\[4830-01-P\]

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

\[TD 9062\]

RIN 1545-BB83

Assumption of Partner Liabilities

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations regarding a
partnership's assumption of a partner's liabilities in a transaction
occurring after October 18, 1999, and before June 24, 2003. These
temporary regulations affect partners and partnerships and clarify the
tax treatment of an assumption by a partnership of a partner's
liability. The text of these temporary regulations also serves as the
text of the proposed regulations set forth in a notice of proposed
rulemaking on this subject in the Proposed Rules section of this issue
of the **Federal Register**.

DATES: [Effective Date]{.underline}: These regulations are effective
June 24, 2003.

[Applicability Date]{.underline}: For date of applicability, see
1.752-6T(d).

FOR FURTHER INFORMATION CONTACT: Horace Howells (202) 622-3050 (not a
toll-free number).

SUPPLEMENTARY INFORMATION:

**Background**

With certain exceptions, no gain or loss is recognized if property is
transferred to a corporation solely in exchange for stock of the
corporation, and, immediately after the exchange, the transferors
control the corporation. If, however, the transferee corporation assumes
a liability of the transferor, then, under section 358(d), the
transferor's basis in the stock received in the exchange is reduced by
the amount of that liability. If the amount of the liability exceeds the
transferor's basis in the property transferred to the corporation, then
the transferor recognizes gain under section 357(c)(1). Under section
357(c)(3), a liability the payment of which would give rise to a
deduction or that would be described in section 736(a) (regarding
payments to a retiring partner) is not taken into account in applying
section 357(c)(1), unless the incurrence of the liability resulted in
the creation of, or an increase in, the basis of any property.

Under section 752(a) and (b), similar rules apply where a partnership
assumes a liability from a partner or a partner contributes property to
a partnership subject to a liability. The difference between the amount
of the liability and the partner's share of that liability after the
partnership's assumption is treated as a distribution of money, which
reduces the partner's basis in the partnership interest and may cause
the partner to recognize gain. There is no statutory or regulatory
definition of liabilities for purposes of section 752. Case law and
revenue rulings, however, have established that, as under section
357(c)(3), the term [liabilities]{.underline} for this purpose does not
include liabilities the payment of which would give rise to a deduction,
unless the incurrence of the liability resulted in the creation of, or
an increase in, the basis of property. Rev. Rul. 88-77 (1988-2 C.B.
128); [Salina Partnership LP, FPL Group, Inc. v.
Commissioner]{.underline}, T.C. Memo 2000-352.

On December 21, 2000, as part of the Community Renewal Tax Relief Act of
2000 (Appendix G of H.R. 4577, Consolidated Appropriations Act, 2001)
Public Law 106-554, 114 Stat. 2763, 2763A-638 (2001) (the Act), Congress
enacted section 358(h) to address certain situations where property was
transferred to a corporation in exchange for both stock and the
corporation's assumption of certain obligations of the transferor. In
these situations, 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 transferor's stock. 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) 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. Exceptions to section 358(h) are
provided where: (1) the trade or business with which the liability is
associated is transferred to the person assuming the liability as part
of the exchange; or (2) 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 term [liability]{.underline} 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 Internal Revenue Code (Code).

Congress recognized that taxpayers were attempting to use partnerships
to carry out the same types of abuses that section 358(h) was designed
to deter. Therefore, in section 309(c) and (d)(2) of the Act, Congress
directed the Secretary to prescribe rules to provide "appropriate
adjustments under subchapter K of chapter 1 of the Code to prevent the
acceleration or duplication of losses through the assumption of (or
transfer of assets subject to) liabilities described in section
358(h)(3) . . . in transactions involving partnerships." This statutory
provision does not specify whether the exceptions in section 358(h)(2)
should apply. The only cross-reference to section 358(h) in this
statutory provision is to section 358(h)(3), which defines the term
[liability]{.underline}. Under the statute, these rules are to "apply to
assumptions of liability after October 18, 1999, or such later date as
may be prescribed in such rules."

In response to this directive, these temporary regulations provide rules
to prevent the duplication and acceleration of loss through the
assumption by a partnership of a liability of a partner in a
nonrecognition transaction. Section 1.752-6T adopts the approach of
section 358(h), with some modifications, for transactions involving
partnership assumptions of partners' liabilities occurring after October
18, 1999, and before June 24, 2003. The modifications made to the
approach of section 358(h) were to provide rules to conform the
application of section 358(h) to partnerships and, as discussed below,
to prevent abuse.

