Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 23

§ 207.46 Investigations concerning certain

countervailing duty orders.

(a) Definitions. For purposes of this

section:

(1) Requesting party means an

interested party described in section

771(9) (C), (D), (E), (F), or (G) of the Act.

(2) Order means a countervailing duty

order issued under section 303 of the

Act as to which the requirement of an

affirmative determination of material

injury under section 303(a)(2) of the Act

was not applicable at the time such

order was issued.

(3) WTO Agreement means the

Agreement Establishing the World

Trade Organization entered into on

April 15, 1994.

(b) Request for review. A requesting

party may file with the Commission a

request for an investigation under

section 753 of the Act within the time

period established by section 753(a)(3)

of the Act. The request should contain

the following information:

(1) A description and identification of

the relevant domestic like product, the

industry in the United States producing

that product that is likely to be

materially injured by reason of imports

of the subject merchandise if the Order

is revoked, and each individual member

of that industry.

(2) Information reasonably available

to the requesting party concerning the

names and addresses of all known

enterprises believed to be

manufacturing, producing, exporting, or

importing the subject merchandise;

(3) Information reasonably available

to the requesting party documenting

that the industry described in paragraph

(b)(1) of this section is likely to be

materially injured by reason of subject

imports if the Order is revoked,

including:

(i) Information concerning the

capacity, production, sales, market

share, inventories, employment, wages,

productivity, profits, ability to raise

capital, and development and

production efforts of the industry

described in paragraph (b)(1) of this

section.

(ii) Information concerning current

and projected production capacity in

the exporting country of the subject

merchandise, inventories of the subject

merchandise, and the existence of

barriers to the importation of such

merchandise into countries other than

the United States.

(4) Information concerning any scope

and anticircumvention rulings issued by

the administering authority with respect

to the Order.

(c) Initiation of Investigation. (1)

Upon the receipt of a timely filed

request for a section 753 investigation

satisfying the requirements of paragraph

(b) of this section, the Secretary shall

publish a notice of initiation of such

investigation in the Federal Register.

(2) Subject to paragraph (c)(3) of this

section, a section 753 investigation shall

be completed within one year of the

date of publication of the notice of

initiation of such investigation in the

Federal Register.

(3) The Commission may take more

than one year to complete section 753

investigations for which requests for

investigations are received within one

year after the date on which the WTO

Agreement enters into force with respect

to the United States. All such

investigations must be completed

within four years of that date, however.

In determining whether to extend the

completion date for a section 753

investigation, the Commission shall

consult with the administering

authority. Grounds for extending

completion include, but are not limited

to, the desire to conduct investigations

involving the same or similar domestic

industries and domestic like products

on a simultaneous basis, and the desire

to efficiently manage the Commission’s

caseload.

(d) Conduct of Investigations. The

procedures set forth in subparts A and

C of this part shall apply to all

investigations initiated under this

section.

(e) When No Request for Review Is

Filed. When there has been no properly

filed and sufficient request for a section

753 investigation of an Order, the

Commission shall notify the

administering authority that a negative

determination has been made under

section 753(a) of the Act with respect to

that Order.

(f) Pending and Suspended Section

303 Investigations. If, on the data on

which a country becomes a signatory to

the Agreement on Subsidies and

Countervailing Measures referred to in

section 101(d)(12) of the Uruguay

Round Agreements Act, there is a

section 303 countervailing duty

investigation in progress or suspended

with respect to that country’s

merchandise for which the requirement

of a material injury determination under

section 303(a)(2) of the Act was not

applicable at the time the investigation

was initiated, the Commission shall

commence an investigation pursuant to

the provisions of section 753(c) of the

Act with respect to pending

investigations and suspended

investigations to which section

704(i)(1)(B) of the Act applies.

(g) Request for Simultaneous

Expedited Section 751(c) Review. (1) A

requesting party who requests a section

753 review may at the same time request

from the Commission and the

administering authority an expedited

review under section 751(c) of the Act

of a countervailing or antidumping duty

order involving the same or comparable

subject merchandise. The request for

review under section 751(c) of the Act

should set forth evidence to establish

why revocation of the order to be

reviewed under section 751(c) of the Act

would be likely to lead to continuation

or recurrence of material injury and

should additionally contain any

information required by the regulations

of the administering authority.

(2) Should the administering

authority, after consulting with the

Commission, determine to initiate a

section 751(c) review, the Commission

shall conduct a consolidated review

under sections 751(c) and 753 of the Act

of the orders involving the same or

comparable subject merchandise. The

procedures set forth in subparts A and

C of this part shall apply to any such

consolidated review.

(3) Should the administering

authority, after consulting with the

Commission, determine not to initiate a

section 751(c) review, the Commission

will consider the request for a section

753 review pursuant to the procedures

established in this section.

By order of the Commission:

Issued: December 24, 1994.

Donna R. Koehnke,

Secretary.

[FR Doc. 94–32127 Filed 12–30–94; 8:45 am]

BILLING CODE 7020–02–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8588]

RIN 1545–AS70

Subchapter K Anti-Abuse Rule

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulation.

SUMMARY: This document contains a

final regulation providing an anti-abuse

rule under subchapter K of the Internal

Revenue Code of 1986 (Code). The rule

authorizes the Commissioner of Internal

Revenue, in certain circumstances, to

recast a transaction involving the use of

a partnership. The final regulation

affects partnerships and the partners of

those partnerships and is necessary to

provide guidance needed to comply

with the applicable tax law.
24 Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations

EFFECTIVE DATES: This regulation is

effective May 12, 1994, except that

§ 1.701–2 (e) and (f) are effective

December 29, 1994.

FOR FURTHER INFORMATION CONTACT:

Mary A. Berman or D. Lindsay Russell,

(202) 622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Introduction

This document adds § 1.701–2 to the

Income Tax Regulations (26 CFR part 1)

under section 701 of the Code.

Background

Subchapter K was enacted to permit

businesses organized for joint profit to

be conducted with ‘‘simplicity,

flexibility, and equity as between the

partners.’’ S. Rep. No. 1622, 83d Cong.,

2d Sess. 89 (1954); H.R. Rep. No. 1337,

83d Cong., 2d Sess. 65 (1954). It was not

intended, however, that the provisions

of subchapter K be used for tax

avoidance purposes. For example, in

enacting subchapter K, Congress

indicated that aggregate, rather than

entity, concepts should be applied if

such concepts are more appropriate in

applying other provisions of the Code.

H.R. Conf. Rep. No. 2543, 83d Cong., 2d

Sess. 59 (1954). Similarly, in later

amending the rules relating to special

allocations, Congress sought to ‘‘prevent

the use of special allocations for tax

avoidance purposes, while allowing

their use for bona fide business

purposes.’’ S. Rep. No. 938, 94th Cong.,

2d Sess. 100 (1976).

On May 12, 1994, the IRS and

Treasury issued a notice of proposed

rulemaking (59 FR 25581) under section

701 of the Code. That document

proposed to add an anti-abuse rule

under subchapter K. Comments

responding to the notice were received,

and a public hearing was held on July

25, 1994. After considering the

comments that were received in

response to the notice of proposed

rulemaking and the statements made at

the hearing, the IRS and Treasury adopt

the proposed regulation as revised by

this Treasury decision. The anti-abuse

rule in this final regulation applies to

the operation and interpretation of any

provision of the Code and the

regulations thereunder that may be

relevant to a particular partnership

transaction (including income, estate,

gift, generation-skipping, and excise

tax). The anti-abuse rule in the final

regulation is expected primarily to affect

a relatively small number of partnership

transactions that make inappropriate

use of the rules of subchapter K. The

regulation is not intended to interfere

with bona fide joint business

arrangements conducted through

partnerships.

Explanation of Provisions

A. Overview of Provisions

As noted above, subchapter K is

intended to permit taxpayers to conduct

joint business (including investment)

activities through a flexible economic

arrangement without incurring an

entity-level tax. Implicit in the intent of

subchapter K are three requirements.

First, the partnership must be bona fide

and each partnership transaction (or

series of related transactions) must be

entered into for a substantial business

purpose. Second, the form of each

partnership transaction must be

respected under substance over form

principles. Third, the tax consequences

under subchapter K to each partner of

partnership operations and of

transactions between the partner and

the partnership must accurately reflect

the partners’ economic agreement and

clearly reflect the partner’s income

(referred to in the final regulation as

proper reflection of income), except to

the extent that a provision of subchapter

K that is intended to promote

administrative convenience or other

policy objectives causes tax results that

deviate from that requirement. In those

cases, if the application of that

provision of subchapter K and the

ultimate tax results to the partners and

the partnership, taking into account all

the relevant facts and circumstances, are

clearly contemplated by that provision,

the transaction is treated as properly

reflecting the partners’ income. In

determining whether a transaction

clearly reflects the partners’ income, the

principles of sections 446(b) and 482

apply.

The provisions of subchapter K must

be applied to partnership transactions in

a manner consistent with the intent of

subchapter K. The final regulation

clarifies the authority of the

Commissioner to recast transactions that

attempt to use partnerships in a manner

inconsistent with the intent of

subchapter K as appropriate to achieve

tax results that are consistent with this

intent, taking into account all the facts

and circumstances.

