21988 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

Z LK

Capital account following sale ............................................................................................................................................... $11,000 $11,000

Deemed sale adjustment ......................................................................................................................................................... 9,000 9,000

Capital account before constructive liquidation ................................................................................................................... 20,000 20,000

Constructive liquidating distributions of the

interests in the new partnership are made

with reference to its $40,000 fair market

value. Under section 732(b), the adjusted tax

basis of the 50 percent interest in the new

partnership constructively distributed to Z is

equal to the $11,000 adjusted tax basis of Z’s

partnership interest before the constructive

liquidation, and the adjusted tax basis of the

50 percent interest in the new partnership

constructively distributed to LK is equal to

the $20,000 adjusted tax basis of LK’s

partnership interest before the constructive

liquidation. Under paragraph (b)(2)(iv)(d) of

this section, the capital account of the

terminated partnership with respect to the

new partnership would be $40,000 (i.e., the

fair market value of the property

constructively contributed to the new

partnership by the terminated partnership).

The capital accounts of Z and LK with

respect to the constructively distributed

interests in the new partnership are stated at

$20,000 (i.e., one-half of the $40,000 capital

account of the terminated partnership). This

Example 13(v) applies to terminations of

partnerships under section 708(b)(1)(B)

occurring on or after the date on which these

regulations are published as final regulations

in the Federal Register.

* * * * *

Par. 3. Section 1.704–4 is amended by

revising paragraphs (a)(4)(ii) and (c)(3)

to read as follows:

§ 1.704–4 Distribution of contributed

property.

(a) * * *

(4) * * *

(ii) Section 708(b)(1)(B) terminations.

A termination of the partnership under

section 708(b)(1)(B) does not begin a

new five-year period for each partner

with respect to the built-in gain and

built-in loss property that the

terminated partnership is deemed to

contribute to a new partnership

following the termination. See § 1.704–

3(a)(3)(ii) for the definitions of built-in

gain and built-in loss on section 704(c)

property. This paragraph (a)(4)(ii)

applies to terminations of partnerships

under section 708(b)(1)(B) occurring on

or after the date on which these

regulations are published as final

regulations in the Federal Register.

* * * * *

(c) * * *

(3) Section 708(b)(1)(B) terminations.

Section 704(c)(1)(B) and this section do

not apply to a deemed distribution of

interests in a new partnership caused by

a termination of a partnership under

section 708(b)(1)(B). A subsequent

distribution of section 704(c) property

by the new partnership to a partner of

the new partnership is subject to section

704(c)(1)(B) to the same extent that a

distribution by the terminated

partnership would have been subject to

section 704(c)(1)(B). See also § 1.737–

2(a) for a similar rule in the context of

section 737. This paragraph (c)(3)

applies to terminations of partnerships

under section 708(b)(1)(B) occurring on

or after the date on which these

regulations are published as final

regulations in the Federal Register.

* * * * *

Par. 4. In § 1.708–1, paragraph

(b)(1)(iv) is amended by removing the

first sentence and adding two new

sentences in its place to read as follows:

§ 1.708–1 Continuation of Partnership.

* * * * *

(b) * * *

(1) * * *

(iv) If a partnership is terminated by

a sale or exchange of an interest, the

following is deemed to occur: The

partnership transfers all of its assets and

liabilities to a new partnership in

exchange for an interest in the new

partnership; and, immediately

thereafter, the terminated partnership

distributes an interest in the new

partnership to the purchasing partner

and the other remaining partners in

liquidation of the terminated

partnership, either for the continuation

of the business of the new partnership

or for its dissolution and winding up.

The first sentence of this paragraph

(b)(1)(iv) applies to terminations of

partnerships under section 708(b)(1)(B)

occurring on or after the date on which

these regulations are published as final

regulations in the Federal Register.

* * *

* * * * *

Par. 5. Section 1.743–1 is amended by

adding paragraph (d) as follows:

§ 1.743–1 Optional adjustment to basis of

partnership property.

* * * * *

(d) Section 708(b)(1)(B) terminations.

A partner with a special basis

adjustment in property held by a

partnership that terminates under

section 708(b)(1)(B) will continue to

have the same special basis adjustment

with respect to property contributed by

the terminated partnership to the new

partnership under § 1.708–1(b)(1)(iv).

This paragraph (d) applies to

terminations of partnerships under

section 708(b)(1)(B) occurring on or after

the date on which these regulations are

published as final regulations in the

Federal Register.

Par. 6. In § 1.737–2, paragraph (a) is

revised to read as follows:

§ 1.737–2 Exceptions and special rules.

(a) Section 708(b)(1)(B) terminations.

Section 737 and this section do not

apply to a deemed distribution of

interests in a new partnership caused by

a termination of a partnership under

section 708(b)(1)(B). A subsequent

distribution of section 704(c) property

by the new partnership to a partner of

the new partnership is subject to section

737 to the same extent that a

distribution by the terminated

partnership would have been subject to

section 737. See also § 1.704–4(c)(3) for

a similar rule in the context of section

704(c)(1)(B). This paragraph (a) applies

to terminations of partnerships under

section 708(b)(1)(B) occurring on or after

the date on which these regulations are

published as final regulations in the

Federal Register.

* * * * *

Par 7. In § 1.761–1, paragraph (e) is

added to read as follows:

§ 1.761–1 Terms defined.

