Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21985

are specifically invited on the overall

regulatory, economic, environmental,

and energy-related aspects of the

proposal. Communications should

identify the airspace docket number and

be submitted in triplicate to the address

listed above. Commenters wishing the

FAA to acknowledge receipt of their

comments on this notice must submit

with those comments a self-addressed,

stamped postcard on which the

following statement is made:

‘‘Comments to Airspace Docket No. 96–

ACE–5.’’ The postcard will be date/time

stamped and returned to the

commenter. All communications

received on or before the closing date

for comments will be considered before

taking action on the proposed rule. The

proposal contained in this notice may

be changed in light of comments

received. All comments submitted will

be available for examination in the

Rules Docket both before and after the

closing date for comments. A report

summarizing each substantive public

contact with FAA personnel concerned

with this rulemaking will be filed in the

docket.

Availability of NPRMs

Any person may obtain a copy of this

Notice of Proposed Rulemaking (NPRM)

by submitting a request to the Federal

Aviation Administration, Office of

Public Affairs, Attention: Public Inquiry

Center, APA–230, 800 Independence

Avenue, SW, Washington, DC 20591, or

by calling (202) 267–3484.

Communications must identify the

notice number of this NPRM. Persons

interested in being placed on a mailing

list for future NPRMs should also

request a copy of Advisory Circular No.

11–2A, which describes the procedures.

The Proposal

The FAA is considering an

amendment to part 71 of the Federal

Aviation Regulations (14 CFR part 71) to

provide additional controlled airspace

for a new Instrument Flight Rules (IFR)

procedure at the Ames Municipal

Airport, Ames, Iowa. The additional

airspace would segregate aircraft

operating under VFR conditions from

aircraft operating under IFR procedures.

The area would be depicted on

appropriate aeronautical charts thereby

enabling pilots to circumnavigate the

area or otherwise comply with IFR

procedures. Class E airspace

designations for airspace areas

extending upward from 700 feet or more

above the surface of the earth are

published in paragraph 6005 of FAA

Order 7400.9C, dated August 17, 1995,

and effective September 16, 1995, which

is incorporated by reference in 14 CFR

71.1. The Class E airspace designation

listed in this document would be

published subsequently in the Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore, this proposed regulation (1)

is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not

a ‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule will

not have a significant economic impact

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR Part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration proposes to

amend part 71 of the Federal Aviation

Regulations (14 CFR part 71) as follows:

PART 71—[AMENDED]

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g); 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389; 14 CFR 11.69.

71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of Federal Aviation

Administration Order 7400.9C, Airspace

Designations and Reporting Points,

dated August 17, 1995, and effective

September 16, 1995, is amended as

follows:

Paragraph 6005 Class E airspace areas

extending upward from 700 feet or more

above the surface of the earth.

* * * * *

ACE IA E5 Ames, IA [Revised]

Ames Municipal Airport, IA

(lat. 41°59′32′′ N., long. 93°37′18 W.)

Ames NDB

(lat. 41°59′42′′ N., long. 93°37′37′′ W.)

That airspace extending upward from 700

feet above the surface within a 6.6-mile

radius of the Ames Municipal Airport, and

within 2.1 miles each side of the 197° bearing

from the Ames NDB extending from the 6.6-

mile radius to 7.4 miles south of the airport,

and within 2 miles each side of the 136°

bearing from the airport extending from the

6.6-mile radius to 10 miles southeast of the

airport.

* * * * *

Issued in Kansas City, MO, on April 9,

1996.

Christopher R. Blum,

Acting Manager, Air Traffic Division Central

Region.

[FR Doc. 96–11932 Filed 5–10–96; 8:45 am]

BILLING CODE 4910–13–M

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[PS–5–96]

RIN 1545–AU14

Termination of a Partnership under

Section 708(b)(1)(B)

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to the

termination of a partnership upon the

sale or exchange of 50 percent or more

of the total interest in partnership

capital and profits. The proposed

regulations affect all partners and

partnerships that terminate under

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

DATES: Written comments and requests

to speak (with outlines of oral

comments) at a public hearing

scheduled for September 5, 1996, must

be received by August 15, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (PS–5–96), 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–5–96), Courier’s

Desk, Internal Revenue Service, 1111

Constitution Avenue, NW., Washington,

DC. The public hearing will be held in

the IRS Auditorium, Seventh Floor,

7400 Corridor, Internal Revenue

Building, 1111 Constitution Avenue,

NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the proposed regulations,

Steven R. Schneider, (202) 622–3060;

concerning submissions and the

hearing, Christina Vasquez, (202) 622–

7190; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Introduction

This document proposes to revise

section 1.708–1(b)(1)(iv) of the Income
21986 Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules

Tax Regulations (26 CFR Part 1) under

section 708(b)(1)(B) of the Internal

Revenue Code (Code). This document

also proposes revisions to other sections

of the Income Tax Regulations to reflect

the proposed revision to § 1.708-

1(b)(1)(iv).

