This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

1572

Vol. 65, No. 7

Tuesday, January 11, 2000

DEPARTMENT OF COMMERCE

National Institute of Standards and

Technology

15 CFR Part 280

[Docket No. 980623159–9316–03]

RIN 0693–AB47

Procedures for Implementation of the

Fastener Quality Act

AGENCY: National Institute of Standards

and Technology and the Bureau of

Export Administration and the Patent

and Trademark Office, United States

Department of Commerce.

ACTION: Proposed rule; extension of

comment period.

SUMMARY: The National Institute of

Standards and Technology (NIST) and

the Bureau of Export Administration

(BXA) and the Patent and Trademark

Office (PTO), United States Department

of Commerce, are extending for 15 days

the period for submitting comments on

the proposed rule amending the

regulations pertaining to the

implementation of the Fastener Quality

Act. NIST, BXA, and PTO are granting

this extension based on requests

received from the public for an

extension of the comment period.

DATES: Comments must be received no

later than January 28, 2000.

ADDRESSES: Comments must be

submitted to Dr. Subhas Malghan,

Director’s Office, Technology Services,

National Institute of Standards and

Technology, Mail Stop 2000,

Gaithersburg, MD 20899–2000;

telephone number (301) 975–4510.

FOR FURTHER INFORMATION CONTACT: Dr.

Subhas Malghan, Director’s Office,

Technology Services, National Institute

of Standards and Technology, Mail Stop

2000, Gaithersburg, MD 20899–2000;

telephone number (301) 975–4510.

SUPPLEMENTARY INFORMATION: In the

Federal Register of December 15, 1999

(64 FR 69969), NIST, BXA, and PTO

proposed changes to their existing

Fastener Quality Act (FQA) regulations

to implement amendments to the FQA

contained in the Fastener Quality Act

Amendments of 1999 (Pub. L. 106–234).

Interested parties were given until

January 14, 2000 to submit written

comments on the proposed rule.

Two representatives of the aerospace

industry, two representatives of the

fastener industry, and two fastener

manufacturers have submitted requests

to extend the comment period on the

proposed rulemaking. The extension is

sought because, since the holiday

season fell in the middle of the

comment period, there was not

sufficient time to correlate industry

comments and meet the stipulated

January 14, 2000 due date.

To be responsive to these requests,

and to ensure that the public has

sufficient time to formulate appropriate

comments, NIST, BXA, and PTO are

granting an extension of 15 days.

Although this notice is being issued by

NIST, the extension applies to

comments regarding all subparts of the

proposed rule. Comments must be

received at the address given above no

later than January 28, 2000.

Dated: January 7, 2000.

Karen H. Brown,

Deputy Director.

[FR Doc. 00–701 Filed 1–10–00; 8:45 am]

BILLING CODE 3510–13–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–111119–99]

RIN 1545–AX32

Partnership Mergers and Divisions

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations on the tax

consequences of partnership mergers

and divisions. The proposed regulations

affect partnerships and their partners.

This document also contains a notice of

public hearing on these proposed

regulations.

DATES: Written comments must be

received by April 10, 2000. Requests to

speak (with outlines of oral comments)

at the public hearing scheduled for May

4, 2000, must be submitted by April 13,

2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–111119–99),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the

alternative, submissions may be hand

delivered Monday through Friday

between the hours of 8 a.m. and 5 p.m.

to: CC:DOM:CORP:R (REG–111119–99),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue, NW,

Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by

selecting the ‘‘Tax Regs’’ option of the

IRS Home Page, or by submitting

comments directly to the IRS Internet

site at: http://www.irs.ustreas.gov/

taxlregs/regslist.html. The public

hearing will be held in room 2615,

Internal Revenue Building, 1111

Constitution Avenue, NW, Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Dan

Carmody, (202) 622–3080; concerning

submissions of comments, the hearing,

and/or to be placed on the building

access list to attend the hearing, LaNita

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

numbers).

SUPPLEMENTARY INFORMATION: This

document proposes to amend sections

708, 743, and 752 of the Income Tax

Regulations (26 CFR part 1) regarding

partnership mergers and divisions.

Partnership Mergers

Background

Section 708(b)(2)(A) provides that in

the case of a merger or consolidation of

two or more partnerships, the resulting

partnership is, for purposes of section

708, considered the continuation of any

merging or consolidating partnership

whose members own an interest of more

than 50 percent in the capital and

profits of the resulting partnership.

Section 1.708–1(b)(2)(i) of the Income

Tax Regulations provides that if the

resulting partnership can be considered

a continuation of more than one of the

merging partnerships, the resulting

partnership is the continuation of the

partnership that is credited with the

contribution of the greatest dollar value

of assets to the resulting partnership. If

none of the members of the merging

Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules 1573

partnerships own more than a 50

percent interest in the capital and

profits of the resulting partnership, all

of the merged partnerships are

considered terminated, and a new

partnership results. The taxable years of

the merging partnerships that are

considered terminated are closed under

section 706(c).

Although section 708 and the

applicable regulations provide which

partnership continues when two or

more partnerships merge, the statute

and regulations do not prescribe a form

for the partnership merger. (Often, state

merger statutes do not provide a

particular form for a partnership

merger.) In revenue rulings, however,

the IRS has prescribed the form of a

partnership merger for Federal income

tax purposes.

In Rev. Rul. 68–289 (1968–1 C.B. 314),

three existing partnerships (P1, P2, and

P3) merged into one partnership with P3

continuing under section 708(b)(2)(A).

The revenue ruling holds that P1 and

P2, the two terminating partnerships,

are treated as having contributed all of

their respective assets and liabilities to

P3, the resulting partnership, in

exchange for a partnership interest in

P3. P1 and P2 are considered terminated

and the partners of P1 and P2 receive

interests in P3 with a basis under

section 732(b) in liquidation of P1 and

P2 (Assets-Over Form). Rev. Rul. 77–458

(1977–2 C.B. 220), and Rev. Rul. 90–17

(1990–1 C.B. 119), also follow the

Assets-Over Form for a partnership

merger.

Explanation of Provisions

A. Form of a Partnership Merger

The IRS and Treasury are aware that

taxpayers may accomplish a partnership

merger by undertaking transactions in

accordance with jurisdictional laws that

follow a form other than the Assets-Over

Form. For example, the terminating

partnership could liquidate by

distributing its assets and liabilities to

its partners who then contribute the

assets and liabilities to the resulting

partnership (Assets-Up Form). In

addition, the partners in the terminating

partnership could transfer their

terminating partnership interests to the

resulting partnership in exchange for

resulting partnership interests, and the

terminating partnership could liquidate

into the resulting partnership (InterestOver Form).

In the partnership incorporation area,

a taxpayer’s form generally is respected

if the taxpayer actually undertakes,

under the relevant jurisdictional law, all

the steps of a form that is set forth in

one of three situations provided in Rev.

Rul. 84–111 (1984–2 C.B. 88). The three

situations that Rev. Rul. 84–111 sets

forth are the Assets-Over Form, AssetsUp Form, and Interest-Over Form. Rev.

