68838 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

TABLE 1.—Continued

Title Docket No. FR Publication Date and Cite 

Dental Devices; Effective Date of Requirement for Premarket Approval of 

Over-the-Counter (OTC) Denture Cushions or Pads and OTC Denture Repair Kits

95N–0034 July 11, 1995, 60 FR 35713

Food Labeling; Nutrient Content Claims and Health Claims; Special Requirements95N–0103 February 2, 1996, 61 FR 3885

Maltodextrin; Food Chemicals Codex Specifications 95N–0189 September 21, 1995, 60 FR 48939

Beverages: Bottled Water 95N–0203 November 13, 1995, 60 FR 57132

Dental Devices; Effective Date of Requirement for Premarket Approval of Partially Fabricated Denture Kits95N–0298 November 29, 1995, 60 FR 61232

Lowfat and Skim Milk Products, Lowfat and Nonfat Yogurt Products, Lowfat 

Cottage Cheese: Proposed Revocation of Standards of Identity; Food Labeling, Nutrient Content Claims for Fat, Fatty Acids and Cholesterol Content of 

Food

95P–0250 November 9, 1995, 60 FR 56541

Food Standards; Reinvention of Regulations Needing Revisions, Request for 

Comments on Certain Existing Regulations

96N–0149 June 12, 1996, 61 FR 29701

Reinvention of Certain Food Additive Regulations 96N–0177 June 12, 1996, 61 FR 29711

Food Labeling; Declaration of Free Glutamate In Food 96N–0244 September 12, 1996, 61 FR 48102

Regulation of Medical Foods 96N–0364 November 29, 1996, 61 FR 60661

Food Labeling: Nutrient Content Claims Pertaining to the Available Fat Content 

of Food

96N–0421 and 94P–

0453/CP1

December 20, 1996, 61 FR 67243

Food Labeling; Serving Sizes; Reference Amounts for Candies 96P–0023 and 96P–

0179

January 8, 1998, 63 FR 1078

1Denotes documents that were included in the December 1991 withdrawal notice, but were not withdrawn at that time.

Dated: August 30, 2004.

William K. Hubbard,

Associate Commissioner for Policy and 

Planning.

[FR Doc. 04–26234 Filed 11–24–04; 8:45 am]

BILLING CODE 4160–01–S

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: Notice of proposed rulemaking 

and notice of public hearing. 

SUMMARY: This document contains 

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 (Code). 

The proposed regulations affect 

partnerships and their partners, and are 

necessary to provide guidance needed to 

comply with the applicable tax law. 

This document also provides notice of 

a public hearing on these proposed 

regulations.

DATES: Written or electronic comments 

must be received by February 24, 2005. 

Requests to speak and outlines of topics 

to be discussed at the public hearing 

scheduled for March 8, 2005, at 10 a.m. 

must be received by February 24, 2005.

ADDRESSES: Send submissions to: 

CC:PA:LPD:PR (REG–149519–03), room 

5203, Internal Revenue Service, PO Box 

7604, Ben Franklin Station, Washington, 

DC 20044. Submissions may be handdelivered Monday through Friday 

between the hours of 8 a.m. and 4 p.m. 

to CC:PA:LPD:PR (REG–149519–03), 

Courier’s Desk, Internal Revenue 

Service, 1111 Constitution Avenue, 

NW., Washington, DC, or sent 

electronically, via the IRS internet site 

http://www.irs.gov/regs or via the 

Federal eRulemaking Portal site at

http://www.regulations.gov (indicate 

IRS and REG–149519–03). The public 

hearing will be held in the IRS 

Auditorium, Seventh Floor, Internal 

Revenue Building, 1111 Constitution 

Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations, 

Deane M. Burke or Christopher L. 

Trump, (202) 622–3070; concerning 

submissions of comments, the hearing, 

or to be placed on the building access 

list to attend the hearing, Treena V. 

Garrett, (202) 622–7180 (not toll-free 

numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collection of information 

contained in this notice of proposed 

rulemaking has been submitted to the 

Office of Management and Budget for 

review in accordance with the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)). Comments on the 

collection of information should be sent 

to the Office of Management and 

Budget, Attn: Desk Officer for the 

Department of the Treasury, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, with copies to 

the Internal Revenue Service, Attn: IRS 

Reports Clearance Officer, 

SE:W:CAR:MP:T:T:SP, Washington, DC 

20224. Comments on the collection of 

information should be received by 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68839

January 25, 2005. Comments are 

specifically requested concerning: 

Whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Internal Revenue Service, including 

whether the information will have 

practical utility; 

The accuracy of the estimated burden 

associated with the proposed collection 

of information (see below); 

How the quality, utility, and clarity of 

the information to be collected may be 

enhanced; 

How the burden of complying with 

the proposed collection of information 

may be minimized, including through 

the application of automated collection 

techniques or other forms of information 

technology; and 

Estimates of capital or start-up costs 

and costs of operation, maintenance, 

and purchase of services to provide 

information. 

The collection of information in the 

proposed regulations is in §§ 1.707–

3(c)(2), 1.707–5(a)(8), 1.707–6(c), and 

1.707–7(k). This information is required 

by the IRS to ensure that section 

707(a)(2)(B) of the Code and the 

regulations thereunder are properly 

applied to transfers between partners in 

a partnership. The information collected 

will be used to determine whether 

partners are complying with section 

707(a)(2)(B) and the regulations 

thereunder. The respondents will be 

partners and partnerships. 

Estimated total annual reporting 

burden: 7,500 hours. 

Estimated average burden per 

respondent varies from 15 minutes to 25 

minutes, depending on individual 

circumstances, with an estimated 

average of 20 minutes. 

Estimated number of respondents:

22,500.

Estimated annual frequency of 

responses: annually. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless it displays a valid control 

number assigned by the Office of 

Management and Budget. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. 6103. 

Background 

This document proposes to amend 

section 707 of the Income Tax 

Regulations (26 CFR part 1) regarding 

disguised sales of partnership property, 

including partnership interests. 

Section 707(a)(2)(B) of the Code 

provides that, under regulations 

prescribed by the Secretary, transfers to 

and by a partnership that are more 

properly characterized as 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 shall be treated as 

such transactions. 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) C.B. 115. Specifically, 

Congress was concerned about court 

decisions that allowed tax-free 

treatment in cases that were 

economically 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 September 30, 1992, final 

regulations under section 707(a)(2) (TD 

8439, 1992–2 C.B. 126) relating to 

disguised sales of property to and by 

partnerships were published in the 

Federal Register (57 FR 44974 as 

corrected on November 30, 1992, by 57 

FR 56443) (existing regulations). Section 

1.707–7 of the existing regulations was 

reserved for rules on disguised sales of 

partnership interests. On October 9, 

2001, the IRS and the Treasury 

Department issued Notice 2001–64 

(2001–2 C.B. 316), 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 these proposed regulations. 

In February 2003, the Joint Committee 

on Taxation released its Report of 

Investigation of Enron Corporation and 

Related Entities Regarding Federal Tax 

and Compensation Issues and Policy 

Recommendations (Enron Report), and 

the Written Testimony of the Staff of the 

Joint Committee on the Enron Report 

(Written Testimony). In the Enron 

Report and the Written Testimony, the 

Joint Committee recommended changes 

to rules in the existing regulations that 

require disclosure of certain 

transactions. These proposed 

regulations include those changes and 

provide disclosure rules for disguised 

sales of partnership interests consistent 

with the disclosure rules in the existing 

regulations, as amended. 

Explanation of Provisions 

1. Framework of Rules 

Commentators responding to Notice 

2001–64 generally recommended that 

the proposed regulations relating to 

disguised sales of partnership interests 

include a framework similar to that in 

the existing regulations, with a general 

rule that applies based on all of the facts 

and circumstances, and a variety of safe 

harbors and presumptions. In addition, 

the commentators specifically 

recommended that certain of the 

presumptions and safe harbors in the 

existing regulations be incorporated into 

the proposed regulations and that the 

treatment of liabilities under the 

proposed regulations largely follow the 

treatment of liabilities under the 

existing regulations. The IRS and the 

Treasury Department agree with those 

recommendations and, accordingly, the 

proposed regulations follow the form of 

the existing regulations and include 

rules similar to many of the rules in the 

existing regulations, with appropriate 

modifications. 

2. General Rule 

The commentators also recommended 

that the proposed regulations provide a 

narrower rule than the existing 

regulations for determining that a 

purported contribution and distribution 

are related, and therefore, are treated as 

a disguised sale of a partnership 

interest. One commentator noted that, 

unlike the existing regulations, the 

proposed regulations would potentially 

apply whenever there are cash 

contributions and distributions, which 

are common events for most 

partnerships. In addition, unlike in a 

disguised sale of partnership property, 

no person, other than the partnership, 

participates in both of the transactions 

68840 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

that constitute the disguised sale 

(transfers to and by a partnership) and 

a party engaged in one of those 

transactions may not even be aware of 

the other transaction. Another 

commentator expressed concern that 

without a narrower rule, the proposed 

regulations could apply to many 

common, legitimate partnership 

transactions, such as the routine 

admission to and redemption from 

professional and securities partnerships.

Under the existing regulations, a 

transfer of property by a partner to a 

partnership and a simultaneous transfer 

of money or other consideration by the 

partnership to the partner are treated as 

a disguised sale of property only if, 

based on all the facts and 

circumstances, the transfer by the 

partnership would not have been made 

but for the transfer to the partnership, 

and, in cases in which the transfers are 

not made simultaneously, the 

subsequent transfer is not dependent on 

the entrepreneurial risks of partnership 

operations. Section 1.707–3(b)(1). One 

of the commentators suggested that in 

addition to the ‘‘but for’’ test in the 

existing regulations, the proposed 

regulations provide that transfers to and 

by a partnership will constitute a 

disguised sale of a partnership interest 

only if the two transfers are ‘‘directly 

related.’’ Another commentator 

suggested that the proposed regulations 

find a disguised sale of a partnership 

interest only where both the transfer to 

and the transfer by the partnership 

would not have been made but for the 

other transfer, a so-called ‘‘double but 

for test.’’ The commentators also 

recommended narrowing the scope of 

the proposed regulations by providing 

additional favorable presumptions or 

safe harbors for certain transactions, 

such as transfers to and from 

professional partnerships. 

The IRS and the Treasury Department 

agree that because many more 

transactions may potentially be subject 

to the proposed regulations, it is 

appropriate that the proposed 

regulations be narrower than the 

existing regulations. However, the IRS 

and the Treasury Department have 

concerns about the alternate tests of 

relatedness suggested by the 

commentators. Specifically, the IRS and 

the Treasury Department are not certain 

how a ‘‘directly related’’ test would be 

interpreted or applied, or whether it 

would be effective in narrowing the 

scope of the proposed rules. In addition, 

the IRS and the Treasury Department 

are concerned that certain transactions 

that should be treated as a disguised 

sale of a partnership interest would not 

be covered under a ‘‘double but for 

test.’’ For example, assume that a 

prospective investor in a partnership 

and an existing partner who wishes to 

sell its partnership interest agree that 

upon the prospective investor’s transfer 

to the partnership, the partnership will 

make a corresponding transfer to the 

existing partner. If the prospective 

investor is indifferent as to whether the 

existing partner retains its partnership 

interest, the transaction would not 

satisfy a ‘‘double but for test’’ since the 

transfer to the partnership was not made 

but for the transfer from the partnership. 