In addition, the final regulation

provides that the Commissioner can

treat a partnership as an aggregate of its

partners in whole or in part as

appropriate to carry out the purpose of

any provision of the Code or

regulations, except to the extent that (1)

a provision of the Code or regulations

prescribes the treatment of the

partnership as an entity, and (2) that

treatment and the ultimate tax results,

taking into account all of the facts and

circumstances, are clearly contemplated

by that provision.

B. Discussion of Comments Relating to

Provisions in the Regulation

Comments that relate to the

application of the proposed regulation

and the responses to them, including an

explanation of the revisions made to the

final regulation, are summarized below.

1. Scope of the Regulation

Several comments stated that, as

drafted, the language in the proposed

regulation was too broad and too vague

to provide adequate guidance to

taxpayers as to which transactions are

affected by the regulation. Similarly,

some comments suggested that the

intent of subchapter K as stated in the

proposed regulation (upon which the

regulation operates) was overbroad and

potentially conflicted with explicit

statutory or regulatory provisions.

Several comments expressed concern

that the regulation, if finalized as

proposed, would adversely affect the

legitimate use of partnerships. Other

comments suggested that additional

examples should be added to clarify the

scope of the regulation, which would

provide the necessary guidance. Some

of the comments requested that the

regulation be withdrawn, or revised and

reproposed.

On the other hand, other comments

supported the approach in the proposed

regulation, noting that it was well

established that the provisions of the

Code must be interpreted consistent

with their purpose. Some of these

comments noted that the regulation

would in large part simply be codifying

aspects of existing judicial doctrines,

such as substance over form and

business purpose, as they relate to

partnership transactions. Finally, some

of these comments suggested that the

regulation be modified in various

respects, including by adding additional

examples of its application.

In response to these comments, the

IRS and Treasury have revised the final

regulation in three principal respects.

First, the scope of the regulation has

been clarified substantially by revising

the portion captioned Intent of

Subchapter K, in paragraph (a) of the

proposed regulation. Paragraph (a) of

the final regulation now specifically

requires that (1) the partnership must be

bona fide and each partnership

transaction or series of related

transactions (individually or

collectively, the transaction) must be

entered into for a substantial business

purpose, (2) the form of each

partnership transaction must be
Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 25

respected under substance over form

principles, and (3) the tax consequences

under subchapter K to each partner of

partnership operations and of

transactions between the partner and

the partnership must, subject to certain

exceptions, accurately reflect the

partners’ economic agreement and

clearly reflect the partner’s income

(proper reflection of income). However,

certain provisions of subchapter K that

were adopted to promote administrative

convenience or other policy objectives

may, under certain circumstances,

produce tax results that do not properly

reflect income. To reflect the conscious

choice in these instances to favor

administrative convenience or such

other objectives over the accurate

measurement of income, the final

regulation provides that proper

reflection of income will be treated as

satisfied with respect to the tax

consequences of a partnership

transaction that satisfies paragraphs (a)

(1) and (2) of the final regulation to the

extent the application of such a

provision to the transaction and the

ultimate tax results, taking into account

all the relevant facts and circumstances,

are clearly contemplated by that

provision. Examples of such provisions

include section 732, the elective feature

of section 754, and the value-equalsbasis rule in § 1.704–1(b)(2)(iii)(c), as

well as regulatory de minimis rules such

as those reflected in §§ 1.704–3(e)(1)

and 1.752–2(e)(4). A number of

examples in the final regulation

demonstrate the proper application of

these rules.

In addition, the revised Intent of

Subchapter K set forth in paragraph (a)

no longer provides that the provisions of

subchapter K are not intended to permit

taxpayers ‘‘to use the existence of the

partnerships to avoid the purposes of

other provisions of the Internal Revenue

Code.’’ Many comments expressed

confusion regarding the scope of this

clause. Other comments suggested that

this clause should be limited to

questions of the appropriate treatment

of a partnership as an entity or as an

aggregate of its partners for purposes of

applying another provision of the Code.

Some comments further suggested that

the correct application of the aggregate/

entity concept does not depend on the

intent of the taxpayer in structuring the

transaction.

This clause was principally intended

to address aggregate/entity issues that

exist under current law. The final

regulation clarifies this aspect of the

regulation by removing the clause from

paragraph (a) and adding a new

paragraph (e) to address inappropriate

treatment of a partnership as an entity.

Paragraph (e) confirms the

Commissioner’s authority to treat a

partnership as an aggregate of its

partners in whole or in part as

appropriate to carry out the purpose of

any provision of the Code or the

regulations thereunder. As stated in

some comments, as well as under

current law, the Commissioner’s

authority to treat a partnership as an

aggregate of its partners is not

dependent on the taxpayer’s intent in

structuring the transaction. However,

the Commissioner may not treat the

partnership as an aggregate of its

partners under paragraph (e) to the

extent that a provision of the Code or

the regulations thereunder prescribes

the treatment of a partnership as an

entity, in whole or in part, and that

treatment and the ultimate tax results,

taking into account all the relevant facts

and circumstances, are clearly

contemplated by that provision.

Underlying the promulgation of

paragraph (e) is the belief that

significant potential for abuse exists in

the inappropriate treatment of a

partnership as an entity in applying

rules outside of subchapter K to

transactions involving partnerships.

Examples in new paragraph (f) illustrate

the application of paragraph (e).

Paragraph (c) contains the second

principal revision reflected in this final

regulation. The corresponding

paragraph in the proposed regulation

provides that the purposes for

structuring a transaction involving a

partnership will be determined based on

all of the facts and circumstances. In

response to comments requesting

guidance concerning the factors that

will indicate that the taxpayers had a

principal purpose to reduce

substantially their aggregate federal tax

liability in a manner inconsistent with

the intent of subchapter K, paragraph (c)

of the final regulation sets forth several

of those factors.

Finally, in response to comments that

the examples in the proposed regulation

do not provide adequate guidance

regarding the application of the

regulation, as well as to suggestions that

additional examples would help clarify

the scope of the regulation, the final

regulation contains numerous examples

that illustrate the application of the

regulation to specifically described

transactions, including the weight to be

given to relevant factors listed in

paragraph (c) in the particular situations

involved. The examples include

transactions that are consistent with the

intent of subchapter K as well as

transactions that are inconsistent with

the intent of subchapter K.

2. A Principal Purpose

The proposed regulation provides that

if a partnership is formed or availed of

in connection with a transaction or

series of related transactions with a

principal purpose of substantially

reducing the present value of the

partners’ aggregate federal tax liability

in a manner inconsistent with the intent

of subchapter K, the Commissioner can

disregard the form of the transaction.

Some comments stated that all

partnership transactions have a

principal purpose of reducing federal

taxes, and therefore, the standard

should be changed from a principal

purpose to the principal purpose. Other

comments supported an ‘‘a principal

purpose’’ standard, because the

Commissioner can recast the transaction

only if the tax results are also found to

be inconsistent with the intent of

subchapter K. Other comments stated

that the taxpayer’s intent should be

irrelevant in all cases; rather, the

inquiry should only be whether the

results are inconsistent with the intent

of subchapter K. Still other comments

suggested that the taxpayer’s intent

should be irrelevant only in the case of

aggregate/entity determinations.

The IRS and Treasury continue to

believe that an inquiry into the

taxpayer’s intent generally is

appropriate for an anti-abuse rule of this

nature. As noted above, the regulation

applies only if both (1) the taxpayer has

a principal purpose to achieve

substantial federal tax reduction, and (2)

that tax reduction is inconsistent with

the intent of subchapter K. Having a

principal purpose to use a bona fide

partnership to conduct business

activities in a manner that is more tax

efficient than any alternative means

available does not establish that the

resulting tax reduction is inconsistent

with the intent of subchapter K. In those

cases, the Commissioner cannot recast

the transaction under this regulation. A

number of examples in the final

regulation demonstrate this point. Thus,

the additional requirement in the

regulation that the tax results be

inconsistent with the intent of

subchapter K sufficiently restricts the

potential application of the regulation,

so that the requirement of a principal

purpose of federal tax reduction is

appropriate.

By contrast, as noted above, the

entity/aggregate determination under

paragraph (e) of the final regulation does

not require the taxpayer to have a

principal purpose of substantially

reducing taxes through misapplication

of that principle. In this context, the IRS

and Treasury agree with those
26 Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations

comments that suggested that the entity/

aggregate principle is properly applied,

as under current law, solely on the basis

of carrying out the purpose of the

particular provision to be applied.

3. Scope of Commissioner’s Ability To

Recast Transactions

The proposed regulation provides that

if a transaction is determined to be

inconsistent with the intent of

subchapter K and the taxpayer acted

with the requisite principal purpose of

federal tax reduction, the Commissioner

can disregard the form of the

transaction. The proposed regulation

describes several ways in which a

transaction could appropriately be

recast. Some comments interpreted this

language as attempting to provide the

Commissioner with unlimited

discretionary recharacterization powers,

without guidance as to which

recharacterization applies to a particular

transaction. To address these concerns,

paragraph (b) of the final regulation has

been revised to clarify that the

Commissioner may recast transactions

only as appropriate to ensure that the

tax treatment of each transaction is

consistent with the intent of subchapter

K.

