Federal Register /Vol. 65, No. 9 / Thursday, January 13, 2000 / Proposed Rules 2081

rulemaking intended to implement the

Birth and Adoption Unemployment

Compensation program. This action is

taken to permit additional comment

from interested persons.

DATES: Comments must be received on

or before February 2, 2000.

ADDRESSES: Send written comments to

Grace A. Kilbane, Director,

Unemployment Insurance Service,

Employment and Training

Administration (ETA), U.S. Department

of Labor, 200 Constitution Avenue, NW,

Room S–4231, Washington, DC 20210,

or by e-mail to the following address:

commentonbaauc@doleta.gov.

FOR FURTHER INFORMATION CONTACT:

Gerard Hildebrand, Unemployment

Insurance Service, ETA, U.S.

Department of Labor, 200 Constitution

Avenue, N.W., Room S–4231,

Washington, DC 20210. Telephone:

(202) 219–5200 (this is not a toll-free

number); facsimile: (202) 219–8506.

SUPPLEMENTARY INFORMATION: In the

Federal Register of December 3, 1999

(64 FR 67971), the Department of Labor

published a notice of proposed

rulemaking intended to add 20 CFR Part

604, which concerns the establishment

of a Birth and Adoption Unemployment

Compensation program. Interested

persons were requested to submit

comments on or before January 18,

2000.

The Department has received a

number of requests for extensions of the

comment period. The Department

believes that it is reasonable to extend

the comment period an additional 15

days for all interested persons.

Therefore, the comment period for the

notice of proposed rulemaking, adding

20 CFR Part 604 (Regulations for Birth

and Adoption Unemployment

Compensation), is extended to February

2, 2000.

Signed at Washington, DC, on January 10,

2000.

Raymond L. Bramucci,

Assistant Secretary of Labor.

[FR Doc. 00–844 Filed 1–12–00; 8:45 am]

BILLING CODE 4510–30–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–103831–99]

RIN 1545–AX09

Allocation of Partnership Debt

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

allocation of nonrecourse liabilities by a

partnership. The proposed regulations

revise tier three of the three-tiered

allocation structure contained in the

current nonrecourse liability

regulations, and also provide guidance

regarding the allocation of a single

nonrecourse liability secured by

multiple properties. This document also

contains a notice of public hearing on

these proposed regulations.

DATES: Written comments must be

received by April 12, 2000. Requests to

speak (with outlines of oral comments)

at a public hearing scheduled for May

3, 2000, at 10 a.m., must be received by

April 12, 2000.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–103831–99),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. In the

alternative, submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:DOM:CORP:R (REG–

103831–99), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option of

the IRS Home Page, or by submitting

comments directly to the IRS Internet

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

taxlregs/comments.html. The public

hearing will be held in Room 2615,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Christopher

Kelley, (202) 622–3070; concerning

submissions of comments, the hearing,

and/or to be placed on the building

access list to attend the hearing, Guy

Traynor, (202) 622–7190 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document proposes to revise

§§ 1.752–3 and 1.752–5 of the Income

Tax Regulations (26 CFR part 1) relating

to the allocation by a partnership of

nonrecourse liabilities.

Background

Treasury regulation § 1.752–3

currently provides a three-tiered system

for allocating nonrecourse liabilities.

The three-tiered system applies

sequentially. Thus, as a portion of a

liability is allocated to a partner under

the first tier, that portion is not available

to be allocated under the second tier.

Similarly, as a portion of a liability is

allocated to a partner under the second

tier, that portion is not available to be

allocated in the third tier.

Under the first tier, a partner is

allocated an amount of the liability

equal to that partner’s share of

partnership minimum gain under

section 704(b). See § 1.704–2(g)(1).

Under the second tier, to the extent

the entire liability has not been

allocated under the first tier, a partner

will be allocated an amount of liability

equal to the gain that partner would be

allocated under section 704(c) if the

partnership disposed of all partnership

property subject to one or more

nonrecourse liabilities in full

satisfaction of the liabilities (section

704(c) minimum gain). Under the third

tier, a partner is allocated any excess

nonrecourse liabilities under one of

several methods that the partnership

may choose. One allocation method is

based on the partner’s share of

partnership profits. The partnership

may specify in its partnership

agreement the partners’ interests in

partnership profits for purposes of

allocating excess nonrecourse liabilities

provided the specified interests are

reasonably consistent with allocations

of some other significant item of

partnership income or gain. The

partnership also may allocate excess

nonrecourse liabilities in accordance

with the manner in which it is

reasonably expected that the deductions

attributable to those nonrecourse

liabilities will be allocated. The

partnership may change its allocation

method under the third tier from year to

year.