Rul. 84–111 explains that, depending on

the form chosen to incorporate the

partnership, the adjusted basis and

holding periods of the various assets

received by the corporation and the

adjusted basis and holding periods of

the stock received by the former

partners can vary. Like partnership

incorporations, each form of a

partnership merger has potentially

different tax consequences.

Under the Assets-Up Form, partners

could recognize gain under sections

704(c)(1)(B) and 737 (and incur state or

local transfer taxes) when the

terminating partnership distributes the

assets to the partners. However, under

the Assets-Over Form, gain under

sections 704(c)(1)(B) and 737 is not

triggered. See §§ 1.704–4(c)(4) and

1.737–2(b). Additionally, under the

Assets-Up Form, because the adjusted

basis of the assets contributed to the

resulting partnership is determined first

by reference to section 732 (as a result

of the liquidation) and then section 723

(by virtue of the contribution), in certain

circumstances, the adjusted basis of the

assets contributed may not be the same

as the adjusted basis of the assets in the

terminating partnership. These

circumstances occur if the partners’

aggregate adjusted basis of their

interests in the terminating partnership

does not equal the terminating

partnership’s adjusted basis in its assets.

Under the Assets-Over Form, because

the resulting partnership’s adjusted

basis in the assets it receives is

determined solely under section 723,

the adjusted basis of the assets in the

resulting partnership is the same as the

adjusted basis of the assets in the

terminating partnership.

The regulations propose to respect the

form of a partnership merger for Federal

income tax purposes if the partnerships

undertake, pursuant to the laws of the

applicable jurisdiction, the steps of

either the Assets-Over Form or the

Assets-Up Form. (This rule applies even

if none of the merged partnerships are

treated as continuing for Federal income

tax purposes.) Generally, when

partnerships merge, the assets move

from one partnership to another at the

entity level, or in other words, like the

Assets-Over Form. However, if as part of

the merger, the partnership titles the

assets in the partners’ names, the

proposed regulations treat the

transaction under the Assets-Up Form.

If partnerships use the Interest-Over

Form to accomplish the result of a

merger, the partnerships will be treated

as following the Assets-Over Form for

Federal income tax purposes.

In the context of partnership

incorporations, Rev. Rul. 84–111

distinguishes among all three forms of

incorporation. However, with respect to

the Interest-Over Form, the revenue

ruling respects only the transferors’

conveyances of partnership interests,

while treating the receipt of the

partnership interests by the transferee

corporation as the receipt of the

partnership’s assets (i.e., the Assets-Up

Form). The theory for this result, based

largely on McCauslen v. Commissioner,

45 T.C. 588 (1966), is that the transferee

corporation can only receive assets

since it is not possible, as a sole

member, for it to receive and hold

interests in a partnership (i.e., a

partnership cannot have only one

member; so, the entity is never a

partnership in the hands of the

transferee corporation).

Adherence to the approach followed

in Rev. Rul. 84–111 creates problems in

the context of partnership mergers that

are not present with respect to

partnership incorporations. Unlike the

corporate rules, the partnership rules

impose certain tax results on partners

based upon a concept that matches a

contributed asset to the partner that

contributed the asset. Sections 704(c)

and 737 are examples of such rules. The

operation of these rules breaks down if

the partner is treated as contributing an

asset that is different from the asset that

the partnership is treated as receiving.

Given that the hybrid treatment of the

Interest-Over Form transactions utilized

in Rev. Rul. 84–111 is difficult to apply

in the context of partnership mergers,

another characterization will be applied

to such transactions. The Assets-Over

Form generally will be preferable for

both the IRS and taxpayers. For

example, when partnerships merge

under the Assets-Over Form, gain under

sections 704(c)(1)(B) and 737 is not

triggered. Moreover, the basis of the

assets in the resulting partnership is the

same as the basis of the assets in the

terminating partnership, even if the

partners’ aggregate adjusted basis of

their interests in the terminating

partnership does not equal the

terminating partnership’s adjusted basis

in its assets.

If partnerships merge under

applicable law without implementing a

form, the proposed regulations treat the

partnerships as following the AssetsOver Form. This approach is consistent

with the treatment of partnership to

corporation elective conversions under

the check-the-box regulations and

technical terminations under section

1574 Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules

708(b)(1)(B), other formless movements

of a partnership’s assets.

B. Adverse Tax Consequences of the

Assets-Over Form

The IRS and Treasury are aware that

certain adverse tax consequences may

occur for partnerships that merge in a

transaction that will be taxed in

accordance with the Assets-Over Form.

These proposed regulations address

some of the adverse tax consequences

regarding section 752 liability shifts and

buyouts of exiting partners.

1. Section 752 Revisions

If a highly leveraged partnership (the

terminating partnership) merges with

another partnership (the resulting

partnership), all of the partners in the

terminating partnership could recognize

gain because of section 752 liability

shifts. Under the Assets-Over Form, the

terminating partnership becomes a

momentary partner in the resulting

partnership when the terminating

partnership contributes its assets and

liabilities to the resulting partnership in

exchange for interests in the resulting

partnership. If the terminating

partnership (as a momentary partner in

the resulting partnership) is considered

to receive a deemed distribution under

section 752 (after netting increases and

decreases in liabilities under § 1.752–

1(f)) that exceeds the terminating

partnership’s adjusted basis of its

interests in the resulting partnership,

the terminating partnership would

recognize gain under section 731. The

terminating partnership’s gain then

would be allocated to each partner in

the terminating partnership under

section 704(b). In this situation, a

partner in the terminating partnership

could recognize gain even though the

partner’s adjusted basis in its resulting

partnership interest or its share of

partnership liabilities in the resulting

partnership is large enough to avoid the

recognition of gain, provided that the

decreases in liabilities in the

terminating partnership are netted

against the increases in liabilities in the

resulting partnership.

The proposed regulations clarify that

when two or more partnerships merge

under the Assets-Over Form, increases

or decreases in partnership liabilities

associated with the merger are netted by

the partners in the terminating

partnership and the resulting

partnership to determine the effect of

the merger under section 752. The IRS

and Treasury consider it appropriate to

treat the merger as a single transaction

for determining the net liability shifts

under section 752. Therefore, a partner

in the terminating partnership will

recognize gain on the contribution

under section 731 only if the net section

752 deemed distribution exceeds that

partner’s adjusted basis of its interest in

the resulting partnership.

2. Buyout of a Partner

Another adverse tax consequence may

occur when a partner in the terminating

partnership does not want to become a

partner in the resulting partnership and

would like to receive money or property

instead of an interest in the resulting

partnership. Under the Assets-Over

Form, the terminating partnership will

not recognize gain or loss under section

721 when it contributes its property to

the resulting partnership in exchange

for interests in the resulting partnership.

However, if, in order to facilitate the

buyout of the exiting partner, the

resulting partnership transfers money or

other consideration to the terminating

partnership in addition to the resulting

partnership interests, the terminating

partnership may be treated as selling

part of its property to the resulting

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

Any gain or loss recognized by the

terminating partnership generally would

be allocated to all the partners in the

terminating partnership even though

only the exiting partner would receive

the consideration.

