated as an API.
* * * * *
    (c) * * *
    (1) * * *
    (ii) * * *
    (B) * * * Under paragraph (a)(4)(ii) of this section, A's API Three 
Year Disposition Amount is $100, which is the amount of long-term 
capital gain that A recognized upon disposition of the API held for 
more than three years.* * *
* * * * *
    (iii) * * *
    (B) Determination of A's One Year Gain Amount. Under paragraph 
(a)(2) of this section, A's One Year Gain Amount is $900, which is an 
amount equal to A's $100 API One Year Distributive Share Amount from 
PRS1 and A's $600 API One Year Distributive Share Amount from PRS2 (a 
combined net API One Year Distributive Share Amount of $700) plus A's 
$200 API One Year Disposition Amount.
* * * * *

0
Par. 5. Section 1.1061-5 is amended by:
0
1. Removing the language ``of this section'' in the fourth sentence of 
paragraph (f)(1) and adding the language ``of this section;'' in its 
place.
0
2. Revising paragraphs (f)(2)(i) and (ii) and (f)(3).
    The revisions read as follows:


Sec.  1.1061-5  Section 1061(d) transfers to related persons.

* * * * *
    (f) * * *
    (2) * * *
    (i) Facts. A, B, and C are equal partners in GP, a partnership. GP 
holds only one asset, an API in PRS1 which is an Indirect API as to 
each of A, B, and C. Each of A, B, and C provides services in the ATB 
in connection with which GP was transferred its API in PRS1. A and B 
contribute their interests in GP to PRS2 in a section 721(a) exchange 
for interests in PRS2.
    (ii) Application of section 1061(d). Because the contribution by 
each of A and B of its interest in GP to PRS2 is an exchange in which 
no gain is recognized

[[Page 50526]]

by either A or B, the contribution is not a transfer as described in 
paragraph (b) of this section; thus section 1061(d) does not apply to 
A's and B's contribution. However, the API remains an API in the hands 
of PRS2 under Sec.  1.1061-2(a)(1)(i).
    (3) Example 3: Transfer of an API to a Section 1061(d) Related 
Person. A has held an API in GP, a partnership, for four years. A 
transfers the API to a Section 1061(d) Related Person described in 
paragraph (e) of this section in exchange for $100 of cash, resulting 
in A recognizing long-term capital gain of $100. Because this is a 
transfer described in paragraph (b) of this section, section 1061(d) 
applies to the transfer of A's API and A must determine its Section 
1061(d) Recharacterization Amount under paragraph (c) of this section. 
If, immediately prior to A's transfer of the API, the partnership had 
sold all of its assets in a fully taxable transaction for cash equal to 
the fair market value of the assets, A's share of the net long-term 
capital gain (excluding amounts not taken into account for purposes of 
section 1061 under Sec.  1.1061-4(b)(7)) from assets held for three 
years or less would have been $120. Thus, A's Section 1061(d) 
Recharacterization Amount is $120. As a result, A's $100 long-term 
capital gain is recharacterized as short-term capital gain under 
paragraph (a) of this section. The API remains an API in the hands of 
the Section 1061(d) Related Person under Sec.  1.1061-2(a)(1)(i).
* * * * *


Sec.  1.1061-6  [Amended]

0
Par. 6. Section 1.1061-6 is amended by removing the language ``capital 
gain excluding'' in the first sentence of paragraph (c)(1)(i) and 
adding the language ``capital gain, excluding'' in its place.


Sec.  1.1223-3  [Amended]

0
Par. 7. Section 1.1223-3 is amended by removing the language ``June 30, 
2020'' in the third sentence of paragraph (f)(10) and adding the 
language ``June 1, 2020'' in its place.

Oluwafunmilayo A. Taylor,
Section Chief, Publications and Regulations Section, Associate Chief 
Counsel, (Procedure and Administration).
[FR Doc. 2024-12374 Filed 6-13-24; 8:45 am]
BILLING CODE 4830-01-P