[Federal Register Volume 75, Number 110 (Wednesday, June 9, 2010)]
[Rules and Regulations]
[Pages 32659-32661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13790]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9485]
RIN 1545-BF28


Contributed Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 704(c) 
of the Internal Revenue Code (Code) providing that the section 704(c) 
anti-abuse rule takes into account the tax liabilities of both the 
partners in a partnership and certain direct and indirect owners of 
such partners. These final regulations further provide that a section 
704(c) allocation method cannot be used to achieve tax results 
inconsistent with the intent of subchapter K of the Code. The final 
regulations affect partnerships and their partners.

DATES: Effective Date: These final regulations are effective June 9, 
2010.
    Applicability Date: These final regulations are applicable for 
taxable years beginning after June 9, 2010.

FOR FURTHER INFORMATION CONTACT: Bryan A. Rimmke at (202) 622-3050 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains amendments to 26 CFR part 1 under section 
704 of the Internal Revenue Code (Code). On May 19, 2008, a notice of 
proposed rulemaking (REG-100798-06, 2008-23 IRB 1135) was published in 
the Federal Register (73 FR 28765) in response to the Joint Committee 
on Taxation's recommendation that the partnership rules be strengthened 
to ensure that the allocation rules in the regulations under section 
704(c) are not used to generate unwarranted benefits. See The Report of 
Investigation of Enron Corporation and Related Entities Regarding 
Federal Tax and Compensation Issues, and Policy Recommendations, (JCS-
3-03) February 2003 at pg. 220. Because no requests to speak were 
submitted by August 18, 2008, no public hearing was held. Written 
comments, however, were

[[Page 32660]]

received in response to the notice of proposed rulemaking. After 
consideration of these comments, the proposed regulations are adopted 
without change by this Treasury decision.

Summary of Comments and Explanation of Provisions

    The comments on the proposed regulations requested that examples be 
given to specifically describe the types of transactions to which these 
regulations apply. Additionally, the comments requested examples to 
describe the types of transactions which would not be abusive under 
this regulation but would be abusive under the general subchapter K 
anti-abuse rule found in Sec.  1.701-2. In light of the fact that these 
regulations are anti-abuse provisions and the factually intensive 
analysis needed to determine whether this regulation is applicable, the 
Treasury Department and the IRS decline to adopt these comments.
    Additional comments requested that the Treasury Department and the 
IRS consider both a de minimis partner rule for direct partners similar 
to Sec.  1.704-1(b)(2)(iii) and a rule for indirect partners where the 
owners would need to be related to the look-through entity within the 
meaning of sections 267 or 707 in order to be considered indirect 
partners for the purposes of the regulation. For purposes of Sec.  
1.704-1(b)(2)(iii), a de minimis partner is any partner, including a 
look-through entity, that owns less than 10 percent of the capital and 
profits of a partnership, and who is allocated less than 10 percent of 
each partnership item. The Treasury Department and the IRS have 
determined that neither a de minimis partner provision nor a related 
partner provision for indirect partners would conform to the intent of 
this anti-abuse provision and therefore decline to adopt such rules.
    This Treasury decision adopts the proposed regulations without 
substantive change. Accordingly, the regulations amend Sec.  1.704-
3(a)(10) to provide that, for purposes of applying the anti-abuse rule, 
both direct and indirect partners are considered. The final regulations 
provide that an indirect partner is any direct or indirect owner of a 
partnership, S corporation, or controlled foreign corporation (as 
defined in section 957(a) or 953(c)), or direct or indirect beneficiary 
of a trust or estate, that is a partner in the partnership, and any 
consolidated group of which the partner in the partnership is a member 
(within the meaning of Sec.  1.1502-1(h)). However, an owner of a 
controlled foreign corporation is treated as an indirect partner only 
with respect to the allocation of items that enter into the computation 
of a United States shareholder's inclusion under section 951(a) with 
respect to the controlled foreign corporation, enter into any person's 
income attributable to a United States shareholder's inclusion under 
section 951(a) with respect to the controlled foreign corporation, or 
would enter into the computations described in this paragraph if such 
items were allocated to the controlled foreign corporation.
    These final regulations further provide that the principles of 
section 704(c), together with the allocation methods described in Sec.  
1.704-3, paragraphs (b), (c) and (d), apply only with respect to the 
contributions of property to the partnership. In that regard, the anti-
abuse rule of Sec.  1.701-2(b) provides that, 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' Federal tax liability in a manner inconsistent with the 
intent of subchapter K, the IRS may recast the transaction for Federal 
tax purposes as appropriate to achieve tax results that are consistent 
with the intent of subchapter K. Thus, even though a transaction may 
satisfy the literal words of the statute or regulations, the IRS may 
recast a transaction as appropriate to avoid tax results that are 
inconsistent with the intent of subchapter K, including but not limited 
to: (i) Disregarding purported partnerships, in whole or part, so that 
partnership assets are treated as owned by the partner; (ii) 
disregarding one or more contributions or (iii) disregarding one or 
more purported partners. The final regulations also provide that, in 
determining if a purported contribution of property to a partnership 
should be recast to avoid results that are inconsistent with subchapter 
K, one factor that may be relevant is the use of the remedial method in 
which allocations of remedial items of income, gain, loss or deduction 
are made to one partner and allocations of offsetting remedial items 
are made to a related partner.