The IRS and Treasury believe that,

under certain circumstances, when

partnerships merge and one partner

does not become a partner in the

resulting partnership, the receipt of cash

or property by that partner should be

treated as a sale of that partner’s interest

in the terminating partnership to the

resulting partnership, not a disguised

sale of the terminating partnership’s

assets. Accordingly, the proposed

regulations provide that if the merger

agreement (or similar document)

specifies that the resulting partnership

is purchasing the exiting partner’s

interest in the terminating partnership

and the amount paid for the interest, the

transaction will be treated as a sale of

the exiting partner’s interest to the

resulting partnership. This treatment

will apply even if the resulting

partnership sends the consideration to

the terminating partnership on behalf of

the exiting partner, so long as the

designated language is used in the

relevant document.

In this situation, the exiting partner is

treated as selling a partnership interest

in the terminating partnership to the

resulting partnership (and the resulting

partnership is treated as purchasing the

partner’s interest in the terminating

partnership) immediately prior to the

merger. Immediately after the sale, the

resulting partnership becomes a

momentary partner in the terminating

partnership. Consequently, the resulting

partnership and ultimately its partners

(determined prior to the merger) inherit

the exiting partner’s capital account in

the terminating partnership and any

section 704(c) liability of the exiting

partner. If the terminating partnership

has an election in effect under section

754 (or makes an election under section

754), the resulting partnership will have

a special basis adjustment regarding the

terminating partnership’s property

under section 743. The proposed

regulations provide that the resulting

partnership’s basis adjustments under

section 743 must be ultimately allocated

solely to the partners who were partners

in the resulting partnership immediately

before the merger; the adjustments do

not affect the common basis of the

resulting partnership’s assets.

C. Merger as Part of a Larger

Transaction

The proposed regulations provide that

if the merger is part of a larger series of

transactions, and the substance of the

larger series of transactions is

inconsistent with following the form

prescribed for the merger, the form may

not be respected, and the larger series of

transactions may be recast in

accordance with their substance. An

example illustrating the application of

this rule is included in the proposed

regulations.

D. Measurement of Dollar Value of

Assets

As discussed above, the regulations

currently provide that in a merger of

partnerships, if the resulting partnership

can be considered a continuation of

more than one of the merging

partnerships, the resulting partnership

is the continuation of the partnership

that is credited with the contribution of

the greatest dollar value of assets to the

resulting partnership. Commentators

have questioned whether this rule refers

to the gross or net value of the assets of

a partnership. The proposed regulations

provide that the value of assets of a

partnership is determined net of the

partnership’s liabilities.

E. Effective Date

The regulations are proposed to apply

to mergers occurring on or after the date

final regulations are published in the

Federal Register.

Partnership Divisions

Background

Section 708(b)(2)(B) provides that, in

the case of a division of a partnership

into two or more partnerships, the

resulting partnerships (other than any

Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules 1575

resulting partnership the members of

which had an interest of 50 percent or

less in the capital and profits of the

prior partnership) are considered a

continuation of the prior partnership.

Section 1.708–1(b)(2)(ii) provides that

any other resulting partnership is not

considered a continuation of the prior

partnership but is considered a new

partnership. If the members of none of

the resulting partnerships owned an

interest of more than 50 percent in the

capital and profits of the prior

partnership, the prior partnership is

terminated. Where members of a

partnership that has been divided do

not become members of a resulting

partnership that is considered a

continuation of the prior partnership,

such partner’s interest is considered

liquidated as of the date of the division. Section 708(b)(2)(B) and the

applicable regulations do not prescribe

a particular form for the division

involving continuing partnerships. The

IRS has not addressed in published

guidance how the assets and liabilities

of the prior partnership move into the

resulting partnerships. Taxpayers

generally have followed either the

Assets-Over Form or the Assets-Up

Form for partnership divisions. Under the Assets-Over Form, the prior

partnership transfers certain assets to a

resulting partnership in exchange for

interests in the resulting partnership.

The prior partnership then immediately

distributes the resulting partnership

interests to partners who are designated

to receive interests in the resulting

partnership. Under the Assets-Up Form, the prior

partnership distributes certain assets to

some or all of its partners who then

contribute the assets to a resulting

partnership in exchange for interests in

the resulting partnership.

Explanation of Provisions

A. Form of a Partnership Division

As with partnership mergers, the IRS

and Treasury recognize that different tax

consequences can arise depending on

the form of the partnership division.

Because of the potential different tax

results that could occur depending on

the form followed by the partnership,

the regulations propose to respect for

Federal income tax purposes the form of

a partnership division accomplished

under laws of the applicable jurisdiction

if the partnership undertakes the steps

of either the Assets-Over Form or the

Assets-Up Form. Thus, the same forms

allowed for partnership mergers will be

allowed for partnership divisions. Generally, an entity cannot be

classified as a partnership if it has only

one member. This universally has been

held to be the case in classifying

transactions where interests in a

partnership are transferred to a single

person, so that the partnership goes out

of existence. McCauslen v.

Commissioner, 45 T.C. 588 (1966); Rev.

Rul. 99–6, 1999–6 I.R.B. 6; Rev. Rul.

67–65, 1967–1 C.B. 168; Rev. Rul. 55–

68, 1955–1 C.B. 372.

However, in at least one instance

involving the contribution of assets by

an existing partnership to a newlyformed partnership, regulations have

provided that the momentary existence

of the new partnership will be respected

for Federal income tax purposes. See

§ 1.708–1(b)(1)(iv). Pursuant to the

proposed regulations, under the AssetsOver Form of a partnership division, the

prior partnership’s momentary

ownership of all the interests in a

resulting partnership will not prevent

the resulting partnership from being

classified as a partnership on formation. The example in current § 1.708–

1(b)(2)(ii) indicates that when a

partnership is not considered a

continuation of the prior partnership

under section 708(b)(2)(B) (partnership

considered a new partnership under

current § 1.708–1(b)(2)(ii)), the new

partnership is created under the AssetsUp Form. The regulations propose to

modify this result and provide examples

illustrating that partnerships can divide

and create a new partnership under

either the Assets-Over Form or the

Assets-Up Form. Consistent with partnership mergers,

if a partnership divides using a form

other than the two prescribed, it will be

treated as undertaking the Assets-Over

Form.