Nonetheless, the IRS and the Treasury 

Department believe that the transaction 

is economically indistinguishable from 

a sale of a partnership interest and 

should be treated as such. In contrast, 

the IRS and the Treasury Department 

believe that the ‘‘but for’’ test of the 

existing regulations provides a relatively 

bright line rule that is easier to interpret 

and administer and that, in most cases, 

covers those transactions that should be 

treated as disguised sales of partnership 

interests. The IRS and the Treasury 

Department thus believe that the 

appropriate way to narrow the scope of 

those rules is to provide additional safe 

harbors but adopt the same ‘‘but for’’

test included in the existing regulations. 

Accordingly, the proposed regulations 

provide that a transfer of money, 

property or other consideration 

(including the assumption of a liability) 

(consideration) by a purchasing partner 

to a partnership and a transfer of 

consideration by the partnership to a 

selling partner constitute a sale, in 

whole or in part, of the selling partner’s 

interest in the partnership to the 

purchasing partner only if, based on all 

the facts and circumstances, the transfer 

by the partnership would not have been 

made but for the transfer to the 

partnership, and, in cases in which the 

transfers are not made simultaneously, 

the subsequent transfer is not dependent 

on the entrepreneurial risks of 

partnership operations. 

3. Facts and Circumstances 

As under the existing regulations, the 

proposed regulations provide that 

whether two transfers constitute a 

disguised sale is determined based on 

all the facts and circumstances. The 

proposed regulations list a series of 

factors that, among others, tend to 

indicate the existence of a disguised sale 

of a partnership interest. The weight 

given each of the factors will depend on 

the circumstances of each case. 

Generally, the facts and circumstances 

existing on the date of the earliest of the 

transfers are the ones considered in 

determining if a sale exists. 

Many of the factors listed in the 

proposed regulations are similar to 

those under the existing regulations. 

However, the proposed regulations 

include additional facts and 

circumstances that are relevant in the 

context of a disguised sale of a 

partnership interest. For example, 

included in the facts and circumstances 

in the proposed regulations are (1) that 

the same property (other than money, 

including marketable securities that are 

treated as money under section 

731(c)(1)) (non-cash property) that is 

transferred to the partnership by the 

purchasing partner is transferred to the 

selling partner, and (2) that the 

partnership holds transferred non-cash 

property for a limited period of time, or 

during the period of time the 

partnership holds transferred non-cash 

property, the risk of gain or loss 

associated with the property is not 

significant. 

4. Presumptions and Safe Harbors 

a. In General 

The commentators generally 

suggested that the proposed regulations 

provide presumptions and safe harbors 

that model those contained in the 

existing regulations. Those rules 

generally focus on the timing, risk, and 

source of partnership distributions. The 

IRS and the Treasury Department 

believe that rules similar to those rules 

in the existing regulations should apply 

in the context of disguised sales of 

partnership interests. Therefore, the 

proposed regulations include 

presumptions and safe harbors similar 

to those in the existing regulations, 

along with an additional favorable 

presumption and an additional 

exception that address concerns 

specifically relevant in the context of 

disguised sales of partnership interests. 

As under the existing regulations, each 

of the presumptions in the proposed 

regulations may be rebutted only by 

facts and circumstances that clearly 

establish the contrary. 

b. Timing of Transfers, Liquidations, 

and Service Partnerships

The proposed regulations adopt an 

approach similar to that in the existing 

regulations regarding transfers made 

within two years and transfers made 

more than two years apart. Thus, the 

proposed regulations provide that a 

transfer of consideration by a 

purchasing partner to a partnership and 

a transfer of consideration by the 

partnership to a selling partner that are 

made within two years of each other are 

presumed to be a sale, and that such 

transfers made more than two years 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68841

apart are presumed not to be a sale. One 

commentator suggested that the timing 

presumptions in the proposed 

regulations should only apply to 

‘‘extraordinary’’ contributions and 

distributions because the proposed 

regulations, unlike the existing 

regulations, may apply whenever there 

is a cash contribution to and cash 

distribution from a partnership, which 

are routine transactions for many 

partnerships. The IRS and the Treasury 

Department believe that this concern is 

adequately addressed by the inclusion 

in the proposed regulations of (1) 

presumptions, discussed below, against 

sale treatment for transfers of money 

(including marketable securities) to a 

selling partner in liquidation of the 

selling partner’s interest in the 

partnership as well as for guaranteed 

payments, preferred returns, operating 

cash flow distributions, and 

reimbursements of preformation 

expenditures, and (2) an exception for 

contributions and distributions of 

money (including marketable securities) 

to and from service partnerships 

(defined as described below). 

Another commentator argued that the 

proposed regulations should not include 

presumptions based upon the amount of 

time that elapses between transfers. The 

commentator submitted that the timing 

presumptions in the existing regulations 

have done little to promote certainty for 

taxpayers. The IRS and the Treasury 

Department did not follow the 

commentator’s recommendation. Even 

though timing presumptions do not 

eliminate the need to analyze the 

relevant facts and circumstances, the 

IRS and the Treasury Department 

believe that timing presumptions help 

the IRS and taxpayers identify 

transactions where closer scrutiny is 

required. See S. Prt. No. 169 (Vol. I), 

98th Cong. 2nd Sess. 231 (1984) 

(suggesting that regulations provide a 

presumption of ‘‘relatedness’’ for 

transfers within three years). 

The IRS and the Treasury Department 

believe that the abuse that section 

707(a)(2)(B) was intended to address 

typically is not present in situations 

involving complete liquidations of 

partners’ partnership interests for 

money. Accordingly, the proposed 

regulations provide that, 

notwithstanding the presumption 

relating to transfers within two years, a 

transfer of money, including marketable 

securities that are treated as money 

under section 731(c)(1), to a selling 

partner in liquidation of that partner’s 

entire interest in the partnership is 

presumed not to be part of a disguised 

sale of that interest. However, the IRS 

and the Treasury Department recognize 

that there are instances in which a 

liquidating distribution may properly be 

characterized as part of a disguised sale 

of a partnership interest, particularly 

when the tax consequences of a 

liquidating distribution are significantly 

different from those of a sale of a 

partnership interest. Accordingly, the 

presumption against sale treatment may 

be rebutted in those cases. 

As recommended by the 

commentators, the proposed regulations 

provide that transfers of money, 

including marketable securities that are 

treated as money under section 

731(c)(1), to and by a partnership that 

would be described in section 448(d)(2) 

if the partnership were a corporation 

(service partnership) are not a sale and 

need not be disclosed. This exception 

takes into account that partners 

frequently enter and exit service 

partnerships and, in most cases, those 

transactions are factually unrelated to 

each other and should not be treated as 

a disguised sale of a partnership 

interest. One commentator also 

suggested that the proposed regulations 

provide favorable presumptions or safe 

harbors for other types of partnerships, 

including securities partnerships and 

partnerships involved in staged 

closings. The IRS and the Treasury 

Department specifically request 

additional comments on whether the 

proposed regulations should include 

safe harbors for partnerships other than 

service partnerships, and if so, how to 

appropriately define those categories of 

partnerships. 

c. Guaranteed Payments, Preferred 

Returns, Operating Cash Flow 

Distributions, and Qualified 

Reimbursements 

As recommended by the 

commentators, the proposed regulations 

provide that rules similar to those 

provided in § 1.707–4 of the existing 

regulations concerning guaranteed 

payments, preferred returns, operating 

cash flow distributions, and 

reimbursements of preformation 

expenditures apply (notwithstanding 

the presumption relating to transfers 

made within two years of each other) to 

determine the extent to which a transfer 

to a selling partner is treated as part of 

a sale of the selling partner’s interest in 

the partnership to the purchasing 

partner. The IRS and the Treasury 

Department agree that inclusion of those 

rules in the proposed regulations is 

appropriate in order to distinguish 

between transfers to partners that occur 

in the ordinary course of business and 

transfers to partners that are part of a 

disguised sale. 

d. Certain Presumptions Not Included 

Commentators expressed concern that 

a transfer of property by one partner to 

a partnership and a transfer of different 

property by the partnership to another 

partner should not form the basis of a 

disguised sale of a partnership interest. 

One commentator argued that to 

recharacterize those transfers as a sale of 

a partnership interest would require the 

reordering of steps or the creation of 

additional steps, which is impermissible 

under the step transaction and related 

doctrines. Nonetheless, the 

commentator acknowledged that there 

are situations in which the 

recharacterization more properly 

reflects the substance of the transaction.

The proposed regulations do not 

adopt a specific favorable presumption 

or safe harbor for transactions involving 

transfers of different property. The IRS 

and the Treasury Department are 

concerned that if such a favorable 

presumption or safe harbor were 

available, a purchasing partner and 

selling partner could easily structure a 

transaction to fit within the favorable 

presumption or safe harbor, for 

example, by the purchasing partner 

transferring an asset that it wishes to 

sell to the partnership and the 

partnership selling the asset and 

transferring the sales proceeds to the 

selling partner. The IRS and the 

Treasury Department specifically 

request additional comments on 

whether a favorable presumption or safe 

harbor for transactions involving 

transfers of different property is 

appropriate and, if so, how any 

favorable presumption or safe harbor 

could be narrowly tailored to cover only 

those transactions that clearly should 

not be characterized as a sale of a 

partnership interest. 

The commentators also suggested that 

the proposed regulations provide a safe 

harbor for situations in which one 

partner funds a defaulting partner’s 

obligation to make a capital 

contribution. According to one 

commentator, the subsequent transfer by 

the defaulting partner to the partnership 

and the related transfer by the 

partnership to the non-defaulting 

partner merely restore the original 

economic deal intended, and should not 

be characterized as a sale. The IRS and 

the Treasury Department believe, 

however, that this type of transaction 

can be difficult to distinguish from an 

actual sale of a partnership interest. 

Therefore, the proposed regulations do 

not include a safe harbor for these 

transactions. 

68842 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

5. Liabilities 

The proposed regulations generally 

follow the approach of the existing 

regulations with respect to the treatment 

of liabilities. Thus, if a partnership 

assumes a liability of a partner, the 

partnership is treated as transferring 

consideration to the partner to the 

extent that the amount of the liability 

exceeds the partner’s share of that 

liability immediately after the 

partnership assumes the liability. 

Similarly, if a partner assumes a liability 

of a partnership, the partner is treated 

as transferring consideration to the 

partnership to the extent that the 

amount of the liability assumed exceeds 

the partner’s share of that liability 

immediately before the assumption. 

However, the proposed regulations 

specifically provide, as suggested by the 

commentators, that deemed 

contributions to and distributions from 

a partnership under section 752 

resulting from reallocations of 

partnership liabilities among partners 

are not treated as transfers of 

consideration. The rules in the proposed 

regulations relating to a partner’s share 

of a partnership liability, including the 

effect of a subsequent reduction in a 

partner’s share of a partnership liability, 

follow those rules in the existing 

regulations. The proposed regulations 

also include rules with respect to debtfinanced transfers of consideration by 

partnerships that follow the rules in the 

existing regulations. 