In Rev. Rul. 95–41, 1995–1 C.B. 132,

the IRS and Treasury addressed the

effect of the three section 704(c)

allocation methods under § 1.704–3

upon the three tiers of § 1.752–3(a). Rev.

Rul. 95–41 also stated that in

determining the partners’ interests in

partnership profits, solely for purposes

of the third tier, section 704(c) built-in

gain (i.e., the excess of a property’s book

value over the contributing partner’s

adjusted tax basis in the property upon

contribution) that was not taken into

account under § 1.752–3(a)(2) (the

second tier) is one factor, but not the

only factor, to be considered. This gain

(excess section 704(c) gain) is equal to

the excess of the amount of section

704(c) built-in gain attributable to an

item of property over the amount of

section 704(c) minimum gain on that

property.

2082 Federal Register /Vol. 65, No. 9 / Thursday, January 13, 2000 / Proposed Rules

Explanation of Provisions

Modifications to Third Tier

The three tiers of § 1.752–3(a) are

structured to allocate liabilities to those

partners who generally would be

allocated income or gain upon the relief

of those liabilities. Under section 752(b),

any decrease in a partner’s share of the

liabilities of a partnership will be

considered a distribution of money to

the partner by the partnership.

Under section 731(a), a partner will

recognize gain on the distribution of

money by the partnership to the extent

that the distribution exceeds the

partner’s adjusted basis in its

partnership interest. Section 704(c)

generally ensures that any built-in gain

on contributed property will be

recognized by the contributing partner

upon the disposition of the property by

the partnership. The partnership

liability allocation rules arguably should

not accelerate the contributing partner’s

recognition of that gain when the

amount of the partnership’s liability

attributable to such property is

sufficient, if allocated to the

contributing partner, to prevent such

partner from recognizing gain.

In response to comments received, the

proposed regulations modify the third

tier to allow a partnership to allocate the

portion of a nonrecourse liabilities in

excess of the portions allocated in tiers

one and two (excess nonrecourse

liabilities) based on the excess section

704(c) gain attributable to the property

securing the liability. Thus, to the extent

a portion of a partnership nonrecourse

liability is available to be allocated in

the third tier, the partnership may

allocate that portion to the contributing

partner based on the excess section

704(c) gain inherent in the property.

Under § 1.704–3(a)(2), section 704(c)

generally applies on a property-byproperty basis. Therefore, in

determining the amount of excess

section 704(c) gain, the built-in gains

and losses on items of contributed

property cannot be aggregated.

Section 1.704–3(a)(3)(i) provides that

the book value of contributed property

is equal to its fair market value at the

time of contribution and is subsequently

adjusted for cost recovery and other

events that affect the basis of the

property. Section 1.704-3(a)(3)(ii)

provides that the section 704(c) built-in

gain with respect to a property is the

excess of the property’s book value over

the contributing partner’s adjusted tax

basis in the property upon contribution.

The built-in gain is thereafter reduced

by decreases in the difference between

the property’s book value and adjusted

tax basis. Similarly, the excess section

704(c) gain will decline as the difference

between the property’s fair market value

and tax basis declines.

If a partnership holds section 704(c)

property subject to the ceiling rule of

§ 1.704–3(b)(1), in certain situations, the

first tier of § 1.752–3(a) can gradually

shift the allocation of liabilities away

from the partner that contributed the

property (the contributing partner) to a

non-contributing partner who does not

necessarily need, for tax purposes, the

entire amount of the liability allocated

to the non-contributing partner in the

first tier. This can give rise to deemed

distributions to the contributing partner,

resulting in gain recognition under

section 731(a)(1) at a time that arguably

is earlier than appropriate. The IRS and

Treasury considered other alternatives

for amending § 1.752–3 that would

address these liability shifts caused by

the ceiling rule, but rejected them

because of their complexity. The

proposed alternative was adopted

because it is simple and seems to

address the predominant concerns

raised by practitioners regarding the

contribution of section 704(c) property.