These proposed regulations use four

terms to describe the form of a

partnership division. Two of these

terms, prior partnership and resulting

partnership, describe partnerships that

exist under the applicable jurisdictional

law. The prior partnership is the

partnership that exists under the

applicable jurisdictional law before the

division, and the resulting partnerships

are the partnerships that exist under the

applicable jurisdictional law after the

division. The other two terms, divided

partnership and recipient partnership,

are Federal tax concepts. A divided

partnership is a partnership that is

treated, for Federal income tax

purposes, as transferring assets in

connection with a division, and a

recipient partnership is a partnership

that is treated, for Federal income tax

purposes, as receiving assets in

connection with a division. The divided

partnership must be a continuation of

the prior partnership. Although the

divided partnership is considered one

continuing partnership for Federal

income tax purposes, it may actually be

two different partnerships under the

applicable jurisdictional law (i.e., the

prior partnership and a different

resulting partnership that is considered

a continuation of the prior partnership

for Federal income tax purposes). Finally, because in a formless division

it generally will be unclear which

partnership should be treated, for

Federal income tax purposes, as

transferring assets (i.e., the divided

partnership) to another partnership (i.e.,

the recipient partnership) where more

than one partnership is a continuation

of the prior partnership, the proposed

regulations provide that the continuing

resulting partnership with the assets

having the greatest fair market value

(net of liabilities) will be treated as the

divided partnership. This issue also is

present where the partnership that, in

form, transfers assets is not a

continuation of the prior partnership,

but more than one of the other resulting

partnerships are continuations of the

prior partnership. The same rule applies

to these situations.

B. Consequences under Sections

704(c)(1)(B) and 737

Gain under sections 704(c)(1)(B) and

737 may be triggered when section

704(c) property or substituted section

704(c) property is distributed to certain

partners. These rules often will be

implicated in the context of partnership

divisions.

Where a division is accomplished in

a transaction that is taxed in accordance

with the Assets-Over Form, the

partnership interest in the recipient

partnership will be treated as a section

704(c) asset to the extent that the

interest is received by the divided

partnership in exchange for section

704(c) property. Section 1.704–4(d)(1).

Accordingly, the distribution of the

partnership interests in the recipient

partnership by the divided partnership

generally will trigger section

704(c)(1)(B) where the interests in the

recipient partnership are received by a

partner of the divided partnership other

than the partner who contributed the

section 704(c) property to the divided

partnership. In addition, section 737

may be triggered if a partner who

contributed section 704(c) property to

the divided partnership receives an

interest in the recipient partnership that

is not attributable to the section 704(c)

property. Where a division is accomplished

under the Assets-Up Form, assets are

distributed directly to the partners who

will hold interests in the recipient

partnership. The distribution could

trigger section 704(c)(1)(B) or 737

depending on the identity of the

1576 Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules

distributed asset and the distributee

partner.

The regulations under section 737

provide an exception for certain

partnership divisions. Section 737 does

not apply when a transferor partnership

transfers all the section 704(c) property

contributed by a partner to a second

partnership in a section 721 exchange,

followed by a distribution of an interest

in the transferee partnership in

complete liquidation of the interest of

the partner that originally contributed

the section 704(c) property to the

transferor partnership. Section 1.737–

2(b)(2). This rule, however, may not

apply to many partnership divisions

because the original contributing

partner often remains a partner in the

divided partnership. No similar rule is

provided under section 704(c)(1)(B).

In many instances, the application of

sections 704(c)(1)(B) and 737 will be

appropriate when a partnership divides

under either the Assets-Over Form or

the Assets-Up Form. Consider the

following example: A, B, C, and D form

a partnership. A contributes appreciated

property X ($0 basis and $200 value), B

contributes property Y ($200 basis and

$200 value), and C and D each

contribute $200 cash. The partnership

subsequently divides into two

partnerships using the Assets-Over

Form, distributing interests in the

recipient partnership in accordance

with each partner’s pro rata interest in

the prior partnership. Property X

remains in the prior partnership, and

property Y is contributed to the

recipient partnership. Under these facts,

section 737 could be avoided if an

exception were created for the

distribution of the recipient partnership

interests. If, subsequent to the division,

half of property Y is distributed to A,

section 737 would not be triggered

because property X (the section 704(c)

property) is no longer in the same

partnership as property Y.

While the IRS and Treasury generally

believe that it is appropriate to apply

sections 704(c)(1)(B) and 737 in the

context of partnership divisions,

comments are invited on whether it

would be appropriate to expand the

exceptions to these sections in certain

circumstances relating to divisive

transactions.

C. Division as Part of a Larger

Transaction

The proposed regulations provide the

same rule for partnership divisions that

applies to partnership mergers.

D. Effective Date

The regulations are proposed to apply

to divisions occurring on or after the

date final regulations are published in

the Federal Register.

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, and because these

regulations do not impose on small

entities a collection of information

requirement, the Regulatory Flexibility

Act (5 U.S.C. chapter 6) does not apply.

Therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

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 (preferably a signed

original and eight (8) copies) that are

submitted timely to the IRS. The IRS

and the Department of Treasury

specifically request comments on the

clarity of the proposed regulations and

how they may be made easier to

understand. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for May 4, 2000, beginning at 10 a.m.,

in room 2615, Internal Revenue

Building, 1111 Constitution Avenue,

NW, Washington, DC. Due to building

security procedures, visitors must enter

at the 10th Street entrance, located

between Constitution and Pennsylvania

Avenues, NW. 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 15 minutes

before the hearing starts. For

information about having your name

placed 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 that wish

to present oral comments at the hearing

must submit timely written comments

and must submit an outline of the topics

to be discussed and the time to be

devoted to each topic (preferably a

signed original and eight (8) copies) by

April 13, 2000.

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 Mary Beth

Collins, Office of Chief Counsel

(Passthroughs and Special Industries).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read as follows:

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

Par. 2. Section 1.708–1 is amended as

follows:

1. Paragraph (b) is amended by

removing paragraph (b)(2) and by

redesignating each paragraph listed in

the first column of the following table

as the paragraph listed in the second

column:

Old paragraph Redesignated

paragraph

(b)(1)(i) ...................... (b)(1)

(b)(1)(i)(a) .................. (b)(1)(i)

(b)(1)(i)(b) .................. (b)(1)(ii)

(b)(1)(ii) ..................... (b)(2)

(b)(1)(iii) ..................... (b)(3)

(b)(1)(iii)(a) ................ (b)(3)(i)

(b)(1)(iii)(b) ................ (b)(3)(ii)

(b)(1)(iv) .................... (b)(4)

(b)(1)(v) ..................... (b)(5)

2. Paragraphs (c) and (d) are added to

read as follows:

§ 1.708–1 Continuation of partnership.

* * * * *

(c) Merger or consolidation—(1)

General rule. If two or more

partnerships merge or consolidate into

one partnership, the resulting

partnership shall be considered a

continuation of the merging or

consolidating partnership the members

of which own an interest of more than

50 percent in the capital and profits of

the resulting partnership. If the resulting

partnership can, under the preceding

sentence, be considered a continuation

of more than one of the merging or

Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules 1577

consolidating partnerships, it shall,

unless the Commissioner permits

otherwise, be considered the

continuation of that partnership which

is credited with the contribution of

assets having the greatest fair market

value (net of liabilities) to the resulting

partnership. Any other merging or

consolidating partnerships shall be

considered as terminated. If the

members of none of the merging or

consolidating partnerships have an

interest of more than 50 percent in the

capital and profits of the resulting

partnership, all of the merged or

consolidated partnerships are

terminated, and a new partnership

results. The taxable years of such

merging or consolidating partnerships

which are considered terminated shall

be closed in accordance with the

provisions of section 706(c), and such

partnerships shall file their returns for

a taxable year ending upon the date of

termination, i.e., the date of merger or

consolidation. The resulting partnership

shall file a return for the taxable year of

the merging or consolidating

partnership that is considered as

continuing. The return shall state that

the resulting partnership is a

continuation of such merging or

consolidating partnership and shall

include the names and addresses of the

merged or consolidated partnerships.

