80 FR 33452 - Aggregation of Basis for Partnership Distributions Involving Equity Interests of a Partner

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 80, Issue 113 (June 12, 2015)

Page Range		33452-33456
FR Document		2015-14404
This document contains proposed regulations that would allow consolidated group members that are partners in the same partnership to aggregate their bases in stock distributed by the partnership for the purpose of limiting the application of rules that might otherwise cause basis reduction or gain recognition. The proposed regulations would also require certain corporations that engage in gain elimination transactions to reduce the basis of corporate assets or to recognize gain. The proposed regulations affect partnerships and their partners.
Federal Register, Volume 80 Issue 113 (Friday, June 12, 2015)
[Federal Register Volume 80, Number 113 (Friday, June 12, 2015)]
[Proposed Rules]
[Pages 33452-33456]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-14404]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-138759-14]
RIN 1545-BM48


Aggregation of Basis for Partnership Distributions Involving 
Equity Interests of a Partner

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations that would allow 
consolidated group members that are partners in the same partnership to 
aggregate their bases in stock distributed by the partnership for the 
purpose of limiting the application of rules that might otherwise cause 
basis reduction or gain recognition. The proposed regulations would 
also require certain corporations that engage in gain elimination 
transactions to reduce the basis of corporate assets or to recognize 
gain. The proposed regulations affect partnerships and their partners.

DATES: Comments and requests for a public hearing must be received by 
September 10, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-138759-14), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
138759-

[[Page 33453]]

14), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue 
NW., Washington, DC, or sent electronically, via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-138759-14).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Kevin I. Babitz, (202) 317-6852; concerning submission of comments or 
to request a public hearing, Oluwafunmilayo Taylor at (202) 317-6901.

SUPPLEMENTARY INFORMATION:

Background

1. Section 337(d) and the Repeal of the General Utilities Doctrine

    In General Utilities & Operating Co. v. Helvering, 296 U.S. 200 
(1935), the Supreme Court held that corporations generally could 
distribute appreciated property to their shareholders without the 
recognition of any corporate level gain (the General Utilities 
doctrine). Beginning in 1969 and ending with the Tax Reform Act of 
1986, Public Law 99-514, 100 Stat. 2085, (the Act), Congress enacted a 
series of statutory changes that limited and ultimately repealed the 
General Utilities doctrine. Under current law, sections 311(b) and 
336(a) of the Internal Revenue Code (Code) require a corporation that 
distributes appreciated property to its shareholders to recognize gain 
determined as if the property were sold to the shareholders for its 
fair market value. Additionally, section 631 of the Act added section 
337(d) to the Code to permit the Secretary to prescribe regulations 
that are necessary or appropriate to carry out the purposes of the 
General Utilities repeal, ``including regulations to ensure that [the 
repeal of the General Utilities doctrine] may not be circumvented 
through the use of any provision of law or regulations.''

2. Section 732(f)

    Section 538 of the Ticket to Work and Work Incentives Improvement 
Act of 1999, Public Law 106-170, 113 Stat. 1860, (the Ticket to Work 
Act), enacted section 732(f) on December 17, 1999. Section 732(f) 
provides that if: (1) A corporate partner receives a distribution from 
a partnership of stock in another corporation (distributed 
corporation), (2) the corporate partner has control of the distributed 
corporation (ownership of stock meeting the requirements of section 
1504(a)(2)) immediately after the distribution or at any time 
thereafter (the ``control requirement''), and (3) the partnership's 
basis in the stock immediately before the distribution exceeded the 
corporate partner's basis in the stock immediately after the 
distribution, then the basis of the distributed corporation's property 
must be reduced by this excess. The amount of this reduction is limited 
to the amount by which the sum of the aggregate adjusted basis of 
property and the amount of money of the distributed corporation exceeds 
the corporate partner's adjusted basis in the stock of the distributed 
corporation. The corporate partner must recognize gain to the extent 
that the basis of the distributed corporation's property cannot be 
reduced.
    Congress enacted section 732(f) due to concerns that a corporate 
partner could otherwise negate the effects of a basis step-down to 
distributed property required under section 732(b) by applying the 
step-down against the basis of distributed stock of a corporation 
(distributed corporation). The Senate Finance Committee stated that:

    The Committee is concerned that the downward adjustment to the 
basis of property distributed by a partnership may be nullified if 
the distributed property is corporate stock. The distributed 
corporation can be liquidated by the corporate partner, so that the 
stock basis adjustment has no effect. Similarly, if the corporations 
file a consolidated return, their taxable income may be computed 
without reference to the downward adjustment to the basis of the 
stock. These results can occur either if the partnership has 
contributed property to the distributed corporation, or if the 
property was held by the corporation before the distribution. 
Therefore, the provision requires a basis reduction to the property 
of the distributed corporation.