The IRS and Treasury request comments

on whether further modifications to the

three-tiered structure of § 1.752–3(a) are

necessary to more appropriately allocate

nonrecourse liabilities among partners

and, if so, what type of modifications

would be appropriate.

The holding in Rev. Rul. 95–41, 1995–

1 C.B. 132, that excess section 704(c)

gain is one factor to consider in

determining a partner’s interest in

partnership profits will remain relevant

where a partner does not allocate

nonrecourse debt under the third tier

based on the excess section 704(c) gain

attributable to the property that is

subject to the debt. However, once a

partner has allocated nonrecourse

indebtedness pursuant to the rule in

these proposed regulations based upon

excess section 704(c) gain, that excess

section 704(c) gain cannot again be

considered in determining a partner’s

interest in partnership profits.

Allocation of Single Liability Among

Multiple Properties

Several commentators have requested

that the IRS and Treasury issue

guidance regarding the calculation of

section 704(c) minimum gain under the

second tier when a partnership holds

multiple properties subject to a single

nonrecourse liability. This situation

typically arises when a partnership that

holds several properties, each subject to

an individual liability, refinances the

individual liabilities with a single

nonrecourse liability.

To apply the second tier, partnerships

must determine the amount of the

liability that encumbers each asset. This

allows the partnerships to determine the

section 704(c) minimum gain in each

asset. See § 1.704–3(a)(2).

The proposed regulations provide that

if a partnership holds multiple

properties subject to a single liability,

the liability may be allocated among the

properties based on any reasonable

method. Under the proposed

regulations, a method is not reasonable

if it allocates to any property an amount

that exceeds the fair market value of the

property. Thus, for example, the

liability may be allocated to the

properties based on the relative fair

market value of each property.

The portion of the nonrecourse

liability allocated to each item of

partnership property is treated as a

separate loan under § 1.752–3(a)(2). The

proposed regulations provide that once

a liability is allocated among the

properties, a partnership may not

change the method for allocating the

liability. However, if one of the

properties is no longer subject to the

liability, the portion of the liability

allocated to that property must be

reallocated to the properties still subject

to the liability so that the amount

allocated to any property does not

exceed the fair market value of such

property at the time of the reallocation.

If the outstanding principal of a

liability is reduced, the reduction will

affect the amount of section 704(c)

minimum gain under the second tier.

The proposed regulations provide that

as the outstanding principal of a

liability is reduced, the reduction in

principal outstanding is allocated

among the properties in the same

proportion that the principal originally

was allocated to the properties.

These rules affect only the calculation

of section 704(c) minimum gain under

the second tier of § 1.752–3(a).

Allocation of Single Liability Among

Multiple Partnerships

Some commentators also have

requested guidance on allocations of a

nonrecourse liability among multiple

partnerships. This situation may arise

when a partner contributes multiple

properties subject to the same

nonrecourse liability to more than one

partnership. It also may arise in a

division of a partnership under section

708. Although the proposed regulations

do not address this issue, the IRS and

Treasury request comments regarding

appropriate methods of allocating such

liabilities.

Federal Register /Vol. 65, No. 9 / Thursday, January 13, 2000 / Proposed Rules 2083

Proposed Effective Date

These regulations are proposed to

apply to any liability incurred or

assumed by a partnership on or after the

date final regulations are published in

the Federal Register.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

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

to these regulations, and because the

regulations do not impose a collection

of information on small entities, a

Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice

of proposed rulemaking will be

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (preferably a signed

original and eight (8) copies) that are

submitted timely to the IRS. The IRS

and Treasury specifically request

comments on the clarity of the proposed

regulations and how they may be made

easier to understand. All comments will

be available for public inspection and

copying.

A public hearing has been scheduled

for May 3, 2000, at 10 a.m., in Room

2615, Internal Revenue Building, 1111

Constitution Avenue NW., Washington,

DC. Due to building security

procedures, visitors must enter at the

10th Street entrance, located between

Constitution and Pennsylvania

Avenues, NW. In addition, all visitors

must present photo identification to

enter the building. Because of access

restrictions, visitors will not be

admitted beyond the Internal Revenue

Building lobby more than 15 minutes

before the hearing starts. For

information about having your name

placed on the building access list to

attend the hearing, see the FOR FURTHER

INFORMATION CONTACT section of this

preamble.

