26580 Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Rules and Regulations 

Dated: June 4, 2018. 

Leslie Kux, 

Associate Commissioner for Policy. 

[FR Doc. 2018–12339 Filed 6–7–18; 8:45 am] 

BILLING CODE 4164–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9833] 

RIN 1545–BO43 

Partnership Transactions Involving 

Equity Interests of a Partner 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final rule. 

SUMMARY: This document contains final 

regulations that prevent a corporate 

partner from avoiding corporate-level 

gain through transactions with a 

partnership involving equity interests of 

the partner or certain related entities. 

This document also contains final 

regulations that allow consolidated 

group members that are partners in the 

same partnership to aggregate their 

bases in stock distributed by the 

partnership for the purpose of limiting 

the application of rules that might 

otherwise cause basis reduction or gain 

recognition. This document also 

contains final regulations that may also 

require certain corporations that engage 

in gain elimination transactions to 

reduce the basis of corporate assets or to 

recognize gain. These final regulations 

affect partnerships and their partners. 

DATES: 

Effective Date: These final regulations 

are effective on June 8, 2018. 

Applicability Date: These final 

regulations are applicable on or after 

June 12, 2015. 

FOR FURTHER INFORMATION CONTACT: 

Concerning the final regulations, Kevin 

I. Babitz, (202) 317–6852. 

SUPPLEMENTARY INFORMATION: 

Background 

1. Overview 

On June 12, 2015, the Department of 

the Treasury (and the IRS published 

final and temporary regulations (TD 

9722) under section 337(d) of the 

Internal Revenue Code (Code) in the 

Federal Register (80 FR 33402). On July 

8, 2015, corrections to TD 9722 were 

published in the Federal Register (80 

FR 38940–38941) (together with TD 

9722, the temporary regulations). The 

temporary regulations expire on June 

11, 2018. 

A notice of proposed rulemaking 

(REG–149518–03) withdrawing 

proposed regulations under section 

337(d) published in 1992, and 

proposing new proposed regulations by 

cross-reference to the temporary 

regulations, was published in the 

Federal Register (80 FR 33451) on the 

same date as TD 9722. Additionally, on 

June 12, 2015, the Treasury Department 

and the IRS published proposed 

regulations (REG–138759–14) under 

section 732(f) in the Federal Register 

(80 FR 33452) (together with the 2015 

proposed regulations under section 

337(d), the 2015 regulations). 

The Treasury Department and the IRS 

received one comment letter in response 

to the 2015 regulations. Except as 

described below, the commenter largely 

supported the 2015 regulations while 

recommending some minor 

modifications and clarifications to the 

2015 regulations under both section 

337(d) and section 732(f). The comment 

letter is discussed in detail in the 

Explanation of Provisions section of this 

preamble. 

After considering this comment letter, 

this Treasury decision adopts as final 

regulations the rules set forth in the 

2015 regulations under section 337(d) 

(with only minor, nonsubstantive 

clarifications in response to the 

commenter’s request for additional 

certainty regarding certain collateral 

effects) and section 732(f) (without any 

change). However, the Treasury 

Department and the IRS are considering 

publishing a new notice of proposed 

rulemaking to propose more substantive 

amendments to the final regulations 

under section 337(d) and to allow for 

additional public comment with respect 

to these more substantive proposals in 

response to the comment letter, further 

reflection by the Treasury Department 

and the IRS, and concerns raised by 

practitioners. 

2. Regulations Under Section 337(d) 

A. Background 

In General Utilities & Operating Co. v. 

Helvering, 296 U.S. 200 (1935), the 

Supreme Court held that corporations 

generally could distribute appreciated 

property to their shareholders without 

the recognition of any corporate level 

gain (the General Utilities doctrine). 

Beginning with legislation in 1969 and 

culminating in the Tax Reform Act of 

1986, Public Law 99–514 (100 Stat. 

2085) (the Act), Congress repealed the 

General Utilities doctrine by enacting 

section 336(a) to apply gain and loss 

recognition to liquidating distributions. 

Under current law, sections 311(b) 

and 336(a) require a corporation that 

distributes appreciated property to its 

shareholders to recognize gain 

determined as if the property were sold 

to the shareholders for its fair market 

value. Additionally, section 631 of the 

Act added section 337(d) to permit the 

Secretary to prescribe regulations that 

are necessary or appropriate to carry out 

the purposes of the General Utilities 

repeal, ‘‘including regulations to ensure 

that [the repeal of the General Utilities 

doctrine] may not be circumvented 

through the use of any provision of law 

or regulations.’’ 

After the enactment of sections 311(b) 

and 337(d), the Treasury Department 

and the IRS became aware of 

transactions in which taxpayers used a 

partnership to postpone or avoid 

completely gain generally required to be 

recognized under section 311(b). In one 

example of this transaction, a 

corporation entered into a partnership 

and contributed appreciated property. 

The partnership then acquired stock of 

that corporate partner, and later made a 

liquidating distribution of this stock to 

the corporate partner. Under section 

731(a), the corporate partner did not 

recognize gain on the partnership’s 

distribution of its stock. By means of 

this transaction, the corporation had 

disposed of the appreciated property it 

formerly held and had acquired its own 

stock, permanently avoiding its gain in 

the appreciated property. If the 

corporation had directly exchanged the 

appreciated property for its own stock, 

section 311(b) would have required the 

corporation to recognize gain upon the 

exchange. 

In response to these types of abusive 

transactions, the Treasury Department 

and the IRS issued Notice 89–37, 1989– 

1 CB 679, on March 9, 1989. Notice 89– 

37 announced that future regulations 

under section 337(d) would address the 

use of partnerships to avoid the repeal 

of the General Utilities doctrine. 

On December 15, 1992, the Treasury 

Department and the IRS published a 

notice of proposed rulemaking under 

section 337(d) (PS–91–90, REG–208989– 

90, 1993–1 CB 919) in the Federal 

Register (57 FR 59324) addressing 

abusive partnership transactions 

involving stock of a corporate partner 

(the 1992 proposed regulations). The 

1992 proposed regulations set forth a 

deemed redemption rule and a separate 

distribution rule to prevent a corporate 

partner from avoiding corporate-level 

gain through transactions with a 

partnership involving stock of the 

corporate partner, stock of the partner’s 

affiliate, and other equity interests in 

the corporate partner or affiliate. The 

1992 proposed regulations treated a 

corporation as an affiliate of a partner at 


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the time of a deemed redemption or 

distribution by the partnership if, 

immediately thereafter, the partner and 

corporation were members of an 

affiliated group as defined in section 

1504(a) without regard to section 

1504(b) (section 337(d) affiliation). On 

January 19, 1993, the Treasury 

Department and the IRS issued Notice 

93–2, 1993–1 CB 292, which stated that 

the 1992 proposed regulations would be 

amended to limit the application of the 

regulations to transactions in which 

section 337(d) affiliation existed 

immediately before the deemed 

redemption or distribution. The 

Treasury Department and the IRS 

received comments on the 1992 

proposed regulations, and adopted a 

number of these comments in the 2015 

regulations. 

B. The 2015 Regulations 

The 2015 regulations under section 

337(d) set forth a rule (the deemed 

redemption rule) that was aimed at 

protecting the repeal of the General 

Utilities doctrine. The 2015 regulations 

provided that certain transactions create 

the economic effect of an exchange of 

appreciated property for Stock of the 

Corporate Partner and, to tax such 

exchange appropriately, the deemed 

redemption rule provided that a 

Corporate Partner recognizes gain at the 

time of, and to the extent that, any 

transaction (or series of transactions) 

has the economic effect of an exchange 

by the partner of its interest in 

appreciated property for an interest in 

Stock of the Corporate Partner owned, 

acquired, or distributed by the 

partnership. (The terms Corporate 

Partner and Stock of the Corporate 

Partner are defined in section 1.B.i. of 

the Explanation of Provisions.) 

The 2015 regulations did not adopt 

the separate distribution rule set forth in 

the 1992 proposed regulations. Instead, 

the 2015 regulations applied the 

deemed redemption rule to partnership 

distributions of Stock of the Corporate 

Partner to the Corporate Partner as 

though the partnership amended its 

agreement, immediately before the 

distribution, to allocate 100 percent of 

the distributed stock to the Corporate 

Partner. The 2015 regulations also set 

forth de minimis and inadvertence 

exceptions to the deemed redemption 

rule. 

3. Regulations Under Section 732(f) 

A. Section 732(f) 

Section 538 of the Ticket to Work and 

Work Incentives Improvement Act of 

1999, Public Law 106–170 (113 Stat. 

1860) (December 17, 1999), added 

section 732(f) generally effective for 

distributions of made after July 14, 

1999. Section 732(f) provides that if (1) 

a corporate partner receives a 

distribution from a partnership of stock 

in another corporation (distributed 

corporation); (2) the corporate partner 

has control of the distributed 

corporation, defined as ownership of 

stock meeting the requirements of 

section 1504(a)(2), immediately after the 

distribution or at any time thereafter 

(control requirement); and (3) the 

partnership’s basis in the stock 

immediately before the distribution 

exceeded the corporate partner’s basis 

in the stock immediately after the 

distribution, then the basis of the 

distributed corporation’s property must 

be reduced by this excess. The amount 

of this reduction is limited to the 

amount by which the sum of the 

aggregate adjusted basis of property and 

the amount of money of the distributed 

corporation exceeds the corporate 

partner’s adjusted basis in the stock of 

the distributed corporation. The 

corporate partner must recognize gain to 

the extent that the basis of the 

distributed corporation’s property 

cannot be reduced. 

Congress enacted section 732(f) due to 

concerns that a corporate partner could 

otherwise negate the effects of a basis 

step-down to distributed property 

required under section 732(b) by 

applying the step-down against the basis 

of the stock of the distributed 

corporation. 

For example, assume a corporate 

partner has a partnership interest with 

zero basis and receives a partnership 

distribution of high-basis stock in a 

corporation. The corporate partner’s 

basis in the distributed corporation’s 

stock is reduced to zero under section 

732(a) or section 732(b). If the 

partnership has elected under section 

754, then the basis of other partnership 

property is increased by an equal 

amount under section 734(b). The 

section 732 basis decrease and the 

section 734(b) basis increase generally 

offset each other. However, if the 

corporate partner owned stock in the 

distributed corporation that satisfied the 

control requirement, the corporate 

partner could liquidate the distributed 

corporation under section 332, and 

section 334(b) would generally provide 

for a carryover basis in the distributed 

corporation’s property received by the 

corporate partner in the liquidation. 

Taken together, these rules could permit 

the partnership to increase the basis of 

its retained property without an 

equivalent basis reduction following the 

liquidation of the distributed 

corporation. Section 732(f) generally 

precludes this result by requiring that 

either the distributed corporation must 

reduce the basis of its property or the 

corporate partner must recognize gain 

(to the extent the distributed 

corporation is unable to reduce the basis 

of its property). Thus, section 732(f) 

generally ensures that any basis increase 

under section 734(b) is offset. 

Section 732(f)(8) grants the Secretary 

authority to prescribe regulations that 

may be necessary to carry out the 

purposes of this subsection, including 

regulations to avoid double counting 

and to prevent the abuse of such 

purposes. 

B. The 2015 Regulations 

In the preamble to the 2015 

regulations under section 732(f), the 

Treasury Department and the IRS stated 

that the application of section 732(f) 

was too broad in some circumstances 

and too narrow in others. Specifically, 

the application was overbroad because 

section 732(f) could require basis 

reduction or gain recognition even 

though that basis reduction or gain 

recognition did not further the purposes 

of section 732(f). Alternatively, the 

application was too narrow because 

corporate partners could 

inappropriately avoid the purposes of 

section 732(f) by engaging in 

transactions that allow corporate 

partners to receive property held by a 

distributed corporation without 

reducing the basis of that property to 

account for basis reductions under 

section 732(b) made when the 

partnership distributed stock of the 

distributed corporation to the corporate 

partner. 

To address these concerns, the 2015 

regulations set forth specific rules 

governing the application of section 

732(f) in two specific sets of 

circumstances. The first rule would 

permit consolidated group members to 

aggregate the bases of their respective 

interests in the same partnership, in 

certain circumstances, for section 732(f) 

purposes. The second rule would 

restrict corporate partners from entering 

into certain transactions or a series of 

transactions (gain elimination 

transactions), such as a distribution 

followed by a reorganization under 

section 368(a), that might eliminate gain 

in the stock of a distributed corporation 

while avoiding the effects of a basis 

step-down under section 732(f) because 

the control requirement would not be 

immediately satisfied. 