S. Rep. No. 106-201, 106th Cong., 1st Sess. 50 (1999).
    For example, assume a corporate partner has a partnership interest 
with zero basis and receives a partnership distribution of high-basis 
stock in a corporation. The corporate partner's basis in the 
distributed corporation's stock is reduced to zero under section 732(a) 
or section 732(b). If the partnership has elected under section 754, 
then the basis of other partnership property is increased by an equal 
amount under section 734(b). The effects of the section 732 basis 
decrease and the section 734(b) basis increase generally offset each 
other. However, if the corporate partner owned stock in the distributed 
corporation that satisfied the control requirement, the corporate 
partner could liquidate the distributed corporation under section 332, 
and section 334(b) would generally provide for a carryover basis in the 
distributed corporation's property received by the corporate partner in 
the liquidation. Taken together, these rules could permit the 
partnership to increase the basis of its retained property without an 
equivalent basis reduction following the liquidation of the distributed 
corporation. Section 732(f) generally precludes this result by 
requiring that either the distributed corporation must reduce the basis 
of its property or the corporate partner must recognize gain (to the 
extent the distributed corporation is unable to reduce the basis of its 
property). Thus, section 732(f) generally ensures that any basis 
increase under section 734(b) is ultimately offset.
    Section 732(f) applies if the corporate partner either has control 
of the distributed corporation following the distribution or if the 
corporate partner subsequently acquires control of the distributed 
corporation at any time thereafter. Section 732(f) does not apply if 
the corporate partner does not have control of the distributed 
corporation immediately following the distribution and the corporate 
partner establishes to the satisfaction of the Secretary that the 
distribution was not part of a plan or arrangement to acquire control 
of the distributed corporation.
    In its discussion of the control requirement of section 
732(f)(1)(B), the Conference Report to the Ticket to Work Act explains 
that ``[t]his provision also calls for regulations, including 
regulations to avoid double counting and to prevent the abuse of the 
purposes of this provision.'' H.R. Conf. Rep. No. 106-478, 106th Cong., 
1st Sess. 174 (1999). This grant of regulatory authority is codified at 
section 732(f)(8), which provides that ``[t]he Secretary shall 
prescribe such regulations as may be necessary to carry out the 
purposes of this subsection, including regulations to avoid double 
counting and to prevent the abuse of such purposes.''
    Simultaneous with this notice of proposed rulemaking, the Treasury 
Department and the IRS are issuing final and temporary regulations 
under section 337(d) (Sec.  1.337(d)-3T) that prevent a corporate 
partner from using a partnership to avoid corporate-level gain required 
to be recognized under section 311(b) or section 336(a) following the 
repeal of the General Utilities doctrine. Those final and temporary 
regulations address partnership acquisitions, ownership, and 
distributions of stock and other equity interests in a corporate 
partner. Sections 732(f) and 337(d) share a common purpose of 
preserving corporate-level gains. Given this shared purpose, these 
proposed regulations are issued under the combined authority of 
sections 337(d) and 732(f).

[[Page 33454]]

Explanation of Provisions

    As described in this preamble, Congress provided the Treasury 
Department and the IRS with a broad grant of statutory authority to 
carry out the purposes of sections 337(d) and 732(f). The Treasury 
Department and the IRS believe that as currently applied, section 
732(f) may be too broad in some circumstances and too narrow in others. 
Specifically, section 732(f) may require basis reduction or gain 
recognition even though that basis reduction or gain recognition does 
not further the purposes of section 732(f). In other circumstances, 
corporate partners may inappropriately avoid the purposes of section 
732(f) by engaging in transactions that allow corporate partners to 
receive property held by a distributed corporation without reducing the 
basis of that property to account for basis reductions under section 
732(b) made when the partnership distributed stock of the distributed 
corporation to the corporate partner. These proposed regulations add 
rules to conform the application of section 732(f) with Congress's 
identified purposes for enacting sections 337(d) and 732(f) in these 
situations.

1. Aggregation of Section 732(b) Basis Adjustments

    Section 732(f) generally applies on a partner-by-partner basis. 
However, the Treasury Department and the IRS believe that in certain 
circumstances, it is appropriate to aggregate the bases of consolidated 
group members in a partnership for purposes of applying section 732(f). 
For example, basis aggregation may be appropriate when two or more 
corporate partners in the same consolidated group (member-partners) 
receive a deemed distribution of stock in a distributed corporation 
either because (a) the partnership elects to be treated as an 
association taxable as a corporation under Sec.  301.7701-3 or (b) one 
corporate partner acquires all of the interests in the partnership 
causing the partnership to liquidate. In these instances, section 
732(b) may cause one member-partner to increase the basis of 
distributed stock while another member-partner reduces the basis of 
distributed stock by an equivalent amount. Under current law, section 
732(f) may require the member-partner whose basis is reduced to 
recognize gain or to reduce the basis of the distributed corporation's 
property, with no offsetting loss or increase to the basis of the 
distributed corporation's property with respect to the member-partner 
whose basis is increased. The Treasury Department and the IRS do not 
believe that prohibiting member-partners from consolidating their bases 
in a partnership for purposes of applying section 732(f) in these 
situations furthers Congress's intent to sustain the effect of the 
basis reduction to distributed property.
    These proposed regulations provide for the aggregation of basis 
within the same consolidated group (as defined in Sec.  1.1502-1(h)), 
for purposes of section 732(f), when two conditions are met. First, two 
or more of the corporate partners receive a distribution of stock in a 
distributed corporation. Second, the distributed corporation is or 
becomes a member of the distributee partners' consolidated group 
following the distribution.
    Under this rule, section 732(f) only applies to the extent that the 
partnership's adjusted basis in the distributed stock immediately 
before the distribution exceeds the aggregate basis of the distributed 
stock in the hands of all members of the distributee corporate 
partner's consolidated group immediately after the distribution. The 
requirement that the distributed corporation be a member of the 
consolidated group is intended to avoid unintended consequences that 
could result if that corporation was a controlled foreign corporation. 
However, the Treasury Department and the IRS request comments on 
whether this proposed rule should apply more broadly.

