Part I. Rulings — Internal Revenue Bulletin 2003-26

Section 472.—Last-in, First-out Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department stores. The April 2003 Bureau of Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in, first-out inventory methods for valuing inventories for tax years ended on, or with reference to, April 30, 2003.

Rev. Rul. 2003–68

The following Department Store Inventory Price Indexes for April 2003 were issued by the Bureau of Labor Statistics. The indexes are accepted by the Internal Revenue Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86– 46, 1986–2 C.B. 739, for appropriate application to inventories of department stores employing the retail inventory and last-in, first-out inventory methods for tax years ended on, or with reference to, April 30, 2003.

The Department Store Inventory Price Indexes are prepared on a national basis and include (a) 23 major groups of departments, (b) three special combinations of the major groups — soft goods, durable goods, and miscellaneous goods, and (c) a store total, which covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

Percent Change from Apr. 2002 to

Apr. 2003 ¹

Groups

Apr. Apr. 2002 2003

Piece Goods .............................................................................. 488.7 457.9 -6.3
Domestics and Draperies.......................................................... 597.7 568.1 -5.0
Women’s and Children’s Shoes ............................................... 652.6 646.4 -1.0
Men’s Shoes.............................................................................. 902.7 844.7 -6.4
Infants’ Wear............................................................................. 622.2 597.8 -3.9
Women’s Underwear................................................................. 554.0 517.2 -6.6
Women’s Hosiery...................................................................... 356.0 347.1 -2.5
Women’s and Girls’ Accessories.............................................. 565.6 552.1 -2.4
Women’s Outerwear and Girls’ Wear...................................... 395.0 385.7 -2.4
Men’s Clothing ......................................................................... 600.2 569.0 -5.2
Men’s Furnishings .................................................................... 604.4 589.8 -2.4
Boys’ Clothing and Furnishings............................................... 504.2 465.5 -7.7
Jewelry ...................................................................................... 905.6 876.5 -3.2
Notions ...................................................................................... 794.8 794.1 -0.1
Toilet Articles and Drugs.......................................................... 974.7 982.5 0.8
Furniture and Bedding.............................................................. 627.7 627.7 0.0
Floor Coverings ........................................................................ 618.7 584.4 -5.5
Housewares ............................................................................... 756.6 730.3 -3.5
Major Appliances...................................................................... 222.6 215.3 -3.3
Radio and Television ................................................................ 50.8 46.4 -8.7
Recreation and Education ² ....................................................... 87.2 83.7 -4.0
Home Improvements ² ............................................................... 125.8 125.1 -0.6
Auto Accessories ² ..................................................................... 110.8 111.5 0.6

Groups 1–15: Soft Goods ..................................................................... 591.9 573.8 -3.1 Groups 16–20: Durable Goods............................................................. 413.9 399.0 -3.6 Groups 21–23: Misc. Goods ² ............................................................... 97.1 94.8 -2.4

Store Total ³ ................................................................................ 526.3 510.0 -3.1

(Footnotes are on the following page.)

2003–26 I.R.B. 1108 June 30, 2003

1Absence of a minus sign before the percentage change in this column signifies a price increase. 2Indexes on a January 1986 = 100 base. 3The store total index covers all departments, including some not listed separately, except for the following: candy, food, liquor, tobacco and contract departments.

cated to ordinary income property. The basis adjustment is then allocated to individual assets within each class.

The final regulations issued on December 14, 1999, worked in conjunction with §1.755–2T. In the case of a basis adjustment under section 743(b) or section 732(d), the fair market values of all assets other than goodwill or going concern value were determined on the basis of all the facts and circumstances, and the fair market value of goodwill and going concern value was determined using the residual method. As described more fully in the notice of proposed rulemaking, §1.755–2T was published prior to the enactment of section 1060(d), which (as amended in 1993) requires the residual method to be applied for purposes of determining the values of section 197 intangibles for purposes of applying section 755. These final regulations implement section 1060(d) and replace §1.755– 2T. These final regulations differ from §1.755–2T by using the residual method to value all section 197 intangibles (not just goodwill and going concern value). In addition, these final regulations also apply to basis adjustments under section 734(b) and contain special rules for certain substituted basis transactions. Finally, for convenience, the provisions of the regulations have been relocated to the beginning of §1.755–1.