In addition, the 2015 regulations 

under section 732(f) required taxpayers 

to apply those rules to tiered 

partnerships in a manner consistent 

with the purpose of section 732(f). 


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Explanation of Provisions 

1. Final Regulations Under Section 

337(d) 

A. Generally 

The final regulations under section 

337(d) provide that the purpose of the 

regulations is to prevent corporate 

taxpayers from using a partnership to 

circumvent gain required to be 

recognized under section 311(b) or 

section 336(a). These final regulations, 

including the rules governing the 

amount, timing, and character of 

recognized gain, must be applied in a 

manner consistent with, and which 

reasonably carries out, this purpose. 

These final regulations apply when a 

partnership, either directly or indirectly, 

owns, acquires, or distributes Stock of 

the Corporate Partner (as defined in 

§ 1.337(d)–3(c)(2) of these final 

regulations). Under these final 

regulations, a Corporate Partner (as 

defined at § 1.337(d)–3(c)(1) of these 

final regulations) may recognize gain 

when it is treated as acquiring or 

increasing its interest in Stock of the 

Corporate Partner held by a partnership 

in exchange for appreciated property in 

a manner that avoids gain recognition 

under section 311(b) or section 336(a). 

These final regulations also provide 

exceptions under which a Corporate 

Partner is not required to recognize gain. 

B. Scope and Definitions 

i. Corporate Partner and Stock of the 

Corporate Partner 

The 2015 regulations defined a 

Corporate Partner as a person that holds 

or acquires an interest in a partnership 

and that is classified as a corporation for 

federal income tax purposes. The 2015 

regulations defined Stock of the 

Corporate Partner expansively to 

include the Corporate Partner’s stock, or 

other equity interests, including 

options, warrants, and similar interests, 

in the Corporate Partner, or in a 

corporation that controls the Corporate 

Partner within the meaning of section 

304(c), except that section 318(a)(1) and 

(3) shall not apply (referred to in this 

Explanation of Provisions as a 

Controlling Corporation). Stock of the 

Corporate Partner also included 

interests in any entity to the extent that 

the value of the interest is attributable 

to Stock of the Corporate Partner. 

The commenter asked whether an 

equity interest issued by a third party on 

a Corporate Partner’s stock, such as an 

option issued by a bank on the 

Corporate Partner’s stock, was 

considered Stock of the Corporate 

Partner. The Treasury Department and 

the IRS confirm that all options, 

warrants, and other similar interests 

issued by third parties on a Corporate 

Partner’s stock, a Controlling 

Corporation’s stock, or any interests in 

any entity to the extent that the value of 

the interest is attributable to Stock of the 

Corporate Partner, are Stock of the 

Corporate Partner under both the 

temporary regulations and these final 

regulations. No inference is intended 

regarding whether options, warrants, 

and other similar interests are subject to 

section 1032 where they create an 

equity interest in the Stock of the 

Corporate Partner. 

ii. Stock of the Corporate Partner: 

Controlling Corporations 

The 2015 regulations provided that 

Stock of the Corporate Partner includes 

the stock (or other equity interests) in a 

Controlling Corporation. The 

commenter asked whether stock in a 

Controlling Corporation wholly 

constitutes Stock of the Corporate 

Partner or only constitutes Stock of the 

Corporate Partner to the extent the value 

of the Controlling Corporation’s stock is 

attributable to that corporation’s interest 

in the Corporate Partner. These final 

regulations clarify that it is intended 

that stock (or any other equity interest) 

in a Controlling Corporation will wholly 

constitute Stock of the Corporate Partner 

irrespective of the ratio of the 

Controlling Corporation’s interest in the 

Corporate Partner to the Controlling 

Corporation’s total assets. In response to 

this comment, the final regulations also 

include a new example to clearly 

illustrate this point. See Example 2 of 

§ 1.337(d)–3(h) in these final 

regulations. 

With respect to the rule that Stock of 

the Corporate Partner includes an 

interest in an entity to the extent that 

the value of the interest is attributable 

to the Stock of the Corporate Partner 

(Value Rule), the commenter asked that, 

in cases in which the entity is not 

controlled by the Corporate Partner and 

which is not a Controlling Corporation, 

that a limitation be added that the 

interest in the entity would not be 

treated as Stock of the Corporate Partner 

if less than 20 percent of the assets of 

the entity consisted of Stock of the 

Corporate Partner. The Treasury 

Department and the IRS agree with the 

commenter that the Value Rule in the 

2015 regulations could be overbroad in 

certain situations but decline to adopt 

the commenter’s specific suggestion in 

these final regulations because such a 

rule would be too generous and could 

permit taxpayers to structure 

transactions that would contravene the 

purpose of section 337(d) and these 

regulations. However, the Treasury 

Department and the IRS are considering 

publishing new proposed regulations to 

limit the application of the Value Rule 

to entities that are not Controlling 

Corporations but which own, directly or 

indirectly, 5 percent or more of the 

stock, by vote or value, of the Corporate 

Partner and clarifying how taxpayers 

would determine what portion of the 

value of the interest in the entity is 

attributable to Stock of the Corporate 

Partner. 

iii. Stock of the Corporate Partner: 

Attribution 

The 2015 regulations defined Stock of 

the Corporate Partner to include stock in 

a Controlling Corporation. The 2015 

regulations employed the section 304(c) 

definition of control, which generally 

requires the ownership of stock with 

either 50 percent of the voting power in 

the corporation or 50 percent of the 

value of the corporation. While section 

304(c) incorporates the constructive 

ownership rules of section 318(a) with 

some modifications, the 2015 

regulations excluded the application of 

sections 318(a)(1) and (3) from its 

definition of control. 

The commenter agreed with 

excluding section 318(a)(3) attribution 

from the application of section 304(c) 

under the 2015 regulations, but noted 

that it may be inappropriate to exclude 

section 318(a)(1) family attribution. The 

commenter suggested that families 

could invoke this exclusion to structure 

partnerships in such a way to avoid 

these regulations but which would be 

transactions that should otherwise be 

subject to these final regulations. The 

Treasury Department and the IRS agree 

that excluding family attribution under 

section 318(a)(1) could produce 

inappropriate results. Additionally, the 

Treasury Department and the IRS have 

also determined that taxpayers could 

structure transactions designed to take 

advantage of the lack of section 

318(a)(3) attribution. Therefore, the 

Treasury Department and the IRS are 

considering publishing new proposed 

regulations to further modify the 

definition of Stock of the Corporate 

Partner so that it would no longer 

exclude attribution under sections 

318(a)(1) and (3) when determining 

whether an interest in an entity is Stock 

of the Corporate Partners under section 

304(c), but which would limit the 

proposed expanded scope of section 

304(c) control to entities that own, 

directly or indirectly, an interest in the 

Corporate Partner. 


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iv. Stock of the Corporate Partner: 

Related-Party Partnerships 

The 2015 regulations provided an 

exception from the definition of Stock of 

the Corporate Partner in the case of 

certain related-party partnerships. 

Under this exception, Stock of the 

Corporate Partner did not include any 

stock or other equity interests held or 

acquired by a partnership if all interests 

in the partnership’s capital and profits 

are held by members of an affiliated 

group defined in section 1504(a) that 

includes the Corporate Partner 

(Affiliated Group Exception). 

The commenter suggested that the 

final regulations extend the Affiliated 

Group Exception to partnerships in 

which a high percentage, but not all, of 

its interests are owned by affiliated 

group members. The commenter 

asserted that, under these facts, there 

would be no reason to require gain 

recognition. The commenter also 

recommended that the final regulations 

extend the affiliated group exception to 

lower-tier partnerships owned by one or 

more upper-tier partnerships, if the 

upper-tier partnerships are entirely 

owned by members of an affiliated 

group that includes the Corporate 

Partner. 

After further study of this issue, and 

in light of the other exceptions to the 

deemed redemption rule, the Treasury 

Department and the IRS decline to 

adopt these comments because even 

without such extensions the Affiliated 

Group Exception could permit 

inappropriate elimination of corporate 

level built-in gain. For example— 

Assume that P, a corporation, owns all of 

the stock of S1, and S1 owns all of the stock 

of CP. P, S1, and CP are members of an 

affiliated group. P and CP form a 50–50 

partnership, where CP contributes an 

appreciated asset to the partnership, and P 

contributes S1 stock with a basis equal to fair 

market value. After seven years, the 

partnership liquidates and distributes the S1 

stock to CP and the appreciated asset to P. 

At that time, the asset may be sold outside 

of the group with an artificially increased 

basis. While the built-in gain that was in the 

asset now is preserved in the S1 stock held 

by CP, the group may permanently eliminate 

the gain without tax by causing CP to 

liquidate. CP would receive nonrecognition 

treatment on distribution of the S1 stock to 

S1 under section 332, and S1 would receive 

nonrecognition treatment on the receipt of its 

own stock under section 1032. Thus, the 

liquidation of CP permanently eliminates the 

built-in gain on the appreciated asset that 

attached to the hook stock CP held in S1 after 

the liquidation of the partnership. 

Although these final regulations 

retain the Affiliated Group Exception, 

the Treasury Department and the IRS 

are considering publishing new 

proposed regulations to remove the 

Affiliated Group Exception because this 

exception can permit corporations to 

engage in transactions with partnerships 

to eliminate permanently the built-in 

gain on appreciated assets or otherwise 

to avoid the purposes of General 

Utilities repeal and these regulations. 

v. Section 337(d) Transactions 

The 2015 regulations provided that, 

for partnerships that hold Stock of the 

Corporate Partner, the 2015 regulations 

apply to a transaction (or a series of 

transactions) that is a ‘‘Section 337(d) 

Transaction.’’ The 2015 regulations 

defined a Section 337(d) Transaction as 

a transaction (or series of transactions) 

that has the effect of an exchange by a 

Corporate Partner of its interest in 

appreciated property for an interest in 

Stock of the Corporate Partner owned, 

acquired, or distributed by a 

partnership. For example, a Section 

337(d) Transaction may occur if: (i) A 

Corporate Partner contributes 

appreciated property to a partnership 

that owns Stock of the Corporate 

Partner; (ii) a partnership acquires Stock 

of the Corporate Partner; (iii) a 

partnership that owns Stock of the 

Corporate Partner distributes 

appreciated property to a partner other 

than the Corporate Partner; (iv) a 

partnership distributes Stock of the 

Corporate Partner to the Corporate 

Partner; or (v) a partnership agreement 

is amended in a manner that increases 

a Corporate Partner’s interest in the 

Stock of the Corporate Partner 

(including in connection with a 

contribution to, or distribution from, a 

partnership). 

In certain circumstances, a 

partnership’s acquisition of Stock of the 

Corporate Partner does not have the 

effect of an exchange of appreciated 

property for that stock. For example, if 

a partnership with an operating 

business uses the cash generated in that 

business to purchase Stock of the 

Corporate Partner, the deemed 

redemption rule does not apply to the 

stock purchase because the Corporate 

Partner’s share in appreciated property 

has not been reduced, and thus no 

exchange has occurred. The Treasury 

Department and the IRS acknowledge 

that such stock acquisitions would not 

trigger the deemed redemption rule. The 

Treasury Department and the IRS note, 

however, that because of the 

administrative difficulties in tracing the 

source of cash used to acquire Corporate 

Partner stock, taxpayers wishing to 

invoke this exception must maintain 

appropriate records or other 

documentation to affirmatively 

demonstrate that the consideration used 

in the exchange to acquire the Stock of 

the Corporate Partner at issue came from 

operating cashflow. 

The commenter asked whether the 

2015 regulations encompassed other 

types of acquisitions of Stock of the 

Corporate Partner for cash, and 

requested that the final regulations 

include examples of transactions that do 

not have the effect of an exchange of 

appreciated property for Stock of the 

Corporate Partner. The Treasury 

Department and the IRS considered this 

comment, but decline to add additional 

examples because those examples 

would go beyond the scope of these 

final regulations which is to prevent the 

exchange of appreciated property for 

Stock of the Corporate Partner. 