2. Gain Elimination Transactions

    As described in the Background section of this Preamble, Congress 
enacted section 732(f) to address concerns that a corporate partner 
could otherwise negate the effects of a basis step-down to distributed 
property required under section 732(b) by applying the step-down 
against stock of a distributed corporation. Congress indicated that it 
intended for the control requirement to apply expansively by requiring 
corporate partners to apply section 732(f) whenever the corporate 
partner acquires control (as defined in section 732(f)(5)) of the 
distributed corporation as part of a plan or arrangement. The 
formalistic definition of control, however, fails to anticipate other 
scenarios in which a corporate partner's acquisition of the property of 
a distributed corporation has the same effect. To address these 
scenarios, Congress granted the Secretary authority to promulgate 
regulations necessary to carry out the purposes of section 732(f).
    The Treasury Department and the IRS are concerned that some 
corporate partners might eliminate gain in the stock of a distributed 
corporation while avoiding the effects of a basis step-down in 
transactions in which the corporate partner's ownership of the 
distributed corporation does not satisfy the control requirement. For 
example, a distributed corporation not controlled by a corporate 
partner might subsequently merge into the corporate partner in a 
reorganization under section 368(a) in which gain is not recognized as 
part of a plan or arrangement. In this situation, the gain inherent in 
the stock of the distributed corporation is eliminated, but the basis 
of the distributed corporation's property is not reduced. If section 
732(f) does not apply to this transaction, then the basis step-down is 
negated, contravening the purposes of section 732(f) and General 
Utilities repeal.
    Accordingly, these proposed regulations provide that, in the event 
of a gain elimination transaction, section 732(f) shall apply as though 
the corporate partner acquired control (as defined in section 
732(f)(5)) of the distributed corporation immediately before the gain 
elimination transaction.
    The proposed regulations define several terms for purposes of 
applying this rule. The term ``Corporate Partner'' means a person that 
is classified as a corporation for federal income tax purposes and that 
holds or acquires an interest in a partnership. The term ``Stock'' 
includes other equity interests, including options, warrants and 
similar interests. The term ``Distributed Stock'' means Stock 
distributed by a partnership to a Corporate Partner, or Stock the basis 
of which is determined by reference to the basis of such Stock. 
Distributed Stock also includes Stock owned directly or indirectly by a 
Distributed Corporation if the basis of such Stock has been reduced 
pursuant to section 732(f)(7). The term ``Distributed Corporation'' 
means the issuer of Distributed Stock (or, in the case of an option, 
the issuer of the Stock into which the option is exercisable). The term 
``Gain Elimination Transaction'' means a transaction in which 
Distributed Stock is disposed of and less than all of the gain is 
recognized, unless (1) the transferor of the Distributed Stock receives 
in exchange Stock or a partnership interest that is exchanged basis 
property (as defined in section 7701(a)(44)) with respect to the 
Distributed Stock, or (2) a transferee corporation holds the 
Distributed Stock as transferred basis property (as defined in section 
7701(a)(43)) with respect to a transferor corporation's gain. Examples 
of Gain Elimination Transactions include (without limitation) a 
reorganization under section 368(a) in which the

[[Page 33455]]

Corporate Partner and the Distributed Corporation combine, and a 
distribution of the Distributed Stock by the Corporate Partner to which 
section 355(c)(1) or 361(c)(1) applies.

3. Tiered Partnerships

    The IRS and the Treasury Department are concerned that taxpayers 
could use tiered partnerships to circumvent these regulations and 
section 732(f) generally. Congress specified in the Conference Report 
to the Ticket to Work Act that taxpayers should not be permitted to 
avoid the purposes of section 732(f) through the use of tiered 
partnerships. H.R. Conf. Rep. No. 106-478, 106th Cong., 1st Sess. 174 
(1999). Therefore, these regulations require taxpayers to apply these 
regulations to tiered partnerships in a manner consistent with the 
purpose of section 732(f).
Effective/Applicability Date
    The rules governing aggregation of basis apply to distributions 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register. The rules governing gain 
elimination transactions apply to transactions occurring on or after 
the date these regulations are published as final regulations in the 
Federal Register. The rules governing tiered partnerships apply to 
distributions and transactions occurring on or after the date these 
regulations are published as final regulations in the Federal Register. 
No inference is expressed or implied with respect to distributions or 
transactions occurring before the date 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 Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. These proposed regulations do 
not impose a collection of information on small entities. Further, 
pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is 
hereby certified that these proposed regulations would not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that these proposed regulations 
would primarily affect sophisticated ownership structures with 
interlocking ownership of corporations, partnerships and corporate 
stock. Accordingly, a regulatory flexibility analysis is not required. 
Pursuant to section 7805(f) of the Code, these regulations have been 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits written or 
electronic comments. If a public hearing is scheduled, notice of the 
date, time, and place for the public hearing will be published in the 
Federal Register.

Drafting Information

    The principal authors of these regulations are Kevin I. Babitz and 
Joseph R. Worst, Office of the Associate Chief Counsel (Passthroughs 
and Special Industries). However, other personnel from the Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendment to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART I--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *
    Section 1.732-3 also issued under 26 U.S.C. 337(d), 732(f), and 
1502. * * *

0
Par. 2. Section 1.732-3 is revised to read as follows:


Sec.  1.732-3  Corresponding adjustment to basis of assets of a 
distributed corporation controlled by a corporate partner.