Prior to the enactment of Code section 358(h) and section 309(c) and
(d)(2) of the Act, the lack of specific rules addressing the treatment
of liabilities upon the transfer of property to a corporation or a
partnership led to interpretations of then existing law that failed to
reflect the true economics of certain transactions. In some cases,
taxpayers continued to assert these interpretations even after the
enactment of these statutory provisions. For example, in a transaction
addressed in Notice 2000-44 (2000-2 C.B. 255), a taxpayer purchases and
writes economically offsetting options and then purports to create
substantial positive basis by transferring those option positions to a
partnership. On the disposition of the partnership interest, the
liquidation of the partner's interest in the partnership, or the
taxpayer's sale or depreciation of distributed partnership assets, the
taxpayer claims a tax loss, even though the taxpayer has incurred no
corresponding economic loss.

Treasury and the IRS believe that it is appropriate to prohibit partners
and partnerships engaging in transactions described in, or transactions
that are substantially similar to the transactions described in, Notice
2000-44 from relying on the exception in section 358(h)(2)(B). The
exceptions to section 358(h) were intended to exclude from the
application of section 358(h) ordinary business transactions. They were
not intended to allow taxpayers to engage in transactions that create
noneconomic tax losses.

The text of the temporary regulations also serves as the text of the
proposed regulations set forth in the notice of proposed rulemaking on
this subject in the Proposed Rules section of this issue of the
**Federal Register** (1.752-6 of the proposed Income Tax Regulations).
As part of that notice of proposed rulemaking, §1.752-7 of the proposed
Income Tax Regulations is being issued to carry out the directive of
section 309(c) of the Act with respect to assumptions of liabilities
occurring on or after June 24, 2003. The proposed regulations conform
the application of section 358(h) to partnerships by providing a basis
reduction upon an event that separates the partner from the liability
rather than on assumption of the liability by the partnership and by
adopting certain exceptions. Section 1.752-7(j) of the proposed Income
Tax Regulations allows a partnership to elect to apply 1.752-7 of the
proposed Income Tax Regulations and related proposed provisions to
assumptions of liabilities occurring after October 18, 1999, and before
June 24, 2003, in lieu of applying 1.752-6T of the temporary Income Tax
Regulations to this period.

**Explanation of Provisions**

Under these temporary regulations, if a partnership assumes a liability
of a partner (other than a liability to which section 752(a) and (b)
apply) in a transaction described in section 721(a), then, after
application of section 752(a) and (b), the partner's basis in the
partnership is reduced (but not below the adjusted value of such
interest) by the amount (determined as of the date of the exchange) of
the liability. For this purpose, the term [liability]{.underline}
includes any fixed or contingent obligation to make payment, without
regard to whether the obligation is otherwise taken into account for
federal tax purposes. The adjusted value of a partner's interest in a
partnership is the fair market value of that interest increased by the
partner's share of partnership liabilities under 1.752-1 through
1.752-5.

The exceptions under section 358(h) applicable to corporate assumptions
of shareholder liabilities generally apply for purposes of these
temporary regulations. Therefore, a reduction in a partner's basis
generally is not required, under these regulations, after an assumption
of a liability by a partnership from that partner if: (1) the trade or
business with which the liability is associated is transferred to the
partnership assuming the liability as part of the transaction, or (2)
substantially all of the assets with which the liability is associated
are contributed to the partnership assuming the liability.

However, in the case of a partnership transaction described in, or a
partnership transaction that is substantially similar to the
transactions described in, Notice 2000-44, the exception for
contributions of "substantially all of the assets with which the
liability is associated" does not apply.

**Effective Date**

In accordance with the directive in section 309(c) and (d)(2) of the
Act, these temporary regulations apply to assumptions of liabilities
occurring after October 18, 1999, and before June 24, 2003. Under
section 7805(b)(6), the Secretary may provide that any regulation may
take effect in accordance with a legislative grant from Congress
authorizing the Secretary to prescribe the effective date for such
regulation. In addition, under section 7805(b)(3), the Secretary may
provide that any regulation may take effect or apply retroactively to
prevent abuse. The Secretary has determined that a later effective date
is inappropriate. Therefore, these regulations are being applied
retroactively in accordance with the directive from Congress in section
309(d)(2) of the Act and to prevent abuse.