4. Effective Date of the Regulation

The regulation was proposed to be

effective for all transactions relating to

a partnership occurring on or after May

12, 1994, the date the proposed

regulation was issued. Some comments

requested that, in order to address the

regulation’s effect on bona fide

partnership transactions, it apply

prospectively only from the date the

final regulation is issued. In light of the

significant revisions made in the final

regulation that clarify and narrow its

potential scope and application, the

final regulation generally continues to

be effective as of May 12, 1994.

However, to preclude the possibility

that the regulation could be interpreted

to apply, for example, when a partner

who received an asset from a

partnership before the effective date

disposes of the asset after the effective

date, the final regulation has been

revised to clarify that it applies only to

transactions involving a partnership

after the effective date. Also, in light of

the elimination of the proposed

requirement that the taxpayer must have

a principal purpose to achieve

substantial tax reduction in the case of

aggregate/entity determinations under

paragraph (e), paragraphs (e) and (f) are

effective for all transactions involving a

partnership on or after December 29,

1994. No inference is intended as to the

treatment of partnership transactions

prior to the applicable effective date of

the regulation.

5. Relationship of the Regulation to

Established Legal Doctrines

Several comments questioned the

relationship between the regulation and

established legal doctrines, such as the

business purpose and substance over

form doctrines (including the step

transaction and sham transaction

doctrines), which are designed to assure

that the tax consequences of

transactions under the Code are

governed by their substance and that

statutes and regulations are interpreted

consistent with their purposes.

Partnerships, like other business

arrangements, are subject to those

doctrines. The application of those

doctrines to partnership transactions is

particularly important in light of (i) the

flexibility of partnership arrangements,

which can take myriad forms that are

often of substantial complexity, and (ii)

the tax rules for partnerships, which are

also often complex and, in many cases,

appear purely mechanical. A literal

application of these partnership tax

rules in contexts not contemplated by

Congress has, in certain circumstances,

resulted in taxpayers claiming tax

results that are contrary to those

doctrines.

The final regulation confirms certain

fundamental principles that must, in all

cases, be satisfied in applying the

provisions of subchapter K to

partnership transactions, to assure that

those provisions are not used to achieve

inappropriate tax results. While the

fundamental principles reflected in the

regulation are consistent with the

established legal doctrines, those

doctrines will also continue to apply.

So viewed, the uncertainty regarding

the application of the regulation reflects

the uncertainty that already exists in

properly evaluating transactions under

current law, including the proper

application of existing legal doctrines.

As a result, the regulation should not

impose any undue administrative

burdens on either taxpayers or the IRS.

C. Other Comments

1. Suggested Alternatives to the

Regulation

While some comments stated that it is

appropriate to include a general antiabuse rule in the regulations to limit the

misuse of the provisions of subchapter

K, others claimed that was not

necessary. These comments stated that

the IRS and Treasury already have

sufficient means to challenge abusive

partnership transactions and that

existing authority should be used to

address specific transactions as they are

discovered. These comments suggested

using the established legal doctrines,

amending the section 704(b) regulations,

and increasing partnership audits.

These comments are discussed below.

In the past, the IRS and Treasury have

attempted to address partnership

transactions on a case-by-case basis.

However, as recognized in those

comments supporting a regulatory antiabuse rule, experience has demonstrated

that the case-by-case approach has been

inadequate. A case-by-case approach

arguably encourages non-economic, taxmotivated behavior by inappropriately

putting a premium on being the first to

engage in a transaction that would

violate the principles of this regulation.

The IRS and Treasury believe that the

final regulation is a reasonable and

effective way to reduce the number and

magnitude of these abusive transactions.

Moreover, the IRS and Treasury believe

that proper application of the principles

embodied in the regulation will forestall

additional complexity in the Code and

the regulations, by reducing the

pressure for case-by-case legislative or

regulatory revisions to prevent

inappropriate use of the provisions of

subchapter K.

Although the section 704(b)

regulations are one example of the

provisions of subchapter K that may be

used inappropriately to reach results

that are inconsistent with the intent of

subchapter K, there are many other

provisions of subchapter K that are

being inappropriately applied to

partnership transactions in a manner

inconsistent with the intent of

subchapter K. Therefore, an amendment

to the section 704(b) regulations, by

itself, is not sufficient.

Significant efforts are already

underway to reduce the inappropriate

use of subchapter K through increased

resource allocation to partnership

audits. This regulation is part of that

focus on partnership transactions, and

should not be viewed as an alternative

to increased audits of partnerships. As

part of this overall focus, a new team

under the Industry Specialization

Program has been established that will

coordinate partnership audits and

(together with the IRS National Office)

the application of this regulation to

partnership transactions. Thus, the IRS

and Treasury believe that the regulation

complements the increased enforcement

of partnership transactions through

enhanced audit activity.

2. Application by Revenue Agents

Many comments expressed concern

that the regulation, if finalized as

proposed, will not be applied
Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 27

appropriately by Revenue Agents. As

stated in Announcement 94–87, 1994–

27 I.R.B. 124, when an issue that may

be affected by the regulation is

considered on examination, any

application of the regulation must be

coordinated with both the Issue

Specialist on the Partnership Industry

Specialization Program team and the

IRS National Office. The IRS and

Treasury believe that this coordination,

together with the many clarifying

changes made in the final regulation,

will result in fair and consistent

treatment of taxpayers in the application

of the final regulation to partnership

transactions.

3. Special Analyses and the Secretary’s

Authority

Some comments questioned the

determination that the notice of

proposed rulemaking was not a

significant regulatory action as defined

in EO 12866, as well as the

determination that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility

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

Some comments also questioned the

Secretary’s authority to issue the

regulation as proposed. The IRS and

Treasury believe that the regulation

complies with all statutory and

regulatory requirements relating to the

issuance of the notice of proposed

rulemaking, and that it is clearly within

the Secretary’s authority to issue the

final regulation. The final regulation

clarifies that the authority for the

regulation includes sections 701

through 761.

4. De Minimis Rule

In the preamble accompanying the

proposed regulation, the IRS and

Treasury solicited comments on the

appropriateness of a safe harbor or de

minimis rule. Some comments

responded that a de minimis rule would

be appropriate, and suggested

delineating the rule on the basis of the

number of partners, the value of the

partnership assets, or the amount of the

reduction in the present value of the

partners’ aggregate federal tax liability

resulting from the transaction.

The requirement in the regulation that

the present value of the partners’

aggregate federal tax reduction must be

substantial assures that the regulation

will not be applied where the amounts

involved are not significant. In addition,

the IRS and Treasury believe that the

clarifications made in the final

regulation provide sufficient safeguards

for bona fide joint business

arrangements involving partnerships.

For example, the exception from the

proper reflection of income standard set

forth in paragraph (a)(3) for transactions

that are clearly contemplated by a

particular provision of subchapter K

provides appropriate safeguards for

these business arrangements. Finally,

the final regulation explicitly recognizes

the application of specific statutory and

regulatory de minimis rules in

subchapter K. In light of these

safeguards, the IRS and Treasury believe

no additional specific safe harbor rules

are needed.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to this regulation, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

was submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business. Comments

were submitted and are addressed in the

Supplementary Information section of

this document.

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 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding an entry

in numerical order to read as follows:

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

Section 1.701–2 also issued under 26

U.S.C. 701 through 761 * * *

Par. 2. Section 1.701–2 is added

under the heading ‘‘Determination of

Tax Liability’’ to read as follows:

§ 1.701–2 Anti-abuse rule.

(a) Intent of subchapter K. Subchapter

K is intended to permit taxpayers to

conduct joint business (including

investment) activities through a flexible

economic arrangement without

incurring an entity-level tax. Implicit in

the intent of subchapter K are the

following requirements—

(1) The partnership must be bona fide

and each partnership transaction or

series of related transactions

(individually or collectively, the

transaction) must be entered into for a

substantial business purpose.

(2) The form of each partnership

transaction must be respected under

substance over form principles.

(3) Except as otherwise provided in

this paragraph (a)(3), the tax

consequences under subchapter K to

each partner of partnership operations

and of transactions between the partner

and the partnership must accurately

reflect the partners’ economic agreement

and clearly reflect the partner’s income

(collectively, proper reflection of

income). However, certain provisions of

subchapter K and the regulations

thereunder were adopted to promote

administrative convenience and other

policy objectives, with the recognition

that the application of those provisions

to a transaction could, in some

circumstances, produce tax results that

do not properly reflect income. Thus,

the proper reflection of income

requirement of this paragraph (a)(3) is

treated as satisfied with respect to a

transaction that satisfies paragraphs

(a)(1) and (2) of this section to the extent

that the application of such a provision

to the transaction and the ultimate tax

results, taking into account all the

relevant facts and circumstances, are

clearly contemplated by that provision.