    (a) Determination of control. The determination of whether a 
corporate partner that is a member of a consolidated group has control 
of a distributed corporation for purposes of section 732(f) shall be 
made by applying the special aggregate stock ownership rules of Sec.  
1.1502-34.
    (b) Aggregation of basis within consolidated group. With respect to 
distributed stock of a corporation, if the following two conditions are 
met, then section 732(f) shall apply only to the extent that the 
partnership's adjusted basis in the distributed stock immediately 
before the distribution exceeds the aggregate basis of the distributed 
stock of the corporation in the hands of corporate partners that are 
members of the same consolidated group (as defined in Sec.  1.1502-
1(h)) immediately after the distribution:
    (1) Two or more of the corporate partners receive a distribution of 
stock in another corporation; and
    (2) The corporation, the stock of which was distributed by the 
partnership, is or becomes a member of the distributee partners' 
consolidated group following the distribution.
    (c) Application of section 732(f) to Gain Elimination 
Transactions--(1) General rule. In the event of a Gain Elimination 
Transaction, section 732(f) shall apply as though the Corporate Partner 
acquired control (as defined in section 732(f)(5)) of the Distributed 
Corporation immediately before the Gain Elimination Transaction.
    (2) Definitions. The following definitions apply for purposes of 
this paragraph (c):
    (i) Corporate Partner. The term Corporate Partner means a person 
that is classified a corporation for federal income tax purposes and 
that holds or acquires an interest in a partnership.
    (ii) Stock. The term Stock includes other equity interests, 
including options, warrants and similar interests.
    (iii) Distributed Stock. The term Distributed Stock means Stock 
distributed by a partnership to a Corporate Partner, or Stock the basis 
of which is determined by reference to the basis of such Stock. 
Distributed Stock also includes Stock owned directly or indirectly by a 
Distributed Corporation if the basis of such Stock has been reduced 
pursuant to section 732(f).
    (iv) Distributed Corporation. The term Distributed Corporation 
means the issuer of Distributed Stock (or, in the case of an option, 
the issuer of the Stock into which the option is exercisable).
    (v) Gain Elimination Transaction. The term Gain Elimination 
Transaction means a transaction in which Distributed Stock is disposed 
of and less than all of the gain is recognized unless--
    (A) The transferor of the Distributed Stock receives in exchange 
Stock or a partnership interest that is exchanged basis property (as 
defined in section 7701(a)(44)) with respect to the Distributed Stock, 
or
    (B) A transferee corporation holds the Distributed Stock as 
transferred basis property (as defined in section

[[Page 33456]]

7701(a)(43)) with respect to the transferor corporation's gain. A Gain 
Elimination Transaction includes (without limitation) a reorganization 
under section 368(a) in which the Corporate Partner and the Distributed 
Corporation combine, and a distribution of the Distributed Stock by the 
Corporate Partner to which section 355(c)(1) or 361(c)(1) applies.
    (d) Tiered partnerships. The rules of this section shall apply to 
tiered partnerships in a manner that is consistent with the purposes of 
section 732(f).
    (e) Effective/applicability date. The rules governing aggregation 
of basis in paragraph (b) of these regulations apply to distributions 
occurring on or after the date these regulations are published as final 
regulations in the Federal Register. The rules governing gain 
elimination transactions in paragraph (c) of this section apply to 
transactions occurring on or after the date these regulations are 
published as final regulations in the Federal Register. The rules 
governing tiered partnerships in paragraph (d) of this section apply to 
distributions and transactions occurring on or after the date these 
regulations are published as final regulations in the Federal Register.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-14404 Filed 6-11-15; 8:45 am]
 BILLING CODE 4830-01-P
33452 Federal Register / Vol. 80, No. 113 / Friday, June 12, 2015 / Proposed Rules

Washington, DC 20044. Submissions Comments and Requests for a Public ■ Par. 3. Section 1.732–1 is amended by
may be hand-delivered Monday through Hearing revising paragraphs (c)(1) and (c)(5)(ii)
Friday between the hours of 8 a.m. and to read as follows:
4 p.m. to CC:PA:LPD:PR (REG–149518– Before these proposed regulations are
03), Courier’s Desk, Internal Revenue adopted as final regulations, § 1.732–1 Basis of distributed property