Under these final regulations, a partnership is required to assign values to its assets as follows. First, the partnership must determine the values of each of its assets other than section 197 intangibles under all the facts and circumstances, taking into account section 7701(g) (treating the fair market value of a property as not less than the amount of any nonrecourse indebtedness to which the property is subject). The partnership then must determine the gross value of all partnership assets (partnership gross value). Last, the partnership is required to use the residual method to assign values to the partnership’s section 197 intangibles. For purposes of these regulations, the term sec- tion 197 intangibles includes all section 197 intangibles (as defined in section 197), as

DRAFTING INFORMATION

The principal author of this revenue ruling is Michael Burkom of the Office of Associate Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Burkom at (202) 622–7718 (not a toll-free call).

Section 755.—Rules for Allocation of Basis

26 CFR 1.755–1: Rules for allocation of basis.

T.D. 9059

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 602

Coordination of Sections 755 and 1060; Allocation of Basis Adjustments Among Partnership Assets and Application of the Residual Method to Certain Partnership Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

SUMMARY: This document finalizes regulations relating to the allocation of basis adjustments among partnership assets under section 755. The regulations are necessary to implement section 1060, which applies the residual method to certain partnership transactions.

DATES: These regulations are effective June 9, 2003.

FOR FURTHER INFORMATION CONTACT: Craig Gerson, (202) 622–3050 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to 26 CFR part 1 under section 755 of the In

ternal Revenue Code (Code). On April 5, 2000, a notice of proposed rulemaking (REG–107872–99, 2000–1 C.B. 911 [65 FR 17829]) under section 755 was published in the Federal Register . Only one commentator submitted written comments in response to the notice of proposed rulemaking, and no public hearing was requested or held. After consideration of the comment, the proposed regulations are adopted as revised by this Treasury decision.

Explanation of Revisions and Sum- mary of Contents

1. Summary

Section 743(b) provides for an optional adjustment to the basis of partnership property following certain transfers of partnership interests. The amount of the basis adjustment is the difference between the transferee’s basis in the partnership interest and the transferee’s share of the partnership’s basis in the partnership’s assets. Once the amount of the basis adjustment is determined, it is allocated among the partnership’s individual assets pursuant to section 755.

On December 14, 1999, final regulations (T.D. 8847, 1999–2 C.B. 701 [64 FR 69903]) were published in the Federal Reg- ister under section 755. Under these regulations, basis adjustments under section 743(b) are allocated among a partnership’s assets as follows. First, the adjustment is allocated between the two classes of property described in section 755(b). These classes of property consist of capital assets and section 1231(b) property (capital gain property), and any other property of the partnership (ordinary income property). The amount of a basis adjustment under section 743(b) that is allocated to the class of ordinary income property is equal to the total amount of income, gain, or loss that would be allocated to the transferee from the sale of all ordinary income property. The amount of the basis adjustment under section 743(b) that is allocated to capital gain property is the total amount of the basis adjustment under section 743(b) less the amount of the basis adjustment allo

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rata ” distribution, and another method for valuing partnership assets in the case of a “non- pro rata ” distribution. The IRS and the Treasury Department believe that this approach would be unnecessarily complex.

The final regulations adopt a single method for determining partnership gross value that applies to all section 734(b) basis adjustments and to section 743(b) basis adjustments resulting from transferred basis exchanges. In these circumstances, partnership gross value is the value of the entire partnership as a going concern, increased by the amount of partnership liabilities. In the case of a basis adjustment under section 734(b), the value of the entire partnership as a going concern is determined immediately after the distribution causing the adjustment.

A commentator has suggested that the same method for determining partnership gross value should apply to exchanged basis transactions, such as the distribution of a partnership interest by a partnership. The final regulations adopt this comment by replacing all references to transferred basis exchanges with references to substituted basis transactions. Conforming adjustments are also made to the special rules contained in §1.755–1(b)(5) for allocating basis adjustments under section 743(b) among a partnership’s assets in these exchanges.

4. Transferors of Partnership Interests

In the preamble to the proposed regulations, comments were requested as to whether the residual method should be used to determine the fair market values of partnership assets for purposes of applying section 1(h)(6)(B) (collectibles gain or loss), section 1(h)(7) (section 1250 capital gain), and section 751(a) (ordinary income) to the sale or other disposition of a partnership interest. No comments were received on this issue. Treasury and the IRS have determined that the potential benefits of a rule allowing transferors to use the residual method do not justify the increased complexity that the rule would have created.

5. Other Changes

The final regulations add two clarifying rules for allocating basis adjustments under section 743(b) among a partnership’s assets in the case of a transaction that is not a substituted basis transaction. The first rule provides that assets with respect to which

well as any goodwill or going concern value that would not qualify as a section 197 intangible under section 197.