C. Deemed Redemption Rule 

i. Generally 

The 2015 regulations provided that if 

a transaction is a Section 337(d) 

Transaction, a Corporate Partner must 

recognize gain under the deemed 

redemption rule. To determine the 

amount of gain, the Corporate Partner 

must first determine the amount of 

appreciated property (other than Stock 

of the Corporate Partner) effectively 

exchanged for Stock of the Corporate 

Partner (by value) and then calculate the 

amount of taxable gain recognized. 

The deemed redemption rule applies 

only to the extent that the transaction 

has the effect of an exchange by the 

Corporate Partner of its interest in 

appreciated property for Stock of the 

Corporate Partner. Thus, this rule does 

not apply to the extent a transaction has 

the effect of an exchange by a Corporate 

Partner of non-appreciated property for 

Stock of the Corporate Partner or has the 

effect of an exchange by a Corporate 

Partner of appreciated property for 

property other than Stock of the 

Corporate Partner. 

The 2015 regulations set forth general 

principles that apply in determining the 

amount of appreciated property 

effectively exchanged for Stock of the 

Corporate Partner. These general 

principles require that the Corporate 

Partner’s economic interest with respect 

to both Stock of the Corporate Partner 

and all other appreciated property of the 

partnership be determined based on all 

facts and circumstances, including the 

allocation and distribution rights set 

forth in the partnership agreement. 

A Corporate Partner must recognize 

gain under the 2015 regulations even if 

the Section 337(d) Transaction would 

not otherwise change the Corporate 

Partner’s allocable share of gain under 

section 704(c). For example, if a 

Corporate Partner contributes 


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appreciated property to a newly-formed 

partnership and an individual 

contributes cash that the partnership 

subsequently uses to purchase Stock of 

the Corporate Partner, then the purchase 

of the stock is a Section 337(d) 

Transaction even though the Corporate 

Partner’s allocable share of gain in the 

appreciated property under section 

704(c) is the same before and after the 

purchase. See Example 4 of § 1.337(d)– 

3(h) in these final regulations. 

The Treasury Department and the IRS 

did not receive comments on this 

general deemed redemption rule. 

Therefore, these final regulations adopt 

the rule set forth in the 2015 

regulations. 

ii. Subsequent Transactions 

Under the 2015 regulations, the 

deemed redemption rule did not apply 

to transactions involving stock that does 

not meet the definition of Stock of the 

Corporate Partner. The commenter 

asked whether, in cases in which the 

deemed redemption rule does not apply 

to an initial transaction because the 

definition of Stock of the Corporate 

Partner is not satisfied, if certain 

subsequent transactions would trigger 

gain recognition by treating those 

transactions as Section 337(d) 

Transactions. The Treasury Department 

and the IRS intend for certain 

subsequent transactions to trigger gain 

recognition as Section 337(d) 

Transactions. Therefore, in response to 

this comment, the Treasury Department 

and the IRS clarify that these final 

regulations apply to certain transactions 

involving related parties in which a first 

transaction does not constitute a Section 

337(d) Transaction because the 

partnership does not own stock in either 

a Corporate Partner or in a Controlling 

Corporation, but the Corporate Partner 

in a later, separate transaction transfers 

its partnership interest to a related 

corporation whose stock the partnership 

owns. In these transactions, the deemed 

redemption rule will trigger gain as if 

the first transaction was a Section 

337(d) Transaction with the result that 

the transferee corporation who is now 

itself a Corporate Partner will ‘‘step into 

the shoes’’ of the first Corporate Partner 

and will be subject to the deemed 

redemption rule to the extent of the first 

Corporate Partner’s remaining built-in 

gain in the appreciated asset 

immediately prior to the transfer. 

iii. Prior Transactions 

The 2015 regulations provided that, if 

the Corporate Partner has an existing 

interest in the partnership’s Stock of the 

Corporate Partner prior to the Section 

337(d) Transaction, the deemed 

redemption rule applies only with 

respect to the Corporate Partner’s 

incremental increase in the Stock of the 

Corporate Partner. For example, 

changing allocations to increase a 

Corporate Partner’s interest in the Stock 

of the Corporate Partner from 50 percent 

to 80 percent and to decrease the 

Corporate Partner’s interest in other 

appreciated property from 80 percent to 

50 percent would have the effect of an 

exchange by the Corporate Partner of the 

30-percent incremental decrease in its 

interest in the appreciated property for 

the 30-percent incremental increase in 

the Stock of the Corporate Partner. The 

Treasury Department and the IRS did 

not receive comments on this rule, and 

therefore, these final regulations adopt 

the rule set forth in the 2015 

regulations. 

iv. Special Rule for Determination of 

Corporate Partner’s Interest 

For purposes of recognizing gain 

under the deemed redemption rule, the 

2015 regulations provided that a 

Corporate Partner’s interest in an 

identified share of Stock of the 

Corporate Partner will never be less 

than the Corporate Partner’s largest 

interest (by value) in that share of Stock 

of the Corporate Partner that was taken 

into account when the partnership 

previously determined whether there 

had been a Section 337(d) Transaction 

(regardless of whether the Corporate 

Partner recognized gain in the earlier 

transaction). See Example 7 of 

§ 1.337(d)–3(h) in these final 

regulations. This rule ensures that 

alternating increases and decreases in a 

Corporate Partner’s interest in Stock of 

the Corporate Partner do not cause 

duplicate gain recognition. 

This limitation does not apply if any 

reduction in the Corporate Partner’s 

interest in the identified share of Stock 

of the Corporate Partner occurred as part 

of a plan or arrangement to circumvent 

the purpose of these final regulations. 

See Example 8 of § 1.337(d)–3(h) in 

these final regulations. 

The commenter raised a question 

regarding the numbers used in this 

Example 8 (which was numbered as 

Example 7 in the 2015 regulations 

under section 337(d)). The commenter 

pointed out that under the example’s 

facts, the two partners make initial 

contributions to the partnership in a 99 

to 1 ratio, and make subsequent 

contributions in a 50 to 50 ratio. The 

commenter questioned why the example 

stated that the two partners are ‘‘equal 

partners’’ in all respects after the 

subsequent contributions. In response to 

this comment, the Treasury Department 

and the IRS clarify the example to 

provide that the subsequent 

contributions resulted in the partners’ 

total contributions as being in a 50 to 50 

ratio, so that, after the partners make 

these subsequent contributions, the 

partners have equal interests in the 

partnership in all respects. The aim of 

the example is to illustrate the rule that 

partners cannot utilize this special rule 

for determining a Corporate Partner’s 

interest to circumvent the purpose of 

these final regulations. The Treasury 

Department and the IRS did not receive 

any other comments on this rule, and 

therefore, these final regulations adopt 

the rule set forth in the 2015 

regulations. 

v. Amount and Character of Gain 

The 2015 regulations provided that, if 

a transaction is a Section 337(d) 

Transaction, the deemed redemption 

rule requires the Corporate Partner to 

recognize a percentage of the total gain 

in partnership appreciated property that 

is subject to the exchange equal to a 

fraction, the numerator of which is the 

Corporate Partner’s interest (by value) in 

appreciated property effectively 

exchanged for Stock of the Corporate 

Partner under the deemed redemption 

rule, and the denominator of which is 

the Corporate Partner’s interest (by 

value) in appreciated property 

immediately before the Section 337(d) 

Transaction. The 2015 regulations 

define this fraction as the Gain 

Percentage. The Corporate Partner’s gain 

under the deemed redemption rule 

equals the product of (i) the Corporate 

Partner’s Gain Percentage and (ii) the 

gain from the appreciated property that 

is the subject of the exchange that the 

Corporate Partner would recognize if, 

immediately before the Section 337(d) 

Transaction, all assets of the partnership 

and any assets contributed to the 

partnership in the Section 337(d) 

Transaction were sold in a fully taxable 

transaction for cash in an amount equal 

to the fair market value of such property 

(taking into account section 7701(g)), 

reduced, but not below zero, by any gain 

the Corporate Partner is required to 

recognize with respect to the 

appreciated property in the Section 

337(d) Transaction under any other 

section of the Code. 

The gain from the hypothetical sale 

used to compute gain under the deemed 

redemption rule is determined by 

applying the principles of section 

704(c), which generally requires the 

partnership to take into account 

variations between the adjusted tax 

basis and fair market value of 

partnership property at the time it is 

contributed to the partnership and upon 

certain other events that allow or 


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require the value of partnership 

property to be redetermined under 

§ 1.704–1(b)(2)(iv)(f). See Examples 4 

and 6 of § 1.337(d)–3(h) in these final 

regulations. A partner’s share of gain 

under section 704(c) for this purpose 

includes any remedial allocations under 

§ 1.704–3(d) for a partnership that has 

elected under section 704(c) to report 

notional items of offsetting tax gain and 

loss to its partners to eliminate 

distortions that may arise when the 

partnership’s total tax gain or loss on 

the sale of partnership property is less 

than all partners’ aggregate share of gain 

or loss from the property. The Treasury 

Department and the IRS did not receive 

comments on this general rule 

governing the amount of gain from a 

Section 337(d) Transaction. These final 

regulations therefore adopt the rule set 

forth in the 2015 regulations. However, 

the commenter asked whether section 

743(b) basis adjustments are taken into 

account when determining a Corporate 

Partner’s gain in a Section 337(d) 

Transaction. The Treasury Department 

and the IRS confirm that basis 

adjustments, including adjustments 

made pursuant to section 743(b), are 

taken into account when calculating this 

gain, so that the Corporate Partner 

would not be subject to a duplication of 

tax liability. 

The commenter also noted that the 

2015 regulations do not specify the 

character of the gain that a Corporate 

Partner recognizes in a Section 337(d) 

Transaction. In response to this 

comment, the final regulations clarify 

that the character of the gain that the 

Corporate Partner recognizes in a 

Section 337(d) Transaction is the same 

character of the gain that the Corporate 

Partner would have recognized if, 

immediately before the Section 337(d) 

Transaction, the Corporate Partner had 

disposed of the appreciated property in 

a fully taxable transaction for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)). 

vi. Basis Rules 

The 2015 regulations contained two 

rules related to the effect of the deemed 

redemption rule on partner and 

partnership basis. First, the 2015 

regulations require the Corporate 

Partner to increase its basis in its 

partnership interest by an amount equal 

to the gain that the Corporate Partner 

recognizes in a Section 337(d) 

Transaction. This basis increase is 

necessary to prevent the Corporate 

Partner from recognizing gain a second 

time when the partnership liquidates 

(or, if property is distributed to the 

Corporate Partner, when that property is 

sold). Under the 2015 regulations, this 

basis increase applies regardless of 

whether the partnership has a Section 

754 election in effect. The commenter 

suggested that the final regulations 

clarify how a basis increase is treated for 

basis-recovery purposes. The final 

regulations provide this clarification by 

specifying that this increase is treated as 

property that is placed in service by the 

partnership in the taxable year of the 

Section 337(d) Transaction. 

Second, the 2015 regulations require 

the partnership to increase its adjusted 

tax basis in the appreciated property 

that is treated as the subject of a Section 

337(d) Transaction by the amount of 

gain that the Corporate Partner 

recognized with respect to that property 

as a result of the Section 337(d) 

Transaction. The Treasury Department 

and the IRS did not receive comments 

on this basis increase rule and, 

accordingly, these final regulations 

adopt the rule set forth in the 2015 

regulations. 

D. Partnership Distributions of Stock of 

the Corporate Partner 

i. General Rule Governing Distributions 

The 2015 regulations extended the 

deemed redemption rule to certain 

distributions to the Corporate Partner of 

Stock of the Corporate Partner. These 

rules governing distributions applied 

only if the distributed stock had 

previously been the subject of a Section 

337(d) Transaction or became the 

subject of a Section 337(d) Transaction 

as a result of the distribution (a section 

337(d) distribution). The 2015 

regulations did not apply to a 

distribution to the Corporate Partner of 

the Stock of the Corporate Partner to 

which section 732(f) applied at the time 

of the distribution. 

If the deemed redemption rule 

applied to a distribution, the 2015 

regulations deem the partnership to 

amend its agreement immediately before 

the distribution to allocate a 100 percent 

interest in that portion of the stock to 

the Corporate Partner that is distributed 

and to allocate an appropriately reduced 

interest in other partnership property 

away from the Corporate Partner. The 

2015 regulations employ this deemed 

allocation solely for purposes of 

recognizing gain, and no inference is 

intended with regard to the treatment of 

such allocations generally. 