Background

Section 708(b)(1)(B) provides that, for

purposes of section 708(a), a partnership

shall be considered terminated if within

a 12-month period there is a sale or

exchange of 50 percent or more of the

total interest in partnership capital and

profits. The Code and the legislative

history to section 708(b)(1)(B) do not

specify the tax consequences of that

termination or the steps by which such

a termination occurs.

However, § 1.708–1(b)(1)(iv) of the

Income Tax Regulations provides that, if

a partnership is terminated by a sale or

exchange of an interest, the following is

deemed to occur: the partnership

distributes its properties to the

purchaser and the other remaining

partners in proportion to their

respective interests in the partnership

properties; and, immediately thereafter,

the purchaser and the other remaining

partners contribute the properties to a

new partnership, either for the

continuation of the business or for its

dissolution and winding up.

The distribution of property that is

deemed to occur upon a termination

under section 708(b)(1)(B) is treated like

an actual distribution for federal tax

purposes. As a result, a continuing

partner may recognize gain under

section 731(a) if the amount of money

deemed distributed to the partner

(including any money deemed

distributed upon a shift in liabilities

under section 752) exceeds the partner’s

basis in the partnership interest. In

addition, the distribution may affect the

basis of the partnership’s assets because

the basis of the distributed property in

the hands of the partners (and thus in

the hands of the reconstituted

partnership) is determined under

section 732(b) by reference to the

partners’ bases in their partnership

interests. Another possible consequence

of the deemed distribution is a change

in the holding periods of the partners’

interests in the partnership.

The deemed distribution of

partnership property that occurs on a

termination raises particular concerns

with respect to the interaction of

sections 708(b)(1)(B), 704(c), and 737.

Section 704(c)(1)(A) requires that gain

or loss with respect to property

contributed to a partnership by a partner

be shared among the partners so as to

take into account any built-in gain or

loss in the property at the time of the

contribution. Section 704(c)(1)(B)

provides that, if property contributed by

a partner is distributed to another

partner within five years, the

contributing partner must recognize

gain or loss in an amount equal to the

gain or loss the partner would have been

allocated under section 704(c)(1)(A) on

a sale of the property by the partnership.

Section 737 provides that, if property is

distributed to a partner that had

contributed other property to the

partnership within five years, the

distributee partner must recognize gain

equal to the lesser of (i) the net

precontribution gain on property

contributed by the partner, or (ii) the

excess of the value of the distributed

property over the adjusted basis of the

partner’s interest in the partnership. Net

precontribution gain is the net gain, if

any, that would have been recognized

by the distributee partner under section

704(c)(1)(B) if all partnership property

contributed by the distributee partner

within five years of the distribution had

been distributed to another partner.

The legislative history of sections

704(c)(1)(B) and 737 indicates that

Congress intended these sections to be

coordinated with the rules governing

partnership terminations under section

708(b)(1)(B). The legislative history

states that such coordination will

provide that (1) no gain is recognized

under sections 704(c)(1)(B) and 737 as a

result of a deemed distribution on

termination; (2) the deemed distribution

will not change the application of the

sharing requirements of section 704(c)

to precontribution gain or loss with

respect to property contributed to the

partnership before the termination; and

(3) the constructive contribution of

partnership property to a new

partnership is treated as beginning a

new five-year period for all contributed

property to the extent that the

pretermination appreciation in the value

of property was not already required to

be allocated to the original contributor

(if any) of the property. H.R. Rep. No.

247, 101st Cong., 1st Sess. 1355 (1989);

H.R. Conf. Rep. No. 1018, 102d Cong.,

2d Sess. 428 (1992). These results are

difficult to integrate with the current

regulations under section 708(b)(1)(B).

The difficulty arises primarily because

the section 708(b)(1)(B) regulations

provide for a pro rata distribution of

property to the partners, while the

legislative history seems to contemplate

that partnership property previously

contributed to the partnership by a

partner will be distributed to that

partner, at least to the extent of the

remaining built-in gain or loss in the

property.

The IRS and Treasury Department

recently issued final regulations under

sections 704(c)(1)(B) and 737.

Commentators, however, noted that the

approach taken in the legislative history

and the final regulations would not be

required if the section 708(b)(1)(B)

regulations did not create a deemed

distribution of partnership property to

the partners as part of a section

708(b)(1)(B) termination. The preamble

to the final regulations indicated that

the IRS and Treasury would consider

issuing separate guidance on the

interaction of sections 704(c) and

708(b)(1)(B) and invited additional

comments and suggestions regarding the

project.

Explanation of Provisions

The proposed regulations under

section 708(b)(1)(B) provide that, 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;

immediately thereafter, the terminated

partnership distributes interests 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 or for its dissolution and

winding up.

