**DESCRIPTION OF REVENUE PROVISIONTO BE CONSIDEREDIN CONNECTION WITH THE MARKUP OFTHE MISCELLANEOUS TRADE AND TECHNICALCORRECTIONS ACT OF 1999 
Scheduled for Markup

by the

SENATE COMMITTEE ON FINANCE

on

January 22, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

January 21, 1999

JCX-2-99

**CONTENTS
**INTRODUCTION**

**DESCRIPTION OF REVENUE PROVISION**

	1.	Clarify the Definition of "Subject to" Liabilities Under Code Section 357(c)		

**INTRODUCTION**

	This document(1), prepared by the staff of the Joint Committee on Taxation, contains adescription of the revenue proposal to be considered by the Senate Committee on Finance inconnection with the markup of the Miscellaneous Trade and Technical Corrections Act of 1999,scheduled for January 22, 1999.

	This document contains a description of the following revenue proposal:  to clarify thedefinition of "subject to" liabilities under Code section 357(c).

**DESCRIPTION OF REVENUE PROVISION**

**1.  Clarify Definition of "Subject to" Liabilities Under Code Section 357(c)**

**Present Law**

	Present law provides that the transferor of property recognizes no gain or loss if theproperty is exchanged solely for qualified stock in a controlled corporation (sec. 351).  Theassumption by the controlled corporation of a liability of the transferor (or the acquisition ofproperty "subject to" a liability) generally will not cause the transferor to recognize gain. However, under section 357(c), the transferor does recognize gain to the extent that the sum ofthe assumed liabilities, together with the liabilities to which the transferred property is subject,exceeds the transferor's basis in the transferred property.  If the transferred property is "subjectto" a liability, Treasury regulations indicate that the amount of the liability is included in thecalculation regardless of whether the underlying liability is assumed by the controlledcorporation.  Treas. Reg. sec. 1.357-2(a).  Similar rules apply to reorganizations described insection 368(a)(1)(D).

	The gain recognition rule of section 357(c) is applied separately to each transferor in asection 351 exchange.

	The basis of the property in the hands of the controlled corporation equals the transferor'sbasis in such property, increased by the amount of gain recognized by the transferor, includingsection 357(c) gain.

**Description of Proposal**

	Under the proposal, the distinction between the assumption of a liability and theacquisition of an asset subject to a liability is generally eliminated.  First, except as provided inregulations, a recourse liability or any portion thereof is treated as having been assumed if, asdetermined on the basis of all facts and circumstances, the transferee has agreed to, and isexpected to, satisfy the liability or portion thereof (whether or not the transferor has been relievedof the liability).  Thus, where more than one person agrees to satisfy a liability or portion thereof,only one would be expected to satisfy such liability or portion thereof.  Second, except asprovided in regulations, a nonrecourse liability is treated as having been assumed by thetransferee of any asset subject to such liability; except that the amount treated as assumed shallbe reduced by the amount of such liability which an owner of other assets not transferred to thetransferee and also subject to such liability has agreed with the transferee to, and is expected tosatisfy, up to the fair market value of such other assets (determined without regard to section7701(g)).

	In determining whether any person has agreed to and is expected to satisfy a liability, allfacts and circumstances are to be considered.  In any case where the transferee does agree tosatisfy a liability, the transferee will also be expected to satisfy the liability in the absence offacts indicating the contrary.

	In determining any increase to the basis of property transferred to the transferee as aresult of gain recognized because of the assumption of liabilities under section 357, such increaseshall not cause the basis to exceed the fair market value of the property (determined withoutregard to sec. 7701(g)).  In addition, if gain is recognized to the transferor as the result of anassumption by a corporation of a nonrecourse liability that is also secured by any assets nottransferred to the corporation, and if no person is subject to tax under the Internal Revenue Code on such gain, then for purposes of determining the basis of assets transferred, the amount of gaintreated as recognized as the result of such assumption of liability shall be determined as if theliability assumed by the transferee equaled such transferee's ratable portion of the liability, based on the relative fair market values (determined without regard to sec. 7701(g)) of all assetssubject to such nonrecourse liability.

	The Treasury Department has authority to prescribe such regulations as may be necessaryto carry out the purposes of the provision.  Where appropriate, the Treasury Department may alsoprescribe regulations which provide that the manner in which a liability is treated as assumedunder the provision is applied elsewhere in the Code.

	The Miscellaneous Trade and Technical Corrections Act of 1998 (H.R. 4856), as passedby the House of Representatives on October 20, 1998, contained a substantially identicalprovision.

**Effective Date**

	The proposal would be effective for transfers on or after October 19, 1998.  No inferenceregarding the tax treatment under present law is intended.

1.  This document may be cited as follows: Joint Committee on Taxation, *Description ofRevenue Provision to be Considered in Connection with the Markup of the Miscellaneous Tradeand Technical Corrections Act of 1999* (JCX-2-99), January 21, 1999.****