The Treasury Department and the IRS 

did not receive comments on this 

general rule governing partnership 

distributions and, accordingly, these 

final regulations adopt the rule set forth 

in the 2015 regulations. 

ii. Gain Recognition Rule 

The 2015 regulations provided that if 

a distribution is a section 337(d) 

distribution, then in addition to any 

gain recognized under the deemed 

redemption rule upon the distribution 

of Stock of the Corporate Partner to the 

Corporate Partner, the 2015 regulations 

also would require the Corporate 

Partner to recognize gain to the extent 

that the partnership’s basis in the 

distributed Stock of the Corporate 

Partner exceeds the Corporate Partner’s 

basis in its partnership interest (as 

reduced by any cash distributed in the 

transaction) immediately before the 

distribution. 

The commenter noted that the 

language used in this provision differs 

from the gain recognition provision of 

section 732(f)(1)(C), which evaluates 

whether the partnership’s adjusted basis 

in the distributed stock immediately 

before the distribution exceeded the 

Corporate Partner’s adjusted basis in 

that stock immediately after the 

distribution. The commenter asked 

whether these differences were 

intentional and, if so, for the 

explanation of the differences. The 

differences were not intentional and the 

Treasury Department and the IRS have 

determined that the provisions should 

be the same. Accordingly, the language 

of the gain recognition rule in these 

final regulations is modified to conform 

to the language used in the section 

732(f) gain recognition provision. 

iii. Basis Rules 

The 2015 regulations set forth two 

rules under sections 337(d) and 732 to 

coordinate the effects of the rule 

requiring gain recognition when the 

basis of the Stock of the Corporate 

Partner is stepped down on a section 

337(d) distribution with existing rules 

for determining the basis of property 

upon partnership distributions. 

The first rule applied for purposes of: 

(1) Determining the basis of property 

distributed to the Corporate Partner 

(other than the basis of the Corporate 

Partner in its own stock); (2) 

determining the basis of the Corporate 

Partner’s remaining partnership interest; 

(3) determining the partnership’s basis 

in undistributed Stock of the Corporate 

Partner; and (4) computing gain on the 

distribution. For these purposes, the 

basis of Stock of the Corporate Partner 

distributed to the Corporate Partner 

equals the greater of (i) the partnership’s 

basis of that distributed Stock of the 

Corporate Partner immediately before 

the distribution, or (ii) the fair market 

value of that distributed Stock of the 

Corporate Partner immediately before 


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the distribution, less the Corporate 

Partner’s allocable share of gain from all 

of the Stock of the Corporate Partner, if 

the partnership sold all of its assets in 

a fully taxable transaction for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)) immediately before the 

distribution. See Examples 3 and 4 of 

§ 1.337(d)–3(h) in these final 

regulations. This special rule is 

necessary to prevent basis from shifting 

away from distributed Stock of the 

Corporate Partner to other property. 

This basis shift could occur, for 

example, upon a distribution of less 

than all of the partnership’s Stock of the 

Corporate Partner to the Corporate 

Partner. 

The commenter asked whether this 

basis rule applies solely to the Corporate 

Partner or whether it applies for all 

purposes and recommended expanding 

Example 4 of § 1.337(d)–3(h) in these 

final regulations (which was numbered 

as Example 3 in the 2015 regulations 

under section 337(d)) to address the 

basis consequences to the partnership 

and to the non-corporate partner. The 

Treasury Department and the IRS 

confirm that this basis rule applies for 

all purposes, and these final regulations 

expand Example 4 of § 1.337(d)–3(h) to 

discuss the basis that AX partnership 

and partner A have in the X stock that 

is distributed to A. 

The second rule applied when a 

Corporate Partner receives both Stock of 

the Corporate Partner and other 

property in a section 337(d) 

distribution. Under this rule, the basis 

to be allocated to the properties 

distributed under section 732(a) or (b) is 

allocated first to the Stock of the 

Corporate Partner before taking into 

account the distribution of any other 

property (other than cash). Therefore, 

before taking into account the 

distribution of other property, the 

Corporate Partner will reduce its basis 

in its partnership interest by the 

Corporate Partner’s basis in the 

distributed Stock of the Corporate 

Partner (but not below zero). The 

Corporate Partner will determine its 

basis in other distributed partnership 

property and in its remaining 

partnership interest after giving effect to 

this reduction. The 2015 regulations set 

forth this rule to ensure that the 

purposes of the repeal of the General 

Utilities doctrine are not circumvented 

through the use of any provision of law 

or regulations. 

When a Corporate Partner receives a 

partnership distribution of its own 

stock, it is unclear under existing law 

whether the Corporate Partner has basis 

in that stock. (See, for example, Rev. 

Rul. 2006–2, 2006–1 CB 261.) The 

resolution of this question is beyond the 

scope of these final regulations. 

However, because the distribution to a 

Corporate Partner of its own stock 

affects the Corporate Partner’s basis in 

other distributed property and any 

retained partnership interest, these final 

regulations make clear that the 

partnership and the Corporate Partner 

must determine the basis of other 

distributed property and any retained 

partnership interest by reference to the 

partnership’s basis in the distributed 

Stock of the Corporate Partner. That is, 

the Corporate Partner determines its 

basis in other distributed property and 

in any retained partnership interest as 

though the distributed stock was stock 

other than Stock of the Corporate 

Partner. Similarly, the 2015 regulations 

computed any gain recognition on the 

distribution by comparing the Corporate 

Partner’s basis in its partnership interest 

to the basis of that Stock of the 

Corporate Partner in the hands of the 

partnership (without regard to whether 

the Corporate Partner can have basis in 

the distributed stock). No inference is 

intended with respect to the question of 

whether a corporation does or does not 

have basis in its own stock. 

The commenter noted that 

duplication of gain under sections 

337(d) and 732(f) may occur under the 

2015 regulations. The commenter 

provided an example in which a 

Corporate Partner could potentially 

recognize gain first under section 337(d) 

from a partnership distribution to which 

section 732(f) does not apply, because 

its control requirement is not satisfied at 

the time of the distribution, but then 

later be subject to the 732(f) basis 

reduction if the control requirement is 

subsequently satisfied. The Treasury 

Department and the IRS agree with the 

commenter and therefore, these final 

regulations set forth a basis rule 

providing that, for purposes of 

determining the amount of the decrease 

to the basis of property held by a 

distributed corporation pursuant to 

section 732(f), the amount of this 

decrease is reduced by the amount of 

gain that a Corporate Partner has 

recognized under this section in a 

Section 337(d) Transaction, both in 

cases where section 732(f) applies at the 

time of the Section 337(d) Transaction 

and in cases where section 732(f) is 

subsequently triggered. This rule 

prevents the Corporate Partner from 

recognizing the same gain twice. 

E. Exceptions 

i. De Minimis Exception 

The 2015 regulations set forth a de 

minimis rule providing that the 2015 

regulations do not apply to a Corporate 

Partner if three conditions are satisfied. 

These conditions are tested upon the 

occurrence of a Section 337(d) 

Transaction and upon any subsequent 

revaluation event described in § 1.704– 

1(b)(2)(iv)(f). 

The first condition requires that both 

the Corporate Partner and any persons 

related to the Corporate Partner under 

section 267(b) or section 707(b) own, in 

the aggregate, less than 5 percent of the 

partnership. The second condition 

requires that the partnership hold Stock 

of the Corporate Partner worth less than 

2 percent of the value of the 

partnership’s gross assets, including 

Stock of the Corporate Partner. The 

third condition requires that the 

partnership has never, at any point in 

time, held more than $1,000,000 in 

Stock of the Corporate Partner or more 

than 2 percent of any particular class of 

Stock of the Corporate Partner. 

The 2015 regulations provided a 

special rule that applies if the 

conditions of the de minimis rule are 

satisfied at the time of a Section 337(d) 

Transaction, but are not satisfied at the 

time of a subsequent Section 337(d) 

Transaction or revaluation event 

described in § 1.704–1(b)(2)(iv)(f). This 

rule provided that, solely for purposes 

of the deemed redemption rule, a 

Corporate Partner may determine its 

gain on the subsequent acquisition or 

revaluation event as if it had already 

recognized gain at the previous event. 

Accordingly, the Corporate Partner 

would only recognize gain with respect 

to appreciation arising between the 

earlier acquisition or revaluation event 

and the subsequent event. Neither the 

Corporate Partner nor the partnership 

increases its basis by the gain the 

Corporate Partner would have 

recognized if the de minimis rule did 

not apply to the prior acquisition or 

revaluation event. 

The Treasury Department and the IRS 

are concerned that taxpayers could 

intentionally plan to combine entities, 

each meeting the de minimis limits, to 

avoid the purposes of these final 

regulations. To address this concern, in 

these final regulations, the Treasury 

Department and the IRS add a clarifying 

provision to the de minimis exception 

stating that the exception does not apply 

to Stock of the Corporate Partner that is 

acquired as part of a plan to circumvent 

the purpose of these final regulations. 


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ii. Exception for Certain Dispositions of 

Stock 

The 2015 regulations set forth another 

exception titled the ‘‘inadvertence rule.’’ 

This exception provided that the 2015 

regulations do not apply to Section 

337(d) Transactions in which the 

partnership satisfies two requirements. 

First, the partnership must dispose of, 

by sale or distribution, the Stock of the 

Corporate Partner before the due date 

(including extensions) of its federal 

income tax return for the taxable year in 

which the partnership acquired the 

stock (or in which the Corporate Partner 

joined the partnership, if applicable). 

Second, the partnership must not have 

distributed the Stock of the Corporate 

Partner to the Corporate Partner or a 

person possessing section 304(c) control 

of the Corporate Partner. 

The commenter asked, whether, 

notwithstanding the exception’s title, 

the dispositions needed to be 

inadvertent to qualify for the exception. 

In order to avoid any ambiguity or any 

assumption that these dispositions must 

be inadvertent, these final regulations 

rename the exception to state that the 

exception simply applies to ‘‘certain 

dispositions of stock’’ that qualify for 

the exception and that inadvertence is 

not a requirement. 

The Treasury Department and the IRS 

also note that this exception requires 

that the stock at issue is not distributed 

to the Corporate Partner or a Controlling 

Corporation. As discussed in (1)(B) of 

this Explanation of Provisions with 

respect to the general definition of Stock 

of the Corporate Partner, the Treasury 

Department and the IRS are considering 

publishing new proposed regulations to 

modify the definition of Stock of the 

Corporate Partner to remove the 

exception for attribution under section 

318(a)(1) and (3) from the scope of 

section 304(c) control. 

F. Other Comments 

The commenter requested that these 

final regulations provide examples on 

how to measure a Corporate Partner’s 

partnership interest in more complex 

partnership agreements, such as 

situations in which the agreement 

contains a distribution waterfall. 

Similarly, the commenter requested that 

these final regulations provide more 

detailed examples relating to tiered 

partnership structures. The Treasury 

Department and the IRS believe that the 

purpose of these final regulations is to 

set forth rules of general applicability to 

prevent a corporate partner from 

avoiding corporate level gain through 

transactions with a partnership. The 

Treasury Department and the IRS 

therefore believe that providing such 

detailed examples is beyond the scope 

of these final regulations. 

2. Final Regulations Under Section 

732(f) 

These final regulations adopt the rules 

set forth in the 2015 regulations under 

section 732(f) without any change to 

conform the application of section 

732(f) with Congress’ identified 

purposes for enacting sections 337(d), 

732(f), and 1502 in certain situations. 

A. Aggregation of Section 732(b) Basis 

Adjustments 

As discussed in the Background, 

section 732(f) generally applies on a 

partner-by-partner basis. However, the 

Treasury Department and the IRS 

determined that, in certain 

circumstances, it is appropriate to 

aggregate the bases of consolidated 

group members in a partnership for 

purposes of applying section 732(f). 

The 2015 regulations provided that 

corporate partners that are members of 

the same consolidated group (as defined 

in § 1.1502–1(h)) could aggregate their 

bases in interests in the same 

partnership for purposes of section 

732(f) when two conditions are met. 