Under the proposed regulations, a

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

will no longer result in a deemed

distribution of the terminated

partnership’s assets to the purchasing

and remaining partners. As a result, the

federal tax consequences of a

termination that result from the deemed

distribution of assets will no longer

occur on a section 708(b)(1)(B)

termination. Such consequences include

the possibility of gain under section

731(a), a change in the partnership’s

basis in partnership property, and the

commencement of a new five-year

period for purposes of sections

704(c)(1)(B) and 737. In addition, the

interaction between section 704(c) and

section 708(b)(1)(B) is greatly simplified

under the proposed regulation. The

section 704(c) property held by the

terminated partnership (and deemed

contributed to a new partnership) will

continue to be treated as section 704(c)

property in the hands of the new

partnership under § 1.704–3(a)(9). A

distribution of property by the new

partnership will have the same effect for

purposes of section 704(c)(1)(B) and

section 737 as a distribution from the

terminated partnership. See §§ 1.704–
Federal Register / Vol. 61, No. 93 / Monday, May 13, 1996 / Proposed Rules 21987

4(c)(4) and 1.737–2(b)(1) as proposed to

be amended by this document.

The proposed regulations do not

change the federal tax consequences of

a termination under section 708(b)(1)(B)

to the extent that the consequences were

not dependent on the deemed

distribution. Such consequences will

continue under the proposed

regulations. For example, the tax year of

the terminated partnership will still

close as a result of the termination, the

elections of the terminated partnership

will be invalidated, and a termination

will continue to be treated as a

liquidation under the section 704(b)

regulations.

In addition, the proposed regulations

will not change the effect of a

termination on the depreciation of

partnership property by the new

partnership. Property deemed

contributed to the new partnership will

continue to be subject to the antichurning provisions of section 168(f)(5),

which generally require the new

partnership to depreciate the property

as if it were newly acquired property

under the same depreciation system

used by the terminated partnership.

This result is required by statute and is

not affected by the specific mechanics of

a termination under section

708(b)(1)(B). See Code sections 168(f)(5);

168(i)(7); 168(e)(4) and (f)(10) (repealed

1986).

This document also contains

proposed regulations under sections

704(b), 704(c)(1)(B), 743(b), 737, and

761(e). These proposed regulations

relate to the elimination of a deemed

distribution of partnership assets as part

of a section 708(b)(1)(B) termination.

The proposed regulations under section

704(b) will eliminate the reference to a

deemed contribution of partnership

property by the partners of the

continuing partnership. The proposed

regulations under sections 704(c)(1)(B)

and 737 provide that a termination

under section 708(b)(1)(B) does not

commence a new five-year period for

partnership property and that a

distribution of property by the new

partnership will be treated in the same

manner as a distribution by the

terminated partnership would have

been treated. Although the legislative

history suggests the beginning of a new

five year period for built in gain or loss

in the property deemed contributed to

the new partnership, that legislative

history was commenting on a deemed

contribution of property by the partners

to the new partnership, as then required

by the section 708 regulations. Under

the approach proposed in this

regulation, a new five year period is no

longer appropriate.

The proposed regulations under

section 743(b) provide that any special

basis adjustment a partner has in assets

of the terminated partnership as a result

of a section 754 election will carry over

to the new partnership. The proposed

regulations under section 761(e) provide

that the distribution of interests in the

new partnership by the terminated

partnership is not treated as a sale or

exchange of the interests in the new

partnership. This provision is necessary

to prevent the distribution of interests in

the new partnership from causing a

termination of the new partnership.

Proposed Effective Date

This section is proposed to apply 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.

Special Analyses

It has been determined that this notice

of proposed rulemaking 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 these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (a signed original and

eight (8) copies) that are timely

submitted to the IRS. All comments will

be available for public inspection and

copying.

A public hearing has been scheduled

for September 5, 1996, at 10 a.m. in the

Auditorium of the Internal Revenue

Building, 1111 Constitution Avenue

NW., Washington, DC. Because of access

restrictions, visitors will not be

admitted beyond the Internal Revenue

Building lobby more than 15 minutes

before the hearing starts.

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

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by August 15, 1996,

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (signed original and eight

(8) copies) by August 15, 1996.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these

regulations is Steven R. Schneider of the

Office of Assistant 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.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is

proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 continues to read in part as

follows:

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

Section 1.704–4 also issued under 26

U.S.C. 704(c). * * *

Par. 2. Section 1.704–1 is amended as

follows:

1. Paragraph (b)(2)(iv)(l) is amended

by removing the fourth sentence.

2. Paragraph (b)(5) Example 13(v) is

amended by removing sentences five to

the end and adding five new sentences

in their place.

The revisions and addition read as

follows:

§ 1.704–1 Partner’s distributive share.

* * * * *

(b) * * *

(5) * * *

Example 13. * * *

(v) * * * In accordance with paragraph

(b)(2)(iv)(e) of this section, the partnership

agreement provides that the partners’ capital

accounts are adjusted to reflect how

unrealized taxable gain would have been

allocated if the property distributed to the

partners in liquidation of the partnership

(i.e., the interest in the new partnership

constructively received by the terminated

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

been sold for its fair market value of $40,000.

Accordingly, the $18,000 of unrealized gain

($40,000 less $22,000 adjusted tax basis) is

credited to the partners’ capital accounts as

follows:
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.