Unlike the existing regulations, the 

proposed regulations do not include any 

special rules for qualified liabilities. The 

IRS and the Treasury Department 

believe that the inclusion of those 

special rules in the existing regulations 

is appropriate because, otherwise, any 

transfer of property to a partnership 

subject to a liability could be 

recharacterized as a disguised sale of 

property. In contrast, under the 

proposed regulations, a transfer to a 

partnership of encumbered property 

alone would not be subject to 

recharacterization as a disguised sale of 

a partnership interest. Rather, a transfer 

to a partnership of encumbered property 

would have to be related to a transfer of 

consideration by another partner in 

order for disguised sale treatment to 

apply. Nonetheless, the IRS and the 

Treasury Department specifically 

request comments on whether the 

proposed regulations should include 

rules similar to those in the existing 

regulations for qualified liabilities, and 

if so, whether and how those rules 

should be modified to address issues 

particular to disguised sales of 

partnership interests. 

The proposed regulations also include 

an anti-abuse rule to address cases in 

which the rules of the proposed 

regulations do not adequately capture 

the substance of an integrated set of 

transactions. The anti-abuse rule in the 

proposed regulations provides that an 

increase in a partner’s share of a 

partnership liability may be treated as a 

transfer of consideration in a sale of a 

partnership interest if, within a short 

period of time after the partnership 

incurs or assumes the liability or 

another liability, one or more partners 

(or related parties) in substance bear an 

economic risk for the liability that is 

disproportionate to the partners’

interests in partnership profits or 

capital, and the transactions are 

undertaken pursuant to a plan that has 

as one of its principal purposes 

minimizing the extent to which the 

partners are treated as making a transfer 

of consideration to a partnership that 

may be treated as part of a sale. 

Comments are requested on this 

proposed anti-abuse rule, including 

examples of particular situations where 

application of this rule would be 

appropriate. 

6. Treatment of Transfers as a Sale 

If a transfer of consideration by a 

purchasing partner to the partnership 

and a transfer of consideration by the 

partnership to a selling partner are 

treated as part of a sale of a partnership 

interest, the proposed regulations 

provide several rules relating to the tax 

consequences of sale treatment. First, 

the proposed regulations provide that 

transfers that are treated as a sale of a 

partnership interest are treated as a sale 

for all purposes of the Code. In addition, 

the proposed regulations include rules 

relating to the timing of the sale that are 

similar to those in the existing 

regulations. Specifically, the proposed 

regulations provide that the sale is 

considered to take place on the date of 

the earliest of the transfers. If the 

transfer by the partnership occurs before 

the transfer to the partnership, the 

partners and the partnership are treated 

as if, on the date of the sale, the 

purchasing partner transferred to the 

partnership an obligation to deliver that 

partner’s consideration in exchange for 

the consideration transferred by the 

partnership to the selling partner 

(selling partner’s consideration), and the 

purchasing partner transferred the 

selling partner’s consideration to the 

selling partner in exchange for the 

selling partner’s partnership interest. If 

the transfer by the partnership occurs 

after the transfer to the partnership, the 

partners and the partnership are treated 

as if, on the date of the sale, the 

purchasing partner transferred that 

partner’s consideration to the 

partnership (purchasing partner’s 

consideration) in exchange for an 

obligation of the partnership to deliver 

the selling partner’s consideration, and 

the purchasing partner transferred that 

obligation to the selling partner in 

exchange for the selling partner’s 

partnership interest.

The IRS and the Treasury Department 

intend that the deemed transactions that 

are treated as occurring as described in 

the immediately preceding paragraph 

result in actual tax consequences to the 

partnership, the purchasing partner(s), 

and the selling partner(s) for all 

purposes of the Code. Thus, for 

instance, where the consideration 

actually transferred by the purchasing 

partner to a partnership is different than 

the actual consideration later transferred 

from the partnership to the purchasing 

partner, there may be tax consequences 

for the partnership and the partners 

resulting from deemed exchanges of 

consideration, e.g., gain or loss 

recognition to the partnership or 

partners (including the potential 

application of section 267 or 707). 

The proposed regulations also provide 

rules relating to the amount of the sale 

and the inclusion of liability relief in 

the amount realized on the sale. 

Specifically, with respect to the amount 

of the sale, the proposed regulations 

provide that the selling partner is 

treated as selling to the purchasing 

partner a partnership interest with a 

value equal to the lesser of the selling 

partner’s consideration or the 

purchasing partner’s consideration. For 

this purpose, simultaneous transfers of 

consideration by more than one 

purchasing partner to a partnership, or 

by a partnership to more than one 

selling partner, are aggregated. In those 

cases, each purchasing partner is 

presumed to have purchased a fractional 

share of the partnership interest(s) sold, 

and each selling partner is presumed to 

have sold its fractional share of the total 

partnership interest(s) sold. In addition, 

although the proposed regulations 

provide that deemed contributions to 

and distributions from a partnership 

under section 752 resulting from 

reallocations of partnership liabilities 

among partners are not treated as 

transfers of consideration, the proposed 

regulations clarify that the amount 

realized by a selling partner on the sale 

of the partner’s interest in the 

partnership includes any reduction in 

the selling partner’s share of partnership 

liabilities that is treated as occurring as 

a result of the sale, if the reduction in 

liability has not otherwise been treated 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68843

as a transfer of consideration to the 

selling partner. 

The proposed regulations also address 

issues relating to the application of 

certain rules that may overlap. First, the 

proposed regulations provide that if a 

portion of a transfer of consideration by 

a partnership to a selling partner is not 

treated as part of a sale of the partner’s 

interest in the partnership, but as a 

distribution to the selling partner under 

section 731, and the sale is treated as 

occurring on the same date as the 

distribution, then the distribution is 

treated as occurring immediately 

following the sale. Thus, the portion of 

the transfer that is treated as a 

distribution is not taken into account for 

purposes of computing the selling 

partner’s basis in its partnership interest 

prior to the disguised sale of the 

interest. In addition, the proposed 

regulations provide that the rules for 

disguised sales of property apply before 

the rules of the proposed regulations, 

and to the extent a transfer of 

consideration is treated as part of a sale 

of property under the rules for disguised 

sales of property, the transfer is not 

taken into account for purposes of the 

rules in the proposed regulations. This 

ordering rule is appropriate because, in 

some cases, the tax consequences of a 

disguised sale of property may be 

simpler than a disguised sale of a 

partnership interest because, for 

example, a disguised sale of property 

will not result in a technical termination 

of the partnership under section 

708(b)(1)(B) or basis adjustments under 

section 743(b). 

Finally, the proposed regulations 

clarify whether the rules apply to 

certain transfers that occur upon the 

formation or termination of a 

partnership. The proposed regulations 

do not apply to transfers incident to the 

formation of a partnership, although 

these transfers may be subject to 

recharacterization as a disguised sale of 

property under the existing regulations. 

The proposed regulations also do not 

apply to deemed transfers resulting from 

a termination of a partnership under 

section 708(b)(1)(B). The IRS and the 

Treasury Department specifically 

request comments on whether the 

proposed regulations should include 

special rules or exceptions for some or 

all of the transfers occurring in a 

partnership merger or division under 

§ 1.708–1(c) or (d). 

7. Disclosure 

In the Enron Report and the Written 

Testimony, the Joint Committee 

recommended that the period for which 

disclosure of a transaction is required 

under the disguised sale rules should be 

extended beyond two years. The 

Committee further suggested that 

expanding the disclosure period to 

seven years might make it more likely 

that taxpayers would undertake the facts 

and circumstances determination for 

transfers occurring more than two years 

apart and would make that facts and 

circumstances determination easier for 

the IRS to administer. To effect this 

recommendation, the proposed 

regulations would amend §§ 1.707–

3(c)(2) and 1.707–6(c) of the existing 

regulations to extend the disclosure 

requirement to the specified events 

occurring within seven years instead of 

two years. The IRS and the Treasury 

Department request comments regarding 

whether the disclosure requirement 

should be extended to a period that is 

more than two years, but less than seven 

years.

The proposed regulations also would 

add a new requirement to both 

§§ 1.707–5 and –6 of the existing 

regulations, relating to the disclosure of 

the assumption of or taking subject to 

liabilities. Specifically, § 1.707–5(a)(8) 

of the proposed regulations would 

require disclosure if a partner transfers 

property to a partnership, and the 

partnership assumes or takes subject to 

a liability of the partner (whether or not 

the liability is qualified) within a sevenyear period (without regard to the order 

of the transactions), and the partner 

treats the transactions as other than as 

a sale for tax purposes. Similarly, 

§ 1.707–6(c)(3) of the proposed 

regulations would require disclosure if 

a partnership transfers property to a 

partner, and the partner assumes or 

takes subject to a liability of the 

partnership (whether or not the liability 

is qualified) within a seven-year period 

(without regard to the order of the 

transactions), and the partnership treats 

the transactions as other than as a sale 

for tax purposes. These disclosure 

requirements were added because of a 

concern that taxpayers are taking 

unwarranted positions regarding a 

partner’s share of partnership liabilities 

before or after an assumption of or 

taking subject to a liability. 

Finally, the proposed regulations 

would amend the provision in § 1.707–

8(c) to clarify who is required to 

disclose under the disguised sale rules. 

The amended paragraph provides that 

the required disclosure must be made by 

any person who makes a transfer that is 

required to be disclosed, and that the 

persons who are required to disclose 

may designate by written agreement a 

single person to make the disclosure. 

However, the designation of one person 

to make the disclosure does not relieve 

the other persons required to disclose 

from their obligation to make the 

disclosure, if the designated person fails 

to make the appropriate disclosure. 

The proposed regulations provide 

disclosure rules for transactions that 

may be treated as disguised sales of 

partnership interests consistent with the 

disclosure rules in the existing 

regulations, as amended. Disclosure to 

the IRS is required when a partner 

transfers consideration to a partnership 

and the partnership transfers 

consideration to another partner within 

a seven-year period (without regard to 

the order of the transfers), the partners 

treat the transfers other than as a sale for 

tax purposes, and the transfer of 

consideration by the partnership is not 

presumed to be a guaranteed payment 

for capital, is not a reasonable preferred 

return, and is not an operating cash flow 

distribution. However, disclosure is not 

required if the exception described 

earlier for service partnerships applies. 

8. Review of Existing Regulations

The IRS and the Treasury Department 

have become aware of certain 

deficiencies and technical ambiguities 

in the existing regulations under 

§§ 1.707–3, 1.707–4 and 1.707–5. 

Among the deficiencies and technical 

ambiguities identified are the rules for 

capital expenditure reimbursements, the 

liability sharing rules, and the 

interaction of the capital expenditure 

reimbursement rules with the qualified 

liability rules. In order to address these 

deficiencies and technical ambiguities, 

the IRS and the Treasury Department 

intend to issue proposed regulations 

amending the existing regulations. In 

addition, the IRS and the Treasury 

Department intend to revise these 

proposed regulations to reflect those 

proposed amendments to the existing 

regulations. The IRS and Treasury 

Department request comments on the 

scope and content of the revisions to the 

existing regulations (and these proposed 

regulations). 

Proposed Effective Date 

The regulations are proposed to apply 

to transactions with respect to which all 

transfers considered part of a sale occur 

on and after the date these regulations 

are published as final regulations in the 

Federal Register. A determination of 

disguised sale treatment for a 

partnership interest for the period 

between the effective date of section 

707(a)(2)(B) and the effective date of 

these regulations is to be made based on 

the statutory language and the guidance 

provided in the legislative history of 

section 707(a)(2)(B). 