First, two or more of the corporate 

partners receive a distribution of stock 

in a distributed corporation from the 

partnership. Second, the distributed 

corporation is or becomes a member of 

the distributee partners’ consolidated 

group following the distribution. 

Under this rule, section 732(f) only 

applies to the extent that the 

partnership’s adjusted basis in the 

distributed stock immediately before the 

distribution exceeds the aggregate basis 

of the distributed stock in the hands of 

all members of the distributee corporate 

partners’ consolidated group 

immediately after the distribution. The 

2015 regulations included the 

requirement that the distributed 

corporation be a member of the 

consolidated group in order to avoid 

unintended consequences that could 

result if that corporation were a 

controlled foreign corporation. 

The commenter recommended that 

the final regulations extend this basisaggregation rule to include a distributed 

corporation (including a controlled 

foreign corporation) that is owned by 

members of the distributee partners’ 

consolidated group following the 

distribution. The commenter stated that 

the distributed corporation need not be 

a member of the distributee partners’ 

consolidated group, and that the rule 

should apply to corporations like a 

controlled foreign corporation that 

cannot be a member of a consolidated 

group. The Treasury Department and 

the IRS decline to adopt the comment 

because there could be unanticipated 

consequences if the distributed 

corporation were a controlled foreign 

corporation. 

B. Gain Elimination Transactions 

The 2015 regulations also provided 

rules that restrict corporate partners 

from entering into transactions or a 

series of transactions (gain elimination 

transactions), such as a distribution 

followed by a reorganization under 

section 368(a), that might eliminate gain 

in the stock of a distributed corporation 

while avoiding the effects of a basis 

step-down in transactions, because the 

section 732(f) control requirement is not 

immediately satisfied. 

Accordingly, the 2015 regulations 

provided that, in the event of a gain 

elimination transaction, section 732(f) 

shall apply as though the corporate 

partner acquired control (as defined in 

section 732(f)(5)) of the distributed 

corporation immediately before the gain 

elimination transaction. 

The Treasury Department and the IRS 

did not receive comments on the 

proposed rule governing gain 

elimination transactions. These final 

regulations adopt the rules set forth in 

the 2015 regulations. 

C. Tiered Partnerships 

The 2015 regulations required 

taxpayers to apply its rules to tiered 

partnerships in a manner consistent 

with the purpose of section 732(f). 

These final regulations maintain this 

requirement. The commenter requested 

that these final regulations provide 

examples illustrating their application 

to tiered partnerships. The Treasury 

Department and the IRS decline to 

adopt this comment, because such 

examples are beyond the scope of these 

final regulations, which is to set forth 

rules of general applicability governing 

the application of section 732(f) to two 

specific sets of circumstances. 

Applicability Date 

These final regulations apply to 

transactions occurring on or after June 

12, 2015. 

Special Analyses 

This regulation is not subject to 

review under section 6(b) of Executive 

Order 12866 pursuant to the 

Memorandum of Agreement (April 11, 

2018) between the Department of the 

Treasury and the Office of Management 

and Budget regarding review of tax 

regulations. 

Further, pursuant to the Regulatory 

Flexibility Act (5 U.S.C. chapter 6), it is 


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26588 Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Rules and Regulations 

hereby certified that these final 

regulations would not have a significant 

economic impact on a substantial 

number of small entities. This 

certification is based on the fact that 

these final regulations would primarily 

affect sophisticated ownership 

structures involving corporations that 

own partnerships owning stock or other 

equity interests in corporate partners. 

Additionally, these final regulations 

contain a number of de minimis and 

other exceptions that render the final 

regulations inapplicable to most small 

businesses, and do not impose a 

collection of information on small 

entities. 

Pursuant to section 7805(f), these final 

regulations have been submitted to the 

Chief Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business, and no 

comments were received. 

Statement of Availability of IRS 

Documents 

Notice 89–37 cited in this document 

is published in the Internal Revenue 

Bulletin (or Cumulative Bulletin) and is 

available from the Superintendent of 

Documents, U.S. Government 

Publishing Office, Washington, DC 

20402, or by visiting the IRS website at 

http://www.irs.gov. 

Drafting Information 

The principal author of these final 

regulations is Kevin I. Babitz, Office of 

the Associate Chief Counsel 

(Passthroughs and Special Industries). 

However, other personnel from the 

Treasury Department and the IRS 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, 26 CFR part 1 is 

amended as follows: 

PART I—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 is amended by removing the 

sectional authority for § 1.337(d)–3T, 

adding a sectional authority for 

§ 1.337(d)(3) in numerical order, and 

revising the sectional authority for 

§ 1.732–3 to read as follows: 

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

* * * * * 

Section 1.337(d)–3 also issued under 26 

U.S.C. 337(d). 

* * * * * 

Section 1.732–3 also issued under 26 

U.S.C. 337(d), 732(f)(8), and 1502. 

* * * * * 

■ Par. 2. Section 1.337(d)–3 is added to 

read as follows: 

§ 1.337(d)–3 Gain recognition upon certain 

partnership transactions involving a 

partner’s stock. 

(a) Purpose. The purpose of this 

section is to prevent corporate taxpayers 

from using a partnership to circumvent 

gain required to be recognized under 

section 311(b) or section 336(a). The 

rules of this section, including the 

determination of the amount of gain, 

must be applied in a manner that is 

consistent with and reasonably carries 

out this purpose. 

(b) In general. This section applies 

when a partnership, either directly or 

indirectly, owns, acquires, or distributes 

Stock of the Corporate Partner (within 

the meaning of paragraph (c)(2) of this 

section). Under paragraphs (d) or (e) of 

this section, a Corporate Partner (within 

the meaning of paragraph (c)(1) of this 

section) is required to recognize gain 

when a transaction has the effect of the 

Corporate Partner acquiring or 

increasing an interest in its own stock 

in exchange for appreciated property in 

a manner that contravenes the purpose 

of this section as set forth in paragraph 

(a) of this section. Paragraph (f) of this 

section sets forth exceptions under 

which a Corporate Partner does not 

recognize gain. 

(c) Definitions. The following 

definitions apply for purposes of this 

section: 

(1) Corporate Partner. A Corporate 

Partner is a person that is classified as 

a corporation for federal income tax 

purposes and holds or acquires an 

interest in a partnership. 

(2) Stock of the Corporate Partner—(i) 

In general. With respect to a Corporate 

Partner, Stock of the Corporate Partner 

includes the Corporate Partner’s stock, 

or other equity interests, including 

options, warrants, and similar interests, 

in the Corporate Partner or a corporation 

that controls the Corporate Partner 

within the meaning of section 304(c) 

(except that section 318(a)(1) and (3) 

shall not apply). Stock of the Corporate 

Partner also includes interests in any 

entity to the extent that the value of the 

interest is attributable to Stock of the 

Corporate Partner. 

(ii) Affiliated partner exception. Stock 

of the Corporate Partner does not 

include any stock or other equity 

interests held or acquired by a 

partnership if all interests in the 

partnership’s capital and profits are 

held by members of an affiliated group 

as defined in section 1504(a) that 

includes the Corporate Partner. 

(3) Section 337(d) Transaction. A 

Section 337(d) Transaction is a 

transaction (or series of transactions) 

that has the effect of an exchange by a 

Corporate Partner of its interest in 

appreciated property for an interest in 

Stock of the Corporate Partner owned, 

acquired, or distributed by a 

partnership. For example, a Section 

337(d) Transaction may occur when — 

(i) A Corporate Partner contributes 

appreciated property to a partnership 

that owns Stock of the Corporate 

Partner; 

(ii) A partnership acquires Stock of 

the Corporate Partner; 

(iii) A partnership that owns Stock of 

the Corporate Partner distributes 

appreciated property to a partner other 

than a Corporate Partner; 

(iv) A partnership distributes Stock of 

the Corporate Partner to the Corporate 

Partner; or 

(v) A partnership agreement is 

amended in a manner that increases a 

Corporate Partner’s interest in Stock of 

the Corporate Partner (including in 

connection with a contribution to, or 

distribution from, a partnership). 

(4) Gain Percentage. A Corporate 

Partner’s Gain Percentage equals a 

fraction, the numerator of which is the 

Corporate Partner’s interest (by value) in 

appreciated property effectively 

exchanged for Stock of the Corporate 

Partner under the test described in 

paragraphs (d)(1) and (2) of this section, 

and the denominator of which is the 

Corporate Partner’s interest (by value) in 

that appreciated property immediately 

before the Section 337(d) Transaction. 

Paragraph (d) of this section requires a 

partnership to multiply the Gain 

Percentage by the Corporate Partner’s 

aggregate gain in appreciated property 

to determine gain recognized under this 

section. 

(d) Deemed redemption rule—(1) In 

general. A Corporate Partner in a 

partnership that engages in a Section 

337(d) Transaction recognizes gain at 

the time, and to the extent, that the 

Corporate Partner’s interest in 

appreciated property (other than Stock 

of the Corporate Partner) is reduced in 

exchange for an increased interest in 

Stock of the Corporate Partner, as 

determined under paragraph (d)(2) of 

this section. This section does not apply 

to the extent a transaction has the effect 

of an exchange by a Corporate Partner 

of non-appreciated property for Stock of 

the Corporate Partner, or has the effect 

of an exchange by a Corporate Partner 

for property other than Stock of the 

Corporate Partner. 

(2) Corporate Partner’s interest in 

partnership property. The Corporate 

Partner’s interest with respect to both 

Stock of the Corporate Partner and the 

appreciated property that is the subject 


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of the exchange is determined based on 

all facts and circumstances, including 

the allocation and distribution rights set 

forth in the partnership agreement. The 

Corporate Partner’s interest in an 

identified share of Stock of the 

Corporate Partner will never be less 

than the Corporate Partner’s largest 

interest (by value) in that share of Stock 

of the Corporate Partner that was taken 

into account when the partnership 

previously determined whether there 

had been a Section 337(d) Transaction 

with respect to such share (regardless of 

whether the Corporate Partner 

recognized gain in the earlier 

transaction). See Example 7 of 

paragraph (h) of this section. However, 

this limitation will not apply if any 

reduction in the Corporate Partner’s 

interest in the identified share of Stock 

of the Corporate Partner occurred as part 

of a plan or arrangement to circumvent 

the purpose of this section. See Example 

8 of paragraph (h) of this section. 

(3) Amount and character of gain 

recognized on the exchange—(i) 

Amount of gain. The amount of gain the 

Corporate Partner recognizes under 

paragraph (d)(1) of this section equals 

the product of the Corporate Partner’s 

Gain Percentage and the gain from the 

appreciated property that is the subject 

of the exchange that the Corporate 

Partner would recognize if, immediately 

before the Section 337(d) Transaction, 

all assets of the partnership and any 

assets contributed to the partnership in 

the Section 337(d) Transaction were 

sold in a fully taxable transaction for 

cash in an amount equal to the fair 

market value of such property (taking 

into account section 7701(g)), reduced, 

but not below zero, by any gain the 

Corporate Partner is required to 

recognize with respect to the 

appreciated property in the Section 

337(d) Transaction under any other 

provision of this chapter. This gain is 

computed taking into account 

allocations of tax items applying the 

principles of section 704(c), including 

any remedial allocations under § 1.704– 

3(d), and also taking into account any 

basis adjustments including adjustments 

made pursuant to section 743(b). 

(ii) Character of gain. The character of 

the gain that the Corporate Partner 

recognizes under paragraph (d)(1) of this 

section from the appreciated property 

that is the subject of the exchange shall 

be the character of the gain that the 

Corporate Partner would recognize if, 

immediately before the Section 337(d) 

Transaction, the Corporate Partner had 

disposed of the appreciated property 

that is the subject of the exchange in a 

fully taxable transaction for cash in an 

amount equal to the fair market value of 

such property (taking into account 

section 7701(g)). 

(4) Basis adjustments—(i) Corporate 

Partner’s basis in the partnership 

interest. The basis of the Corporate 

Partner’s interest in the partnership is 

increased by the amount of gain that the 

Corporate Partner recognizes under this 

paragraph (d). 

(ii) Partnership’s basis in partnership 

property. The partnership’s adjusted tax 

basis in the appreciated property that is 

treated as the subject of the exchange 

under this paragraph (d) is increased by 

the amount of gain recognized with 

respect to that property by the Corporate 

Partner as a result of that exchange, 

regardless of whether the partnership 

has an election in effect under section 

754. For basis recovery purposes, this 

basis increase is treated as property that 

is placed in service by the partnership 

in the taxable year of the Section 337(d) 

Transaction. 