See, for example, paragraph (d) Example

8 of this section (relating to the valueequals-basis rule in § 1.704–

1(b)(2)(iii)(c)), paragraph (d) Example 11

of this section (relating to the election

under section 754 to adjust basis in

partnership property), and paragraph (d)

Examples 12 and 13 of this section

(relating to the basis in property

distributed by a partnership under

section 732). See also, for example,

§§ 1.704–3(e)(1) and 1.752–2(e)(4)

(providing certain de minimis

exceptions).

(b) Application of subchapter K rules.

The provisions of subchapter K and the

regulations thereunder must be applied

in a manner that is consistent with the

intent of subchapter K as set forth in

paragraph (a) of this section (intent of

subchapter K). Accordingly, if a

partnership is formed or availed of in

connection with a transaction a

principal purpose of which is to reduce

substantially the present value of the

partners’ aggregate federal tax liability

in a manner that is inconsistent with the

intent of subchapter K, the

Commissioner can recast the transaction

for federal tax purposes, as appropriate

to achieve tax results that are consistent

with the intent of subchapter K, in light

of the applicable statutory and

regulatory provisions and the pertinent

facts and circumstances. Thus, even
28 Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations

though the transaction may fall within

the literal words of a particular statutory

or regulatory provision, the

Commissioner can determine, based on

the particular facts and circumstances,

that to achieve tax results that are

consistent with the intent of subchapter

K—

(1) The purported partnership should

be disregarded in whole or in part, and

the partnership’s assets and activities

should be considered, in whole or in

part, to be owned and conducted,

respectively, by one or more of its

purported partners;

(2) One or more of the purported

partners of the partnership should not

be treated as a partner;

(3) The methods of accounting used

by the partnership or a partner should

be adjusted to reflect clearly the

partnership’s or the partner’s income;

(4) The partnership’s items of income,

gain, loss, deduction, or credit should

be reallocated; or

(5) The claimed tax treatment should

otherwise be adjusted or modified.

(c) Facts and circumstances analysis;

factors. Whether a partnership was

formed or availed of with a principal

purpose to reduce substantially the

present value of the partners’ aggregate

federal tax liability in a manner

inconsistent with the intent of

subchapter K is determined based on all

of the facts and circumstances,

including a comparison of the purported

business purpose for a transaction and

the claimed tax benefits resulting from

the transaction. The factors set forth

below may be indicative, but do not

necessarily establish, that a partnership

was used in such a manner. These

factors are illustrative only, and

therefore may not be the only factors

taken into account in making the

determination under this section.

Moreover, the weight given to any factor

(whether specified in this paragraph or

otherwise) depends on all the facts and

circumstances. The presence or absence

of any factor described in this paragraph

does not create a presumption that a

partnership was (or was not) used in

such a manner. Factors include:

(1) The present value of the partners’

aggregate federal tax liability is

substantially less than had the partners

owned the partnership’s assets and

conducted the partnership’s activities

directly;

(2) The present value of the partners’

aggregate federal tax liability is

substantially less than would be the

case if purportedly separate transactions

that are designed to achieve a particular

end result are integrated and treated as

steps in a single transaction. For

example, this analysis may indicate that

it was contemplated that a partner who

was necessary to achieve the intended

tax results and whose interest in the

partnership was liquidated or disposed

of (in whole or in part) would be a

partner only temporarily in order to

provide the claimed tax benefits to the

remaining partners;

(3) One or more partners who are

necessary to achieve the claimed tax

results either have a nominal interest in

the partnership, are substantially

protected from any risk of loss from the

partnership’s activities (through

distribution preferences, indemnity or

loss guaranty agreements, or other

arrangements), or have little or no

participation in the profits from the

partnership’s activities other than a

preferred return that is in the nature of

a payment for the use of capital;

(4) Substantially all of the partners

(measured by number or interests in the

partnership) are related (directly or

indirectly) to one another;

(5) Partnership items are allocated in

compliance with the literal language of

§§ 1.704–1 and 1.704–2 but with results

that are inconsistent with the purpose of

section 704(b) and those regulations. In

this regard, particular scrutiny will be

paid to partnerships in which income or

gain is specially allocated to one or

more partners that may be legally or

effectively exempt from federal taxation

(for example, a foreign person, an

exempt organization, an insolvent

taxpayer, or a taxpayer with unused

federal tax attributes such as net

operating losses, capital losses, or

foreign tax credits);

(6) The benefits and burdens of

ownership of property nominally

contributed to the partnership are in

substantial part retained (directly or

indirectly) by the contributing partner

(or a related party); or

(7) The benefits and burdens of

ownership of partnership property are

in substantial part shifted (directly or

indirectly) to the distributee partner

before or after the property is actually

distributed to the distributee partner (or

a related party).

(d) Examples. The following examples

illustrate the principles of paragraphs

(a), (b), and (c) of this section. The

examples set forth below do not

delineate the boundaries of either

permissible or impermissible types of

transactions. Further, the addition of

any facts or circumstances that are not

specifically set forth in an example (or

the deletion of any facts or

circumstances) may alter the outcome of

the transaction described in the

example. Unless otherwise indicated,

parties to the transactions are not

related to one another.

Example 1. Choice of entity; avoidance of

entity-level tax; use of partnership consistent

with the intent of subchapter K. (i) A and B

form limited partnership PRS to conduct a

bona fide business. A, the corporate general

partner, has a 1% partnership interest. B, the

individual limited partner, has a 99%

interest. PRS is properly classified as a

partnership under §§ 301.7701–2 and

301.7701–3. A and B chose limited

partnership form as a means to provide B

with limited liability without subjecting the

income from the business operations to an

entity-level tax.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. Although B has

retained, indirectly, substantially all of the

benefits and burdens of ownership of the

money or property B contributed to PRS (see

paragraph (c)(6) of this section), the decision

to organize and conduct business through

PRS under these circumstances is consistent

with this intent. In addition, on these facts,

the requirements of paragraphs (a)(1), (2), and

(3) of this section have been satisfied. The

Commissioner therefore cannot invoke

paragraph (b) of this section to recast the

transaction.

Example 2. Choice of entity; avoidance of

subchapter S shareholder requirements; use

of partnership consistent with the intent of

subchapter K. (i) A and B form partnership

PRS to conduct a bona fide business. A is a

corporation that has elected to be treated as

an S corporation under subchapter S. B is a

nonresident alien. PRS is properly classified

as a partnership under §§ 301.7701–2 and

301.7701–3. Because section 1361(b)

prohibits B from being a shareholder in A, A

and B chose partnership form, rather than

admit B as a shareholder in A, as a means

to retain the benefits of subchapter S

treatment for A and its shareholders.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

is consistent with this intent. In addition, on

these facts, the requirements of paragraphs

(a)(1), (2), and (3) of this section have been

satisfied. Although it may be argued that the

form of the partnership transaction should

not be respected because it does not reflect

its substance (inasmuch as application of the

substance over form doctrine arguably could

result in B being treated as a shareholder of

A, thereby invalidating A’s subchapter S

election), the facts indicate otherwise. The

shareholders of A are subject to tax on their

pro rata shares of A’s income (see section

1361 et seq.), and B is subject to tax on B’s

distributive share of partnership income (see

sections 871 and 875). Thus, the form in

which this arrangement is cast accurately

reflects its substance as a separate

partnership and S corporation. The

Commissioner therefore cannot invoke

paragraph (b) of this section to recast the

transaction.

Example 3. Choice of entity; avoidance of

more restrictive foreign tax credit limitation;
Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 29

use of partnership consistent with the intent

of subchapter K. (i) X, a domestic

corporation, and Y, a foreign corporation,

form partnership PRS under the laws of

foreign Country A to conduct a bona fide

joint business. X and Y each owns a 50%

interest in PRS. PRS is properly classified as

a partnership under §§ 301.7701–2 and

301.7701–3. PRS pays income taxes to

Country A. X and Y chose partnership form

to enable X to qualify for a direct foreign tax

credit under section 901, with look-through

treatment under § 1.904–5(h)(1). Conversely,

if PRS were a foreign corporation for U.S. tax

purposes, X would be entitled only to

indirect foreign tax credits under section 902

with respect to dividend distributions from

PRS. The look-through rules, however, would

not apply, and pursuant to section

904(d)(1)(E) and § 1.904–4(g), the dividends

and associated taxes would be subject to a

separate foreign tax credit limitation for

dividends from PRS, a noncontrolled section

902 corporation.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

in order to take advantage of the look-through

rules for foreign tax credit purposes, thereby

maximizing X’s use of its proper share of

foreign taxes paid by PRS, is consistent with

this intent. In addition, on these facts, the

requirements of paragraphs (a)(1), (2), and (3)

of this section have been satisfied. The

Commissioner therefore cannot invoke

paragraph (b) of this section to recast the

transaction.

Example 4. Choice of entity; avoidance of

gain recognition under sections 351(e) and

357(c); use of partnership consistent with the

intent of subchapter K. (i) X, ABC, and DEF

form limited partnership PRS to conduct a

bona fide real estate management business.