The respective distributive shares of the

partners for the periods prior to and

subsequent to the date of merger or

consolidation shall be shown as a part

of the return.

(2) Form of a merger or

consolidation—(i) Assets-over form.

When two or more partnerships merge

or consolidate into one partnership

under the applicable jurisdictional law

without undertaking a form for the

merger or consolidation, or undertake a

form for the merger or consolidation

that is not described in paragraph

(c)(2)(ii) of this section, any merged or

consolidated partnership that is

considered terminated under paragraph

(c)(1) of this section is treated as

undertaking the assets-over form for

Federal income tax purposes. Under the

assets-over form, the merged or

consolidated partnership that is

considered terminated under paragraph

(c)(1) of this section contributes all of its

assets and liabilities to the resulting

partnership in exchange for an interest

in the resulting partnership; and,

immediately thereafter, the terminated

partnership distributes interests in the

resulting partnership to its partners in

liquidation of the terminated

partnership.

(ii) Assets-up form. Despite the

partners’ transitory ownership of the

terminated partnership’s assets and

liabilities, the form of a partnership

merger or consolidation will be

respected for Federal income tax

purposes if the merged or consolidated

partnership that is considered

terminated under paragraph (c)(1) of

this section distributes its assets and

liabilities to its partners in liquidation

of the partners’ interests in the

terminated partnership; and,

immediately thereafter, the partners in

the terminated partnership contribute

the distributed assets and liabilities to

the resulting partnership in exchange

for interests in the resulting partnership.

(3) Sale of an interest in the merging

or consolidating partnership. In a

transaction characterized under the

assets-over form, a sale of an interest in

the terminated partnership to the

resulting partnership that occurs as part

of a merger or consolidation under

section 708(b)(2)(A), as described in

paragraph (c)(2)(i) of this section, will

be respected as a sale of a partnership

interest if the merger agreement (or

similar document) specifies that the

resulting partnership is purchasing

interests from a particular partner in the

merging or consolidating partnership

and the consideration that is transferred

for each interest sold. See section 741

and § 1.741–1 for determining the

selling partner’s gain or loss on the sale

or exchange of the partnership interest.

(4) Examples. The following examples

illustrate the rules in paragraphs (c)(1)

through (3) of this section:

Example 1. Partnership AB, in whose

capital and profits A and B each own a 50-

percent interest, and partnership CD, in

whose capital and profits C and D each own

a 50-percent interest, merge on September 30,

1999, and form partnership ABCD. Partners

A, B, C, and D are on a calendar year, and

partnership AB and partnership CD are also

on a calendar year. After the merger, the

partners have capital and profits interests as

follows: A, 30 percent; B, 30 percent; C, 20

percent; and D, 20 percent. Since A and B

together own an interest of more than 50

percent in the capital and profits of

partnership ABCD, such partnership shall be

considered a continuation of partnership AB

and shall continue to file returns on a

calendar year basis. Since C and D own an

interest of less than 50 percent in the capital

and profits of partnership ABCD, the taxable

year of partnership CD closes as of September

30, 1999, the date of the merger, and

partnership CD is terminated as of that date.

Partnership ABCD is required to file a return

for the taxable year January 1 to December

31, 1999, indicating thereon that, until

September 30, 1999, it was partnership AB.

Partnership CD is required to file a return for

its final taxable year, January 1 through

September 30, 1999.

Example 2. (i) Partnership X, in whose

capital and profits A owns a 40-percent

interest and B owns a 60-percent interest,

and partnership Y, in whose capital and

profits B owns a 60-percent interest and C

owns a 40-percent interest, merge on

September 30, 1999. The dollar-value of the

partnership X assets (net of liabilities) is

$100X, and the dollar-value of the

partnership Y assets (net of liabilities) is

$200X. The merger is accomplished under

state law by partnership Y contributing its

assets and liabilities to partnership X in

exchange for interests in partnership X, with

partnership Y then liquidating, distributing

interests in partnership X to B and C.

(ii) B, a partner in both partnerships prior

to the merger, owns a greater than 50-percent

interest in the resulting partnership following

the merger. Accordingly, because the dollarvalue of partnership Y’s assets (net of

liabilities) was greater than that of

partnership X’s, under paragraph (c)(1) of

this section, X will be considered to

terminate in the merger. As a result, even

though, for state law purposes, the

transaction was undertaken with partnership

Y contributing its assets and liabilities to

partnership X and distributing interests in

partnership X to its partners, pursuant to

paragraph (c)(2)(i) of this section, for Federal

income tax purposes, the transaction will be

treated as if partnership X contributed its

assets to partnership Y in exchange for

interests in partnership Y and then

liquidated, distributing interests in

partnership Y to A and B.

Example 3. (i) Partnership X and

partnership Y merge when the partners of

partnership X transfer their partnership X

interests to partnership Y in exchange for

partnership Y interests. Immediately

thereafter, partnership X liquidates into

partnership Y. The resulting partnership is

considered a continuation of partnership Y,

and partnership X is considered terminated.

(ii) The partnerships are treated as

undertaking the assets-over form described in

paragraph (c)(2)(i) of this section because the

partnerships undertook a form that is not the

assets-up form described in paragraph

(c)(2)(ii) of this section. Accordingly, for

Federal income tax purposes, partnership X

is deemed to contribute its assets and

liabilities to partnership Y in exchange for

interests in partnership Y; and, immediately

thereafter, partnership X is deemed to have

distributed the interests in partnership Y to

its partners in liquidation of their interests in

partnership X.

Example 4. (i) A, B, and C are partners in

partnership X. D, E, and F are partners in

Partnership Y. Partnership X and partnership

Y merge within the meaning of section

708(b)(2)(A), and the resulting partnership is

considered a continuation of partnership Y.

Partnership X is considered terminated.

Under state law, partnerships X and Y

undertake the assets-over form of paragraph

(c)(2)(i) of this section to accomplish the

partnership merger. C does not want to

become a partner in partnership Y, and

partnership X does not have the resources to

buy C’s interest before the merger. C,

partnership X, and partnership Y enter into

an agreement that specifies that partnership

Y will purchase C’s interest in partnership X

for $150 immediately before the merger. As

1578 Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules

part of the merger, partnership X receives

from partnership Y $150 that will be

distributed to C immediately before the

merger, and interests in partnership Y in

exchange for partnership X’s assets and

liabilities. Partnership X has made an

election under section 754.