If the aggregate value of partnership property other than section 197 intangibles is equal to or greater than partnership gross value, then all section 197 intangibles are deemed to have a value of zero. In all other cases, the aggregate value of the partnership’s section 197 intangibles (the residual section 197 intangibles value) is deemed to equal the excess of partnership gross value over the aggregate value of partnership property other than section 197 intangibles. The residual section 197 intangibles value must be allocated, first, among section 197 intangibles other than goodwill and going concern value. Any remaining value is assigned to goodwill and going concern value.

The proposed regulations used the residual method to assign values to all partnership assets, rather than limiting the scope of the residual method to section 197 intangibles. Treasury and the IRS have concluded that these rules were unduly complex, especially when they applied to partnerships whose partnership agreements contained special allocations of partnership income or loss. Accordingly, the final regulations utilize the residual method only to value section 197 intangibles.

2. Transactions Subject to the Regulations

Because the proposed regulations used the residual method to value all partnership assets (and not just section 197 intangibles), it was desirable for all partnerships to value their assets using the same method. Accordingly, under the authority of sections 1060(d) and 755, the proposed regulations applied to all partnerships, whether or not their assets constituted a trade or business. In contrast, the final regulations apply the residual method only for the purpose of valuing section 197 intangibles, which are usually held by partnerships whose assets constitute a trade or business. Thus, the final regulations apply the residual method only to partnerships whose assets constitute a trade or business (as described in §1.1060–1(b)(2)).

The proposed regulations specifically applied to basis adjustments under section 732(d). Some references to section 732(d) have been removed in the final regulations to enhance readability. Neverthe

less, the final regulations continue to apply to basis adjustments under section 732(d).

3. Methods for Determining Partnership Gross Value

If a partnership interest is transferred in a taxable transaction, the transferee’s basis in its partnership interest provides a frame of reference for determining partnership gross value. In these transactions, both the proposed and the final regulations generally provide that partnership gross value is the amount that, if assigned to all partnership property, would result in a liquidating distribution to the transferee partner equal to that partner’s basis (reduced by the amount, if any, of such basis that is attributable to partnership liabilities) in the transferred partnership interest immediately following the relevant transfer.

In certain circumstances involving basis adjustments under section 743(b), such as where income or loss with respect to particular section 197 intangibles is allocated differently among partners, partnership gross value may vary depending on the fair market values of particular section 197 intangibles held by the partnership. In these situations, the final regulations require the partnership to use a reasonable method, consistent with the purposes of the final regulations, to determine partnership gross value.

In the preamble to the proposed regulations, the IRS and the Treasury Department requested comments regarding how the residual method applies in the context of a basis adjustment that results from an exchange of a partnership interest in which the transferee’s basis in the interest is determined in whole or in part by reference to the transferor’s basis in the interest (a transferred basis exchange). Determining partnership gross value in such an exchange is problematic, because the transferee’s basis in the partnership interest does not necessarily have any connection to the fair market values of partnership assets. No comments were received regarding the specific method to be adopted by the final regulations.

The IRS and the Treasury Department also requested comments regarding how the residual method applies in the context of basis adjustments under section 734(b). One commentator suggested that the final regulations should require one method for valuing partnership assets in the case of a “ pro

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as unrealized receivables under section 751(c) and the regulations thereunder shall be treated as separate assets that are ordinary income property. Third, the portion of the basis adjustment allocated to each class is allocated among the items within the class. Basis adjustments under section 743(b) are allocated among partnership assets under paragraph (b) of this section. Basis adjustments under section 734(b) are allocated among partnership assets under paragraph (c) of this section.

(2) Coordination of sections 755 and 1060 . If there is a basis adjustment to which this section applies, and the assets of the partnership constitute a trade or business (as described in §1.1060–1(b)(2)), then the partnership is required to use the residual method to assign values to the partnership’s section 197 intangibles. To do so, the partnership must, first, determine the value of partnership assets other than section 197 intangibles under paragraph (a)(3) of this section. The partnership then must determine partnership gross value under paragraph (a)(4) of this section. Last, the partnership must assign values to the partnership’s section 197 intangibles under paragraph (a)(5) of this section. For purposes of this section, the term section 197 intangibles includes all section 197 intangibles (as defined in section 197), as well as any goodwill or going concern value that would not qualify as a section 197 intangible under section 197.