* * * * *

(e) Distribution of partnership

interest. For purposes of section

708(b)(1)(B) and § 1.708–1(b)(1)(iv), the

distribution of an interest in a new

partnership by a partnership that

terminates under section 708(b)(1)(B) is

not a sale or exchange of an interest in

the new partnership. This paragraph (e)

applies to terminations of partnerships

under section 708(b)(1)(B) occurring on

or after the date on which these

regulations are published as final

regulations in the Federal Register.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 96–11779 Filed 5–9–96; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 1

[FI–47–92]

RIN 1545–AR76

Reissuance of Mortgage Credit

Certificates; Hearing Cancellation

AGENCY: Internal Revenue Service,

Treasury.
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21989

ACTION: Cancellation of notice of public

hearing on proposed rulemaking.

SUMMARY: This document provides

notice of cancellation of a public

hearing on proposed regulations relating

to implementing a provision of the Tax

reform Act of 1984 permitting the

reissuance of mortgage credit

certificates.

DATES: The public hearing originally

scheduled for May 22, 1996, beginning

at 10:00 a.m. is cancelled.

FOR FURTHER INFORMATION CONTACT:

Evangelista C. Lee of the Regulations

Unit, Assistant Chief Counsel

(Corporate), (202) 622–7190 (not a toll

free number).

SUPPLEMENTARY INFORMATION: The

subject of the public hearing is proposed

amendments to the Income Tax

Regulations under section 25 of the

Internal Revenue Code. A notice of

public hearing appearing in the Federal

Register on Friday, April 5, 1996 (61 FR

15204), announced that a public hearing

would be held on Wednesday, May 22,

1996, beginning at 10:00 a.m., in the

Commissioners Conference Room,

Internal Revenue Building, 1111

Constitution Avenue, NW, Washington,

D.C. 20224.

The public hearing scheduled for

Wednesday, May 22, 1996, is cancelled.

Michael L. Slaughter,

Acting Chief, Regulations Unit, Assistant

Chief Counsel (Corporate).

[FR Doc. 96–11778 Filed 5–10–96; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Part 301

[PS–43–95]

RIN 1545–AT91

Simplification of Entity Classification

Rules

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations that would replace

the existing regulations for classifying

certain business organizations with an

elective regime. These proposed

regulations simplify the existing

classification rules.

DATES: Written comments and requests

to speak (with outlines of oral

comments) at a public hearing

scheduled for August 21, 1996, at 10

a.m. must be submitted by August 12,

1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (PS–43–95), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative,

submissions may be hand delivered

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

to: CC:DOM:CORP:R (PS–43–95),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue NW.,

Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Armando

Gomez, (202) 622–3050; concerning

foreign organizations, Ronald M.

Gootzeit or William H. Morris, (202)

622–3880; concerning submissions and

the hearing, Evangelista Lee (202) 622–

7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the

Paperwork Reduction Act of 1995 (44

U.S.C. 3507).

Comments on the collection of

information should be sent to the Office

of Management and Budget, Attn: Desk

Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503, with copies to the Internal

Revenue Service, Attn: IRS Reports

Clearance Officer, T:FP, Washington, DC

20224. Comments on the collection of

information should be received by July

12, 1996.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The collections of information are

required by §§ 301.6109–1(b)(2)(vi) and

301.7701–3(c). This information is

required by the IRS to ensure the proper

classification of business organizations

and to ensure compliance with the

proposed regulations. The likely

respondents are businesses and other

for-profit organizations, including small

businesses.

Books or records relating to a

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

The burden of the collection of

information required by § 301.6109–1

will be reflected in Forms SS–4 and W–

7. The burden of the collection of

information required by § 301.7701–3(c)

will be reflected in such form as is

prescribed by the Commissioner for

purposes of making the election

described in this regulation.

Introduction

This document proposes to revise

§§ 301.7701–1 through 301.7701–3 of

the Procedure and Administration

Regulations (26 CFR part 301) to clarify

which organizations are classified as

corporations automatically under the

Internal Revenue Code (Code) and to

provide a simple elective regime for

classifying other business organizations.

This document also proposes

conforming changes to §§ 1.581–1,

1.581–2, and 1.761–1 of the Income Tax

Regulations (26 CFR part 1), and to

§§ 301.6109–1, 301.7701–4, 301.7701–6,

and 301.7701–7 of the Procedure and

Administration Regulations (26 CFR

part 301).

Background

On April 3, 1995, Notice 95–14,

relating to classification of business

organizations under section 7701, was

published in the Internal Revenue

Bulletin (1995–1 C.B. 297). A notice of

public hearing was published in the

Federal Register on May 10, 1995 (60

FR 24813). Written comments were

received and a public hearing was held

on July 20, 1995. After consideration of

the comments, the Treasury Department

and the IRS propose to replace the

existing classification regulations with a

simplified regime that is elective for

certain business organizations.

Explanation of Provisions

I. Introduction

Section 7701(a)(2) of the Code defines

a partnership to include a syndicate,

group, pool, joint venture, or other

unincorporated organization, through or

by means of which any business,

financial operation, or venture is carried

on, and that is not a trust or estate or

a corporation. Section 7701(a)(3) defines

a corporation to include associations,

joint-stock companies, and insurance

companies.

The existing regulations for

classifying business organizations as

associations (which are taxable as

corporations under section 7701(a)(3))

or as partnerships under section

7701(a)(2) are based on the historical

differences under local law between

partnerships and corporations.

However, many states have revised their

statutes to provide that partnerships and

other unincorporated organizations may

possess characteristics that traditionally

have been associated with corporations,

thereby narrowing considerably the

traditional distinctions between