(ii) Because the merger agreement satisfies

the requirements of paragraph (c)(3) of this

section, C will be treated as selling its

interest in partnership X to partnership Y for

$150 immediately before the merger. See

section 741 and § 1.741–1 to determine the

amount and character of C’s gain or loss on

the sale or exchange of its interest in

partnership X.

(iii) Because the merger agreement satisfies

the requirements of paragraph (c)(3) of this

section, partnership Y is considered to have

purchased C’s interest in partnership X for

$150 immediately before the merger. See

§ 1.704–1(b)(2)(iv)(l) for determining

partnership Y’s capital account in

partnership X. Partnership Y’s adjusted basis

of its interest in partnership X is determined

under section 742 and § 1.742–1. To the

extent any built-in gain or loss on section

704(c) property in partnership X would have

been allocated to C (including any allocations

with respect to property revaluations under

section 704(b) (reverse section 704(c)

allocations)), see section 704 and § 1.704–

3(a)(7) for determining the built-in gain or

loss or reverse section 704(c) allocations

apportionable to partnership Y. Similarly,

after the merger is completed, the built-in

gain or loss and reverse section 704(c)

allocations attributable to C’s interest are

apportioned to D, E, and F under section

704(c) and § 1.704-3(a)(7).

(iv) Because partnership X has an election

under section 754 in effect, partnership Y, as

a momentary partner in partnership X, will

have a special basis adjustment regarding the

basis of partnership X’s property under

section 743 and § 1.743–1. See section 743

and § 1.743–1 for determining the amount of

the adjustment. After the merger, the

adjustment is allocated solely to D, E, and

F—the partners in partnership Y immediately

before the merger.

(v) Under paragraph (c)(2)(i) of this section,

partnership X contributes assets and

liabilities attributable to the interests of A

and B to partnership Y in exchange for

interests in partnership Y; and, immediately

thereafter, partnership X distributes the

interests in partnership Y to A and B in

liquidation of their interests in partnership X.

At the same time, partnership X distributes

assets to partnership Y in liquidation of

partnership Y’s interest in partnership X.

(5) Prescribed form not followed in

certain circumstances. (i) If any

transactions described in paragraph

(c)(2) or (3) of this section are part of a

larger series of transactions, and the

substance of the larger series of

transactions is inconsistent with

following the form prescribed in such

paragraph, the Commissioner may

disregard such form, and may recast the

larger series of transactions in

accordance with their substance.

(ii) The following example illustrates

the rule in paragraph (c)(5) of this

section:

Example. A, B, and C are equal partners in

partnership ABC. ABC holds no section

704(c) property. D and E are equal partners

in partnership DE. B and C want to exchange

their interest in ABC for all of the interests

in DE. However, rather than exchanging

partnership interests, DE merges with ABC

by undertaking the assets-up form described

in paragraph (c)(2)(ii) of this section, with D

and E receiving title to the DE assets and then

contributing the assets to ABC in exchange

for interests in ABC. As part of a prearranged

transaction, the assets acquired from DE are

contributed to a new partnership, and the

interests in the new partnership are

distributed to B and C in complete

liquidation of their interests in ABC. The

merger and division in this example

represent a series of transactions that in

substance are an exchange of interests in

ABC for interests in DE. Even though

paragraph (c)(2)(ii) of this section provides

that the form of a merger will be respected

for Federal income tax purposes if the steps

prescribed under the asset-up form are

followed, and paragraph (d)(2)(i) of this

section provides a form that will be followed

for Federal income tax purposes in the case

of partnership divisions, these forms will not

be respected for Federal income tax purposes

under these facts, and the transactions will

be recast in accordance with their substance

as a taxable exchange of interests in ABC for

interests in DE.

(6) Effective date. This paragraph (c)

is applicable to partnership mergers

occurring on or after the date final

regulations are published in the Federal

Register.

(d) Division of a partnership—(1)

General rule. Upon the division of a

partnership into two or more

partnerships, any resulting partnership

(as defined in paragraph (d)(3)(iv) of this

section) or resulting partnerships shall

be considered a continuation of the

prior partnership (as defined in

paragraph (d)(3)(ii) of this section) if the

members of the resulting partnership or

partnerships had an interest of more

than 50 percent in the capital and

profits of the prior partnership. Any

other resulting partnership will not be

considered a continuation of the prior

partnership but will be considered a

new partnership. If the members of none

of the resulting partnerships owned an

interest of more than 50 percent in the

capital and profits of the prior

partnership, none of the resulting

partnerships will be considered a

continuation of the prior partnership

and the prior partnership will be

considered to have terminated. Where

members of a partnership which has

been divided into two or more

partnerships do not become members of

a resulting partnership which is

considered a continuation of the prior

partnership, such partner’s interests

shall be considered liquidated as of the

date of the division. The resulting

partnership that is regarded as

continuing shall file a return for the

taxable year of the partnership that has

been divided. The return shall state that

the partnership is a continuation of the

prior partnership and shall set forth

separately the respective distributive

shares of the partners for the periods

prior to and subsequent to the date of

division.

(2) Form of a division—(i) Assets-over

form. When a partnership divides into

two or more partnerships under

applicable jurisdictional law without

undertaking a form for the division, or

undertakes a form that is not described

in paragraph (d)(2)(ii) of this section, the

transaction will be characterized under

the assets-over form for Federal income

tax purposes.

(A) Assets-over form where at least

one resulting partnership is a

continuation of the prior partnership. In

a division under the assets-over form

where at least one resulting partnership

is a continuation of the prior

partnership, the divided partnership (as

defined in paragraph (d)(3)(i) of this

section) contributes certain assets and

liabilities to a recipient partnership (as

defined in paragraph (d)(3)(iv) of this

section) or recipient partnerships in

exchange for interests in such recipient

partnership or partnerships; and,

immediately thereafter, distributes the

interests in such recipient partnership

or partnerships to some or all of its

partners in partial or complete

liquidation of the partners’ interests in

the divided partnership.

(B) Assets-over form where none of

the resulting partnerships is a

continuation of the prior partnership. In

a division under the assets-over form

where none of the resulting partnerships

is a continuation of the prior

partnership, the prior partnership will

be treated as contributing all of its assets

and liabilities to new resulting

partnerships in exchange for interests in

the resulting partnerships; and,

immediately thereafter, the prior

partnership will be treated as

liquidating by distributing the interests

in the new resulting partnerships to the

prior partnership’s partners.

(ii) Assets-up form—(A) Assets-up

form where the partnership distributing

assets is a continuation of the prior

partnership. Despite the partners’

transitory ownership of some of the

prior partnership’s assets and liabilities,

the form of a partnership division will

be respected for Federal income tax

purposes if the divided partnership,

which by definition is a continuing

partnership, distributes certain assets

and liabilities to some or all of its

partners in partial or complete

liquidation of the partners’ interests in

Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules 1579

the divided partnership; and,

immediately thereafter, such partners

contribute the distributed assets and

liabilities to a recipient partnership or

partnerships in exchange for interests in

such recipient partnership or

partnerships.