(e) Distribution of Stock of the 

Corporate Partner—(1) In general. This 

paragraph (e) applies to distributions to 

the Corporate Partner of Stock of the 

Corporate Partner to which section 

732(f) does not apply and that have 

previously been the subject of a Section 

337(d) Transaction or become the 

subject of a Section 337(d) Transaction 

as a result of the distribution. Upon the 

distribution of Stock of the Corporate 

Partner to the Corporate Partner, 

paragraph (d) of this section will apply 

as though immediately before the 

distribution the partners amended the 

partnership agreement to allocate to the 

Corporate Partner a 100 percent interest 

in that portion of the Stock of the 

Corporate Partner that is distributed, 

and to allocate an appropriately reduced 

interest in other partnership property 

away from the Corporate Partner. 

(2) Basis rules—(i) Basis allocation on 

distributions of stock and other 

property. If, as part of the same 

transaction, a partnership distributes 

Stock of the Corporate Partner and other 

property (other than cash) to the 

Corporate Partner, see § 1.732– 

1(c)(1)(iii) for a rule allocating basis first 

to the Stock of the Corporate Partner 

before the distribution of the other 

property. 

(ii) Computation of basis. For 

purposes of determining the basis of 

property distributed to a partner in a 

transaction that includes the 

distribution of Stock of the Corporate 

Partner (other than the basis of the 

Corporate Partner in its own stock), the 

basis of the partner’s remaining 

partnership interest, and the 

partnership’s basis in undistributed 

Stock of the Corporate Partner, and for 

purposes of computing gain under 

paragraph (e)(3) of this section, the 

partnership’s basis of Stock of the 

Corporate Partner distributed to the 

partner equals the greater of— 

(A) The partnership’s basis of that 

distributed Stock of the Corporate 

Partner immediately before the 

distribution; or 

(B) The fair market value of that 

distributed Stock of the Corporate 

Partner immediately before the 

distribution less the partner’s allocable 

share of gain from all of the Stock of the 

Corporate Partner if the partnership sold 

all of its assets in a fully taxable 

transaction for cash in an amount equal 

to the fair market value of such property 

(taking into account section 7701(g)) 

immediately before the distribution. 

(iii) Section 732(f) basis reduction. 

For purposes of determining the amount 

of the decrease to the basis of property 

held by a distributed corporation 

pursuant to section 732(f), the amount 

of this decrease shall be reduced by the 

amount of gain that a Corporate Partner 

has recognized under this section in the 

same Section 337(d) Transaction or in a 

prior Section 337(d) Transaction 

involving the property. 

(3) Gain recognition. The Corporate 

Partner will recognize gain on a 

distribution of Stock of the Corporate 

Partner to the Corporate Partner to the 

extent that the partnership’s adjusted 

basis in the distributed Stock of the 

Corporate Partner (as determined under 

paragraph (e)(2)(ii) of this section) 

immediately before the distribution 

exceeds the Corporate Partner’s adjusted 

basis in its partnership interest 

immediately after the distribution. 

(f) Exceptions—(1) De minimis rule— 

(i) In general. Unless Stock of the 

Corporate Partner is acquired as part of 

a plan to circumvent the purpose of this 

section, this section does not apply to a 

Corporate Partner if at the time that the 

partnership acquires Stock of the 

Corporate Partner or at the time of a 

revaluation event as described in 

§ 1.704–1(b)(2)(iv)(f) (without regard to 

whether or not the partnership revalues 

its assets)— 

(A) The Corporate Partner and any 

persons related to the Corporate Partner 

under section 267(b) or section 707(b) 

own in the aggregate less than 5 percent 

of the partnership; 

(B) The partnership holds Stock of the 

Corporate Partner with a value of less 

than 2 percent of the partnership’s gross 

assets (including the Stock of the 

Corporate Partner); and 

(C) The partnership has never, at any 

point in time, held in the aggregate— 

(1) Stock of the Corporate Partner 

with a fair market value greater than 

$1,000,000; or 


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(2) More than 2 percent of any 

particular class of Stock of the Corporate 

Partner. 

(ii) De minimis rule ceases to apply. 

If a partnership satisfies the conditions 

of the de minimis rule of paragraph 

(f)(1) of this section upon an acquisition 

of Stock of the Corporate Partner or 

revaluation event as described in 

§ 1.704–1(b)(2)(iv)(f), but later fails to 

satisfy the conditions of the de minimis 

rule upon a subsequent acquisition or 

revaluation event, then solely for 

purposes of paragraph (d) of this 

section, the Corporate Partner may 

compute its gain on the subsequent 

acquisition or revaluation event as if it 

had already recognized gain at the 

previous event. Neither the Corporate 

Partner nor the partnership increases its 

basis by the gain the Corporate Partner 

would have recognized if the de 

minimis rule of paragraph (f)(1) of this 

section did not apply to the prior 

acquisition or revaluation event. 

(2) Certain dispositions of stock. 

Unless acquired as part of a plan to 

circumvent the purpose of this section, 

this section does not apply to Stock of 

the Corporate Partner that— 

(i) Is disposed of (by sale or 

distribution) by the partnership before 

the due date (including extensions) of 

its federal income tax return for the 

taxable year during which the Stock of 

the Corporate Partner is acquired (or for 

the taxable year in which the Corporate 

Partner becomes a partner, whichever is 

applicable); and 

(ii) Is not distributed to the Corporate 

Partner or a corporation that controls 

the Corporate Partner within the 

meaning of section 304(c), except that 

section 318(a)(1) and (3) shall not apply. 

(g) Tiered partnerships. The rules of 

this section shall apply to tiered 

partnerships in a manner that is 

consistent with the purpose set forth in 

paragraph (a) of this section. 

(h) Examples. The following examples 

illustrate the principles of this section. 

All amounts in the following examples 

are reported in millions of dollars: 

Example 1. Deemed redemption rule— 

contribution of Stock of the Corporate 

Partner. (i) In Year 1, X, a corporation, and 

A, an individual, form partnership AX as 

equal partners in all respects. X contributes 

Asset 1 with a fair market value of $100 and 

a basis of $20. A contributes X stock, which 

is Stock of the Corporate Partner, with a basis 

and fair market value of $100. 

(ii) Because A and X are equal partners in 

AX in all respects, the partnership formation 

causes X’s interest in X stock to increase from 

$0 to $50 and its interest in Asset 1 to 

decrease from $100 to $50. Thus, the 

partnership formation is a Section 337(d) 

Transaction because the formation has the 

effect of an exchange by X of $50 of Asset 1 

for $50 of X stock. 

(iii) X must recognize gain under paragraph 

(d) of this section with respect to Asset 1 to 

prevent the circumvention of section 311(b) 

principles. X’s gain equals the product of X’s 

Gain Percentage and the gain from Asset 1 

that X would recognize (decreased, but not 

below zero, by any gain that X recognized 

with respect to Asset 1 in the Section 337(d) 

Transaction under any other provision of this 

chapter) if, immediately before the Section 

337(d) Transaction, all assets were sold in a 

fully taxable transaction for cash in an 

amount equal to the fair market value of such 

property. If Asset 1 had been sold in a fully 

taxable transaction immediately before the 

formation of partnership AX, X’s allocable 

share of gain would have been $80. X’s Gain 

Percentage is 50 percent (equal to a fraction, 

the numerator of which is X’s $50 interest in 

Asset 1 effectively exchanged for X stock, 

and the denominator of which is X’s $100 

interest in Asset 1 immediately before the 

Section 337(d) Transaction). Thus, X 

recognizes $40 of gain ($80 multiplied by 50 

percent) under the deemed redemption rule 

in paragraph (d) of this section. Under 

paragraph (d)(4)(i) of this section, X’s basis in 

its AX partnership interest increases from 

$20 to $60. Under paragraph (d)(4)(ii) of this 

section, AX’s basis in Asset 1 increases from 

$20 to $60 because Asset 1 is the appreciated 

property treated as the subject of the 

exchange. 

Example 2. Deemed redemption rule— 

contribution of stock in a corporation that 

controls the Corporate Partner. (i) In Year 1, 

X, a corporation, and A, an individual, form 

partnership AX as equal partners in all 

respects. X contributes Asset 1 with a fair 

market value of $100 and a basis of $20. A 

contributes stock in P, with a basis and fair 

market value of $100. P is the sole owner of 

X. P’s interest in X constitutes 10 percent of 

P’s total assets. 

(ii) Because P controls X within the 

meaning of section 304(c), stock in P is Stock 

of the Corporate Partner under paragraph 

(c)(2)(i) of this section. 

(iii) Because A and X are equal partners in 

AX in all respects, the partnership formation 

causes X’s interest in Stock of the Corporate 

Partner stock to increase from $0 to $50 and 

its interest in Asset 1 to decrease from $100 

to $50. Thus, the partnership formation is a 

Section 337(d) Transaction because the 

formation has the effect of an exchange by X 

of $50 of Asset 1 for $50 of Stock of the 

Corporate Partner. 

(iv) X must recognize gain under paragraph 

(d) of this section with respect to Asset 1 to 

prevent the circumvention of section 311(b) 

principles. X’s gain equals the product of X’s 

Gain Percentage and the gain from Asset 1 

that X would recognize (decreased, but not 

below zero, by any gain that X recognized 

with respect to Asset 1 in the Section 337(d) 

Transaction under any other provision of this 

chapter) if, immediately before the Section 

337(d) Transaction, all assets were sold in a 

fully taxable transaction for cash in an 

amount equal to the fair market value of such 

property. If Asset 1 had been sold in a fully 

taxable transaction immediately before the 

formation of partnership AX, X’s allocable 

share of gain would have been $80. X’s Gain 

Percentage is 50 percent (equal to a fraction, 

the numerator of which is X’s $50 interest in 

Asset 1 effectively exchanged for Stock of the 

Corporate Partner, and the denominator of 

which is X’s $100 interest in Asset 1 

immediately before the Section 337(d) 

Transaction). Thus, X recognizes $40 of gain 

($80 multiplied by 50 percent) under the 

deemed redemption rule in paragraph (d) of 

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

section, X’s basis in its AX partnership 

interest increases from $20 to $60. Under 

paragraph (d)(4)(ii) of this section, AX’s basis 

in Asset 1 increases from $20 to $60 because 

Asset 1 is the appreciated property treated as 

the subject of the exchange. 

Example 3. Distribution of Stock of the 

Corporate Partner—pro rata distribution. (i) 

The facts are the same as in Example 1(i) of 

this paragraph (h). AX liquidates in Year 9, 

when Asset 1 and the X stock each have a 

fair market value of $200. X and A each 

receive 50 percent of Asset 1 and 50 percent 

of the X stock in the liquidation. At the time 

AX liquidates, X’s basis in its AX partnership 

interest is $60 and A’s basis in its AX 

partnership interest is $100. 

(ii) When AX liquidates, X’s interests in its 

stock and in Asset 1 do not change. Thus, the 

liquidation is not a Section 337(d) 

Transaction because it does not have the 

effect of an exchange by X of appreciated 

property for Stock of the Corporate Partner. 

(iii) Paragraph (e) of this section applies 

because the distributed X stock was the 

subject of a previous Section 337(d) 

Transaction and because section 732(f) does 

not apply. Under § 1.732–1(c)(1)(iii), the 

distribution to X of X stock is deemed to 

immediately precede the distribution of 50 

percent of Asset 1 to X for purposes of 

determining X’s basis in the distributed 

property. For purposes of determining X’s 

basis in Asset 1 and X’s gain on distribution, 

the basis of the distributed X stock is treated 

as $50, the greater of $50 (50 percent of the 

stock’s $100 basis in the hands of the 

partnership), or $50, the fair market value of 

that distributed X stock ($100) less X’s 

allocable share of gain from the distributed 

X stock if AX had sold all of its assets in a 

fully taxable transaction for cash in an 

amount equal to the fair market value of such 

property immediately before the distribution 

($50). Thus, X reduces its basis in its 

partnership interest by $50 prior to the 

distribution of Asset 1. Accordingly, X’s basis 

in the distributed portion of Asset 1 is $10. 