PRS is properly classified as a partnership

under §§ 301.7701–2 and 301.7701–3. X, the

general partner, is a newly formed

corporation that elects to be treated as a real

estate investment trust as defined in section

856. X offers its stock to the public and

contributes substantially all of the proceeds

from the public offering to PRS. ABC and

DEF, the limited partners, are existing

partnerships with substantial real estate

holdings. ABC and DEF contribute all of their

real property assets to PRS, subject to

liabilities that exceed their respective

aggregate bases in the real property

contributed, and terminate under section

708(b)(1)(A). In addition, some of the former

partners of ABC and DEF each have the right,

beginning two years after the formation of

PRS, to require the redemption of their

limited partnership interests in PRS in

exchange for cash or X stock (at X’s option)

equal to the fair market value of their

respective interests in PRS at the time of the

redemption. These partners are not

compelled, as a legal or practical matter, to

exercise their exchange rights at any time. X,

ABC, and DEF chose to form a partnership

rather than have ABC and DEF invest directly

in X to allow ABC and DEF to avoid

recognition of gain under sections 351(e) and

357(c). Because PRS would not be treated as

an investment company within the meaning

of section 351(e) if PRS were incorporated (so

long as it did not elect under section 856),

section 721(a) applies to the contribution of

the real property to PRS. See section 721(b).

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS,

thereby avoiding the tax consequences that

would have resulted from contributing the

existing partnerships’ real estate assets to X

(by applying the rules of sections 721, 731,

and 752 in lieu of the rules of sections 351(e)

and 357(c)), is consistent with this intent. In

addition, on these facts, the requirements of

paragraphs (a)(1), (2), and (3) of this section

have been satisfied. Although it may be

argued that the form of the transaction

should not be respected because it does not

reflect its substance (inasmuch as the present

value of the partners’ aggregate federal tax

liability is substantially less than would be

the case if the transaction were integrated

and treated as a contribution of the

encumbered assets by ABC and DEF directly

to X, see paragraph (c)(2) of this section), the

facts indicate otherwise. For example, the

right of some of the former ABC and DEF

partners after two years to exchange their

PRS interests for cash or X stock (at X’s

option) equal to the fair market value of their

PRS interest at that time would not require

that right to be considered as exercised prior

to its actual exercise. Moreover, X may make

other real estate investments and other

business decisions, including the decision to

raise additional capital for those purposes.

Thus, although it may be likely that some or

all of the partners with the right to do so will,

at some point, exercise their exchange rights,

and thereby receive either cash or X stock,

the form of the transaction as a separate

partnership and real estate investment trust

is respected under substance over form

principles (see paragraph (a)(2) of this

section). The Commissioner therefore cannot

invoke paragraph (b) of this section to recast

the transaction.

Example 5. Family partnership to conduct

joint business activities; valuation discount;

use of partnership consistent with the intent

of subchapter K. (i) H and W, husband and

wife, form limited partnership PRS by

contributing their interests in actively

managed, income-producing real property

that PRS will own and operate. H holds a

general partnership interest, and W holds a

limited partnership interest. At a later date,

W makes a gift of a portion of her limited

partnership interest to each of H and W’s two

children, S and D. Appropriate discounts,

consistent with the taxpayers’ treatment of

the arrangement as a partnership, were

applied in determining the value of W’s gifts

to the children.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. Although PRS

is owned entirely by related parties (see

paragraph (c)(4) of this section), the decision

to organize and conduct business through

PRS under these circumstances is consistent

with this intent. In addition, on these facts,

the requirements of paragraphs (a)(1), (2), and

(3) of this section have been satisfied.

Therefore, absent other facts (such as the

creation of the partnership immediately

before the gifts by W), the Commissioner

cannot invoke paragraph (b) of this section to

recast the transaction. But see sections 2701

through 2704 for special valuation rules

applicable to family arrangements for estate

and gift tax purposes. See also sections 2036

through 2039.

(iii) The special valuation rules provided

under chapter 14 of the Code, in particular

section 2701, prescribe certain special rules

in valuing gifts of family controlled

partnership interests. These special rules

clearly contemplate that a bona fide

partnership like PRS be treated as an entity

and not as an aggregate of its partners for that

purpose. Accordingly, under paragraph (e) of

this section, the Commissioner cannot treat

PRS as an aggregate of its partners for

purposes of valuing the gifts from W to S and

D.

Example 6. Family partnership not

engaged in bona fide joint business activities;

valuation discount; use of partnership not

consistent with the intent of subchapter K. (i)

H and W, husband and wife, form limited

partnership PRS and contribute to it their

respective interests in their vacation home. H

holds a general partnership interest, and W

holds a limited partnership interest. At a

later date, W makes a gift of a portion of her

limited partnership interest to each of H and

W’s two children, S and D. Discounts,

consistent with the taxpayers’ treatment of

the arrangement as a partnership, were

applied in determining the value of W’s gifts

to the children.

(ii) PRS is not bona fide and there is no

substantial business purpose for the

purported activities of PRS. In addition, by

using a partnership (if respected), H and W’s

aggregate federal tax liability would be

substantially less than had they owned the

partnership’s assets directly (see paragraph

(c)(1) of this section). On these facts, PRS has

been formed and availed of with a principal

purpose to reduce H’s and W’s aggregate

federal tax liability in a manner that is

inconsistent with the intent of subchapter K.

Therefore (in addition to possibly

challenging the transaction under applicable

judicial principles, such as the substance

over form doctrine, see paragraph (h) of this

section), the Commissioner can recast the

transaction as appropriate under paragraph

(b) of this section.

Example 7. Special allocations; dividends

received deductions; use of partnership

consistent with the intent of subchapter K. (i)

Corporations X and Y contribute equal

amounts to PRS, a bona fide partnership

formed to make joint investments. PRS pays

$100 for a share of common stock of Z, an

unrelated corporation, which has historically

paid an annual dividend of $6. PRS specially

allocates the dividend income on the Z stock

to X to the extent of the London Inter-Bank

Offered Rate (LIBOR) on the record date,

applied to X’s contribution of $50, and

allocates the remainder of the dividend
30 Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations

income to Y. All other items of partnership

income and loss are allocated equally

between X and Y. The allocations under the

partnership agreement have substantial

economic effect within the meaning of

§ 1.704–1(b)(2). In addition to avoiding an

entity-level tax, a principal purpose for the

formation of the partnership was to invest in

the Z common stock and to allocate the

dividend income from the stock to provide X

with a floating-rate return based on LIBOR,

while permitting X and Y to claim the

dividends received deduction under section

243 on the dividends allocated to each of

them.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

is consistent with this intent. In addition, on

these facts, the requirements of paragraphs

(a)(1), (2), and (3) of this section have been

satisfied. Section 704(b) and § 1.704–1(b)(2)

permit income realized by the partnership to

be allocated validly to the partners separate

from the partners’ respective ownership of

the capital to which the allocations relate,

provided that the allocations satisfy both the

literal requirements of the statute and

regulations and the purpose of those

provisions (see paragraph (c)(5) of this

section). Section 704(e)(2) is not applicable to

the facts of this example (otherwise, the

allocations would be required to be

proportionate to the partners’ ownership of

contributed capital). The Commissioner

therefore cannot invoke paragraph (b) of this

section to recast the transaction.

Example 8. Special allocations;

nonrecourse financing; low-income housing

credit; use of partnership consistent with the

intent of subchapter K. (i) A and B, highbracket taxpayers, and X, a corporation with

net operating loss carryforwards, form

general partnership PRS to own and operate

a building that qualifies for the low-income

housing credit provided by section 42. The

project is financed with both cash

contributions from the partners and

nonrecourse indebtedness. The partnership

agreement provides for special allocations of

income and deductions, including the

allocation of all depreciation deductions

attributable to the building to A and B

equally in a manner that is reasonably

consistent with allocations that have

substantial economic effect of some other

significant partnership item attributable to

the building. The section 42 credits are

allocated to A and B in accordance with the

allocation of depreciation deductions. PRS’s

allocations comply with all applicable

regulations, including the requirements of

§§ 1.704–1(b)(2)(ii) (pertaining to economic

effect) and 1.704–2(e) (requirements for

allocations of nonrecourse deductions). The

nonrecourse indebtedness is validly allocated

to the partners under the rules of § 1.752–3,

thereby increasing the basis of the partners’

respective partnership interests. The basis

increase created by the nonrecourse

indebtedness enables A and B to deduct their

distributive share of losses from the

partnership (subject to all other applicable

limitations under the Internal Revenue Code)

against their nonpartnership income and to

apply the credits against their tax liability.

(ii) At a time when the depreciation

deductions attributable to the building are

not treated as nonrecourse deductions under

§ 1.704–2(c) (because there is no net increase

in partnership minimum gain during the

year), the special allocation of depreciation

deductions to A and B has substantial

economic effect because of the value-equalsbasis safe harbor contained in § 1.704–

1(b)(2)(iii)(c) and the fact that A and B would

bear the economic burden of any decline in

the value of the building (to the extent of the

partnership’s investment in the building),

notwithstanding that A and B believe it is

unlikely that the building will decline in

value (and, accordingly, they anticipate

significant timing benefits through the

special allocation). Moreover, in later years,

when the depreciation deductions

attributable to the building are treated as

nonrecourse deductions under § 1.704–2(c),

the special allocation of depreciation

deductions to A and B is considered to be

consistent with the partners’ interests in the

partnership under § 1.704–2(e).