(B) Assets-up form where none of the

resulting partnerships are a

continuation of the prior partnership. If

none of the resulting partnerships are a

continuation of the prior partnership,

then despite the partners’ transitory

ownership of some or all of the prior

partnership’s assets and liabilities, the

form of a partnership division will be

respected for Federal income tax

purposes if the prior partnership

distributes certain assets and liabilities

to some or all of its partners in partial

or complete liquidation of the partners’

interests in the prior partnership; and,

immediately thereafter, such partners

contribute the distributed assets and

liabilities to a resulting partnership or

partnerships in exchange for interests in

such resulting partnership or

partnerships. If the prior partnership

does not liquidate under the applicable

jurisdictional law, then with respect to

the assets and liabilities that, in form,

are not transferred to a new resulting

partnership, the prior partnership will

be treated as transferring these assets

and liabilities to a new resulting

partnership under the assets over form

described in paragraph (d)(2)(i)(B) of

this section.

(3) Definitions—(i) Divided

partnership—For purposes of paragraph

(d) of this section, the divided

partnership is the partnership which is

treated, for Federal income tax

purposes, as transferring the assets and

liabilities to the recipient partnership or

partnerships, either directly (under the

assets-over form) or indirectly (under

the assets-up form). If the resulting

partnership that, in form, transferred the

assets and liabilities in connection with

the division is a continuation of the

prior partnership, then such resulting

partnership will be treated as the

divided partnership. If a partnership

divides into two or more partnerships

and only one of the resulting

partnerships is a continuation of the

prior partnership, then the resulting

partnership that is a continuation of the

prior partnership will be treated as the

divided partnership. If a partnership

divides into two or more partnerships

without undertaking a form for the

division that is recognized under

paragraph (d)(2) of this section, or if the

resulting partnership that had, in form,

transferred assets and liabilities is not

considered a continuation of the prior

partnership, and more than one

resulting partnership is considered a

continuation of the prior partnership,

the continuing resulting partnership

with the assets having the greatest fair

market value (net of liabilities) will be

treated as the divided partnership.

(ii) Prior partnership—For purposes of

paragraph (d) of this section, the prior

partnership is the partnership subject to

division that exists under applicable

jurisdictional law before the division.

(iii) Recipient partnership—For

purposes of paragraph (d) of this

section, a recipient partnership is a

partnership that is treated as receiving,

for Federal income tax purposes, assets

and liabilities from a divided

partnership, either directly (under the

assets-over form) or indirectly (under

the assets-up form).

(iv) Resulting partnership—For

purposes of paragraph (d) of this

section, a resulting partnership is a

partnership resulting from the division

that exists under applicable

jurisdictional law after the division. For

example, where a prior partnership

divides into two partnerships, both

partnerships existing after the division

are resulting partnerships.

(4) Examples. The following examples

illustrate the rules in paragraphs (d)(1),

(2), and (3) of this section:

Example 1. Partnership ABCD is in the real

estate and insurance business. A owns a 40-

percent interest, and B, C, and D each owns

a 20-percent interest, in the capital and

profits of the partnership. The partnership

and the partners report their income on a

calendar year. They agree to separate the real

estate and insurance business as of November

1, 1999, and to form two partnerships;

partnership AB to take over the real estate

business, and partnership CD to take over the

insurance business. Because members of

resulting partnership AB owned more than a

50-percent interest in the capital and profits

of partnership ABCD (A, 40 percent, and B,

20 percent), partnership AB shall be

considered a continuation of partnership

ABCD. Partnership AB is required to file a

return for the taxable year January 1 to

December 31, 1999, indicating thereon that

until November 1, 1999, it was partnership

ABCD. Partnership CD is considered a new

partnership formed on November 1, 1999,

and is required to file a return for the taxable

year it adopts pursuant to section 706(b) and

the applicable regulations.

Example 2. (i) Partnership ABCD owns

properties W, X, Y, and Z, and divides into

partnership AB and partnership CD. Under

paragraph (d)(1) of this section, partnership

AB is considered a continuation of

partnership ABCD and partnership CD is

considered a new partnership. Partnership

ABCD distributes property Y to C and titles

property Y in C’s name. Partnership ABCD

distributes property Z to D and titles property

Z in D’s name. C and D then contribute

properties Y and Z, respectively, to

partnership CD in exchange for interests in

partnership CD. Properties W and X remain

in partnership AB.

(ii) Under paragraph (d)(2)(ii) of this

section, partnership ABCD will be treated as

following the assets-up form for Federal

income tax purposes.

Example 3. (i) Partnership ABCD owns

three parcels of property: property X, with a

value of $500; property Y, with a value of

$300; and property Z, with a value of $200.

A and B each own a 40-percent interest in

the capital and profits of partnership ABCD,

and C and D each own a 10 percent interest

in the capital and profits of partnership

ABCD. On November 1, 1999, partnership

ABCD divides into three partnerships (AB1,

AB2, and CD) by contributing property X to

a newly formed partnership (AB1) and

distributing all interests in such partnership

to A and B as equal partners, and by

contributing property Z to a newly formed

partnership (CD) and distributing all interests

in such partnership to C and D as equal

partners in exchange for all of their interests

in partnership ABCD.

(ii) Partnerships AB1 and AB2 both are

considered a continuation of partnership

ABCD, while partnership CD is considered a

new partnership formed on November 1,

1999. Under paragraph (d)(2)(i)(A) of this

section, partnership ABCD will be treated as

following the assets-over form, with

partnership ABCD contributing property X to

partnership AB1 and property Z to

partnership CD, and distributing the interests

in such partnerships to the designated

partners.

Example 4. (i) The facts are the same as in

example 3, except that partnership ABCD

divides into three partnerships by operation

of state law, without undertaking a form.

(ii) Under the last sentence of paragraph

(d)(3)(i) of this section, partnership AB1 will

be treated as the resulting partnership that is

the divided partnership. Under paragraph

(d)(2)(i)(A) of this section, partnership ABCD

will be treated as following the assets-over

form, with partnership ABCD contributing

property Y to partnership AB2 and property

Z to partnership CD, and distributing the

interests in such partnerships to the

designated partners.

Example 5. (i) The facts are the same as in

example 3, except that partnership ABCD

divides into three partnerships by

contributing property X to newly-formed

partnership AB1 and property Y to newlyformed partnership AB2 and distributing all

interests in each partnership to A and B in

exchange for all of their interests in

partnership ABCD.

(ii) Because resulting partnership CD is not

a continuation of the prior partnership

(partnership ABCD), partnership CD cannot

be treated, for Federal income tax purposes,

as the partnership that transferred assets (i.e.,

the divided partnership), but instead must be

treated as a recipient partnership. Under the

last sentence of paragraph (d)(3)(i) of this

section, partnership AB1 will be treated as

the resulting partnership that is the divided

partnership. Under paragraph (d)(2)(i)(A) of

this section, partnership ABCD will be

treated as following the assets-over form,

with partnership ABCD contributing property

Y to partnership AB2 and property Z to

1580 Federal Register / Vol. 65, No. 7 / Tuesday, January 11, 2000 / Proposed Rules

partnership CD, and distributing the interests

in such partnerships to the designated

partners.