68844 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

Special Analyses 

It has been determined that this notice 

of proposed rulemaking is not a 

significant regulatory action as defined 

in Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

also has been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. It is hereby 

certified that the collection of 

information in these regulations will not 

have a significant economic impact on 

a substantial number of small entities. 

This certification is based on the fact 

that the amount of time necessary to 

prepare the required disclosure is not 

lengthy and few small businesses are 

likely to be partners or parties required 

to make the disclosures required by the 

rule, and particularly, because the 

disclosure requirement does not apply 

to certain service partnerships. 

Accordingly, a Regulatory Flexibility 

Analysis under the Regulatory 

Flexibility Act (5 U.S.C. chapter 6) does 

not apply. Pursuant to section 7805(f) of 

the Code, this notice of proposed 

rulemaking will be submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Comments and Public Hearing

Before these proposed regulations are 

adopted as final regulations, 

consideration will be given to any 

written comments (a signed original and 

(8) copies) or electronic comments that 

are submitted timely to the IRS. The IRS 

and the Treasury Department request 

comments on all aspects of the proposed 

regulations. Comments are also 

requested on the clarity of the proposed 

rules and how they can be made easier 

to understand. All comments will be 

available for public inspection and 

copying. 

A public hearing has been scheduled 

for March 8, 2005, at 10 a.m. in the IRS 

Auditorium, Seventh Floor, Internal 

Revenue Building, 1111 Constitution 

Avenue, NW., Washington, DC. Due to 

building security procedures, visitors 

must enter at the Constitution Avenue 

entrance. In addition, all visitors must 

present photo identification to enter the 

building. Because of access restrictions, 

visitors will not be admitted beyond the 

immediate entrance area more than 30 

minutes before the hearing starts. For 

information about having your name on 

the building access list to attend the 

hearing, see the FOR FURTHER

INFORMATION CONTACT section of this 

preamble. 

The rules of 26 CFR 601.601(a)(3) 

apply to the hearing. Persons who wish 

to present oral comments at the hearing 

must submit written or electronic 

comments by February 24, 2005, and an 

outline of the topics to be discussed and 

the time to be devoted to each topic (a 

signed original and eight (8) copies) by 

February 15, 2005. A period of 10 

minutes will be allotted to each person 

for making comments. An agenda 

showing the scheduling of the speakers 

will be prepared after the deadline for 

receiving outlines has passed. Copies of 

the agenda will be available free of 

charge at the hearing. 

Drafting Information 

The principal author of these 

regulations is Deane M. Burke of the 

Office of the Associate Chief Counsel 

(Passthroughs & Special Industries), IRS. 

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.

Proposed Amendments to the 

Regulations 

Accordingly, 26 CFR part 1 is 

proposed to be amended as follows:

PART 1—INCOME TAX 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows:

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

Section 1.707–2 through 1.707–9 also 

issued under 26 U.S.C. 707(a)(2)(B).

Par. 2. Section 1.707–0 is amended as 

follows: 

1. Adding an entry for § 1.707–5(a)(8). 

2. Revising the entry for § 1.707–7. 

3. Adding entries for §§ 1.707–7(a) 

through 1.707–7(l). 

4. Revising the entry for § 1.707–8(c). 

5. Revising the entries for §§ 1.707–

9(a) and (a)(2). 

The revisions and additions read as 

follows:

* * * * *

§ 1.707–0 Table of contents.

* * * * *

§ 1.707–5 Disguised sales of property to 

partnerships; special rules relating to 

liabilities.

* * * * *

(a) * * *

(8) Disclosure of liabilities assumed or 

taken subject to within seven years of 

transfer.

* * * * *

§ 1.707–7 Disguised sales of partnership 

interests. 

(a) Treatment of transfers as a sale. 

(1) In general. 

(2) Definition, timing and 

consequences of sale. 

(i) Definition of sale. 

(ii) Timing and consequences of sale. 

(A) In general. 

(B) Simultaneous transfers. 

(C) Transfer to selling partner first. 

(D) Transfer by purchasing partner 

first. 

(E) Consequences of deemed 

transactions. 

(3) Amount of sale. 

(i) In general. 

(ii) Aggregation of consideration. 

(4) Liability relief included in amount 

realized on sale. 

(5) Sale precedes excess distribution 

to selling partner. 

(6) Transfers first treated as a sale of 

property. 

(7) Application of disguised sale 

rules. 

(8) Certain transfers disregarded. 

(b) Transfers treated as sale. 

(1) In general. 

(2) Facts and circumstances. 

(c) Transfers made within two years 

presumed to be a sale. 

(d) Transfers made more than two 

years apart presumed not to be a sale. 

(e) Transfers of money in liquidation 

of a partner’s interest presumed not to 

be a sale. 

(f) Application of § 1.707–4 (special 

rules applicable to guaranteed 

payments, preferred returns, operating 

cash flow distributions, and 

reimbursements of preformation 

expenditures). 

(g) Exception for certain transfers to 

and by service partnerships. 

(h) Other exceptions. 

(i) [Reserved.] 

(j) Special rules relating to liabilities. 

(1) In general. 

(2) Partner liability assumed by 

partnership. 

(3) Partnership liability assumed by 

partner. 

(4) Partner’s share of liability. 

(i) Recourse liability. 

(ii) Nonrecourse liability.

(5) Reduction of partner’s share of 

liability. 

(6) Treatment of debt-financed 

transfers of consideration by 

partnerships. 

(i) In general. 

(ii) Partner’s allocable share of 

liability. 

(A) In general. 

(B) Debt-financed transfers made 

pursuant to a plan. 

(1) In general. 

(2) Special rule. 

(C) Reduction of partner’s share of 

liability. 

(7) Share of liability where 

assumption accompanied by transfer of 

money. 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68845

(8) Anti-abuse rule. 

(k) Disclosure rules. 

(l) Examples.

* * * * *

§ 1.707–8 Disclosure of certain 

information.

* * * * *

(c) Parties required to disclose.

* * * * *

§ 1.707–9 Effective dates and transitional 

rules. 

(a) Sections 1.707–3 through 1.707–7. 

(1) * * *

(2) Transfers occurring before 

effective dates.

* * * * *

Par. 3. In § 1.707–3, the heading for 

paragraph (c)(2) and the text in 

paragraph (c)(2)(i) are amended by 

removing the language ‘‘two’’ and 

adding ‘‘seven’’ in its place. 

Par. 4. In § 1.707–5, new paragraph 

(a)(8) is added. 

The addition reads as follows:

§ 1.707–5 Disguised sales of property to 

partnership; special rules relating to 

liabilities. 

(a) * * *

(8) Disclosure of liabilities assumed or 

taken subject to within seven years of 

transfer. Disclosure to the Internal 

Revenue Service in accordance with 

§ 1.707–8 is required if—

(i) A partner transfers property to a 

partnership and the partnership 

assumes or takes subject to a liability of 

the partner (whether or not the liability 

is qualified, as described in § 1.707–

5(a)(6)) within a seven-year period 

(without regard to the order of the 

transactions); 

(ii) The partner treats the transactions 

as other than as a sale for tax purposes; 

and 

(iii) The transactions are not disclosed 

under paragraph (a)(7)(ii) of this section.

* * * * *

Par. 5. In § 1.707–6 is amended as 

follows: 

1. Revising paragraph (c) introductory 

text. 

2. Amending paragraph (c)(1) by 

removing the language ‘‘two’’ and 

adding ‘‘seven’’ in its place. 

3. Adding new paragraph (c)(3). 

The revisions and addition read as 

follows:

§ 1.707–6 Disguised sales of property by 

partnership to partners; general rule.

* * * * *

(c) * * * Similar to the rules 

provided in §§ 1.707–3(c)(2), 1.707–

5(a)(7)(ii), and 1.707–5(a)(8), a 

partnership is to disclose to the Internal 

Revenue Service, in accordance with 

§ 1.707–8, the facts in the following 

circumstances:

* * * * *

(3) When a partnership transfers 

property to a partner and the partner 

assumes or takes subject to a liability of 

the partnership (whether or not the 

liability is qualified, as described in 

§ 1.707–5(a)(6)) within a seven-year 

period (without regard to the order of 

the transactions), the partnership treats 

the transactions as other than as a sale 

for tax purposes, and the transactions 

are not disclosed under paragraph (c)(2) 

of this section.

* * * * *

Par. 6. Section 1.707–7 is revised to 

read as follows:

§ 1.707–7 Disguised sales of partnership 

interests. 

(a) Treatment of transfers as a sale—

(1) In general. Except as otherwise 

provided in this section, if a transfer of 

money, property or other consideration 

(including the assumption of a liability) 

(consideration) by a partner (purchasing 

partner) to a partnership and a transfer 

of consideration by the partnership to 

another partner (selling partner) are 

described in paragraph (b)(1) of this 

section, the transfers are treated as a 

sale, in whole or in part, of the selling 

partner’s interest in the partnership to 

the purchasing partner. For purposes of 

this section, the term transfer refers to 

a portion of a single transfer or to one 

or more transfers. 

(2) Definition, timing and 

consequences of sale—(i) Definition of 

sale. For purposes of this section, the 

use of the term sale (or any variation of 

that word) to refer to a transfer of 

consideration by a purchasing partner to 

a partnership and a transfer of 

consideration by the partnership to a 

selling partner means a sale or 

exchange, in whole or in part, of the 

selling partner’s interest in the 

partnership to the purchasing partner, 

rather than a contribution and 

distribution to which sections 721 and 

731, respectively, apply. Transfers that 

are treated as a sale under paragraph 

(a)(1) of this section are treated as a sale 

for all purposes of the Internal Revenue 

Code (e.g., sections 453, 483, 704, 708, 

743, 751, 1001, 1012 and 1274). 

(ii) Timing and consequences of 

sale—(A) In general. For purposes of 

this section, a transfer is treated as 

occurring on the date of the actual 

transfer, or if earlier, on the date that the 

transferor agrees in writing to make the 

transfer. The sale of the selling partner’s 

partnership interest is considered to 

take place on the date of the earliest of 

the transfers described in paragraph 

(a)(1) of this section. On this date, the 

purchasing partner is treated as 

acquiring the partnership interest sold 

for all purposes of the Internal Revenue 

Code. 

(B) Simultaneous transfers. If the 

transfer of consideration by the 

purchasing partner and the transfer of 

consideration to the selling partner are 

simultaneous and the consideration 

transferred is the same, the partners and 

the partnership are treated as if, on the 

date of the sale, the purchasing partner 

transferred that partner’s consideration 

(purchasing partner’s consideration) 

directly to the selling partner in 

exchange for all or a portion of the 

selling partner’s interest in the 

partnership. If the transfer of 

consideration by the purchasing partner 

to the partnership and the transfer of 

consideration by the partnership to the 

selling partner are simultaneous and the 

consideration transferred is not the 

same, the partners and the partnership 

are treated as if, on the date of the sale, 

the purchasing partner transferred that 

partner’s consideration to the 

partnership in exchange for the 

consideration to be transferred to the 

selling partner (selling partner’s 

consideration) and then the purchasing 

partner transferred the selling partner’s 

consideration to the selling partner in 

exchange for all or a portion of the 

selling partner’s interest in the 

partnership.