(iii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

is consistent with this intent. In addition, on

these facts, the requirements of paragraphs

(a) (1), (2), and (3) of this section have been

satisfied. Section 704(b), § 1.704–1(b)(2), and

§ 1.704–2(e) allow partnership items of

income, gain, loss, deduction, and credit to

be allocated validly to the partners separate

from the partners’ respective ownership of

the capital to which the allocations relate,

provided that the allocations satisfy both the

literal requirements of the statute and

regulations and the purpose of those

provisions (see paragraph (c)(5) of this

section). Moreover, the application of the

value-equals-basis safe harbor and the

provisions of § 1.704–2(e) with respect to the

allocations to A and B, and the tax results of

the application of those provisions, taking

into account all the facts and circumstances,

are clearly contemplated. Accordingly, even

if the allocations would not otherwise be

considered to satisfy the proper reflection of

income standard in paragraph (a)(3) of this

section, that requirement will be treated as

satisfied under these facts. Thus, even though

the partners’ aggregate federal tax liability

may be substantially less than had the

partners owned the partnership’s assets

directly (due to X’s inability to use its

allocable share of the partnership’s losses

and credits) (see paragraph (c)(1) of this

section), the transaction is not inconsistent

with the intent of subchapter K. The

Commissioner therefore cannot invoke

paragraph (b) of this section to recast the

transaction.

Example 9. Partner with nominal interest;

temporary partner; use of partnership not

consistent with the intent of subchapter K. (i)

Pursuant to a plan a principal purpose of

which is to generate artificial losses and

thereby shelter from federal taxation a

substantial amount of income, X (a foreign

corporation), Y (a domestic corporation), and

Z (a promoter) form partnership PRS by

contributing $9,000, $990, and $10,

respectively, for proportionate interests

(90.0%, 9.9%, and 0.1%, respectively) in the

capital and profits of PRS. PRS purchases

offshore equipment for $10,000 and validly

leases the equipment offshore for a term

representing most of its projected useful life.

Shortly thereafter, PRS sells its rights to

receive income under the lease to a third

party for $9,000, and allocates the resulting

$9,000 of income $8,100 to X, $891 to Y, and

$9 to Z. PRS thereafter makes a distribution

of $9,000 to X in complete liquidation of its

interest. Under § 1.704–1(b)(2)(iv)(f), PRS

restates the partners’ capital accounts

immediately before making the liquidating

distribution to X to reflect its assets

consisting of the offshore equipment worth

$1,000 and $9,000 in cash. Thus, because the

capital accounts immediately before the

distribution reflect assets of $19,000 (that is,

the initial capital contributions of $10,000

plus the $9,000 of income realized from the

sale of the lease), PRS allocates a $9,000 book

loss among the partners (for capital account

purposes only), resulting in restated capital

accounts for X, Y, and Z of $9,000, $990, and

$10, respectively. Thereafter, PRS purchases

real property by borrowing the $8,000

purchase price on a recourse basis, which

increases Y’s and Z’s bases in their respective

partnership interests from $1,881 and $19, to

$9,801 and $99, respectively (reflecting Y’s

and Z’s adjusted interests in the partnership

of 99% and 1%, respectively). PRS

subsequently sells the offshore equipment,

subject to the lease, for $1,000 and allocates

the $9,000 tax loss $8,910 to Y and $90 to

Z. Y’s and Z’s bases in their partnership

interests are therefore reduced to $891 and

$9, respectively.

(ii) On these facts, any purported business

purpose for the transaction is insignificant in

comparison to the tax benefits that would

result if the transaction were respected for

federal tax purposes (see paragraph (c) of this

section). Accordingly, the transaction lacks a

substantial business purpose (see paragraph

(a)(1) of this section). In addition, factors (1),

(2), (3), and (5) of paragraph (c) of this section

indicate that PRS was used with a principal

purpose to reduce substantially the partners’

tax liability in a manner inconsistent with

the intent of subchapter K. On these facts,

PRS is not bona fide (see paragraph (a)(1) of

this section), and the transaction is not

respected under applicable substance over

form principles (see paragraph (a)(2) of this

section) and does not properly reflect the

income of Y (see paragraph (a)(3) of this

section). Thus, PRS has been formed and

availed of with a principal purpose of

reducing substantially the present value of

the partners’ aggregate federal tax liability in

a manner inconsistent with the intent of

subchapter K. Therefore (in addition to

possibly challenging the transaction under

judicial principles or the validity of the

allocations under § 1.704–1(b)(2) (see

paragraph (h) of this section)), the

Commissioner can recast the transaction as

appropriate under paragraph (b) of this

section.
Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 31

Example 10. Plan to duplicate losses

through absence of section 754 election; use

of partnership not consistent with the intent

of subchapter K. (i) A owns land with a basis

of $100 and a fair market value of $60. A

would like to sell the land to B. A and B

devise a plan a principal purpose of which

is to permit the duplication, for a substantial

period of time, of the tax benefit of A’s builtin loss in the land. To effect this plan, A, C

(A’s brother), and W (C’s wife) form

partnership PRS, to which A contributes the

land, and C and W each contribute $30. All

partnership items are shared in proportion to

the partners’ respective contributions to PRS.

PRS invests the cash in an investment asset

(that is not a marketable security within the

meaning of section 731(c)). PRS also leases

the land to B under a three-year lease

pursuant to which B has the option to

purchase the land from PRS upon the

expiration of the lease for an amount equal

to its fair market value at that time. All lease

proceeds received are immediately

distributed to the partners. In year 3, at a

time when the values of the partnership’s

assets have not materially changed, PRS

agrees with A to liquidate A’s interest in

exchange for the investment asset held by

PRS. Under section 732(b), A’s basis in the

asset distributed equals $100, A’s basis in A’s

partnership interest immediately before the

distribution. Shortly thereafter, A sells the

investment asset to X, an unrelated party,

recognizing a $40 loss.

(ii) PRS does not make an election under

section 754. Accordingly, PRS’s basis in the

land contributed by A remains $100. At the

end of year 3, pursuant to the lease option,

PRS sells the land to B for $60 (its fair market

value). Thus, PRS recognizes a $40 loss on

the sale, which is allocated equally between

C and W. C’s and W’s bases in their

partnership interests are reduced to $10 each

pursuant to section 705. Their respective

interests are worth $30 each. Thus, upon

liquidation of PRS (or their interests therein),

each of C and W will recognize $20 of gain.

However, PRS’s continued existence defers

recognition of that gain indefinitely. Thus, if

this arrangement is respected, C and W

duplicate for their benefit A’s built-in loss in

the land prior to its contribution to PRS.

(iii) On these facts, any purported business

purpose for the transaction is insignificant in

comparison to the tax benefits that would

result if the transaction were respected for

federal tax purposes (see paragraph (c) of this

section). Accordingly, the transaction lacks a

substantial business purpose (see paragraph

(a)(1) of this section). In addition, factors (1),

(2), and (4) of paragraph (c) of this section

indicate that PRS was used with a principal

purpose to reduce substantially the partners’

tax liability in a manner inconsistent with

the intent of subchapter K. On these facts,

PRS is not bona fide (see paragraph (a)(1) of

this section), and the transaction is not

respected under applicable substance over

form principles (see paragraph (a)(2) of this

section). Further, the tax consequences to the

partners do not properly reflect the partners’

income; and Congress did not contemplate

application of section 754 to partnerships

such as PRS, which was formed for a

principal purpose of producing a double tax

benefit from a single economic loss (see

paragraph (a)(3) of this section). Thus, PRS

has been formed and availed of with a

principal purpose of reducing substantially

the present value of the partners’ aggregate

federal tax liability in a manner inconsistent

with the intent of subchapter K. Therefore (in

addition to possibly challenging the

transaction under judicial principles or other

statutory authorities, such as the substance

over form doctrine or the disguised sale rules

under section 707 (see paragraph (h) of this

section)), the Commissioner can recast the

transaction as appropriate under paragraph

(b) of this section.

Example 11. Absence of section 754

election; use of partnership consistent with

the intent of subchapter K. (i) PRS is a bona

fide partnership formed to engage in

investment activities with contributions of

cash from each partner. Several years after

joining PRS, A, a partner with a capital

account balance and basis in its partnership

interest of $100, wishes to withdraw from

PRS. The partnership agreement entitles A to

receive the balance of A’s capital account in

cash or securities owned by PRS at the time

of withdrawal, as mutually agreed to by A

and the managing general partner, P. P and

A agree to distribute to A $100 worth of nonmarketable securities (see section 731(c)) in

which PRS has an aggregate basis of $20.

Upon distribution, A’s aggregate basis in the

securities is $100 under section 732(b). PRS

does not make an election to adjust the basis

in its remaining assets under section 754.

Thus, PRS’s basis in its remaining assets is

unaffected by the distribution. In contrast, if

a section 754 election had been in effect for

the year of the distribution, under these facts

section 734(b) would have required PRS to

adjust the basis in its remaining assets

downward by the amount of the untaxed

appreciation in the distributed property, thus

reflecting that gain in PRS’s retained assets.