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

apply to the hearing. Persons that wish

to present oral comments at the hearing

must submit timely written comments

and an outline of the topics to be

discussed and the time to be devoted to

each topic (preferably a signed original

and eight (8) copies) by April 12, 2000.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information: The principal

author of these regulations is

Christopher Kelley, Office of Chief

Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Par. 2. Section 1.752–3 is amended as

follows:

1. Paragraph (a)(3) is amended by

adding two sentences immediately

before the last sentence in the

paragraph.

2. Paragraph (b) is redesignated as

paragraph (c).

3. New paragraph (b) is added.

4. Paragraph (d) is added.

The additions read as follows:

§ 1.752–3 Partner’s share of nonrecourse

liabilities.

(a) * * *

(3) * * * Additionally, the

partnership may first allocate an excess

nonrecourse liability to a partner up to

the amount of built-in gain on section

704(c) property (as defined under

§ 1.704–3(a)(3)(ii)) that is allocable to

the partner on the property subject to

that nonrecourse liability to the extent

that such built-in gain exceeds the gain

described in paragraph (a)(2) of this

section with respect to such property.

To the extent a partnership uses this

additional method and the entire

amount of the excess nonrecourse

liability is not allocated to the

contributing partner, the partnership

must allocate the remaining amount of

the excess nonrecourse liability under

one of the other methods in this

paragraph (a)(3). * * *

(b) Allocation of a single nonrecourse

liability among multiple properties—(1)

In general. For purposes of determining

the amount of taxable gain under

paragraph (a)(2) of this section, if a

partnership holds multiple properties

subject to a single nonrecourse liability,

the partnership may allocate the

liability among the multiple properties

under any reasonable method. A

method is not reasonable if it allocates

to any item of property an amount of the

liability in excess of the fair market

value of the property at the time the

liability is incurred. The portion of the

nonrecourse liability allocated to each

item of partnership property is then

treated as a separate loan under

paragraph (a)(2) of this section. In

general, a partnership may not change

the method of allocating a single

nonrecourse liability under this

paragraph (b) while any portion of the

liability is outstanding. However, if one

or more of the multiple properties

subject to the liability is no longer

subject to the liability, the portion of the

property allocated to that property must

be reallocated among the properties still

subject to the liability so that the

amount of the liability allocated to any

property does not exceed the fair market

value of such property at the time of

reallocation.

(2) Reductions in principal. For this

paragraph (b), when the outstanding

principal of a partnership liability is

reduced, the reduction of outstanding

principal is allocated among the

multiple properties in the same

proportion that the partnership liability

originally was allocated to the

properties under paragraph (b)(1) of this

section.

* * * * *

(d) Effective date. This section applies

to partnership liabilities incurred or

assumed on or after the date final

regulations are published in the Federal

Register.

Par. 3. The first sentence of paragraph

(a) of § 1.752–5 is revised to read as

follows:

§ 1.752–5 Effective dates and transition

rules.

(a) In general. Except as otherwise

provided in § 1.752–3(d), unless a

partnership makes an election under

paragraph (b)(1) of this section to apply

the provisions of §§ 1.752–1 through

1.752–4 earlier, §§ 1.752–1 through

1.752–4 apply to any liability incurred

or assumed by a partnership on or after

December 28, 1991, other than a liability

incurred or assumed by the partnership

pursuant to a written binding contract

2084 Federal Register /Vol. 65, No. 9 / Thursday, January 13, 2000 / Proposed Rules

in effect prior to December 28, 1991 and

at all times thereafter. * * *

* * * * *

Robert E. Wenzel,

Deputy Commissioner of Internal Revenue.

[FR Doc. 00–275 Filed 1–12–00; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–116567–99]

RIN 1545–AX67

Definition of Hyperinflationary

Currency for Purposes of Section 988

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations concerning when a

currency will be considered

hyperinflationary for purposes of

section 988. These regulations are

intended to prevent distortions

associated with the computation of

income and expense arising from

section 988 transactions denominated in

hyperinflationary currencies. This

document also provides notice of a

public hearing on these regulations.

DATES: Written and electronic comments

must be received by April 20, 2000.

Requests to speak (with outlines of oral

comments) at the public hearing

scheduled for May 17, 2000 at 10 a.m.

must be submitted by April 20, 2000.