Service, 1111 Constitution Avenue NW., consideration will be given to comments other than money.
Washington, DC, or sent electronically, that are submitted timely to the IRS as * * * * *
via the Federal eRulemaking Portal at prescribed in this preamble under the (c)(1) [The text of proposed § 1.732–
ADDRESSES heading. The Treasury 1(c)(1) is the same as the text of § 1.732–
http://www.regulations.gov (IRS REG–
149518–03). Department and the IRS request 1T(c)(1) published elsewhere in this
comments on all aspects of the proposed issue of the Federal Register].
FOR FURTHER INFORMATION CONTACT:
rules. All comments will be available at * * * * *
Concerning the proposed regulations, www.regulations.gov or upon request. A
Kevin I. Babitz, (202) 317–6852; (5) * * *
public hearing will be scheduled if (ii) [The text of proposed § 1.732–
concerning submission of comments or requested in writing by any person that
to request a public hearing, 1(c)(5)(ii) is the same as the text of
timely submits written or electronic § 1.732–1T(c)(5)(ii) published elsewhere
Oluwafunmilayo Taylor at (202) 317– comments. If a public hearing is
6901. in this issue of the Federal Register].
scheduled, notice of the date, time, and
SUPPLEMENTARY INFORMATION:
* * * * *
place for the public hearing will be
Background and Explanation of published in the Federal Register. John Dalrymple,
Provisions Drafting Information Deputy Commissioner for Services and
Enforcement.
Temporary regulations in the Rules The principal authors of these [FR Doc. 2015–14403 Filed 6–11–15; 8:45 am]
and Regulations section of this issue of regulations are Joseph R. Worst and BILLING CODE 4830–01–P
the Federal Register amend the Income Kevin I. Babitz, Office of the Associate
Tax Regulations (26 CFR part 1) relating Chief Counsel (Passthroughs and
to section 337(d). The temporary Special Industries). However, other DEPARTMENT OF THE TREASURY
regulations set forth rules for applying personnel from the IRS and the Treasury
section 337(d) to partnerships and S Department participated in their Internal Revenue Service
corporations. The text of the temporary development.
regulations also serves as the text of 26 CFR Part 1
these proposed regulations. The Withdrawal of Notice of Proposed
preamble to the temporary regulations Rulemaking [REG–138759–14]
explains the temporary regulations and Accordingly, under the authority of RIN 1545–BM48
these proposed regulations. 26 U.S.C. 7805, the notice of proposed
Aggregation of Basis for Partnership
Special Analyses rulemaking (PS–91–90; REG–208989–
Distributions Involving Equity Interests
It has been determined that this notice 90) that was published in the Federal
of a Partner
of proposed rulemaking is not a Register on December 15, 1992 (57 FR
significant regulatory action as defined 59324), is withdrawn. AGENCY: Internal Revenue Service (IRS),
in Executive Order 12866, as List of Subjects in 26 CFR Part 1 Treasury.
supplemented by Executive Order ACTION: Notice of proposed rulemaking.
13563. Therefore, a regulatory Income taxes, Reporting and
assessment is not required. These recordkeeping requirements. SUMMARY: This document contains
proposed regulations do not impose a proposed regulations that would allow
Proposed Amendment to the consolidated group members that are
collection of information on small Regulations
entities. Further, pursuant to the partners in the same partnership to
Regulatory Flexibility Act (5 U.S.C. Accordingly, 26 CFR part 1 is aggregate their bases in stock distributed
chapter 6), it is hereby certified that proposed to be amended as follows: by the partnership for the purpose of
these proposed regulations would not limiting the application of rules that
have a significant economic impact on PART I—INCOME TAXES might otherwise cause basis reduction
a substantial number of small entities. or gain recognition. The proposed
■ Paragraph 1. The authority citation regulations would also require certain
This certification is based on the fact
for part 1 is amended by adding an entry corporations that engage in gain
that these proposed regulations would
in numerical order to read in part as elimination transactions to reduce the
primarily affect sophisticated ownership
follows: basis of corporate assets or to recognize
structures with interlocking ownership
of corporations, partnerships and Authority: 26 U.S.C. 7805 * * * gain. The proposed regulations affect
corporate stock. Additionally, these Section 1.337(d)–3 also issued under 26 partnerships and their partners.
proposed regulations contain a number U.S.C. 337(d). * * * DATES: Comments and requests for a
of de minimis provisions that render the ■ Par. 2. Section 1.337(d)–3 is added to public hearing must be received by
regulations inapplicable to most small read as follows: September 10, 2015.
srobinson on DSK5SPTVN1PROD with PROPOSALS