In selecting the assets to be distributed, A

and P had a principal purpose to take

advantage of the facts that (i) A’s basis in the

securities will be determined by reference to

A’s basis in its partnership interest under

section 732(b), and (ii) because PRS will not

make an election under section 754, the

remaining partners of PRS will likely enjoy

a federal tax timing advantage (i.e., from the

$80 of additional basis in its assets that

would have been eliminated if the section

754 election had been made) that is

inconsistent with proper reflection of income

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

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

is consistent with this intent. In addition, on

these facts, the requirements of paragraphs

(a)(1) and (2) of this section have been

satisfied. The validity of the tax treatment of

this transaction is therefore dependent upon

whether the transaction satisfies (or is treated

as satisfying) the proper reflection of income

standard under paragraph (a)(3) of this

section. A’s basis in the distributed securities

is properly determined under section 732(b).

The benefit to the remaining partners is a

result of PRS not having made an election

under section 754. Subchapter K is generally

intended to produce tax consequences that

achieve proper reflection of income.

However, paragraph (a)(3) of this section

provides that if the application of a provision

of subchapter K produces tax results that do

not properly reflect income, but application

of that provision to the transaction and the

ultimate tax results, taking into account all

the relevant facts and circumstances, are

clearly contemplated by that provision (and

the transaction satisfies the requirements of

paragraphs (a)(1) and (2) of this section), then

the application of that provision to the

transaction will be treated as satisfying the

proper reflection of income standard.

(iii) In general, the adjustments that would

be made if an election under section 754

were in effect are necessary to minimize

distortions between the partners’ bases in

their partnership interests and the

partnership’s basis in its assets following, for

example, a distribution to a partner. The

electivity of section 754 is intended to

provide administrative convenience for bona

fide partnerships that are engaged in

transactions for a substantial business

purpose, by providing those partnerships the

option of not adjusting their bases in their

remaining assets following a distribution to

a partner. Congress clearly recognized that if

the section 754 election were not made, basis

distortions may result. Taking into account

all the facts and circumstances of the

transaction, the electivity of section 754 in

the context of the distribution from PRS to

A, and the ultimate tax consequences that

follow from the failure to make the election

with respect to the transaction, are clearly

contemplated by section 754. Thus, the tax

consequences of this transaction will be

treated as satisfying the proper reflection of

income standard under paragraph (a)(3) of

this section. The Commissioner therefore

cannot invoke paragraph (b) of this section to

recast the transaction.

Example 12. Basis adjustments under

section 732; use of partnership consistent

with the intent of subchapter K. (i) A, B, and

C are partners in partnership PRS, which has

for several years been engaged in substantial

bona fide business activities. For valid

business reasons, the partners agree that A’s

interest in PRS, which has a value and basis

of $100, will be liquidated with the following

assets of PRS: a nondepreciable asset with a

value of $60 and a basis to PRS of $40, and

related equipment with two years of cost

recovery remaining and a value and basis to

PRS of $40. Neither asset is described in

section 751 and the transaction is not

described in section 732(d). Under section

732 (b) and (c), A’s $100 basis in A’s

partnership interest will be allocated

between the nondepreciable asset and the

equipment received in the liquidating

distribution in proportion to PRS’s bases in

those assets, or $50 to the nondepreciable

asset and $50 to the equipment. Thus, A will

have a $10 built-in gain in the

nondepreciable asset ($60 value less $50

basis) and a $10 built-in loss in the

equipment ($50 basis less $40 value), which

it expects to recover rapidly through cost

recovery deductions. In selecting the assets to
32 Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations

be distributed to A, the partners had a

principal purpose to take advantage of the

fact that A’s basis in the assets will be

determined by reference to A’s basis in A’s

partnership interest, thus, in effect, shifting

a portion of A’s basis from the

nondepreciable asset to the equipment,

which in turn would allow A to recover that

portion of its basis more rapidly. This shift

provides a federal tax timing advantage to A,

with no offsetting detriment to B or C.

(ii) Subchapter K is intended to permit

taxpayers to conduct joint business activity

through a flexible economic arrangement

without incurring an entity-level tax. See

paragraph (a) of this section. The decision to

organize and conduct business through PRS

is consistent with this intent. In addition, on

these facts, the requirements of paragraphs

(a)(1) and (2) of this section have been

satisfied. The validity of the tax treatment of

this transaction is therefore dependent upon

whether the transaction satisfies (or is treated

as satisfying) the proper reflection of income

standard under paragraph (a)(3) of this

section. Subchapter K is generally intended

to produce tax consequences that achieve

proper reflection of income. However,

paragraph (a)(3) of this section provides that

if the application of a provision of subchapter

K produces tax results that do not properly

reflect income, but the application of that

provision to the transaction and the ultimate

tax results, taking into account all the

relevant facts and circumstances, are clearly

contemplated by that provision (and the

transaction satisfies the requirements of

paragraphs (a)(1) and (2) of this section), then

the application of that provision to the

transaction will be treated as satisfying the

proper reflection of income standard.

(iii) A’s basis in the assets distributed to it

was determined under section 732 (b) and

(c). The transaction does not properly reflect

A’s income due to the basis distortions

caused by the distribution and the shifting of

basis from a nondepreciable to a depreciable

asset. However, the basis rules under section

732, which in some situations can produce

tax results that are inconsistent with the

proper reflection of income standard (see

paragraph (a)(3) of this section), are intended

to provide simplifying administrative rules

for bona fide partnerships that are engaged in

transactions with a substantial business

purpose. Taking into account all the facts and

circumstances of the transaction, the

application of the basis rules under section

732 to the distribution from PRS to A, and

the ultimate tax consequences of the

application of that provision of subchapter K,

are clearly contemplated. Thus, the

application of section 732 to this transaction

will be treated as satisfying the proper

reflection of income standard under

paragraph (a)(3) of this section. The

Commissioner therefore cannot invoke

paragraph (b) of this section to recast the

transaction.

Example 13. Basis adjustments under

section 732; plan or arrangement to distort

basis allocations artificially; use of

partnership not consistent with the intent of

subchapter K. (i) Partnership PRS has for

several years been engaged in the

development and management of commercial

real estate projects. X, an unrelated party,

desires to acquire undeveloped land owned

by PRS, which has a value of $95 and a basis

of $5. X expects to hold the land indefinitely

after its acquisition. Pursuant to a plan a

principal purpose of which is to permit X to

acquire and hold the land but nevertheless to

recover for tax purposes a substantial portion

of the purchase price for the land, X

contributes $100 to PRS for an interest

therein. Subsequently (at a time when the

value of the partnership’s assets have not

materially changed), PRS distributes to X in

liquidation of its interest in PRS the land and

another asset with a value and basis to PRS

of $5. The second asset is an insignificant

part of the economic transaction but is

important to achieve the desired tax results.

Under section 732 (b) and (c), X’s $100 basis

in its partnership interest is allocated

between the assets distributed to it in

proportion to their bases to PRS, or $50 each.

Thereafter, X plans to sell the second asset

for its value of $5, recognizing a loss of $45.

In this manner, X will, in effect, recover a

substantial portion of the purchase price of

the land almost immediately. In selecting the

assets to be distributed to X, the partners had

a principal purpose to take advantage of the

fact that X’s basis in the assets will be

determined under section 732 (b) and (c),

thus, in effect, shifting a portion of X’s basis

economically allocable to the land that X

intends to retain to an inconsequential asset

that X intends to dispose of quickly. This

shift provides a federal tax timing advantage

to X, with no offsetting detriment to any of

PRS’s other partners.

(ii) Although section 732 recognizes that

basis distortions can occur in certain

situations, which may produce tax results

that do not satisfy the proper reflection of

income standard of paragraph (a)(3) of this

section, the provision is intended only to

provide ancillary, simplifying tax results for

bona fide partnership transactions that are

engaged in for substantial business purposes.

Section 732 is not intended to serve as the

basis for plans or arrangements in which

inconsequential or immaterial assets are

included in the distribution with a principal

purpose of obtaining substantially favorable

tax results by virtue of the statute’s

simplifying rules. The transaction does not

properly reflect X’s income due to the basis

distortions caused by the distribution that

result in shifting a significant portion of X’s

basis to this inconsequential asset. Moreover,

the proper reflection of income standard

contained in paragraph (a)(3) of this section

is not treated as satisfied, because, taking into

account all the facts and circumstances, the

application of section 732 to this

arrangement, and the ultimate tax

consequences that would thereby result, were

not clearly contemplated by that provision of

subchapter K. In addition, by using a

partnership (if respected), the partners’

aggregate federal tax liability would be

substantially less than had they owned the

partnership’s assets directly (see paragraph

(c)(1) of this section). On these facts, PRS has

been formed and availed of with a principal

purpose to reduce the taxpayers’ aggregate

federal tax liability in a manner that is

inconsistent with the intent of subchapter K.

Therefore (in addition to possibly

challenging the transaction under applicable

judicial principles and statutory authorities,

such as the disguised sale rules under section

707, see paragraph (h) of this section), the

Commissioner can recast the transaction as

appropriate under paragraph (b) of this

section.