Because AX’s basis in the distributed X stock 

immediately before the distribution ($50) 

does not exceed X’s basis in its AX 

partnership interest immediately before the 

distribution ($60), X recognizes no gain 

under paragraph (e)(3) of this section. 

Example 4. Distribution of Stock of the 

Corporate Partner—non pro rata distribution. 

(i) The facts are the same as Example 3(i) of 

this paragraph (h), except that when AX 

liquidates, X receives 75 percent of the X 

stock and 25 percent of Asset 1 and A 

receives 25 percent of the X stock and 75 

percent of Asset 1. 

(ii) The liquidation of AX causes X’s 

interest in X stock to increase from $100 to 

$150 and its interest in Asset 1 to decrease 

from $100 to $50. Thus, AX’s liquidating 

distributions of X stock and Asset 1 to X are 


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a Section 337(d) Transaction because the 

distributions have the effect of an exchange 

by X of $50 of Asset 1 for $50 of X stock. 

(iii)(A) X must recognize gain with respect 

to Asset 1 to prevent the circumvention of 

section 311(b) principles. Under paragraph 

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

section is applied as if X and A amended the 

AX partnership agreement to allocate to X a 

100 percent interest in the distributed 

portion of the X stock. X must recognize gain 

equal to the product of X’s Gain Percentage 

and the gain from Asset 1 that X would have 

recognized (decreased, but not below zero, by 

any gain X recognized with respect to Asset 

1 in the Section 337(d) Transaction under 

any other provision of this chapter) if, 

immediately before the Section 337(d) 

Transaction, AX had sold all of its assets in 

a fully taxable transaction for cash in an 

amount equal to the fair market value of such 

property. 

(B) If Asset 1 had been sold in a fully 

taxable transaction immediately before the 

amendment of the AX partnership agreement, 

X’s allocable share of gain would have been 

$90, or the sum of X’s $40 remaining gain 

under section 704(c) and $50 of the $100 

post-contribution appreciation. X’s Gain 

Percentage is 50 percent (equal to a fraction, 

the numerator of which is X’s $50 interest in 

Asset 1 effectively exchanged for X stock, 

and the denominator of which is X’s $100 

interest in Asset 1 immediately before the 

Section 337(d) Transaction). Thus, X 

recognizes $45 of gain ($90 multiplied by 50 

percent) under the deemed redemption rule 

in paragraph (d) of this section. Under 

paragraph (d)(4)(i) of this section, X’s basis in 

its AX partnership interest increases from 

$60 to $105. Under paragraph (d)(4)(ii) of this 

section, AX’s basis in Asset 1 increases from 

$60 to $105 because Asset 1 is the 

appreciated property treated as the subject of 

the exchange. 

(iv)(A) Paragraph (e) of this section applies 

because the distributed X stock was the 

subject of a previous Section 337(d) 

Transaction and because section 732(f) does 

not apply. Under § 1.732–1(c)(1)(iii), AX is 

treated as first distributing the X stock to X 

before the distribution of 25 percent of Asset 

1. For purposes of determining X’s basis in 

Asset 1 and X’s gain on distribution, the basis 

of the distributed X stock is treated as $100, 

the greater of $75 (75 percent of the stock’s 

$100 basis in the hands of the partnership) 

or $100, the fair market value of the 

distributed X stock ($150) less X’s allocable 

share of gain if the partnership had sold all 

of the X stock immediately before the 

distribution for cash in an amount equal to 

its fair market value ($50). Thus, X will 

reduce its basis in its partnership interest by 

$100 prior to the distribution of Asset 1. 

Accordingly, X’s basis in the distributed 

portion of Asset 1 is $5. Because AX’s basis 

in the distributed X stock immediately before 

the distribution as computed for purposes of 

this section ($100) does not exceed X’s basis 

in its AX partnership interest immediately 

before the distribution ($105), X recognizes 

no additional gain under paragraph (e)(3) of 

this section. 

(B) For purposes of determining A’s basis 

in Asset 1 and A’s gain on distribution, the 

basis of the distributed X stock is treated as 

$25, the greater of $25 (25 percent of the 

stock’s $100 basis in the hands of the 

partnership) or $0, the fair market value of 

the distributed X stock ($50) less A’s 

allocable share of gain if the partnership had 

sold all of the X stock immediately before the 

distribution for cash in an amount equal to 

its fair market value ($50). Thus, A will 

reduce its basis in its partnership interest by 

$25 prior to the distribution of Asset 1. 

Accordingly, A’s basis in the distributed 

portion of Asset 1 is $75. Because AX’s basis 

in the distributed X stock immediately before 

the distribution as computed for purposes of 

this section ($100) does not exceed A’s basis 

in its AX partnership interest immediately 

before the distribution ($100), A recognizes 

no additional gain under paragraph (e)(3) of 

this section. 

Example 5. Deemed redemption rule— 

subsequent purchase of Stock of the 

Corporate Partner. The facts are the same as 

Example 1(i) of this paragraph (h), except 

that A contributes cash of $100 instead of X 

stock. In a later year, when the value of Asset 

1 has not changed, AX uses the contributed 

cash to purchase X stock for $100. AX’s 

purchase of X stock has the effect of an 

exchange by X of appreciated property for X 

stock, and thus, is a Section 337(d) 

Transaction. X must recognize gain at the 

time, and to the extent, that X’s share of 

appreciated property (other than X stock) is 

reduced in exchange for X stock. Thus, the 

consequences of the partnership’s purchase 

of X stock are the same as those described in 

Example 1(ii) and (iii) of this paragraph (h), 

resulting in X recognizing $40 of gain. 

Example 6. Change in allocation ratios— 

amendment of partnership agreement. (i) The 

facts are the same as Example 3(i) of this 

paragraph (h), except that in Year 9, AX does 

not liquidate, and the AX partnership 

agreement is amended to allocate to X 80 

percent of the income, gain, loss, and 

deduction from the X stock and to allocate 

to A 80 percent of the income, gain, loss, and 

deduction from Asset 1. If AX had sold the 

partnership assets immediately before the 

change to the partnership agreement, X 

would have been allocated $90 of gain from 

Asset 1 and $50 of gain from the X stock. 

(ii) The amendment to the AX partnership 

agreement causes X’s interest in its stock to 

increase from $100 (50 percent of the stock 

value immediately before the amendment of 

the agreement) to $160 (80 percent of stock 

value immediately following amendment of 

agreement) and its interest in Asset 1 to 

decrease from $100 to $40. Thus, the 

amendment of the partnership agreement is 

a Section 337(d) Transaction because the 

amendment has the effect of an exchange by 

X of $60 of Asset 1 for $60 of its stock. 

(iii) X must recognize gain equal to the 

product of X’s Gain Percentage and the gain 

from Asset 1 that X would have recognized 

(decreased, but not below zero, by any gain 

X recognized with respect to Asset 1 in the 

Section 337(d) Transaction under any other 

provision of this chapter) if, immediately 

before the Section 337(d) Transaction, AX 

had sold all of its assets in a fully taxable 

transaction for cash in an amount equal to 

the fair market value of such property. If 

Asset 1 had been sold in a fully taxable 

transaction immediately before the 

amendment of the AX partnership agreement, 

X’s allocable share of gain would have been 

$90, or the sum of X’s $40 remaining gain 

under section 704(c) and 50 percent of the 

$100 post-contribution appreciation. X’s Gain 

Percentage is 60 percent (equal to a fraction, 

the numerator of which is X’s $60 interest in 

Asset 1 effectively exchanged for X stock, 

and the denominator of which is X’s $100 

interest in Asset 1 immediately before the 

Section 337(d) Transaction). Thus, X 

recognizes $54 of gain ($90 multiplied by 60 

percent) under the deemed redemption rule 

in paragraph (d) of this section. Under 

paragraph (d)(4)(i) of this section, X’s basis in 

its AX partnership interest increases from 

$60 to $114. Under paragraph (d)(4)(ii) of this 

section, AX’s basis in Asset 1 increases from 

$60 to $114 because Asset 1 is the 

appreciated property treated as the subject of 

the exchange. 

Example 7. Change in allocation ratios— 

admission and exit of a partner. (i) The facts 

are the same as Example 1(i) of this 

paragraph (h). In addition, in Year 2, when 

the values of Asset 1 and the X stock have 

not changed, B contributes $100 of cash to 

AX in exchange for a one-third interest in the 

partnership. Upon the admission of B as a 

partner, X’s interest in Asset 1 decreases from 

$50 to $33.33, and its interest in B’s 

contributed cash increases. B’s admission is 

not a Section 337(d) Transaction because it 

does not have the effect of an exchange by 

X of its interest in Asset 1 for X stock. 

Accordingly, X does not recognize gain under 

paragraph (d) of this section. 

(ii) In Year 9, when the values of Asset 1 

and the X stock have not changed, the 

partnership distributes $50 of cash and 50 

percent of Asset 1 (valued at $50) to B in 

liquidation of B’s interest. X and A are equal 

partners in all respects after the distribution. 

Upon the liquidation of B’s interest, X’s 

interest in Asset 1 decreases from $33.33 to 

$25, and its interest in X stock increases from 

$33.33 to $50. AX’s liquidation of B’s interest 

has the effect of an exchange by X of 

appreciated property for X stock, and thus, is 

a Section 337(d) Transaction. 

(iii) Pursuant to paragraph (d)(2) of this 

section, X’s interest in X stock and other 

appreciated property held by the partnership 

is determined based on all facts and 

circumstances, including allocation and 

distribution rights in the partnership 

agreement. However, paragraph (d)(2) of this 

section also requires that X’s interest in its 

stock for purposes of paragraph (d) will never 

be less than the Corporate Partner’s largest 

interest (by value) in those shares of Stock of 

the Corporate Partner taken into account 

when the partnership previously determined 

whether there had been a Section 337(d) 

Transaction (regardless of whether the 

Corporate Partner recognized gain in the 

earlier transaction). Although X’s interest in 

X stock increases to $50 upon AX’s 

liquidation of B’s interest, X’s largest interest 

previously taken into account under 

paragraph (d)(1) of this section was $50. 

Thus, X’s interest in its stock is not 

considered to be increased, and X therefore 

recognizes no gain under paragraph (d) of 


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26592 Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Rules and Regulations 

this section, provided that the transactions 

did not occur as part of a plan or arrangement 

to circumvent the purpose of this section. 

Example 8. Change in allocation ratios— 

plan to circumvent purpose of this section. (i) 

In Year 1, X, a corporation, and A, an 

individual, contribute $99 and $1, 

respectively, to newly-formed partnership 

AX, with X receiving a 99 percent interest in 

AX and A receiving a 1 percent interest in 

AX. AX borrows $100,000 from a third-party 

lender and uses the proceeds to purchase X 

stock, which is Stock of the Corporate 

Partner. Later, as part of a plan or 

arrangement to circumvent the purposes of 

this section, A contributes $99,999 of cash, 

which AX uses to repay the loan, and X 

contributes Asset 1 with a fair market value 

of $99,901 and basis of $20,000. After these 

contributions, A and X are equal partners in 

AX in all respects. 

(ii) Pursuant to paragraph (d)(2) of this 

section, X’s interest in X stock and other 

appreciated property held by the partnership 

is determined based on all facts and 

circumstances, including allocation and 

distribution rights in the partnership 

agreement. Generally, pursuant to paragraph 

(d)(2) of this section, X’s interest in X stock 

for purposes of paragraph (d) of this section 

will never be less than the Corporate 

Partner’s largest interest (by value) in those 

shares of Stock of the Corporate Partner taken 

into account when the partnership 

previously determined whether there had 

been a Section 337(d) Transaction (regardless 

of whether the Corporate Partner recognized 

gain in the earlier transaction). This 

limitation does not apply, however, if the 

reduction in X’s interest in X’s stock 

occurred as part of a plan or arrangement to 

circumvent the purpose of this section. 

Because the transactions described in this 

example are part of a plan or arrangement to 

circumvent the purpose of this section, the 

limitation in paragraph (d)(2) of this section 

does not apply. Accordingly, the deemed 

redemption rule under paragraph (d) of this 

section applies to the transactions with the 

consequences described in Example 1(iii) of 

this paragraph (h), resulting in X recognizing 

$39,950.50 of gain. 