(C) Transfer to selling partner first. If 

the transfer of consideration by the 

partnership to the selling partner occurs 

before the transfer of consideration by 

the purchasing partner to the 

partnership, the partners and the 

partnership are treated as if, on the date 

of the sale, the purchasing partner 

transferred an obligation to deliver the 

purchasing partner’s consideration to 

the partnership in exchange for the 

selling partner’s consideration and then 

the purchasing partner transferred the 

selling partner’s consideration to the 

selling partner in exchange for all or a 

portion of the selling partner’s interest 

in the partnership. On the date of the 

actual transfer of the purchasing 

partner’s consideration, the purchasing 

partner and the partnership are treated 

as if the purchasing partner satisfied its 

obligation to deliver the purchasing 

partner’s consideration to the 

partnership. 

(D) Transfer by purchasing partner 

first. If the transfer of consideration by 

the partnership to the selling partner 

occurs after the transfer of consideration 

by the purchasing partner to the 

partnership, the partners and the 

partnership are treated as if, on the date 

of the sale, the purchasing partner 

transferred the purchasing partner’s 

68846 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

consideration to the partnership in 

exchange for an obligation of the 

partnership to deliver the selling 

partner’s consideration and then the 

purchasing partner transferred that 

obligation to the selling partner in 

exchange for all or a portion of the 

selling partner’s interest in the 

partnership. On the date of the actual 

transfer of the selling partner’s 

consideration, the selling partner and 

the partnership are treated as if the 

partnership satisfied its obligation to 

deliver the selling partner’s 

consideration to the selling partner. 

(E) Consequences of deemed 

transactions. Transfers and exchanges 

that are deemed to occur under 

paragraphs (a)(2)(ii)(B), (a)(2)(ii)(C), and 

(a)(2)(ii)(D) of this section are treated as 

actual transfers or exchanges for all 

purposes of the Internal Revenue Code 

(e.g., sections 453, 483, 704, 708, 743, 

751, 1001, 1012 and 1274). 

(3) Amount of sale—(i) In general. If 

a transfer of consideration by a 

purchasing partner to a partnership and 

a transfer of consideration by the 

partnership to a selling partner are 

treated as a sale under paragraph (b)(1) 

of this section, the selling partner is 

treated as selling to the purchasing 

partner a partnership interest with a 

value equal to the lesser of the selling 

partner’s consideration or the 

purchasing partner’s consideration. 

(ii) Aggregation of consideration. For 

purposes of paragraph (a)(3)(i) of this 

section, simultaneous transfers of 

consideration by more than one 

purchasing partner to a partnership or 

by a partnership to more than one 

selling partner are aggregated. In those 

cases—

(A) Each purchasing partner is 

presumed to have purchased that 

fraction of each partnership interest(s) 

sold equal to—

(1) The amount of consideration 

transferred by that partner to the 

partnership, divided; by 

(2) The aggregate consideration 

transferred by all purchasing partners to 

the partnership; and 

(B) Each selling partner is presumed 

to have sold that fraction of the total 

partnership interest(s) sold equal to—

(1) The amount of consideration 

transferred by the partnership to that 

partner, divided; by 

(2) The aggregate consideration 

transferred by the partnership to all 

selling partners. 

(4) Liability relief included in amount 

realized on sale. The amount realized by 

a selling partner on the sale of the 

selling partner’s interest in the 

partnership includes any reduction in 

the selling partner’s share of partnership 

liabilities that is treated as occurring as 

a result of the sale. If a sale of a 

partnership interest and either a 

distribution by the partnership to the 

selling partner under section 731 or a 

contribution by the purchasing partner 

to the partnership under section 721 

occur on the same date, the reduction in 

the selling partner’s share of partnership 

liabilities is computed immediately after 

the sale and before the distribution or 

the contribution, as the case may be. To 

the extent a reduction in a selling 

partner’s share of partnership liabilities 

is included in the amount realized by 

the selling partner on the sale of an 

interest in a partnership because the 

amount is treated as consideration 

received by the selling partner in 

exchange for the selling partner’s 

interest under paragraph (j)(2) of this 

section, the amount of the reduction 

shall not also be included in the amount 

realized by operation of this paragraph. 

(5) Sale precedes excess distribution 

to selling partner. If a portion of a 

transfer of consideration by a 

partnership to a selling partner is not 

treated as part of a sale of the selling 

partner’s interest in the partnership, but 

as a distribution to the selling partner 

under section 731, and the sale is 

treated as occurring on the same date as 

the distribution, then the distribution is 

treated as occurring immediately 

following the sale.

(6) Transfers first treated as a sale of 

property. To the extent that a transfer of 

consideration by a purchasing partner to 

a partnership or a transfer of 

consideration by a partnership to a 

selling partner may be treated as part of 

a sale of property under § 1.707–3(a), 

§ 1.707–3(a) applies before this section, 

and to the extent the transfer is treated 

as part of a sale of property under 

§ 1.707–3(a), such transfer is not taken 

into account in applying the rules of 

this section. 

(7) Application of disguised sale rules. 

Except as otherwise provided in 

paragraph (a)(8) of this section, the rules 

of this section apply to transfers to and 

from a partnership even if, after the 

application of the rules of this section, 

it is determined that the partnership has 

terminated under section 708(b)(1)(A). 

(8) Certain transfers disregarded. 

Section 707(a)(2)(B) and the rules of this 

section do not apply to deemed transfers 

resulting from a termination of a 

partnership under section 708(b)(1)(B) 

and transfers incident to the formation 

of a partnership. However, transfers 

incident to the formation of a 

partnership may be transfers to which 

§ 1.707–3(a) applies. 

(b) Transfers treated as sale—(1) In 

general. A transfer of consideration by 

a purchasing partner to a partnership 

and a transfer of consideration by the 

partnership to a selling partner 

constitute a sale, in whole or in part, of 

the selling partner’s interest in the 

partnership to the purchasing partner 

only if, based on all the facts and 

circumstances—

(i) The transfer of consideration by the 

partnership to the selling partner would 

not have been made but for the transfer 

of consideration to the partnership by 

the purchasing partner; and 

(ii) In cases in which the transfers are 

not made simultaneously, the 

subsequent transfer is not dependent on 

the entrepreneurial risks of partnership 

operations. 

(2) Facts and circumstances. The 

determination of whether a transfer of 

consideration by a purchasing partner to 

a partnership and a transfer of 

consideration by the partnership to a 

selling partner constitute a sale under 

paragraph (b)(1) of this section is made 

based on all the facts and circumstances 

in each case. The weight to be given 

each of the facts and circumstances will 

depend on the particular case. 

Generally, the facts and circumstances 

existing on the date of the earliest of the 

transfers are the ones considered in 

determining if a sale exists under 

paragraph (b)(1) of this section. Among 

the facts and circumstances that may 

tend to prove the existence of a sale 

under paragraph (b)(1) of this section 

are the following: 

(i) That the timing and amount of all 

or any portion of a subsequent transfer 

are determinable with reasonable 

certainty at the time of an earlier 

transfer; 

(ii) That the person receiving the 

subsequent transfer has a legally 

enforceable right to the transfer or that 

the right to receive the transfer is 

secured in any manner, taking into 

account the period for which it is 

secured; 

(iii) That the same property (other 

than money, including marketable 

securities that are treated as money 

under section 731(c)(1)) that is 

transferred to the partnership by the 

purchasing partner is transferred to the 

selling partner; 

(iv) That partnership distributions, 

allocations or control of operations are 

designed to effect an exchange of the 

benefits and burdens of ownership of 

transferred property (other than money, 

including marketable securities that are 

treated as money under section 

731(c)(1)), including a partnership 

interest; 

(v) That the partnership holds 

transferred property (other than money, 

including marketable securities that are 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68847

treated as money under section 

731(c)(1)) for a limited period of time, 

or during the period of time the 

partnership holds transferred property 

(other than money, including 

marketable securities that are treated as 

money under section 731(c)(1)), the risk 

of gain or loss associated with the 

property is not significant; 

(vi) That the transfer of consideration 

by the partnership to the selling partner 

is disproportionately large in 

relationship to the selling partner’s 

general and continuing interest in 

partnership profits; 

(vii) That the selling partner has no 

obligation to return or repay the 

consideration to the partnership, or has 

an obligation to return or repay the 

consideration due at such a distant 

point in the future that the present value 

of that obligation is small in relation to 

the amount of consideration transferred 

by the partnership to the selling partner; 

(viii) That the transfer of 

consideration by the purchasing partner 

or the transfer of consideration to the 

selling partner is not made pro rata; 

(ix) That there were negotiations 

between the purchasing partner and the 

selling partner (or between the 

partnership and each of the purchasing 

and selling partners with each partner 

being aware of the negotiations with the 

other partner) concerning any transfer of 

consideration; and 

(x) That the selling partner and 

purchasing partner enter into one or 

more agreements, including an 

amendment to the partnership 

agreement (other than for admitting the 

purchasing partner) relating to the 

transfers. 

(c) Transfers made within two years 

presumed to be a sale. For purposes of 

this section, if within a two-year period 

a purchasing partner transfers 

consideration to a partnership and the 

partnership transfers consideration to a 

selling partner (without regard to the 

order of the transfers), the transfers are 

presumed to be a sale, in whole or in 

part, of the selling partner’s interest in 

the partnership to the purchasing 

partner unless the facts and 

circumstances clearly establish that the 

transfers do not constitute a sale. 

(d) Transfers made more than two 

years apart presumed not to be a sale. 

For purposes of this section, if a transfer 

of consideration by a purchasing partner 

to a partnership and the transfer of 

consideration by the partnership to a 

selling partner (without regard to the 

order of the transfers) occur more than 

two years apart, the transfers are 

presumed not to be a sale, in whole or 

in part, of the selling partner’s interest 

in the partnership to the purchasing 

partner unless the facts and 

circumstances clearly establish that the 

transfers constitute a sale. 

(e) Transfers of money in liquidation 

of a partner’s interest presumed not to 

be a sale. Notwithstanding the 

presumption set forth in paragraph (c) of 

this section, for purposes of this section, 

if a partnership transfers money, 

including marketable securities that are 

treated as money under section 

731(c)(1), to a selling partner, or is 

treated as transferring consideration to 

the selling partner under paragraph 

(j)(2) of this section, in liquidation of the 

selling partner’s interest in the 

partnership, the transfer is presumed 

not to be a sale, in whole or in part, of 

the selling partner’s interest in the 

partnership to the purchasing partner 

unless the facts and circumstances 

clearly establish that the transfer is part 

of a sale. See § 1.761–1(d) for the 

definition of the term liquidation of a 

partner’s interest.

(f) Application of § 1.707–4 (special 

rules applicable to guaranteed 

payments, preferred returns, operating 

cash flow distributions, and 

reimbursements of preformation 

expenditures). Notwithstanding the 

presumption set forth in paragraph (c) of 

this section, rules similar to those 

provided in § 1.707–4 apply to 

determine the extent to which a transfer 

to a selling partner is treated as part of 

a sale of the selling partner’s interest in 

the partnership to the purchasing 

partner. 

(g) Exception for certain transfers to 

and by service partnerships. Section 

707(a)(2)(B) and the rules of this section 

do not apply to transfers of money, 

including marketable securities that are 

treated as money under section 

731(c)(1), to and by a partnership that 

would be described in section 448(d)(2) 

if the partnership were a corporation. 

Solely for purposes of applying section 

448(d)(2) to partnerships under this 

paragraph (g), partners are treated as 

employees of the partnership and 

‘‘partnership interest’’ is substituted for 

‘‘stock’’ in testing for ownership by the 

employees performing services. 

