Source: http://www.irs.gov/irb/2003-28_IRB/ar15.html
Timestamp: 2014-07-28 20:33:52
Document Index: 287247268

Matched Legal Cases: ['ART 1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§358', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1', '§1']

Internal Revenue Bulletin - July 14, 2003 - REG-106736-00 Internal Revenue Bulletin: 2003-28 July 14, 2003 REG-106736-00 Assumption of Partner Liabilities Table of Contents
Paperwork Reduction Act Background Explanation of Provisions Effective Date Special Analyses Adoption of Amendments to the Regulations PART 1—INCOME TAXES
§1.704-1 [Amended] §1.704-1 Partner’s distributive share. §1.704-2 [Amended]	§1.705-1 Determination of basis of partner’s interest. §1.752-0 [Amended] §1.752-0 Table of contents. §1.752-1 Treatment of partnership liabilities. §1.752-6 Partnership assumption of partner’s §358(h)(3) liability after October 18, 1999, and before June 24, 2003. §1.752-7 Partnership assumption of partner’s §1.752-7 liability on or after June 24, 2003. §1.752-1 Treatment of Partnership Liabilities. §1.752-5(a) [Amended] §1.752-6 Partnership assumption of partner’s section 358(h)(3) liability after October 18, 1999, and before June 24, 2003.
§1.752-7 Partnership assumption of partner’s §1.752-7 liability on or after June 24, 2003. Drafting Information
Notice of Proposed Rulemaking; Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations; and Notice of Public
Hearing AGENCY:
This document contains proposed regulations relating to the definition of liabilities under section 752 of the Internal Revenue
Code. These regulations provide rules regarding a partnership’s assumption of certain fixed and contingent obligations in
exchange for a partnership interest and provide conforming changes to certain regulations. These regulations also provide
rules under section 358(h) for assumptions of liabilities by corporations from partners and partnerships. In addition, this
document provides notice that the IRS and Treasury intend to issue supplemental guidance that may apply certain of the rules
outlined in these proposed regulations to transactions involving corporations. This document also provides notice of public
hearing on the proposed regulations.
Written or electronic comments and requests to speak at the public hearing scheduled for Tuesday, October 14, 2003, must
be received by September 22, 2003.
Send submissions to: CC:PA:RU (REG-106736-00), room 5226, Internal Revenue Service
POB 7604, Ben Franklin Station, Washington, DC 20044 . Submissions may be hand-delivered between the hours of 8 a.m. and 4 p.m. to CC:PA:RU (REG-106736-00), Courier's Desk, Internal Revenue Service
1111 Constitution Avenue, NW, Washington, DC or sent electronically, via the IRS Internet site at: www.irs.gov/regs. The public hearing will be held in the auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington,
DC. FOR FURTHER INFORMATION CONTACT: Horace Howells at (202) 622-3050; concerning submissions, the hearing, and/or placement on the building access list to attend
the hearing, Sonya Cruse, (202) 622-7180 (not toll-free numbers).
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, W:CAR:MP:T:T:SP, Washington, DC 20224 . Comments on the collection of information should be received by August 25, 2003. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the proper performance of the functions of the Internal Revenue
The collection of information in this proposed regulation is in §1.752-7(e), (f), (g), and (h). This information is required
for a former or current partner of a partnership to take deductions attributable to the economic performance of certain fixed
or contingent obligations assumed from the partner by a partnership. This information will be used by the partner to permit
the partner to take a deduction. An additional collection of information in this proposed regulation is in §1.752-7(j)(2).
This information is required to inform the IRS of partnerships making the designated election and to report income appropriately.
The collection of information is required to obtain a benefit, i.e., to elect to apply the provisions of §1.752-7 of the proposed regulations in lieu of §1.752-6T of the temporary regulations.
The likely respondents are individuals, business or other for-profit institutions, and small businesses or organizations.
The estimated annual burden per respondent varies from 20 to 40 minutes, depending on individual circumstances, with an estimated
Estimated annual frequency of responses: On occasion
Background With certain exceptions, no gain or loss is recognized if property is transferred to a corporation solely in exchange for
stock of the corporation, and, immediately after the exchange, the transferors control the corporation. If, however, the transferee
corporation assumes a liability of the transferor, then, under section 358(d), the transferor’s basis in the stock received
in the exchange is reduced by the amount of that liability. If the amount of the liability exceeds the transferor’s basis
in the property transferred to the corporation, then the transferor recognizes gain under section 357(c)(1). Under section
357(c)(3), a liability the payment of which would give rise to a deduction or that would be described in section 736(a) (regarding
payments to a retiring partner) is not taken into account in applying section 357(c)(1), unless the incurrence of the liability
resulted in the creation of, or an increase in, the basis of any property.