**Special Analyses**

These temporary regulations are necessary to prevent abusive
transactions of the type described in the Notice 2000-44. Accordingly,
good cause is found for dispensing with notice and public procedure
pursuant to 5 U.S.C. 553(b)(B) and for dispensing with a delayed
effective date pursuant to 5 U.S.C. 553(d)(1) and (3).

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. For the applicability of the
Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special
Analyses section of the preamble to the notice of proposed rulemaking on
this subject published in the Proposed Rules section of this issue of
the **Federal Register**. Pursuant to section 7805(f) of the Code, these
temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.

**Drafting Information**

The principal author of these temporary regulations is Horace Howells,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries), IRS. 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 the Regulations**

Accordingly, 26 CFR part 1 is amended as follows:

PART 1---INCOME TAXES

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

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

[Section 1.752-6T also issued under Public Law 106-554, 114 Stat. 2763,
2763A-638 (2001) \* \* \*]{.underline}

Par. 2. Section 1.752-6T is added to read as follows:

[1.752-6T Partnership assumption of partner's section 358(h)(3)
liability after October 18, 1999, and before June 24, 2003]{.underline}.

\(a\) [In general]{.underline}. If, in a transaction described in
section 721(a), a partnership assumes a liability (defined in section
358(h)(3)) of a partner (other than a liability to which section 752(a)
and (b) apply), then, after application of section 752(a) and (b), the
partner's basis in the partnership is reduced (but not below the
adjusted value of such interest) by the amount (determined as of the
date of the exchange) of the liability. For purposes of this section,
the adjusted value of a partner's interest in a partnership is the fair
market value of that interest increased by the partner's share of
partnership liabilities under 1.752-1 through 1.752-5.

\(b\) [Exceptions]{.underline}\--(1) [In general]{.underline}. Except as
provided in paragraph (b)(2) of this section, the exceptions contained
in section 358(h)(2)(A) and (B) apply to this section.

\(2\) [Transactions described in Notice 2000-44]{.underline}. The
exception contained in section 358(h)(2)(B) does not apply to an
assumption of a liability (defined in section 358(h)(3)) by a
partnership as part of a transaction described in, or a transaction that
is substantially similar to the transactions described in, Notice
2000-44 (2000-2 C.B. 255). See §601.601(d)(2) of this chapter.

\(c\) [Example]{.underline}. The following example illustrates the
principles of paragraph (a) of this section:

[Example]{.underline}. In 1999, A and B form partnership PRS. A
contributes property with a value and basis of \$200, subject to a
nonrecourse debt obligation of \$50 and a fixed or contingent obligation
of \$100 that is not a liability to which section 752(a) and (b)
applies, in exchange for a 50% interest in PRS. Assume that, after the
contribution, A's share of partnership liabilities under 1.752-1 through
1.752-5 is \$25. Also assume that the \$100 liability is not associated
with a trade or business contributed by A to PRS or with assets
contributed by A to PRS. After the contribution, A's basis in PRS is
\$175 (A's basis in the contributed land (\$200) reduced by the
nonrecourse debt assumed by PRS (\$50), increased by A's share of
partnership liabilities under 1.752-1 through 1.752-5 (\$25)). Because
A's basis in the PRS interest is greater than the adjusted value of A's
interest, \$75 (the fair market value of A's interest (\$50) increased
by A's share of partnership liabilities (\$25)), paragraph (a) of this
section operates to reduce A's basis in the PRS interest (but not below
the adjusted value of that interest) by the amount of liabilities
described in section 358(h)(3) (other than liabilities to which section
752(a) and (b) apply) assumed by PRS. Therefore, A's basis in PRS is
reduced to \$75.

\(d\) [Effective date]{.underline}s\--(1) [In general]{.underline}. This
section applies to assumptions of liabilities occurring after October
18, 1999, and before June 24, 2003.

\(2\) [Election to apply §1.752-7]{.underline}. The partnership may
elect, under the provisions of REG-106736-00 (2003-28 IRB) (see
§601.601(d)(2) of this chapter) to apply those provisions and related
proposed Income Tax Regulations to all assumptions of liabilities by the
partnership occurring after October 18, 1999, and before June 24, 2003.
The provisions of REG-106736-00 (2003-28 IRB) (see §601.601(d)(2) of
this chapter) describes the manner in which the election is made.

David A. Mader

> Assistant Deputy Commissioner of Internal Revenue.

Approved: 5/07/03

Gregory Jenner

> Deputy Assistant Secretary of the Treasury.