(h) Other exceptions. The 

Commissioner may provide by guidance 

published in the Internal Revenue 

Bulletin that section 707(a)(2)(B) and 

the rules of this section do not apply to 

other transfers to and by a partnership. 

(i) [Reserved.] 

(j) Special rules relating to liabilities—

(1) In general. For purposes of this 

section, deemed contributions to and 

distributions from a partnership under 

section 752 resulting from reallocations 

of partnership liabilities among partners 

are not treated as transfers of 

consideration. Under paragraph (a)(4) of 

this section, the preceding sentence 

does not apply if the transaction is 

otherwise treated as a sale of a 

partnership interest under the rules of 

this section. 

(2) Partner liability assumed by 

partnership. For purposes of this 

section, if a partnership assumes a 

liability of a partner, the partnership is 

treated as transferring consideration to 

the partner to the extent that the amount 

of the liability exceeds the partner’s 

share of that liability (determined under 

the rules of paragraphs (j)(4) and (5) of 

this section) immediately after the 

partnership assumes the liability. For 

purposes of this section, a partnership is 

treated as assuming a liability of a 

partner to the extent provided in 

§§ 1.752–1(d) and (e). For purposes of 

this paragraph (j)(2), if the partnership 

assumes the liabilities of more than one 

partner pursuant to a plan, a partner’s 

share of the liabilities assumed by the 

partnership pursuant to that plan 

immediately after the assumptions 

equals the sum of that partner’s shares 

of the liabilities assumed by the 

partnership pursuant to the plan. The 

preceding sentence does not apply to 

any liability assumed by the partnership 

with a principal purpose of reducing the 

extent to which any other liability 

assumed by the partnership is treated as 

a transfer of consideration to a partner 

under this paragraph (j)(2). 

(3) Partnership liability assumed by 

partner. For purposes of this section, if 

a partner assumes a liability of a 

partnership, the partner is treated as 

transferring consideration to the 

partnership to the extent that the 

amount of the liability exceeds the 

partner’s share of that liability 

(determined under the rules of 

paragraph (j)(4) of this section) 

immediately before the partner assumes 

the liability. For purposes of this 

section, a partner assumes a partnership 

liability to the extent provided in 

§§ 1.752–1(e) and 1.704–1(b)(2)(iv)(c). 

For purposes of this paragraph (j)(3), if 

more than one partner assumes a 

liability of the partnership pursuant to 

a plan, the amount that is treated as a 

transfer of consideration by each partner 

is the amount by which all of the 

liabilities assumed by the partner 

pursuant to the plan exceed the 

partner’s share of all of those liabilities 

immediately before the assumption. The 

preceding sentence does not apply to 

any liability assumed by a partner with 

a principal purpose of reducing the 

extent to which any other liability 

assumed by a partner is treated as a 

transfer of consideration to a 

partnership under this paragraph (j)(3). 

68848 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

(4) 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 thereunder. A partnership 

liability is a recourse liability to the 

extent that the obligation is a recourse 

liability under § 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 § 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 § 1.752–

1(a)(2) or would be treated as a 

nonrecourse liability under that section 

if it were treated as a partnership 

liability for purposes of that section.

(5) Reduction of partner’s share of 

liability. For purposes of this section, a 

partner’s share of a liability, 

immediately after a partnership assumes 

the liability, is determined by taking 

into account a subsequent reduction in 

the partner’s share if—

(i) At the time that the partnership 

assumes a liability, it is anticipated that 

the transferring partner’s share of the 

liability will be subsequently reduced; 

and 

(ii) The reduction of the partner’s 

share of the liability is part of a plan that 

has as one of its principal purposes 

minimizing the extent to which the 

assumption of the liability is treated as 

part of a sale under this section. 

(6) Treatment of debt-financed 

transfers of consideration by 

partnerships—(i) In general. For 

purposes of this section, if a partnership 

incurs a liability and all or a portion of 

the proceeds of that liability are 

allocable under § 1.163–8T to a transfer 

of consideration to a partner made 

within 90 days of incurring the liability, 

the transfer of consideration to the 

partner is taken into account only to the 

extent that the amount of consideration 

transferred exceeds that partner’s 

allocable share of the partnership 

liability. 

(ii) Partner’s allocable share of 

liability—(A) In general. A partner’s 

allocable share of a partnership liability 

for purposes of paragraph (j)(6)(i) of this 

section equals the amount obtained by 

multiplying the partner’s share of the 

liability (as defined in paragraph (j)(4) of 

this section) by a fraction determined by 

dividing—

(1) The portion of the liability that is 

allocable under § 1.163–8T to the 

consideration transferred to the partner; 

by 

(2) The total amount of the liability. 

(B) Debt-financed transfers made 

pursuant to a plan—(1) In general. 

Except as provided in paragraph 

(j)(6)(ii)(C) of this section, if a 

partnership transfers to more than one 

partner pursuant to a plan all or a 

portion of the proceeds of one or more 

partnership liabilities, paragraph (j)(6)(i) 

of this section is applied by treating all 

of the liabilities incurred pursuant to 

the plan as one liability, and each 

partner’s allocable share of those 

liabilities equals the amount obtained 

by multiplying the sum of the partner’s 

shares of each of the respective 

liabilities (as defined in paragraph (j)(4) 

of this section) by the fraction obtained 

by dividing—

(i) The portion of those liabilities that 

is allocable under § 1.163–8T to the 

consideration transferred to the partners 

pursuant to the plan; by 

(ii) The total amount of those 

liabilities. 

(2) Special rule. Paragraph 

(j)(6)(ii)(B)(1) of this section does not 

apply to any transfer of consideration to 

a partner that is made with a principal 

purpose of reducing the extent to which 

any transfer is taken into account under 

paragraph (j)(6)(i) of this section. 

(C) Reduction of partner’s share of 

liability. For purposes of paragraph 

(j)(6)(ii) of this section, a partner’s share 

of a liability is determined by taking 

into account a subsequent reduction in 

the partner’s share if—

(1) It is anticipated that the partner’s 

share of the liability that is allocable to 

a transfer of consideration to the partner 

will be reduced subsequent to the 

transfer; and 

(2) The reduction of the partner’s 

share of the liability is part of a plan that 

has as one of its principal purposes 

minimizing the extent to which the 

partnership’s distribution of the 

proceeds of the borrowing is treated as 

part of a sale.

(7) Share of liability where 

assumption accompanied by transfer of 

money. For purposes of paragraph (j)(2) 

of this section, if pursuant to a plan a 

partner pays or contributes money to the 

partnership and the partnership 

assumes one or more liabilities of the 

partner, the amount of those liabilities 

that the partnership is treated as 

assuming is reduced (but not below 

zero) by the money transferred. 

Similarly, for purposes of paragraph 

(j)(3) of this section, if pursuant to a 

plan a partnership pays or distributes 

money to a partner and the partner 

assumes one or more liabilities of the 

partnership, the amount of those 

liabilities that the partner is treated as 

assuming is reduced (but not below 

zero) by the money transferred. 

(8) Anti-abuse rule. For purposes of 

this section, an increase in a partner’s 

share of a partnership liability may be 

treated as a transfer of consideration by 

the partner to the partnership, 

notwithstanding any other rule in this 

section, if—

(i) Within a short period of time after 

the partnership incurs or assumes the 

liability or another liability, one or more 

partners of the partnership, or related 

parties to a partner (within the meaning 

of section 267(b) or 707(b)), in substance 

bears an economic risk for the liability 

that is disproportionate to the partner’s 

interest in partnership profits or capital; 

and 

(ii) The transactions are undertaken 

pursuant to a plan that has as one of its 

principal purposes minimizing the 

extent to which the partner is treated as 

making a transfer of consideration to the 

partnership that may be treated as part 

of a sale under this section. 

(k) Disclosure rules. Disclosure to the 

Internal Revenue Service in accordance 

with § 1.707–8 is required when a 

partner transfers consideration to a 

partnership and the partnership 

transfers consideration to another 

partner within a seven-year period 

(without regard to the order of the 

transfers), the partners treat the transfers 

other than as a sale for tax purposes, 

and the transfer of consideration by the 

partnership is not presumed to be a 

guaranteed payment for capital under 

§ 1.707–4(a)(1)(ii), is not a reasonable 

preferred return within the meaning of 

§ 1.707–4(a)(3), and is not an operating 

cash flow distribution within the 

meaning of § 1.707–4(b)(2). However, 

disclosure is not required under this 

paragraph if an exception provided in 

either paragraph (a)(8) (relating to 

transfers resulting from a termination of 

a partnership under section 708(b)(1)(B) 

and transfers incident to the formation 

of a partnership) or paragraph (g) 

(relating to transfers to and by service 

partnerships) applies to either of the 

transfers. 

(l) Examples. The following examples 

illustrate the application of this section. 

For purposes of these examples, assume 

that the transfers would otherwise be 

respected as contributions and 

distributions and that, except as 

otherwise provided, sections 721(b), 

751(b), 704(c)(1)(B), 737, and § 1.707–3 

do not apply. All amounts and 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68849

percentages in these examples are 

rounded to the nearest whole number.

Example 1. Treatment of simultaneous 

transfers as a sale by a selling partner to a 

purchasing partner. (i) A and B each owns a 

50% interest in partnership AB. AB holds 

Blackacre, real property with a fair market 

value of $400x. AB has no liabilities. On May 

25, 2008, C transfers $100x in cash to AB in 

exchange for an interest in AB. 

Simultaneously, AB transfers $100x in cash 

to A. 

(ii) Because C’s transfer of $100x to AB and 

AB’s transfer of $100x to A occurred within 

two years, the transfers are presumed to be 

a sale of a portion of A’s interest in AB to 

C under paragraph (c) of this section, unless 

the facts and circumstances clearly establish 

otherwise. There are no facts that rebut the 

presumption of sale treatment or that support 

the application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

A’s interest in AB to C. Under paragraph 

(a)(3)(i) of this section, the value of the 

partnership interest that A is treated as 

selling to C equals the lesser of the 

consideration transferred by AB to A or the 

consideration transferred by C to AB. C 

transferred $100x to AB, and A received 

$100x from AB. Thus, A is treated as having 

sold an interest in AB with a value of $100x 

to C.

Example 2. Treatment of non-simultaneous 

transfers as a sale by a selling partner to a 

purchasing partner. (i) The facts are the same 

as in Example 1, except that AB transfers 

$100x in cash to A on March 25, 2008, and 

C transfers $50x in cash to AB on May 25, 

2008, in exchange for an interest in AB. 

(ii) Because AB’s transfer of $100x to A and 

C’s transfer of $50x to AB occurred within 

two years, the transfers are presumed to be 

a sale of a portion of A’s interest in AB to 

C under paragraph (c) of this section, unless 

the facts and circumstances clearly establish 

otherwise. There are no facts that rebut the 

presumption of sale treatment or that support 

the application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

A’s interest in AB to C. Under paragraph 

(a)(2)(ii)(A) of this section, the sale takes 

place on the date of the earliest of the 

transfers, March 25, 2008, upon AB’s transfer 

of $100x to A. Under paragraph (a)(3)(i) of 

this section, the value of the partnership 

interest that A is treated as selling to C equals 

the lesser of the consideration transferred by 

AB to A or the consideration transferred by 

C to AB. C transferred $50x to AB, and A 

received $100x from AB. Thus, A is treated 

as having sold an interest in AB with a value 

of $50x to C. Under paragraph (a)(2)(ii)(C), 

because the transfer to A precedes the 

transfer by C, each of A, C, and AB is treated 

as if, on March 25, 2008, C transferred an 

obligation to deliver $50x to AB in exchange 

for $50x, and then C transferred $50x to A 

in exchange for a portion of A’s interest in 

AB with a value of $50x. On May 25, 2008, 

when C actually transfers $50x to AB, C is 

treated as satisfying the obligation to deliver 

$50x to AB. A also is treated as receiving, in 

its capacity as a partner, a distribution from 

AB to which section 731 applies of $50x 

($100x transfer—$50x amount of sale). Under 

paragraph (a)(5) of this section, the 

distribution is treated as occurring 

immediately following the sale.