Under section 752(a) and (b), similar rules apply where a partnership assumes a liability from a partner or a partner contributes
property to a partnership subject to a liability. The difference between the amount of the liability and the partner’s share
of that liability after the partnership’s assumption is treated as a distribution of money, which reduces the partner’s basis
in the partnership interest and may cause the partner to recognize gain. There is no statutory or regulatory definition of
liabilities for purposes of section 752. Case law and revenue rulings, however, have established that, as under section 357(c)(3),
the term liabilities for this purpose does not include liabilities the payment of which would give rise to a deduction, unless the incurrence
of the liability resulted in the creation of, or an increase in, the basis of property. Rev. Rul. 88-77, 1988-2 C.B. 128;
Salina Partnership LP, FPL Group, Inc. v. Commissioner, T.C. Memo 2000-352.
On December 21, 2000, as part of the Community Renewal Tax Relief Act of 2000 (Appendix G of H.R. 4577, Consolidated Appropriations
Act, 2001) Public Law 106-554, 114 Stat. 2763, 2763A-638 (2001) (the Act), Congress enacted section 358(h) to address certain
situations where property was transferred to a corporation in exchange for both stock and the corporation’s assumption of
certain obligations of the transferor. In these situations, transferors took the position that the obligations were not liabilities
within the meaning of section 357(c) or that they were described in section 357(c)(3), and, therefore, the obligations did
not reduce the basis of the transferor’s stock. These assumed obligations, however, did reduce the value of the stock. The
transferors then sold the stock and claimed a loss. In this way, taxpayers attempted to duplicate a loss in corporate stock
and to accelerate deductions that typically are allowed only on the economic performance of these types of obligations.
Section 358(h) addresses these transactions by requiring that, after application of section 358(d), the basis in stock received
in an exchange to which section 351, 354, 355, 356, or 361 applies be reduced (but not below the fair market value of the
stock) by the amount of any liability assumed in the exchange. Exceptions to section 358(h) are provided where: (1) the trade
or business with which the liability is associated is transferred to the person assuming the liability as part of the exchange;
or (2) substantially all of the assets with which the liability is associated are transferred to the person assuming the liability
as part of the exchange. The term liability for purposes of section 358(h) includes any fixed or contingent obligation to make payment without regard to whether the
obligation is otherwise taken into account for purposes of the Internal Revenue Code (Code).
Congress recognized that taxpayers were attempting to use partnerships and S corporations to carry out the same types of abuses
that section 358(h) was designed to deter. Therefore, in section 309(c) and (d)(2) of the Act, Congress directed the Secretary
to prescribe rules to provide “appropriate adjustments under subchapter K of chapter 1 of the Code to prevent the acceleration
or duplication of losses through the assumption of (or transfer of assets subject to) liabilities described in section 358(h)(3)
. . . in transactions involving partnerships” and to prescribe similar rules for S corporations. Under the statute, these
rules are to “apply to assumptions of liability after October 18, 1999, or such later date as may be prescribed in such rules.”
In response to this directive, these proposed regulations provide rules to prevent the duplication and acceleration of loss
through the assumption by a partnership of a §1.752-7 liability from a partner. For this purpose, a partnership that takes
property subject to a liability is generally treated as assuming the liability. A §1.752-7 liability is any fixed or contingent
obligation to make payment that is not described in §1.752-1(a)(1), without regard to whether the obligation is otherwise
taken into account for purposes of the Code.
The proposed regulations also provide that section 704(c) principles shall apply to a §1.752-7 liability assumed by a partnership
from a partner. Accordingly, the §1.752-7 liability is treated under section 704(c) principles as having a built-in loss equal
to the amount of such liability at the time of its assumption by the partnership. The amount of the §1.752-7 liability is
the amount that a willing assignor would pay to a willing assignee to assume the §1.752-7 liability in an arm’s-length transaction.
In addition, the proposed regulations make conforming amendments to §§1.704-1(b)(2)(iv)(b) (by providing that a partner’s capital account be reduced by the §1.752-7 liabilities that the partnership assumes from
the partner), 1.704-2(b)(3) (by treating a §1.752-7 liability as a nonrecourse liability for purposes of the partnership allocation
rules), and 1.705-1 (by directing taxpayers to §1.358-7(b) and §1.752-7 for basis adjustments necessary to coordinate section
705 with section 358(h) and §1.752-7).
Moreover, the proposed regulations provide rules under section 358(h) for assumptions of liabilities by corporations from
partners and partnerships. In addition, in the Explanation of Provisions section of this preamble, the IRS and Treasury are
alerting taxpayers that they are considering adopting the definition of liability proposed in these regulations as an appropriate
interpretation of the term liability for purposes of subchapter C of chapter 1 of the Code. The IRS and Treasury are also considering issuing regulations to conform
the exceptions to section 358(h) to the exceptions described in these regulations. These regulations will be retroactive to
the extent necessary to prevent abuse.
Section 358(h) applies to S corporations. The Act states that the Secretary may prescribe comparable rules which provide appropriate
adjustments under subchapter S. These proposed regulations do not address the assumption of liabilities by S corporations;
however, any rules applicable to assumptions of liabilities by corporations would, in the absence of provisions to the contrary,
apply equally to S corporations. Comments regarding the assumption of liabilities by S corporations are requested. Explanation of Provisions 1. Addition of §1.752-1(a)(1)—Definition of Liability The question of what constitutes a liability for purposes of section 752 was addressed in Rev. Rul. 88-77, 1988-2 C.B. 128.