businesses. Accordingly, a regulatory ADDRESSES: Send submissions to:
flexibility analysis is not required. § 1.337(d)–3 Gain recognition upon certain CC:PA:LPD:PR (REG–138759–14), Room
Pursuant to section 7805(f) of the partnership transactions involving a 5203, Internal Revenue Service, P.O.
Internal Revenue Code, these partner’s stock. Box 7604, Ben Franklin Station,
regulations have been submitted to the [The text of proposed § 1.337(d)–3 is Washington, DC 20044. Submissions
Chief Counsel for Advocacy of the Small the same as the text of § 1.337(d)–3T(a) may be hand-delivered Monday through
Business Administration for comment through (i) published elsewhere in this Friday between the hours of 8 a.m. and
on its impact on small business. issue of the Federal Register]. 4 p.m. to CC:PA:LPD:PR (REG–138759–

VerDate Sep<11>2014 17:51 Jun 11, 2015 Jkt 235001 PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 E:\FR\FM\12JNP1.SGM 12JNP1
33454 Federal Register / Vol. 80, No. 113 / Friday, June 12, 2015 / Proposed Rules

Explanation of Provisions that prohibiting member-partners from avoiding the effects of a basis step-down
As described in this preamble, consolidating their bases in a in transactions in which the corporate
Congress provided the Treasury partnership for purposes of applying partner’s ownership of the distributed
Department and the IRS with a broad section 732(f) in these situations corporation does not satisfy the control
grant of statutory authority to carry out furthers Congress’s intent to sustain the requirement. For example, a distributed
the purposes of sections 337(d) and effect of the basis reduction to corporation not controlled by a
732(f). The Treasury Department and distributed property. corporate partner might subsequently
These proposed regulations provide merge into the corporate partner in a
the IRS believe that as currently
for the aggregation of basis within the reorganization under section 368(a) in
applied, section 732(f) may be too broad
same consolidated group (as defined in which gain is not recognized as part of
in some circumstances and too narrow
§ 1.1502–1(h)), for purposes of section a plan or arrangement. In this situation,
in others. Specifically, section 732(f)
732(f), when two conditions are met. the gain inherent in the stock of the
may require basis reduction or gain
First, two or more of the corporate distributed corporation is eliminated,
recognition even though that basis partners receive a distribution of stock but the basis of the distributed
reduction or gain recognition does not in a distributed corporation. Second, the corporation’s property is not reduced. If
further the purposes of section 732(f). In distributed corporation is or becomes a section 732(f) does not apply to this
other circumstances, corporate partners member of the distributee partners’ transaction, then the basis step-down is
may inappropriately avoid the purposes consolidated group following the negated, contravening the purposes of
of section 732(f) by engaging in distribution. section 732(f) and General Utilities
transactions that allow corporate Under this rule, section 732(f) only repeal.
partners to receive property held by a applies to the extent that the Accordingly, these proposed
distributed corporation without partnership’s adjusted basis in the regulations provide that, in the event of
reducing the basis of that property to distributed stock immediately before the a gain elimination transaction, section
account for basis reductions under distribution exceeds the aggregate basis 732(f) shall apply as though the
section 732(b) made when the of the distributed stock in the hands of corporate partner acquired control (as
partnership distributed stock of the all members of the distributee corporate defined in section 732(f)(5)) of the
distributed corporation to the corporate partner’s consolidated group distributed corporation immediately
partner. These proposed regulations add immediately after the distribution. The before the gain elimination transaction.
rules to conform the application of requirement that the distributed The proposed regulations define
section 732(f) with Congress’s identified corporation be a member of the several terms for purposes of applying
purposes for enacting sections 337(d) consolidated group is intended to avoid this rule. The term ‘‘Corporate Partner’’
and 732(f) in these situations. unintended consequences that could means a person that is classified as a
1. Aggregation of Section 732(b) Basis result if that corporation was a corporation for federal income tax
Adjustments controlled foreign corporation. purposes and that holds or acquires an
However, the Treasury Department and interest in a partnership. The term
Section 732(f) generally applies on a the IRS request comments on whether ‘‘Stock’’ includes other equity interests,
partner-by-partner basis. However, the this proposed rule should apply more including options, warrants and similar
Treasury Department and the IRS broadly. interests. The term ‘‘Distributed Stock’’
believe that in certain circumstances, it means Stock distributed by a
is appropriate to aggregate the bases of 2. Gain Elimination Transactions
partnership to a Corporate Partner, or
consolidated group members in a As described in the Background Stock the basis of which is determined
partnership for purposes of applying section of this Preamble, Congress by reference to the basis of such Stock.
section 732(f). For example, basis enacted section 732(f) to address Distributed Stock also includes Stock
aggregation may be appropriate when concerns that a corporate partner could owned directly or indirectly by a
two or more corporate partners in the otherwise negate the effects of a basis Distributed Corporation if the basis of
same consolidated group (member- step-down to distributed property such Stock has been reduced pursuant
partners) receive a deemed distribution required under section 732(b) by to section 732(f)(7). The term
of stock in a distributed corporation applying the step-down against stock of ‘‘Distributed Corporation’’ means the
either because (a) the partnership elects a distributed corporation. Congress issuer of Distributed Stock (or, in the
to be treated as an association taxable as indicated that it intended for the control case of an option, the issuer of the Stock
a corporation under § 301.7701–3 or (b) requirement to apply expansively by into which the option is exercisable).
one corporate partner acquires all of the requiring corporate partners to apply The term ‘‘Gain Elimination
interests in the partnership causing the section 732(f) whenever the corporate Transaction’’ means a transaction in
partnership to liquidate. In these partner acquires control (as defined in which Distributed Stock is disposed of
instances, section 732(b) may cause one section 732(f)(5)) of the distributed and less than all of the gain is
member-partner to increase the basis of corporation as part of a plan or recognized, unless (1) the transferor of
distributed stock while another arrangement. The formalistic definition the Distributed Stock receives in
member-partner reduces the basis of of control, however, fails to anticipate exchange Stock or a partnership interest
distributed stock by an equivalent other scenarios in which a corporate that is exchanged basis property (as
amount. Under current law, section partner’s acquisition of the property of defined in section 7701(a)(44)) with
732(f) may require the member-partner a distributed corporation has the same respect to the Distributed Stock, or (2)
srobinson on DSK5SPTVN1PROD with PROPOSALS

whose basis is reduced to recognize gain effect. To address these scenarios, a transferee corporation holds the
or to reduce the basis of the distributed Congress granted the Secretary authority Distributed Stock as transferred basis
corporation’s property, with no to promulgate regulations necessary to property (as defined in section
offsetting loss or increase to the basis of carry out the purposes of section 732(f). 7701(a)(43)) with respect to a transferor
the distributed corporation’s property The Treasury Department and the IRS corporation’s gain. Examples of Gain
with respect to the member-partner are concerned that some corporate Elimination Transactions include
whose basis is increased. The Treasury partners might eliminate gain in the (without limitation) a reorganization
Department and the IRS do not believe stock of a distributed corporation while under section 368(a) in which the

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Federal Register / Vol. 80, No. 113 / Friday, June 12, 2015 / Proposed Rules 33455