(3) Values of properties other than sec- tion 197 intangibles . For purposes of this section, the fair market value of each item of partnership property other than section 197 intangibles shall be determined on the basis of all the facts and circumstances, taking into account section 7701(g).

(4) Partnership gross value —(i) Basis adjustments under section 743(b) —(A) In general . Except as provided in paragraph (a)(4)(ii) of this section, in the case of a basis adjustment under section 743(b), partnership gross value generally is equal to the amount that, if assigned to all partnership property, would result in a liquidating distribution to the partner equal to the transferee’s basis in the transferred partnership interest immediately following the relevant transfer (reduced by the amount, if any, of such basis that is attributable to partnership liabilities).

(B) Special situations . In certain circumstances, such as where income or loss

the transferee partner has no interest in income, gain, losses, or deductions are not taken into account in allocating basis adjustments to capital assets. The second rule provides that in no event may the amount of any decrease in basis allocated to an item of capital gain property exceed the partnership’s adjusted basis in that item. If the amount of a decrease in basis otherwise allocable to a particular capital asset exceeds the partnership’s adjusted basis in that asset, the transferee’s negative basis adjustment in that asset is limited to the partnership’s adjusted basis in that asset, and the excess must be applied to reduce the remaining basis, if any, of other capital gain assets pro rata in proportion to the partnership’s adjusted bases in such assets.

Effective Date

These regulations apply to transfers of partnership interests and distributions of property from partnerships that occur on or after June 9, 2003.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulations do not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small businesses.

Drafting Information

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

* * * * *

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry to read in part as follows:

Authority: 26 U.S.C. 7805. - - Section 1.755–2 also issued under 26 U.S.C. 755 and 26 U.S.C. 1060. - - Par. 2. Section 1.755–1 is amended as follows:

Paragraph (a) is revised. 2–3. A paragraph heading is added for paragraph (b)(1)(i).
The first two sentences of paragraph (b)(1)(i) are revised.
Paragraph (b)(3)(iii) is redesignated as paragraph (b)(3)(iv).
New paragraph (b)(3)(iii) is added.
In paragraph (b)(4)(ii), the Example is revised.
The paragraph heading for paragraph (b)(5) is revised.
Paragraph (b)(5)(i) is revised.
In paragraph (b)(5)(iv) Example 1, the last sentence is amended by removing the language “transferred basis exchange” and adding “substituted basis transaction” in its place.
In paragraph (b)(5)(iv) Example 2, paragraph (iii), the third sentence is amended by adding the language “this” before the language “paragraph (b)(5)”.
In paragraph (c)(5) Example (i) introductory text is revised.
Paragraph (d) is revised.
Paragraph (e) is added. The revisions and additions read as follows:

§1.755–1 Rules for allocation of basis.

(a) In general —(1) Scope . This section provides rules for allocating basis adjustments under sections 743(b) and 734(b) among partnership property. If there is a basis adjustment to which this section applies, the basis adjustment is allocated among the partnership’s assets as follows. First, the partnership must determine the value of each of its assets under paragraphs (a)(2) through (5) of this section. Second, the basis adjustment is allocated between the two classes of property described in section 755(b). These classes of property consist of capital assets and section 1231(b) property (capital gain property), and any other property of the partnership (ordinary income property). For purposes of this section, properties and potential gain treated

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gibles were sold for their actual fair market values (determined based on all the facts and circumstances) (collectively, the flush language receivables value). If the value assigned to section 197 intangibles (other than goodwill and going concern value) is less than the flush language receivables value, then the assigned value is allocated among the properties giving rise to the flush language receivables in proportion to the flush language receivables value in those properties. Any remaining residual section 197 intangibles value is allocated among the remaining portions of the section 197 intangibles (other than goodwill and going concern value) in proportion to the actual fair market values of such portions (determined based on all the facts and circumstances).

(iii) Value assigned to goodwill and go- ing concern value . The fair market value of goodwill and going concern value is the amount, if any, by which the residual section 197 intangibles value exceeds the aggregate value of the partnership’s section 197 intangibles (other than goodwill and going concern value).