Example 3. Treatment of deemed transfers 

and exchanges. (i) A and B each owns a 50% 

interest in partnership AB. AB holds 

Whiteacre, real property with a fair market 

value of $1,000x and a tax basis of $700x, 

along with other assets. AB has no liabilities. 

On January 1, 2008, C transfers Investment 

Property, with a fair market value of $1,500x 

and a tax basis of $300x, to AB. 

Simultaneously with that transfer, AB 

transfers Whiteacre to B. 

(ii) Because C’s transfer of Investment 

Property to AB and AB’s transfer of 

Whiteacre to B occurred within two years, 

the transfers are presumed to be a sale of a 

portion of B’s interest in AB to C under 

paragraph (c) of this section, unless the facts 

and circumstances clearly establish 

otherwise. There are no facts that rebut the 

presumption of sale treatment or that support 

the application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

B’s interest in AB to C. Under paragraph 

(a)(2)(ii)(A) of this section, the sale takes 

place on the date of the earliest of the 

transfers, January 1, 2008. Under paragraph 

(a)(3)(i) of this section, the value of the 

partnership interest that B is treated as 

selling to C equals the lesser of the 

consideration transferred by C to AB or the 

consideration transferred by AB to B. C 

transferred the Investment Property with a 

fair market value of $1,500x to AB, and B 

received Whiteacre with a fair market value 

of $1,000x from AB. Thus, B is treated as 

having sold an interest in AB with a value 

of $1,000x to C.

(iii) Under paragraph (a)(2)(ii)(B), because 

the transfers are simultaneous and the 

consideration transferred is not the same, 

each of B, C, and AB is treated as if, on 

January 1, 2008, C transferred $1,000x of the 

Investment Property to AB in exchange for 

Whiteacre and then C transferred Whiteacre 

to B in exchange for a portion of B’s interest 

in AB with a value of $1,000x. In the deemed 

exchange of $1,000x worth of the Investment 

Property for Whiteacre, AB realizes and 

recognizes gain of $300x ($1,000x–-$700x 

basis), and C realizes and recognizes gain of 

$800x ($1,000x–$200x allocable basis). In the 

deemed exchange of Whiteacre for B’s 

interest in AB, B realizes and recognizes gain 

or loss under section 741 (and section 751(a), 

if applicable) based on an amount realized of 

$1,000x. C also is considered to have 

contributed to AB, in C’s capacity as a 

partner, $500x of the Investment Property 

($1,500x total value of transferred Investment 

Property—$1,000x amount treated as C’s 

consideration) with an allocable basis of 

$100x in a transaction to which section 721 

applies. Thus, the basis of the Investment 

Property in the hands of AB is $1,100x, C’s 

basis in the partnership interest is $1,100x, 

and the basis of Whiteacre in the hands of B 

is $1,000x.

Example 4. Treatment of simultaneous 

transfers as a sale by a selling partner to 

more than one purchasing partner. (i) E and 

F each owns a 50% interest in partnership 

EF. EF holds a building with a fair market 

value of $500x. EF has no liabilities. On May 

25, 2008, G and H each transfer $50x in cash 

to EF in exchange for an interest in EF. 

Simultaneously, EF distributes $100x in cash 

to E. 

(ii) Because each of G’s and H’s transfers 

of $50x to EF and EF’s transfer of $100x to 

E occurred within two years, G’s transfer to 

EF and EF’s transfer to E, and H’s transfer to 

EF and EF’s transfer to E, are presumed to be 

a sale of a portion of E’s interest in EF to G 

and H, respectively, under paragraph (c) of 

this section, unless the facts and 

circumstances clearly establish otherwise. 

There are no facts that rebut the presumption 

of sale treatment or that support the 

application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

E’s partnership interest to G and H, 

respectively. Under paragraph (a)(3)(i) of this 

section, the value of the partnership interest 

that E is treated as selling to each of G and 

H equals the lesser of the consideration 

transferred by EF to E or the consideration 

transferred by G and H to EF. Because G and 

H made simultaneous transfers of 

consideration to EF, the transfers are 

aggregated under paragraph (a)(3)(ii) of this 

section. G and H together transferred $100x 

to EF, and E received $100x from EF. Thus, 

E is treated as having sold a partnership 

interest with a value of $100x to G and H. 

Under paragraph (a)(3)(ii) of this section, 

when transfers of multiple purchasing 

partners are aggregated, each purchasing 

partner is presumed to have purchased a pro 

rata portion of the selling partner’s 

partnership interest. That is, G is presumed 

to have purchased the fraction of E’s 

partnership interest sold that is equal to G’s 

amount transferred ($50x) divided by the 

aggregate amount transferred by G and H 

($100x), or one-half of the partnership 

interest that was sold. H also is presumed to 

have purchased the fraction of E’s 

partnership interest equal to H’s amount 

transferred ($50x) divided by the aggregate 

amount transferred by both G and H ($100x), 

or one-half of the partnership interest that 

was sold. Thus, each of G and H is treated 

as having purchased a fraction of E’s 

partnership interest that is equal to $50x.

Example 5. Treatment of non-simultaneous 

transfers as a sale by a selling partner to 

more than one purchasing partner. (i) The 

facts are the same as in Example 4, except 

that partnership EF distributes $75x in cash 

to E on May 1, 2007. In addition, G transfers 

$50x in cash to EF on March 25, 2008, and 

H transfers $50x in cash to EF on May 25, 

2008, each in exchange for a partnership 

interest in EF. 

(ii) Because each of G’s and H’s transfers 

of $50x to EF and EF’s transfer of $75x to E 

occurred within two years, G’s transfer to EF 

and EF’s transfer to E, and H’s transfer to EF 

68850 Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 

and EF’s transfer to E, are presumed to be a 

sale of a portion of E’s partnership interest 

to G and H, respectively, under paragraph (c) 

of this section, unless the facts and 

circumstances clearly establish otherwise. 

There are no facts that rebut the presumption 

of sale treatment or that support the 

application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

E’s interest in EF to each of G and H, 

respectively. Under paragraph (a)(2)(ii)(A) of 

this section, the sale takes place on the date 

of the earliest of the transfers, May 1, 2007, 

the date that EF transferred $75x to E. Under 

paragraph (a)(3)(i) of this section, the value 

of the partnership interest that E is treated as 

selling to each of G and H equals the lesser 

of the consideration transferred by G and H 

to EF, or the consideration transferred by EF 

to E. Because the transfers made by G and H 

were not simultaneous, the transfers are not 

aggregated. Rather, in accordance with 

paragraph (a)(2)(ii)(A) of this section, the 

transfers are considered in the order in which 

they were made. The value of the partnership 

interest that E is treated as selling to G equals 

$50x, the lesser of G’s $50x transfer to EF and 

the $75x that E received from EF. The value 

of the partnership interest that E is treated as 

selling to H equals $25x, the lesser of the 

remaining amount of the transfer to E, $25x 

($75x¥$50x = $25x), and H’s $50x transfer 

to EF. H also is considered to have 

contributed to EF, in H’s capacity as a 

partner, $25x ($50x transfer¥$25x amount of 

sale), to which section 721 applies. 

(iii) Under paragraph (a)(2)(ii)(C), each of 

E, G, and EF are treated as if, on May 1, 2007, 

G transferred an obligation to deliver $50x to 

EF in exchange for $50x, and, on that same 

date, G transferred $50x to E in exchange for 

a portion of E’s interest in EF with a value 

of $50x. On March 25, 2008, when G actually 

transfers $50x to EF, G is treated as satisfying 

its obligation to deliver $50x to EF. Also, 

under paragraph (a)(2)(ii)(C), each of E, H, 

and EF are treated as if, on May 1, 2007, H 

transferred an obligation to deliver $25x to 

EF in exchange for $25x, and, on that same 

date, H transferred $25x to E in exchange for 

a portion of E’s interest in EF with a value 

of $25x. On May 25, 2008, when H actually 

transfers $25x to EF, H is treated as satisfying 

its obligation to deliver $25x to EF.

Example 6. Operation of presumption for 

liquidation of a partner for money. (i) A and 

B each owns a 50% interest in partnership 

AB. AB holds marketable securities with a 

fair market value of $200x. AB has no 

liabilities. On April 1, 2008, C transfers 

$100x in cash to AB in exchange for an 

interest in AB. Simultaneously, AB 

distributes $100x of the marketable securities 

to A in liquidation of A’s partnership interest 

in AB. Assume that the marketable securities 

transferred to A are treated, under section 

731(c)(1), as money for purposes of section 

731(a)(1). 

(ii) Because C’s transfer of $100x to AB and 

AB’s transfer of $100x of marketable 

securities to A occurred within two years, the 

transfers are presumed to be a sale of a 

portion of A’s interest in AB to C under 

paragraph (c) of this section. However, under 

paragraph (e) of this section, notwithstanding 

the presumption set forth in paragraph (c) of 

this section, AB’s transfer of marketable 

securities to A in liquidation of A’s interest 

in AB is presumed not to be a sale of A’s 

partnership interest to C, unless the facts and 

circumstances clearly establish otherwise. If, 

however, one of the exceptions under section 

731(c)(3) applies to the $100x of marketable 

securities distributed to A, the securities 

would not be treated as money for purposes 

of section 731(a)(1), and the presumption 

against sale treatment under paragraph (e) of 

this section would not apply.

Example 7. Transfers that would otherwise 

be treated as both a sale of property and a 

sale of a partnership interest. (i) C and D 

each owns a 50% interest in partnership CD. 

CD holds Greenacre, real property with a fair 

market value of $2,000x. CD has no 

liabilities. On June 1, 2008, E transfers $500x 

in cash to CD in exchange for a partnership 

interest in CD. Immediately after E’s transfer, 

C transfers Redacre to CD, and CD distributes 

$500x in cash to C. At the time of the 

transfers, Redacre has a fair market value of 

$250x. 

(ii) Because E’s transfer of $500x to CD and 

CD’s transfer of $500x to C occurred within 

two years, the transfers are presumed to be 

a sale of a portion of C’s partnership interest 

in CD to E under paragraph (c) of this section, 

unless the facts and circumstances clearly 

establish otherwise. There are no facts that 

rebut the presumption of sale treatment or 

that support the application of either of the 

presumptions against sale treatment provided 

in paragraphs (e) or (f) or the exception 

provided in paragraph (g) of this section. 

Thus, the transfers are treated as a sale of a 

portion of C’s partnership interest in CD to 

E. However, because C’s transfer of Redacre 

to CD and CD’s transfer of $500x to C 

occurred within two years, under § 1.707–

3(c), the transfers are presumed to be a sale 

of Redacre by C to CD. There are no facts that 

rebut the presumption that the transfers are 

a sale of Redacre by C to CD. Under 

paragraph (a)(6) of this section, transfers that 

are in part a sale of a partnership interest and 

in part a sale of property are treated, first, as 

part of a sale of property.