Effective/Applicability Date

    These regulations apply to taxable years beginning after June 9, 
2010. No inference should be drawn from this effective date with 
respect to prior law.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It has also been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because the 
regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the 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.

Drafting Information

    The principal author of these final regulations is Bryan A. Rimmke, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries), IRS. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
Par. 2. Section 1.704-3 is amended by:
0
1. Adding four sentences to paragraph (a)(1) at the end of the last 
sentence and revising paragraph (a)(10).
0
2. Revising the first sentence of paragraph (f) and adding one sentence 
to the end of the paragraph.
    The revisions and additions read as follows:


Sec.  1.704-3  Contributed property.

    (a) * * * (1) * * * The principles of this paragraph (a)(1), 
together with the methods described in paragraphs (b), (c) and (d) of 
this section, apply only to contributions of property that are 
otherwise respected. See for example Sec.  1.701-2. Accordingly, even 
though a partnership's allocation method may be described in the 
literal language of paragraphs (b), (c) or (d) of this section, based 
on the particular facts and circumstances, the Commissioner can recast 
the contribution as appropriate to avoid tax results inconsistent with 
the intent of subchapter K. One factor that

[[Page 32661]]

may be considered by the Commissioner is the use of the remedial 
allocation method by related partners in which allocations of remedial 
items of income, gain, loss or deduction are made to one partner and 
the allocations of offsetting remedial items are made to a related 
partner.
* * * * *
    (10) Anti-abuse rule--(i) In general. An allocation method (or 
combination of methods) is not reasonable if the contribution of 
property (or event that results in reverse section 704(c) allocations) 
and the corresponding allocation of tax items with respect to the 
property are made with a view to shifting the tax consequences of 
built-in gain or loss among the partners in a manner that substantially 
reduces the present value of the partners' aggregate tax liability. For 
purposes of this paragraph (a)(10), all references to the partners 
shall include both direct and indirect partners.
    (ii) Definition of indirect partner. An indirect partner is any 
direct or indirect owner of a partnership, S corporation, or controlled 
foreign corporation (as defined in section 957(a) or 953(c)), or direct 
or indirect beneficiary of a trust or estate, that is a partner in the 
partnership, and any consolidated group of which the partner in the 
partnership is a member (within the meaning of Sec.  1.1502-1(h)). An 
owner (whether directly or through tiers of entities) of a controlled 
foreign corporation is treated as an indirect partner only with respect 
to allocations of items of income, gain, loss, or deduction that enter 
into the computation of a United States shareholder's inclusion under 
section 951(a) with respect to the controlled foreign corporation, 
enter into any person's income attributable to a United States 
shareholder's inclusion under section 951(a) with respect to the 
controlled foreign corporation, or would enter into the computations 
described in this sentence if such items were allocated to the 
controlled foreign corporation.
* * * * *
    (f) Effective/Applicability Dates. With the exception of paragraphs 
(a)(1), (a)(8)(ii), (a)(8)(iii), (a)(10), and (a)(11) of this section, 
this section applies to properties contributed to a partnership and to 
restatements pursuant to Sec.  1.704-1(b)(2)(iv)(f) on or after 
December 21, 1993. * * * Paragraphs (a)(1) and (a)(10) of this section 
are applicable for taxable years beginning after June 9, 2010.

     Approved: May 28, 2010.
 Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.

Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-13790 Filed 6-8-10; 8:45 am]
BILLING CODE 4830-01-P