ADDRESSES: Send submissions to

CC:DOM:CORP:R (REG–116567–99),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC. 20044. Submissions

may be hand delivered Monday through

Friday between the hours of 8 a.m. and

5 p.m. to CC:DOM:CORP:R (REG–

116567–99), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS site at

http://www.irs.ustreas.gov/tax-regs/

regslist.html. The public hearing is in

room 2615, Internal Revenue Building,

1111 Constitution Avenue, NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Roger M. Brown at (202) 622–3830;

concerning submissions of comments,

the hearing, and/or requests to be placed

on the building access list to attend the

hearing, contact Guy R. Traynor at (202)

622–7180 (not toll-free numbers) .

SUPPLEMENTARY INFORMATION:

Background

This document contains a proposed

amendment to the Income Tax

Regulations (26 CFR part 1) under

section 988 of the Internal Revenue

Code (Code). On March 17, 1992, the

IRS and Treasury published final

regulations in the Federal Register at 57

FR 9172 relating to the taxation of

section 988 transactions, including,

inter alia, transactions denominated in

hyperinflationary currencies. Also on

March 17, 1992, proposed regulations

were published in the Federal Register

at 57 FR 9217 (INTL–15–91) relating to

the treatment of certain financial

instruments denominated in

hyperinflationary currencies. The

proposed regulations did not separately

define hyperinflationary currency.

Rather, they simply made reference to

the definition in the final regulations,

§ 1.988–1(f).

Further, elsewhere in this issue of the

Federal Register, TD 8860 finalized the

proposed regulations issued in 1992.

This notice of proposed rulemaking is

intended to accompany the publication

of these final regulations and propose a

change in the period of years that are

considered in determining whether a

currency is hyperinflationary for

purposes of section 988.

Explanation of Provisions

For purposes of section 988, the term

hyperinflationary currency is defined in

§ 1.988–1(f), which utilizes the

definition in § 1.985–1(b)(2)(ii)(D). This

definition was developed in the context

of the Dollar Approximate Separate

Transactions Method (DASTM)

regulations, § 1.985–3, and generally

considers the cumulative effects of

inflation over the base period in

determining whether a currency is

hyperinflationary. The base period

consists of the thirty-six calendar month

period immediately preceding the first

day of the current calendar year. Use of

this base period is generally appropriate

in the context of DASTM because a

qualified business unit needs to know in

advance if it is subject to § 1.985–3

calculations. In part, this is because of

the translation period requirements of

§ 1.985–3(c)(7).

However, failure to take the current

year’s inflation into account for

purposes of computing foreign currency

gain or loss under section 988 may lead

to distortions in income and expense

arising from certain items whose cash

flows reflect hyperinflationary

conditions because inflation may rise

dramatically in a single year.

Accordingly, the IRS and Treasury

believe that for purposes of section 988,

it is more appropriate to consider the

cumulative inflation rate over the thirtysix month period ending on the last day

of the taxpayer’s (or the qualified

business unit’s) current taxable year.

See also § 1.905–3T(d)(4)(i) (including

current year inflation in determining

whether a currency is hyperinflationary

for purposes of section 905). The change

in the base period in this notice of

proposed rulemaking, however, applies

only for the purposes of section 988 and

not for the purpose of determining

whether a taxpayer (or QBU) is subject

to the provisions of § 1.985–3. However,

other Code provisions may be affected

by this change, due to the relationship

of their substantive rule to section 988.

See, e.g., § 1.267(f)–1(e) (relating to the

application of the loss disallowance rule

of section 267(a)(1) as applied to related

party, nonfunctional currency loans).

Proposed Effective Date

These regulations are proposed to

apply to transactions entered into after

February 14, 2000. Until these proposed

regulations are finalized, the existing

final regulations under § 1.988–1(f) shall

remain in effect.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

has also been determined that section

553(b) of the Administrative Procedure

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

to these regulations, and, because these

regulations do not impose a collection

of information on small entities, the

provisions of the Regulatory Flexibility

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

Pursuant to section 7805(f) of the

Internal Revenue Code, this notice of

proposed rulemaking will be submitted

to the Small Business Administration

for comment on its impact on small

businesses.

Comments and Requests for a Public

Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

electronic and written comments (a

signed original and eight (8) copies, if

written) that are submitted timely to the

IRS. In particular, the IRS and Treasury

are interested in comments relating to

the change in the measurement of the

base period, and suggesting other