Corporate Partner and the Distributed submitted to the Chief Counsel for following two conditions are met, then
Corporation combine, and a distribution Advocacy of the Small Business section 732(f) shall apply only to the
of the Distributed Stock by the Administration for comment on its extent that the partnership’s adjusted
Corporate Partner to which section impact on small business. basis in the distributed stock
355(c)(1) or 361(c)(1) applies. immediately before the distribution
Comments and Requests for a Public
3. Tiered Partnerships exceeds the aggregate basis of the
Hearing
distributed stock of the corporation in
The IRS and the Treasury Department Before these proposed regulations are the hands of corporate partners that are
are concerned that taxpayers could use adopted as final regulations, members of the same consolidated
tiered partnerships to circumvent these consideration will be given to any group (as defined in § 1.1502–1(h))
regulations and section 732(f) generally. comments that are submitted timely to immediately after the distribution:
Congress specified in the Conference the IRS as prescribed in this preamble (1) Two or more of the corporate
Report to the Ticket to Work Act that under the ADDRESSES heading. The partners receive a distribution of stock
taxpayers should not be permitted to Treasury Department and the IRS in another corporation; and
avoid the purposes of section 732(f) request comments on all aspects of the (2) The corporation, the stock of
through the use of tiered partnerships. proposed rules. All comments will be which was distributed by the
H.R. Conf. Rep. No. 106–478, 106th available at www.regulations.gov or partnership, is or becomes a member of
Cong., 1st Sess. 174 (1999). Therefore, upon request. A public hearing will be the distributee partners’ consolidated
these regulations require taxpayers to scheduled if requested in writing by any group following the distribution.
apply these regulations to tiered person that timely submits written or (c) Application of section 732(f) to
partnerships in a manner consistent electronic comments. If a public hearing Gain Elimination Transactions—(1)
with the purpose of section 732(f). is scheduled, notice of the date, time, General rule. In the event of a Gain
Effective/Applicability Date and place for the public hearing will be Elimination Transaction, section 732(f)
published in the Federal Register. shall apply as though the Corporate
The rules governing aggregation of Partner acquired control (as defined in
basis apply to distributions occurring on Drafting Information section 732(f)(5)) of the Distributed
or after the date these regulations are The principal authors of these Corporation immediately before the
published as final regulations in the regulations are Kevin I. Babitz and Gain Elimination Transaction.
Federal Register. The rules governing Joseph R. Worst, Office of the Associate (2) Definitions. The following
gain elimination transactions apply to Chief Counsel (Passthroughs and definitions apply for purposes of this
transactions occurring on or after the Special Industries). However, other paragraph (c):
date these regulations are published as personnel from the Treasury (i) Corporate Partner. The term
final regulations in the Federal Register. Department and the IRS participated in Corporate Partner means a person that is
The rules governing tiered partnerships their development. classified a corporation for federal
apply to distributions and transactions income tax purposes and that holds or
occurring on or after the date these List of Subjects in 26 CFR Part 1 acquires an interest in a partnership.
regulations are published as final Income taxes, Reporting and (ii) Stock. The term Stock includes
regulations in the Federal Register. No recordkeeping requirements. other equity interests, including
inference is expressed or implied with options, warrants and similar interests.
respect to distributions or transactions Proposed Amendment to the (iii) Distributed Stock. The term
occurring before the date these Regulations Distributed Stock means Stock
regulations are published as final Accordingly, 26 CFR part 1 is distributed by a partnership to a
regulations in the Federal Register. proposed to be amended as follows: Corporate Partner, or Stock the basis of
Special Analyses which is determined by reference to the
PART I—INCOME TAXES basis of such Stock. Distributed Stock
It has been determined that this notice also includes Stock owned directly or
of proposed rulemaking is not a ■ Paragraph 1. The authority citation indirectly by a Distributed Corporation
significant regulatory action as defined for part 1 continues to read in part as if the basis of such Stock has been
in Executive Order 12866, as follows: reduced pursuant to section 732(f).
supplemented by Executive Order Authority: 26 U.S.C. 7805 * * * (iv) Distributed Corporation. The term
13563. Therefore, a regulatory Section 1.732–3 also issued under 26 Distributed Corporation means the
assessment is not required. These U.S.C. 337(d), 732(f), and 1502. * * * issuer of Distributed Stock (or, in the
proposed regulations do not impose a ■ Par. 2. Section 1.732–3 is revised to case of an option, the issuer of the Stock
collection of information on small read as follows: into which the option is exercisable).
entities. Further, pursuant to the (v) Gain Elimination Transaction. The
Regulatory Flexibility Act (5 U.S.C. § 1.732–3 Corresponding adjustment to term Gain Elimination Transaction
chapter 6), it is hereby certified that basis of assets of a distributed corporation means a transaction in which
these proposed regulations would not controlled by a corporate partner. Distributed Stock is disposed of and less
have a significant economic impact on (a) Determination of control. The than all of the gain is recognized
a substantial number of small entities. determination of whether a corporate unless—
This certification is based on the fact partner that is a member of a (A) The transferor of the Distributed
srobinson on DSK5SPTVN1PROD with PROPOSALS

that these proposed regulations would consolidated group has control of a Stock receives in exchange Stock or a
primarily affect sophisticated ownership distributed corporation for purposes of partnership interest that is exchanged
structures with interlocking ownership section 732(f) shall be made by applying basis property (as defined in section
of corporations, partnerships and the special aggregate stock ownership 7701(a)(44)) with respect to the
corporate stock. Accordingly, a rules of § 1.1502–34. Distributed Stock, or
regulatory flexibility analysis is not (b) Aggregation of basis within (B) A transferee corporation holds the
required. Pursuant to section 7805(f) of consolidated group. With respect to Distributed Stock as transferred basis
the Code, these regulations have been distributed stock of a corporation, if the property (as defined in section

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33456 Federal Register / Vol. 80, No. 113 / Friday, June 12, 2015 / Proposed Rules