(6) Examples . The provisions of paragraphs (a)(2) through (5) are illustrated by the following examples, which assume that the partnerships have an election in effect under section 754 at the time of the transfer and that the assets of each partnership constitute a trade or business (as described in §1.1060–1(b)(2)). Except as provided, no partnership asset (other than inventory) is property described in section 751(a), and partnership liabilities are secured by all partnership assets. The examples are as follows:

Example 1 . (i) A is the sole general partner in PRS, a limited partnership having three equal partners. PRS has goodwill and going concern value, two section 197 intangibles other than goodwill and going concern value (Intangible 1 and Intangible 2), and two other assets with fair market values (determined using all the facts and circumstances) as follows: inventory worth $1,000,000 and a building (a capital asset) worth $2,000,000. The fair market value of each of Intangible 1 and Intangible 2 is $50,000. PRS has one liability of $1,000,000, for which A bears the entire risk of loss under section 752 and the regulations thereunder. D purchases A’s partnership interest for $650,000, resulting in a basis adjustment under section 743(b). After the purchase, D bears the entire risk of loss for PRS’s liability under section 752 and the regulations thereunder. Therefore, D’s basis in its interest in PRS is $1,650,000.

(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $650,000 ($1,650,000 - $1,000,000). Under paragraph (a)(4)(i) of this section, partnership gross value is $2,950,000

with respect to particular section 197 intangibles are allocated differently among partners, partnership gross value may vary depending on the values of particular section 197 intangibles held by the partnership. In these special situations, the partnership must assign value, first, among section 197 intangibles (other than goodwill and going concern value) in a reasonable manner that is consistent with the ordering rule in paragraph (a)(5) of this section and would cause the appropriate liquidating distribution under paragraph (a)(4)(i)(A) of this section. If the actual fair market values, determined on the basis of all the facts and circumstances, of all section 197 intangibles (other than goodwill and going concern value) is not sufficient to cause the appropriate liquidating distribution, then the fair market value of goodwill and going concern value shall be presumed to equal an amount that if assigned to goodwill and going concern value would cause the appropriate liquidating distribution.

(C) Income in respect of a decedent . Solely for the purpose of determining partnership gross value under this paragraph (a)(4)(i), where a partnership interest is transferred as a result of the death of a partner, the transferee’s basis in its partnership interest is determined without regard to section 1014(c), and is deemed to be adjusted for that portion of the interest, if any, that is attributable to items representing income in respect of a decedent under section 691.

(ii) Basis adjustments under section 743(b) resulting from substituted basis transactions . This paragraph (a)(4)(ii) applies to basis adjustments under section 743(b) that result from exchanges in which the transferee’s basis in the partnership interest is determined in whole or in part by reference to the transferor’s basis in the interest or to the basis of other property held at any time by the transferee (substituted basis transactions). In the case of a substituted basis transaction, partnership gross value equals the value of the entire partnership as a going concern, increased by the amount of partnership liabilities at the time of the exchange giving rise to the basis adjustment.

(iii) Basis adjustments under section 734(b) . In the case of a basis adjustment under section 734(b), partnership gross value equals the value of the entire partnership

as a going concern immediately following the distribution causing the adjustment, increased by the amount of partnership liabilities immediately following the distribution.

(5) Determining the values of section 197 intangibles —(i) Two classes . If the aggregate value of partnership property other than section 197 intangibles (as determined in paragraph (a)(3) of this section) is equal to or greater than partnership gross value (as determined in paragraph (a)(4) of this section), then all section 197 intangibles are deemed to have a value of zero for purposes of this section. In all other cases, the aggregate value of the partnership’s section 197 intangibles (the residual section 197 intangibles value) is deemed to equal the excess of partnership gross value over the aggregate value of partnership property other than section 197 intangibles. The residual section 197 intangibles value must be allocated between two asset classes in the following order (A) Among section 197 intangibles other than goodwill and going concern value; and

(B) To goodwill and going concern value.

(ii) Values assigned to section 197 in- tangibles other than goodwill and going concern value . The fair market value assigned to a section 197 intangible (other than goodwill and going concern value) shall not exceed the actual fair market value (determined on the basis of all the facts and circumstances) of that asset on the date of the relevant transfer. If the residual section 197 intangibles value is less than the sum of the actual fair market values (determined on the basis of all the facts and circumstances) of all section 197 intangibles (other than goodwill and going concern value) held by the partnership, then the residual section 197 intangibles value must be allocated among the individual section 197 intangibles (other than goodwill and going concern value) as follows. The residual section 197 intangibles value is assigned first to any section 197 intangibles (other than goodwill and going concern value) having potential gain that would be treated as unrealized receivables under the flush language of section 751(c) (flush language receivables) to the extent of the basis of those section 197 intangibles and the amount of income arising from the flush language receivables that the partnership would recognize if the section 197 intan

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(the amount that, if assigned to all partnership property, would result in a liquidating distribution to D equal to $650,000).