Example 9. Tiered partnership. (i) In Year 

1, X, a corporation, and A, an individual, 

form partnership UTP. X contributes Asset 1 

with a fair market value of $80 and a basis 

of $0 in exchange for an 80 percent interest 

in UTP. A contributes $20 of cash in 

exchange for a 20 percent interest in UTP. 

UTP and B, an individual, form partnership 

LTP as equal partners. UTP contributes Asset 

1 and $20 of cash. B contributes X stock, 

which is Stock of the Corporate Partner, with 

a basis and fair market value of $100. 

(ii) Pursuant to paragraph (g) of this 

section, the rules of this section shall apply 

to tiered partnerships in a manner that is 

consistent with the purpose set forth in 

paragraph (a) of this section. Pursuant to 

paragraph (d)(1) of this section, if X is in a 

partnership that engages in a Section 337(d) 

Transaction, X must recognize gain at the 

time, and to the extent, that X’s share of 

appreciated property is reduced in exchange 

for X stock. The formation of LTP causes X’s 

interest in X stock to increase from $0 to $40 

and its interest in Asset 1 to decrease from 

$64 to $32. Thus, LTP’s formation is a 

Section 337(d) Transaction because the 

formation has the effect of an exchange by X 

of $32 of Asset 1 for $32 of X stock. 

(iii) X must recognize gain with respect to 

Asset 1 to prevent the circumvention of 

section 311(b) principles. X must recognize 

gain equal to the product of X’s Gain 

Percentage and the gain from Asset 1 

(decreased, but not below zero, by any gain 

X recognized with respect to Asset 1 in the 

Section 337(d) Transaction under any other 

provision of this chapter) that X would 

recognize if, immediately before the Section 

337(d) Transaction, all assets were sold in a 

fully taxable transaction for cash in an 

amount equal to the fair market value of such 

property. If Asset 1 had been sold in a fully 

taxable transaction immediately before LTP’s 

formation, X’s allocable share of gain would 

have been $80 pursuant to section 704(c). X’s 

Gain Percentage is 50 percent (equal to a 

fraction, the numerator of which is X’s $32 

interest in Asset 1 effectively exchanged for 

X stock, and the denominator of which is X’s 

$64 interest in Asset 1 immediately before 

the Section 337(d) Transaction). Thus, X 

recognizes $40 of gain ($80 multiplied by 50 

percent) under the deemed redemption rule 

in paragraph (d) of this section. Under 

paragraphs (d)(4)(i) and (ii) of this section, 

X’s basis in its UTP partnership interest 

increases from $0 to $40, UTP’s basis in its 

LTP partnership interest increases from $20 

to $60, and LTP’s basis in Asset 1 increases 

from $0 to $40 pursuant to paragraph (g) of 

this section. 

(i) Applicability date. This section 

applies to transactions occurring on or 

after June 12, 2015. 

§ 1.337(d)–3T [Removed] 

■ Par. 3. Remove § 1.337(d)–3T. 

■ Par. 4. Section 1.732–1 is amended by 

revising paragraphs (c)(1) and (c)(5)(ii) 

to read as follows: 

§ 1.732–1 Basis of distributed property 

other than money. 

* * * * * 

(c) * * * 

(1) General rule—(i) Unrealized 

receivables and inventory items. Except 

as provided in paragraph (c)(1)(iii) of 

this section, the basis to be allocated to 

properties distributed to a partner under 

section 732(a)(2) or (b) is allocated first 

to any unrealized receivables (as 

defined in section 751(c)) and inventory 

items (as defined in section 751(d)(2)) in 

an amount equal to the adjusted basis of 

each such property to the partnership 

immediately before the distribution. If 

the basis to be allocated is less than the 

sum of the adjusted bases to the 

partnership of the distributed 

unrealized receivables and inventory 

items, the adjusted basis of the 

distributed property must be decreased 

in the manner provided in § 1.732– 

1(c)(2)(i). See § 1.460–4(k)(2)(iv)(D) for a 

rule determining the partnership’s basis 

in long-term contract accounted for 

under a long-term contract method of 

accounting. 

(ii) Other distributed property. Any 

basis not allocated to unrealized 

receivables or inventory items under 

paragraph (c)(1)(i) of this section or to 

stock of persons that control the 

corporate partner or to the corporate 

partner’s stock under paragraph 

(c)(1)(iii) of this section is allocated to 

any other property distributed to the 

partner in the same transaction by 

assigning to each distributed property 

an amount equal to the adjusted basis of 

the property to the partnership 

immediately before the distribution. 

However, if the sum of the adjusted 

bases to the partnership of such other 

distributed property does not equal the 

basis to be allocated among the 

distributed property, any increase or 

decrease required to make the amounts 

equal is allocated among the distributed 

property as provided in § 1.732–1(c)(2). 

(iii) Stock distributed to the corporate 

partner. If a partnership makes a 

distribution described in § 1.337(d)– 

3(e)(1), then for purposes of this section, 

the basis to be allocated to properties 

distributed under section 732(a)(2) or (b) 

is allocated first to the Stock of the 

Corporate Partner, as defined in 

§ 1.337(d)–3(c)(2), before the 

distribution of any other property (other 

than cash). The amount allocated to the 

Stock of the Corporate Partner is as 

provided in § 1.337(d)–3(e)(2). 

* * * * * 

(5) * * * 

(ii) Exception. Notwithstanding 

paragraph (c)(5)(i) of this section, the 

first sentence of each of paragraphs 

(c)(1)(i) and (ii) of this section, and 

paragraph (c)(1)(iii) of this section in its 

entirety, apply to distributions of Stock 

of the Corporate Partner, as defined in 

§ 1.337(d)–3(c)(2), that occur on or after 

June 12, 2015. 

* * * * * 

§ 1.732–1T [Removed] 

■ Par. 5. Remove § 1.732–1T. 

■ Par. 6. Section 1.732–3 is revised to 

read as follows: 

§ 1.732–3 Corresponding adjustment to 

basis of assets of a distributed corporation 

controlled by a corporate partner. 

(a) Determination of control. The 

determination of whether a corporate 

partner that is a member of a 

consolidated group has control of a 

distributed corporation for purposes of 

section 732(f) shall be made by applying 

the special aggregate stock ownership 

rules of § 1.1502–34. 


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Federal Register / Vol. 83, No. 111 / Friday, June 8, 2018 / Rules and Regulations 26593 

(b) Aggregation of basis within 

consolidated group. With respect to 

distributed stock of a corporation, if the 

following two conditions are met, then 

section 732(f) shall apply only to the 

extent that the partnership’s adjusted 

basis in the distributed stock 

immediately before the distribution 

exceeds the aggregate basis of the 

distributed stock of the corporation in 

the hands of corporate partners that are 

members of the same consolidated 

group (as defined in § 1.1502–1(h)) 

immediately after the distribution: 

(1) Two or more of the corporate 

partners receive a distribution of stock 

in another corporation; and 

(2) The corporation, the stock of 

which was distributed by the 

partnership, is or becomes a member of 

the distributee partners’ consolidated 

group following the distribution. 

(c) Application of section 732(f) to 

Gain Elimination Transactions—(1) 

General rule. In the event of a Gain 

Elimination Transaction, section 732(f) 

shall apply as though the Corporate 

Partner acquired control (as defined in 

section 732(f)(5)) of the Distributed 

Corporation immediately before the 

Gain Elimination Transaction. 

(2) Definitions. The following 

definitions apply for purposes of this 

paragraph (c): 

(i) Corporate Partner. The term 

Corporate Partner means a person that 

is classified as a corporation for federal 

income tax purposes and that holds or 

acquires an interest in a partnership. 

(ii) Stock. The term Stock includes 

other equity interests, including 

options, warrants, and similar interests. 

(iii) Distributed Stock. The term 

Distributed Stock means Stock 

distributed by a partnership to a 

Corporate Partner, or Stock the basis of 

which is determined by reference to the 

basis of such Stock. Distributed Stock 

also includes Stock owned directly or 

indirectly by a Distributed Corporation 

if the basis of such Stock has been 

reduced pursuant to section 732(f). 

(iv) Distributed Corporation. The term 

Distributed Corporation means the 

issuer of Distributed Stock (or, in the 

case of an option, the issuer of the Stock 

into which the option is exercisable). 

(v) Gain Elimination Transaction. The 

term Gain Elimination Transaction 

means a transaction in which 

Distributed Stock is disposed of and less 

than all of the gain is recognized 

unless— 

(A) The transferor of the Distributed 

Stock receives in exchange Stock or a 

partnership interest that is exchanged 

basis property (as defined in section 

7701(a)(44)) with respect to the 

Distributed Stock; or 

(B) A transferee corporation holds the 

Distributed Stock as transferred basis 

property (as defined in section 

7701(a)(43)) with respect to the 

transferor corporation’s gain. A Gain 

Elimination Transaction includes 

(without limitation) a reorganization 

under section 368(a) in which the 

Corporate Partner and the Distributed 

Corporation combine, and a distribution 

of the Distributed Stock by the 

Corporate Partner to which section 

355(c)(1) or 361(c)(1) applies. 

(d) Tiered partnerships. The rules of 

this section shall apply to tiered 

partnerships in a manner that is 

consistent with the purposes of section 

732(f). 

(e) Applicability date. This section 

applies to transactions occurring on or 

after June 8, 2018. 

Kirsten Wielobob, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: May 25, 2018. 

David J. Kautter, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2018–12407 Filed 6–7–18; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[Docket No. USCG–2018–0516] 

Drawbridge Operation Regulation; 

Charles River, Boston, MA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of deviation from 

drawbridge regulation. 

SUMMARY: The Coast Guard has issued a 

temporary deviation from the operating 

schedule that governs the Massachusetts 

Department of Transportation (Craigie) 

Bridge across Charles River, mile 1.0, at 

Boston, Massachusetts. This deviation is 

necessary to facilitate the Boston Pops 

Fireworks Spectacular on July 4, 2018, 

and allows the bridge to remain in the 

closed position for two hours. 

DATES: This deviation is effective from 

11 p.m. on July 4, 2018 through 1 a.m. 

on July 5, 2018. 

ADDRESSES: The docket for this 

deviation, USCG–2018–0516 is available 

at http://www.regulations.gov. Type the 

docket number in the ‘‘SEARCH’’ box 

and click ‘‘SEARCH’’. Click on Open 

Docket Folder on the line associated 

with this deviation. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this temporary 

deviation, call or email Jeffrey Stieb, 

Bridge Management Specialist, First 

District Bridge Branch, U.S. Coast 

Guard; telephone 617–223–8364, email 

Jeffrey.D.Stieb@uscg.mil. 

SUPPLEMENTARY INFORMATION: The 

Massachusetts Department of 

Transportation (Craigie) Bridge across 

Charles River, mile 1.0, at Boston, 

Massachusetts, has a vertical clearance 

of 12 feet at normal pool in the closed 

position. The existing drawbridge 

operating regulations are listed at 33 

CFR 117.591(e). 

The Massachusetts Department of 

Transportation requested a temporary 

deviation from the normal operating 

schedule. This temporary deviation will 

allow the bridge to remain closed from 

11 p.m. on July 4, 2018 through 1 a.m. 

on July 5, 2018 to allow pedestrian 

traffic to exit the Boston Pops Fireworks 

Spectacular. The waterway is used 

extensively by recreational traffic during 

the fireworks display. A State Police 

Unit will be on-scene to direct vessel 

traffic. Vessels that can pass under the 

bridge in the closed position may do so 

at any time. The bridge will be able to 

open for emergencies. There is no 

alternate route for vessels to pass. The 

Coast Guard will inform users of the 

waterway of the change in operating 

schedule through our Local and 

Broadcast Notices to Mariners so that 

vessel operators can arrange their 

transits to minimize any impact caused 

by the temporary deviation. 

In accordance with 33 CFR 117.35(e), 

the drawbridge must return to its regular 

operating schedule immediately at the 

end of the effective period of this 

temporary deviation. This deviation 

from the operating regulations is 

authorized under 33 CFR 117.35. 

Dated: June 4, 2018. 

C.J. Bisignano, 

Supervisory Bridge Management Specialist, 

First Coast Guard District. 

[FR Doc. 2018–12310 Filed 6–7–18; 8:45 am] 

BILLING CODE 9110–04–P 


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