Example 6. (i) Partnership ABCDE owns

Blackacre, Whiteacre, and Redacre, and

divides into partnership AB, partnership CD,

and partnership DE. Under paragraph (d)(1)

of this section, partnership ABCDE is

considered terminated (and, hence, none of

the resulting partnerships are a continuation

of the prior partnership) because none of the

members of the new partnerships

(partnership AB, partnership CD, and

partnership DE) owned an interest of more

than 50 percent in the capital and profits of

partnership ABCDE.

(ii) Partnership ABCDE distributes

Blackacre to A and B and titles Blackacre in

the names of A and B. A and B then

contribute Blackacre to partnership AB in

exchange for interests in partnership AB.

Partnership ABCDE will be treated as

following the assets-up form described in

paragraph (d)(2)(ii)(B) of this section for

Federal income tax purposes.

(iii) Partnership ABCDE distributes

Whiteacre to C and D and titles Whiteacre in

the names of C and D. C and D then

contribute Whiteacre to partnership CD in

exchange for interests in partnership CD.

Partnership ABCDE will be treated as

following the assets-up form described in

paragraph (d)(2)(ii)(B) of this section for

Federal income tax purposes.

(iv) Partnership ABCDE does not liquidate

under state law so that, in form, the assets

in new partnership DE are not considered to

have been transferred under state law.

Partnership ABCDE will be treated as

undertaking the assets-over form described in

paragraph (d)(2)(i)(B) of this section for

Federal income tax purposes with respect to

the assets of partnership DE. Thus,

partnership ABCDE will be treated as

contributing Redacre to partnership DE in

exchange for interests in partnership DE; and,

immediately thereafter, partnership ABCDE

will be treated as distributing interests in

partnership DE to D and E in liquidation of

their interests in partnership ABCDE.

Partnership ABCDE then terminates.

(5) Prescribed form not followed in

certain circumstances. If any

transactions described in paragraph

(d)(2) of this section are part of a larger

series of transactions, and the substance

of the larger series of transactions is

inconsistent with following the form

prescribed in such paragraph, the

Commissioner may disregard such form,

and may recast the larger series of

transactions in accordance with their

substance.

(6) Effective date. This paragraph (d)

is applicable to partnership divisions

occurring on or after the date final

regulations are published in the Federal

Register.

Par. 3. Section 1.743–1 is amended by

adding two sentences to the end of

paragraph (h)(1).

§ 1.743–1 Optional adjustment to basis of

partnership property.

* * * * *

(h) * * *

(1) * * * When a resulting

partnership that is considered a

continuation of a merged or

consolidated partnership under section

708(b)(2)(A) has a basis adjustment in

property held by the merged or

consolidated partnership that is

considered terminated under § 1.708–

1(c)(1) (as a result of the resulting

partnership acquiring an interest in

such merged or consolidated

partnership, see § 1.708–1(c)(3)), the

resulting partnership will continue to

have the same basis adjustments with

respect to property distributed (see

§ 1.708–1(c)(4), Example 4(v)) by the

terminated partnership to the resulting

partnership, regardless of whether the

resulting partnership makes a section

754 election. The portion of the

resulting partnership’s adjusted basis in

its assets attributable to the basis

adjustment with respect to the property

distributed by the terminating

partnership must be segregated and

allocated solely to the partners who

were partners in the resulting

partnership immediately before the

merger or consolidation.

* * * * *

Par. 4. Section 1.752–1 is amended as

follows:

1. A sentence is added to the end of

paragraph (f).

2. The current Example in paragraph

(g) is redesignated as Example 1.

3. Example 2 is added in paragraph

(g).

§ 1.752–1 Treatment of partnership

liabilities.

* * * * *

(f) * * * When two or more

partnerships merge or consolidate under

section 708(b)(2)(A), as described in

§ 1.708–1(c)(2)(i), increases and

decreases in partnership liabilities

associated with the merger or

consolidation are netted by the partners

in the terminating partnership and the

resulting partnership to determine the

effect of the merger under section 752.

(g) * * *

Example 1. * * *

Example 2. Merger or consolidation of

partnerships holding property encumbered

by liabilities. (i) B owns a 70 percent interest

in partnership T. Partnership T’s sole asset is

property X, which is encumbered by a $900

liability. Partnership T’s adjusted basis in

property X is $600, and the value of property

X is $1,000. B’s adjusted basis in its

partnership T interest is $420. B also owns

a 20 percent interest in partnership S.

Partnership S’s sole asset is property Y,

which is encumbered by a $100 liability.

Partnership S’s adjusted basis in property Y

is $200, the value of property Y is $1,000,

and B’s adjusted basis in its partnership S

interest is $40.

(ii) Partnership T and partnership S merge

under section 708(b)(2)(A). Under section

708(b)(2)(A) and § 1.708–1(c)(1), partnership

T is considered terminated and the resulting

partnership is considered a continuation of

partnership S. Partnerships T and S

undertake the form described in § 1.708–

1(c)(2)(i) for the partnership merger. Under

§ 1.708–1(c)(2)(i), partnership T contributes

property X and its $900 liability to

partnership S in exchange for an interest in

partnership S. Immediately thereafter,

partnership T distributes the interests in

partnership S to its partners in liquidation of

their interests in partnership T. B owns a 25

percent interest in partnership S after

partnership T distributes the interests in

partnership S to B.

(iii) Under paragraph (f) of this section, B

nets the increases and decreases in its share

of partnership liabilities associated with the

merger of partnership T and partnership S.

Before the merger, B’s share of partnership

liabilities was $650 (B had a $630 share of

partnership liabilities in partnership T and a

$20 share of partnership liabilities in

partnership S immediately before the

merger). B’s share of S’s partnership

liabilities after the merger is $250 (25 percent

of S’s total partnership liabilities of $1,000).

Accordingly, B has a $400 net decrease in its

share of S’s partnership liabilities. Thus, B is

treated as receiving a $400 distribution from

partnership S under section 752(b). Because

B’s adjusted basis in its partnership S interest

before the deemed distribution under section

752(b) is $460 ($420 + $40), B will not

recognize gain under section 731. After the

merger, B’s adjusted basis in its partnership

S interest is $60.

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 00–14 Filed 1–10–00; 8:45 am]

BILLING CODE 4830–01–U

DEPARTMENT OF THE INTERIOR

Minerals Management Service

30 CFR Part 206

RIN 1010–AC09

Workshops on Further Supplementary

Proposed Rule—Establishing Oil Value

for Royalty Due on Federal Leases

AGENCY: Minerals Management Service,

Interior.

ACTION: Notice of cancellation and

rescheduling of public workshop.

SUMMARY: The Minerals Management

Service (MMS) is giving notice that it is

canceling the public workshop for

Albuquerque, New Mexico, concerning

the further supplementary proposed