Thus, C’s transfer of Redacre to CD and 

$250x of CD’s $500x transfer to C are treated, 

first, as a sale of Redacre by C to CD for 

$250x. Although the $250x distributed to C 

that is treated as part of a sale of Redacre is 

not treated as part of a sale of C’s partnership 

interest in CD to E, the remaining $250x that 

is distributed to C is treated as part of a sale 

of C’s partnership interest in CD to E. The 

value of the partnership interest that C is 

treated as selling to E equals $250x, the lesser 

of E’s $500x transfer to CD, and the 

remaining $250x that C received from CD. E 

also is considered to have contributed to CD, 

in E’s capacity as a partner, $250x ($500x 

contribution ¥ $250x amount of sale), to 

which section 721 applies.

Example 8. Treatment of simultaneous 

transfers as a sale where partnership has 

nonrecourse liabilities. (i) A and B each owns 

a 50% interest in partnership AB. The 

partnership agreement states that the partners 

agree to share profits in proportion to the 

partners’ booked-up capital accounts. AB 

holds $100x cash and Orangeacre, a parcel of 

raw land with a fair market value of $860x. 

Orangeacre is encumbered by a $360x 

nonrecourse liability incurred by AB in 1998 

in connection with the purchase of 

Orangeacre. The liability, which has an issue 

price of $360x, has a term of 10 years and 

all principal is payable at maturity. The 

liability provides for adequate stated interest, 

all of which is qualified stated interest. On 

January 1, 2007, C contributes $100x to AB 

in exchange for an interest in AB. On the 

same date, A receives a transfer of $200x 

from AB. 

(ii) For purposes of determining whether 

the transfers constitute a disguised sale of A’s 

or B’s interest in AB, the $360x liability is 

ignored because no partner assumes the 

liability. Because C’s transfer of $100x to AB 

and AB’s transfer of $200x to A occurred 

within two years, the transfers are presumed 

to be a sale of a portion of A’s partnership 

interest in AB to C, under paragraph (c) of 

this section, unless the facts and 

circumstances clearly establish otherwise. 

There are no facts that rebut the presumption 

of sale treatment or that support the 

application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

A’s partnership interest in AB to C. Under 

paragraph (a)(3)(i) of this section, the value 

of the partnership interest that A is treated 

as selling to C equals the lesser of the 

consideration transferred by AB to A, or the 

consideration transferred by C to AB. C 

transferred $100x to AB, and A received 

$200x from AB. Thus, A is treated as having 

sold an interest in AB with a value of $100x 

to C. Under paragraph (a)(4) of this section, 

the amount realized by A on the sale of its 

partnership interest includes any reduction 

in A’s share of the $360x partnership liability 

that is treated as occurring as a result of the 

sale. Before the sale, A’s share of the 

nonrecourse liability under § 1.752–3(a)(3) 

was $180x (50% of the $360x liability). As 

a result of A’s sale of its $100x partnership 

interest in AB to C, A’s share of the 

nonrecourse liability under § 1.752–3(a)(3) 

was reduced to $120x (because A’s 

partnership interest was 33% after the sale 

but immediately before the $100x 

distribution from AB that reduced A’s 

interest in AB to 20%). Thus, A’s amount 

realized on the sale of its partnership interest 

equals $100x plus the reduction in A’s share 

of the $360x partnership liability of $60x 

($180x ¥ $120x), or $160x. A also is treated 

as receiving, in its capacity as a partner, and 

without regard to any deemed distributions 

under section 752(b), a distribution from AB 

to which section 731 applies of $100x ($200x 

transfer ¥ $100x amount of sale). Under 

paragraph (a)(5) of this section, the 

distribution is treated as occurring 

immediately following the sale.

Example 9. Treatment of simultaneous 

transfers as a sale where selling partner has 

recourse liabilities that are assumed by the 

partnership. (i) The facts are the same as 

those in Example 8, except that AB does not 

make a transfer to A but AB does assume a 

Federal Register / Vol. 69, No. 227 / Friday, November 26, 2004 / Proposed Rules 68851

personal $80x recourse liability of A’s, on 

January 1, 2007. Immediately after AB’s 

assumption of A’s personal $80x recourse 

liability, A is completely released from 

liability, and only B and C are ultimately 

liable on the $80x recourse debt. 

(ii) As in Example 8, the $360x liability is 

ignored for purposes of determining whether 

the transfers constitute a sale of A’s or B’s 

interest in AB because no partner assumes 

the $360x liability. However, AB’s 

assumption of A’s $80x recourse liability is 

treated as a transfer of consideration to A to 

the extent that the amount of the liability 

exceeds A’s share of that liability 

immediately after AB assumes the liability, 

determined as provided in paragraph (j)(4)(i) 

of this section. Under paragraph (j)(4)(i) of 

this section, A’s share of the recourse liability 

immediately following the assumption is 

zero. Thus, the assumption is treated as a 

transfer of $80x to A by AB on January 1, 

2007. Because C’s transfer of $100x to AB, 

and AB’s transfer of $80x to A, occurred 

within two years, the transfers are presumed 

to be a sale of a portion of A’s partnership 

interest in AB to C, under paragraph (c) of 

this section, unless the facts and 

circumstances clearly establish otherwise. 

There are no facts that rebut the presumption 

of sale treatment or that support the 

application of either of the presumptions 

against sale treatment provided in paragraphs 

(e) or (f) or the exception provided in 

paragraph (g) of this section. Thus, the 

transfers are treated as a sale of a portion of 

A’s partnership interest in AB to C. Under 

paragraph (a)(3)(i) of this section, the value 

of the partnership interest that A is treated 

as selling to C equals the lesser of the 

consideration transferred by AB to A, or the 

consideration transferred by C to AB. C 

transferred $100x to AB, and A received $80x 

from AB. Thus, A is treated as having sold 

a partnership interest in AB with a value of 

$80x to C. Under paragraph (a)(4) of this 

section, the amount realized by A on the sale 

of its partnership interest includes any 

reduction in A’s share of the $360x 

partnership liability that is treated as 

occurring as a result of the sale. Before the 

sale, A’s share of the nonrecourse liability 

under § 1.752–3(a)(3) was $180x (50% of the 

$360x liability). As a result of A’s sale of its 

$80x partnership interest in AB to C, A’s 

share of the nonrecourse liability under 

§ 1.752–3(a)(3) was reduced to $133x 

(because A’s partnership interest was 37% 

after the sale). Thus, A’s amount realized on 

the sale of its partnership interest equals 

$80x plus the reduction in A’s share of the 

$360x partnership liability of $47x ($180x ¥

$133x), or $127x. C also is treated as making, 

in its capacity as a partner, and without 

regard to any deemed contributions under 

section 752(a), a contribution to AB to which 

section 721 applies of $20x ($100x 

contribution ¥ $80x amount of sale).

Par. 7. Section 1.707–8 is amended as 

follows: 

1. Revising paragraph (a). 

2. Revising paragraph (c). 

The revisions read as follows:

§ 1.707–8 Disclosure of certain 

information. 

(a) In general. The disclosure referred 

to in § 1.707–3(c)(2) (regarding certain 

transfers made within seven years of 

each other), § 1.707–5(a)(7)(ii) (regarding 

a liability incurred within two years 

prior to a transfer of property), § 1.707–

5(a)(8) (relating to liabilities assumed 

within seven years of the transfer), 

§ 1.707–6(c) (relating to transfers of 

property from a partnership to a partner 

in situations analogous to those listed 

above), and § 1.707–7(k) (relating to 

certain transfers made within seven 

years of each other) is to be made in 

accordance with paragraphs (b) and (c) 

of this section.

* * * * *

(c) Parties required to disclose. The 

disclosure required by this section must 

be made by any person who makes a 

transfer that is required to be disclosed. 

The persons who are required to 

disclose may designate by written 

agreement a single person to make the 

disclosure. The designation of one 

person to make the disclosure does not 

relieve the other persons required to 

disclose from their obligation to make 

the disclosure if the designated person 

fails to make the disclosure in 

accordance with paragraph (b) of this 

section. 

Par. 8. Section 1.707–9 is amended as 

follows: 

1. Revising the heading for paragraph 

(a). 

2. Revising paragraph (a)(1).

3. Revising the heading for paragraph 

(a)(2), and adding a sentence at the end 

of the paragraph. 

4. Amending paragraph (a)(3) by 

removing the language ‘‘1.707–6’’ and 

adding ‘‘1.707–7’’ in its place. 

5. Revising paragraph (b). 

The revisions and addition read as 

follows:

§ 1.707–9 Effective dates and transitional 

rules. 

(a) Sections 1.707–3 through 1.707–

7—(1) In general. Except as provided in 

paragraph (a)(3) of this section, 

§§ 1.707–3 through 1.707–7 apply to any 

transaction with respect to which all 

transfers that are part of a sale of an item 

of property or of a partnership interest 

occur on or after the date these 

regulations are published as final 

regulations in the Federal Register. For 

any transaction with respect to which 

all transfers that are part of a sale of an 

item of property occur after April 24, 

1991, but before the date these 

regulations are published as final 

regulations in the Federal Register, 

§§ 1.707–3 through 1.707–6 as 

contained in 26 CFR edition revised 

April 1, 2004, (TD 8439) apply, except 

as provided in paragraph (a)(3) of this 

section. 

(2) Transfers occurring before 

effective dates. * * * In addition, 

except as provided in paragraph (a)(3) of 

this section, in the case of any 

transaction with respect to which one or 

more of the transfers occurs after April 

24, 1991, but before the date these 

regulations are published as final 

regulations in the Federal Register, the 

determination of whether the 

transaction is a disguised sale of a 

partnership interest under section 

707(a)(2)(B) is to be made on the same 

basis.

* * * * *

(b) * * * The disclosure provisions 

described in § 1.707–8 apply to 

transactions with respect to which all 

transfers that are part of a sale of 

property occur on and after the date 

these regulations are published as final 

regulations in the Federal Register. For 

transactions with respect to which all 

transfers that are part of a sale of 

property occur after September 30, 

1992, but before the date these 

regulations are published as final 

regulations in the Federal Register, the 

disclosure provisions as described in 

§ 1.707–8 as contained in the 26 CFR 

edition revised April 1, 2004, (TD 8439) 

apply.

* * * * *

§ 1.752–3 [Amended] 

Par. 9. Section 1.752–3 is amended in 

the sixth sentence of paragraph (a)(3) by 

revising the sentence ‘‘This additional 

method does not apply for purposes of 

§ 1.707–5(a)(2)(ii)’’ to read ‘‘This 

additional method does not apply for 

purposes of §§ 1.707–5(a)(2)(ii) and 

1.707–7(j)(4)(ii).’’

Mark E. Matthews, 

Deputy Commissioner for Services and 

Enforcement.

[FR Doc. 04–26112 Filed 11–24–04; 8:45 am] 

BILLING CODE 4830–01–P

ENVIRONMENTAL PROTECTION 

AGENCY 

40 CFR Part 261

[FRL–7842–9] 

Hazardous Waste Management 

System; Identification and Listing of 

Hazardous Waste

AGENCY: Environmental Protection 

Agency.

ACTION: Proposed rule.