(e) Abuse of entity treatment—(1)

General rule. The Commissioner can

treat a partnership as an aggregate of its

partners in whole or in part as

appropriate to carry out the purpose of

any provision of the Internal Revenue

Code or the regulations promulgated

thereunder.

(2) Clearly contemplated entity

treatment. Paragraph (e)(1) of this

section does not apply to the extent

that—

(i) A provision of the Internal

Revenue Code or the regulations

promulgated thereunder prescribes the

treatment of a partnership as an entity,

in whole or in part, and

(ii) That treatment and the ultimate

tax results, taking into account all the

relevant facts and circumstances, are

clearly contemplated by that provision.

(f) Examples. The following examples

illustrate the principles of paragraph (e)

of this section. The examples set forth

below do not delineate the boundaries

of either permissible or impermissible

types of transactions. Further, the

addition of any facts or circumstances

that are not specifically set forth in an

example (or the deletion of any facts or

circumstances) may alter the outcome of

the transaction described in the

example. Unless otherwise indicated,

parties to the transactions are not

related to one another. See also

paragraph (d) Example 5 (iii) of this

section (also demonstrating the

application of the principles of

paragraph (e) of this section).

Example 1. Aggregate treatment of

partnership appropriate to carry out purpose

of section 163(e)(5). (i) Corporations X and Y

are partners in partnership PRS, which for

several years has engaged in substantial bona

fide business activities. As part of these

business activities, PRS issues certain high

yield discount obligations to an unrelated

third party. Section 163(e)(5) defers (and in

certain circumstances disallows) the interest

deductions on this type of obligation if

issued by a corporation. PRS, X, and Y take

the position that, because PRS is a

partnership and not a corporation, section

163(e)(5) is not applicable.

(ii) Section 163(e)(5) does not prescribe the

treatment of a partnership as an entity for

purposes of that section. The purpose of

section 163(e)(5) is to limit corporate-level

interest deductions on certain obligations.

The treatment of PRS as an entity could

result in a partnership with corporate

partners issuing those obligations and

thereby circumventing the purpose of section
Federal Register / Vol. 60, No. 1 / Tuesday, January 3, 1995 / Rules and Regulations 33

163(e)(5), because the corporate partner

would deduct its distributive share of the

interest on obligations that would have been

deferred until paid or disallowed had the

corporation issued its share of the obligation

directly. Thus, under paragraph (e)(1) of this

section, PRS is properly treated as an

aggregate of its partners for purposes of

applying section 163(e)(5) (regardless of

whether any party had a tax avoidance

purpose in having PRS issue the obligation).

Each partner of PRS will therefore be treated

as issuing its share of the obligations for

purposes of determining the deductibility of

its distributive share of any interest on the

obligations. See also section 163(i)(5)(B).

Example 2. Aggregate treatment of

partnership appropriate to carry out purpose

of section 1059. (i) Corporations X and Y are

partners in partnership PRS, which for

several years has engaged in substantial bona

fide business activities. As part of these

business activities, PRS purchases 50 shares

of Corporation Z common stock. Six months

later, Corporation Z announces an

extraordinary dividend (within the meaning

of section 1059). Section 1059(a) generally

provides that if any corporation receives an

extraordinary dividend with respect to any

share of stock and the corporation has not

held the stock for more than two years before

the dividend announcement date, the basis in

the stock held by the corporation is reduced

by the nontaxed portion of the dividend.

PRS, X, and Y take the position that section

1059(a) is not applicable because PRS is a

partnership and not a corporation.

(ii) Section 1059(a) does not prescribe the

treatment of a partnership as an entity for

purposes of that section. The purpose of

section 1059(a) is to limit the benefits of the

dividends received deduction with respect to

extraordinary dividends. The treatment of

PRS as an entity could result in corporate

partners in the partnership receiving

dividends through partnerships in

circumvention of the intent of section 1059.

Thus, under paragraph (e)(1) of this section,

PRS is properly treated as an aggregate of its

partners for purposes of applying section

1059 (regardless of whether any party had a

tax avoidance purpose in acquiring the Z

stock through PRS). Each partner of PRS will

therefore be treated as owning its share of the

stock. Accordingly, PRS must make

appropriate adjustments to the basis of the

corporation Z stock, and the partners must

also make adjustments to the basis in their

respective interests in PRS under section

705(a)(2)(B). See also section 1059(g)(1).

Example 3. Prescribed entity treatment of

partnership; determination of CFC status

clearly contemplated. (i) X, a domestic

corporation, and Y, a foreign corporation,

intend to conduct a joint venture in foreign

Country A. They form PRS, a bona fide

domestic general partnership in which X

owns a 40% interest and Y owns a 60%

interest. PRS is properly classified as a

partnership under §§ 301.7701–2 and

301.7701–3. PRS holds 100% of the voting

stock of Z, a Country A entity that is

classified as an association taxable as a

corporation for federal tax purposes under

§ 301.7701–2. Z conducts its business

operations in Country A. By investing in Z

through a domestic partnership, X seeks to

obtain the benefit of the look-through rules

of section 904(d)(3) and, as a result,

maximize its ability to claim credits for its

proper share of Country A taxes expected to

be incurred by Z.

(ii) Pursuant to sections 957(c) and

7701(a)(30), PRS is a United States person.

Therefore, because it owns 10% or more of

the voting stock of Z, PRS satisfies the

definition of a U.S. shareholder under section

951(b). Under section 957(a), Z is a

controlled foreign corporation (CFC) because

more than 50% of the voting power or value

of its stock is owned by PRS. Consequently,

under section 904(d)(3), X qualifies for lookthrough treatment in computing its credit for

foreign taxes paid or accrued by Z. In

contrast, if X and Y owned their interests in

Z directly, Z would not be a CFC because

only 40% of its stock would be owned by

U.S. shareholders. X’s credit for foreign taxes

paid or accrued by Z in that case would be

subject to a separate foreign tax credit

limitation for dividends from Z, a

noncontrolled section 902 corporation. See

section 904(d)(1)(E) and § 1.904–4(g).

(iii) Sections 957(c) and 7701(a)(30)

prescribe the treatment of a domestic

partnership as an entity for purposes of

defining a U.S. shareholder, and thus, for

purposes of determining whether a foreign

corporation is a CFC. The CFC rules prevent

the deferral by U.S. shareholders of U.S.

taxation of certain earnings of the CFC and

reduce disparities that otherwise might occur

between the amount of income subject to a

particular foreign tax credit limitation when

a taxpayer earns income abroad directly

rather than indirectly through a CFC. The

application of the look-through rules for

foreign tax credit purposes is appropriately

tied to CFC status. See sections 904(d)(2)(E)

and 904(d)(3). This analysis confirms that

Congress clearly contemplated that taxpayers

could use a bona fide domestic partnership

to subject themselves to the CFC regime, and

the resulting application of the look-through

rules of section 904(d)(3). Accordingly, under

paragraph (e) of this section, the

Commissioner cannot treat PRS as an

aggregate of its partners for purposes of

determining X’s foreign tax credit limitation.

(g) Effective date. Paragraphs (a), (b),

(c), and (d) of this section are effective

for all transactions involving a

partnership that occur on or after May

12, 1994. Paragraphs (e) and (f) of this

section are effective for all transactions

involving a partnership that occur on or

after December 29, 1994.

(h) Application of nonstatutory

principles and other statutory

authorities. The Commissioner can

continue to assert and to rely upon

applicable nonstatutory principles and

other statutory and regulatory

authorities to challenge transactions.

This section does not limit the

applicability of those principles and

authorities.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 20, 1994.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 94–32331 Filed 12–29–94; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 301

[TD 8587]

RIN 1545–AN48

Authority to Release Levy and Return

Property

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations regarding the authority to

release a levy and to return property.

The Technical and Miscellaneous

Revenue Act of 1988 sets forth certain

conditions under which the IRS must

release a levy. In addition, the Internal

Revenue Code was amended in 1979 to

provide for the payment of interest in

certain circumstances in which

wrongfully levied upon property is

returned. These final regulations

describe the conditions under which a

levy will be released and the procedures

for obtaining such a release. Lastly,

these final regulations also conform the

existing regulations regarding the return

of wrongfully levied upon property to

provide for the payment of interest in

certain circumstances.

EFFECTIVE DATE: These regulations are

effective December 30, 1994.

FOR FURTHER INFORMATION CONTACT:

Jerome D. Sekula, 202–622–3640 (not a

toll-free call).

SUPPLEMENTARY INFORMATION:

Background

This document contains final

regulations amending the Procedure and

Administration Regulations (26 CFR

part 301) under section 6343 of the

Internal Revenue Code. These

regulations reflect the amendment of

section 6343 by section 6236(f) of the

Technical and Miscellaneous Revenue

Act of 1988 (Pub. L. 100–647), section

4(a) of Act of Dec. 29, 1979 (Pub. L. 96–

167), and section 1511(c)(10) of the Tax

Reform Act of 1986 (Pub. L. 99–514).

On October 16, 1991 a notice of

proposed rulemaking concerning the

authority to release and return property

was published in the Federal Register

(56 FR 51857). Written comments