7701(a)(43)) with respect to the Specifically, Kentucky proposes to Enforcement, 2675 Regency Road,
transferor corporation’s gain. A Gain amend the language of two provisions Lexington, Kentucky 40503, Telephone:
Elimination Transaction includes that outline the permit application (859) 260–3900. Email:
(without limitation) a reorganization requirements for an operator seeking to bevans@osmre.gov.
under section 368(a) in which the mine land with severed surface and In addition, you may review a copy of
Corporate Partner and the Distributed mineral estates. the amendment during regular business
Corporation combine, and a distribution This document gives the times and hours at the following location:
of the Distributed Stock by the locations that the Kentucky program Mr. Steve Hohmann, Commissioner,
Corporate Partner to which section and this proposed amendment to that Kentucky Department for Natural
355(c)(1) or 361(c)(1) applies. program are available for your Resources, 2 Hudson Hollow, Frankfort,
(d) Tiered partnerships. The rules of inspection, the comment period during Kentucky 40601, Telephone: (502) 564–
this section shall apply to tiered which you may submit written 6940. Email: Steve.Hohmann@ky.gov.
partnerships in a manner that is comments on the amendment, and the FOR FURTHER INFORMATION CONTACT: Mr.
consistent with the purposes of section procedures that we will follow for the Robert Evans, Office of Surface Mining
732(f). public hearing, if one is requested. Reclamation and Enforcement,
(e) Effective/applicability date. The DATES: We will accept written Telephone: (859) 260–3900. Email:
rules governing aggregation of basis in comments on this amendment until 4 bevans@osmre.gov.
paragraph (b) of these regulations apply p.m., Eastern Standard Time (EST), July SUPPLEMENTARY INFORMATION:
to distributions occurring on or after the 13, 2015. If requested, we will hold a I. Background on the Kentucky Program
date these regulations are published as public hearing on the amendment on II. Description of the Proposed Amendment
final regulations in the Federal Register. July 7, 2015. We will accept requests to III. Public Comment Procedures
The rules governing gain elimination speak at a hearing until 4:00 p.m., EST IV. Procedural Determinations
transactions in paragraph (c) of this on June 29, 2015.
section apply to transactions occurring ADDRESSES: You may submit comments, I. Background on the Kentucky
on or after the date these regulations are identified by SATS No. KY–258–FOR Program
published as final regulations in the and Docket ID OSM–2015–0001, by Section 503(a) of the Act permits a
Federal Register. The rules governing either of the following methods: State to assume primacy for the
tiered partnerships in paragraph (d) of • Federal eRulemaking Portal: http:// regulation of surface coal mining and
this section apply to distributions and www.regulations.gov. The proposed rule reclamation operations on non-Federal
transactions occurring on or after the has been assigned Docket ID OSM– and non-Indian lands within its borders
date these regulations are published as 2015–0001. If you would like to submit by demonstrating that its program
final regulations in the Federal Register. comments via the Federal eRulemaking includes, among other things, ‘‘. . . a
John Dalrymple, portal, go to www.regulations.gov and State law which provides for the
Deputy Commissioner for Services and follow the instructions. regulation of surface coal mining and
Enforcement. • Mail/Hand Delivery: Mr. Robert reclamation operations in accordance
[FR Doc. 2015–14404 Filed 6–11–15; 8:45 am] Evans, Field Office Director, Lexington with the requirements of this Act . . .;
BILLING CODE 4830–01–P
Field Office, Office of Surface Mining and rules and regulations consistent
Reclamation and Enforcement, 2675 with regulations issued by the Secretary
Regency Road, Lexington, Kentucky pursuant to this Act.’’ See 30 U.S.C.
40503. 1253(a)(1) and (7). On the basis of these
DEPARTMENT OF THE INTERIOR • Email: bevans@osmre.gov. criteria, the Secretary of the Interior
Office of Surface Mining Reclamation • Fax: (859) 260–8410. conditionally approved the Kentucky
and Enforcement Instructions: All submissions received program on May 18, 1982. You can find
must include the agency name and background information on the
30 CFR Part 917 docket number for this rulemaking. For Kentucky program, including the
detailed instructions on submitting Secretary’s findings, the disposition of
[SATS No. KY–258–FOR; Docket ID: OSM– comments and additional information comments, and conditions of approval,
2015–0001; S1D1SSS08011000SX066A0006 on the rulemaking process, see the in the May 18, 1982, Federal Register
7F144S180110; S2D2SSS08011000SX066A ‘‘Public Comment Procedures’’ heading (47 FR 21434). You can also find later
00033F14XS501520] of the SUPPLEMENTARY INFORMATION actions concerning the Kentucky
Kentucky Regulatory Program section of this document. program and program amendments at 30
Docket: For access to the docket to CFR 917.11, 917.12, 917.13, 917.15,
AGENCY: Office of Surface Mining review copies of the Kentucky program, 917.16, and 917.17.
Reclamation and Enforcement, Interior. this amendment, a listing of any
scheduled public hearings, and all II. Description of the Proposed
ACTION: Proposed rule; public comment
written comments received in response Amendment
period and opportunity for public
hearing on proposed amendment. to this document, you must go to the By letter dated January 29, 2015
address listed below during normal (Administrative Record No. KY–2001),
SUMMARY: The Office of Surface Mining business hours, Monday through Friday, the Kentucky Department for Natural
Reclamation and Enforcement (OSMRE), excluding holidays. You may receive Resources (KYDNR) submitted an
srobinson on DSK5SPTVN1PROD with PROPOSALS

is announcing receipt of a proposed one free copy of the amendment by amendment to its program under
amendment to the Kentucky regulatory contacting OSMRE’s Lexington Field SMCRA (30 U.S.C. 1201 et seq.).
program (the Kentucky program) under Office or the full text of the program SMCRA sets forth the minimum
the Surface Mining Control and amendment is available for you to read application requirements for approval of
Reclamation Act of 1977 (SMCRA or the at www.regulations.gov. a permit at section 510. When the
Act). Kentucky submitted this proposed Mr. Robert Evans, Field Office mineral estate has been severed from the
amendment with the intent to clarify Director, Lexington Field Office, Office private surface estate, section 510(b)(6)
certain permit application requirements. of Surface Mining Reclamation and of SMCRA provides that an operator

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Document Created: 2018-02-22 10:15:57
Document Modified: 2018-02-22 10:15:57
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Proposed Rules
Action		Notice of proposed rulemaking.
Dates		Comments and requests for a public hearing must be received by September 10, 2015.
Contact		Concerning the proposed regulations, Kevin I. Babitz, (202) 317-6852; concerning submission of comments or to request a public hearing, Oluwafunmilayo Taylor at (202) 317-6901.
FR Citation		80 FR 33452
RIN Number		1545-BM48
CFR Associated		Income Taxes and Reporting and Recordkeeping Requirements
80 FR 33452 - Aggregation of Basis for Partnership Distributions Involving Equity Interests of a Partner

DEPARTMENT OF THE TREASURYInternal Revenue Service

Federal Register Volume 80, Issue 113 (June 12, 2015)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
