[Federal Register Volume 69, Number 227 (Friday, November 26, 2004)]
[Proposed Rules]
[Pages 68838-68851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26112]


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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.

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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 hand-delivered 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

[[Page 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 
Sec. Sec.  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

[[Page 68840]]

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

[[Page 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 Sec.  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.

[[Page 68842]]

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 debt-financed 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

[[Page 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 Sec.  
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 Sec. Sec.  
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 
Sec. Sec.  1.707-5 and -6 of the existing regulations, relating to the 
disclosure of the assumption of or taking subject to liabilities. 
Specifically, Sec.  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 seven-year 
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, Sec.  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 
Sec.  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 Sec. Sec.  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).

[[Page 68844]]

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 Sec.  1.707-5(a)(8).
    2. Revising the entry for Sec.  1.707-7.
    3. Adding entries for Sec. Sec.  1.707-7(a) through 1.707-7(l).
    4. Revising the entry for Sec.  1.707-8(c).
    5. Revising the entries for Sec. Sec.  1.707-9(a) and (a)(2).
    The revisions and additions read as follows:
* * * * *


Sec.  1.707-0  Table of contents.

* * * * *


Sec.  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.
* * * * *


Sec.  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 Sec.  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.

[[Page 68845]]

    (8) Anti-abuse rule.
    (k) Disclosure rules.
    (l) Examples.
* * * * *


Sec.  1.707-8  Disclosure of certain information.

* * * * *
    (c) Parties required to disclose.
* * * * *


Sec.  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 Sec.  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 Sec.  1.707-5, new paragraph (a)(8) is added.
    The addition reads as follows:


Sec.  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 Sec.  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 Sec.  
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 Sec.  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:


Sec.  1.707-6  Disguised sales of property by partnership to partners; 
general rule.

* * * * *
    (c) * * * Similar to the rules provided in Sec. Sec.  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 Sec.  
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 Sec.  
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:


Sec.  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

[[Page 68846]]

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 
Sec.  1.707-3(a), Sec.  1.707-3(a) applies before this section, and to 
the extent the transfer is treated as part of a sale of property under 
Sec.  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 Sec.  
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

[[Page 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 Sec.  1.761-1(d) for the definition of the term liquidation of a 
partner's interest.
    (f) Application of Sec.  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 Sec.  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 Sec. Sec.  
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 Sec. Sec.  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).

[[Page 68848]]

    (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 Sec.  1.752-1(a)(1) or would be treated as a 
recourse liability under that section if it were treated as a 
partnership liability for purposes of that section.
    (ii) Nonrecourse liability. A partner's share of a nonrecourse 
liability of the partnership is determined by applying the same 
percentage used to determine the partner's share of the excess 
nonrecourse liability under Sec.  1.752-3(a)(3). A partnership 
liability is a nonrecourse liability of the partnership to the extent 
that the obligation is a nonrecourse liability under Sec.  1.752-
1(a)(2) or would be 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 Sec.  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 Sec.  
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 Sec.  
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 Sec.  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 Sec.  1.707-4(a)(1)(ii), is not a reasonable 
preferred return within the meaning of Sec.  1.707-4(a)(3), and is not 
an operating cash flow distribution within the meaning of Sec.  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 Sec.  1.707-3 do not apply. All amounts and

[[Page 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

[[Page 68850]]

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 Sec.  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 Sec.  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 
Sec.  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

[[Page 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 Sec.  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 Sec.  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:


Sec.  1.707-8  Disclosure of certain information.

    (a) In general. The disclosure referred to in Sec.  1.707-3(c)(2) 
(regarding certain transfers made within seven years of each other), 
Sec.  1.707-5(a)(7)(ii) (regarding a liability incurred within two 
years prior to a transfer of property), Sec.  1.707-5(a)(8) (relating 
to liabilities assumed within seven years of the transfer), Sec.  
1.707-6(c) (relating to transfers of property from a partnership to a 
partner in situations analogous to those listed above), and Sec.  
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:


Sec.  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, Sec. Sec.  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, Sec. Sec.  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 Sec.  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 Sec.  1.707-8 as 
contained in the 26 CFR edition revised April 1, 2004, (TD 8439) apply.
* * * * *


Sec.  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 Sec.  1.707-5(a)(2)(ii)'' to read ``This 
additional method does not apply for purposes of Sec. Sec.  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