(iii) Under paragraph (a)(3) of this section, the inventory has a fair market value of $1,000,000, and the building has a fair market value of $2,000,000. Thus, the aggregate value of partnership property other than section 197 intangibles, $3,000,000, is equal to or greater than partnership gross value, $2,950,000. Accordingly, under paragraphs (a)(3) and (5) of this section, the value assigned to each of the partnership’s assets is as follows: inventory, $1,000,000; building, $2,000,000; Intangibles 1 and 2, $0; and goodwill and going concern value, $0. D’s section 743(b) adjustment must be allocated under paragraph (b) of this section using these assigned fair market values.

Example 2 . (i) Assume the same facts as in Ex- ample 1, except that the fair market values of Intangible 1 and Intangible 2 are each $300,000, and that D purchases A’s interest in PRS for $1,000,000. After the purchase, D’s basis in its interest in PRS is $2,000,000.

(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $1,000,000 ($2,000,000 - $1,000,000). Under paragraph (a)(4)(i) of this section, partnership gross value is $4,000,000 (the amount that, if assigned to all partnership property, would result in a liquidating distribution to D equal to $1,000,000).

(iii) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $1,000,000 (the excess of partnership gross value, $4,000,000, over the aggregate value of assets other than section 197 intangibles, $3,000,000 (the sum of the value of the inventory, $1,000,000, and the value of the building, $2,000,000)). The partnership must determine the values of section 197 assets by allocating the residual section 197 intangibles value among the partnership’s assets. The residual section 197 intangibles value is assigned first to section 197 intangibles other than goodwill and going concern value, and then to goodwill and going concern value. Thus, $300,000 is assigned to each of Intangible 1 and Intangible 2, and $400,000 is assigned to goodwill and going concern value (the amount by which the residual section 197 intangibles value, $1,000,000, exceeds the fair market value of section 197 intangibles other than goodwill and going concern value, $600,000). D’s section 743(b) adjustment must be allocated under paragraph (b) of this section using these assigned fair market values.

Example 3 . (i) Assume the same facts as in Ex- ample 1, except that the fair market values of Intangible 1 and Intangible 2 are each $300,000, and that D purchases A’s interest in PRS for $750,000. After the purchase, D’s basis in its interest in PRS is $1,750,000. Also assume that Intangible 1 was originally purchased for $300,000, and that its adjusted basis has been decreased to $50,000 as a result of amortization. Assume that, if PRS were to sell Intangible 1 for $300,000, it would recognize $250,000 of gain that would be treated as an unrealized receivable under the flush language in section 751(c).

(ii) D’s basis in the transferred partnership interest (reduced by the amount of such basis that is attributable to partnership liabilities) is $750,000 ($1,750,000 - $1,000,000). Under paragraph (a)(4)(i) of this section, partnership gross value is $3,250,000

(the amount that, if assigned to all partnership property, would result in a liquidating distribution to D equal to $750,000).

(iii) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $250,000 (the amount by which partnership gross value, $3,250,000, exceeds the aggregate value of partnership property other than section 197 intangibles, $3,000,000). Intangible 1 has potential gain that would be treated as unrealized receivables under the flush language of section 751(c). The flush language receivables value in Intangible 1 is $300,000 (the sum of PRS’s basis in Intangible 1, $50,000, and the amount of ordinary income, $250,000, that the partnership would recognize if Intangible 1 were sold for its actual fair market value). Because the residual section 197 intangibles value, $250,000, is less than the flush language receivables value of Intangible 1, Intangible 1 is assigned a value of $250,000, and Intangible 2 and goodwill and going concern value are assigned a value of zero. D’s section 743(b) adjustment must be allocated under paragraph (b) of this section using these assigned fair market values.

Example 4 . Assume the same facts as in Example 1, except that the fair market values of Intangible 1 and Intangible 2 are each $300,000, and that A does not sell its interest in PRS. Instead, A contributes its interest in PRS to E, a newly formed corporation wholly-owned by A, in a transaction described in section 351. Assume that the contribution results in a basis adjustment under section 743(b) (other than zero). PRS determines that its value as a going concern immediately following the contribution is $3,000,000. Under paragraph (a)(4)(ii) of this section, partnership gross value is $4,000,000 (the value of PRS as a going concern, $3,000,000, increased by the partnership’s liability, $1,000,000, immediately after the contribution). Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $1,000,000 (the amount by which partnership gross value, $4,000,000, exceeds the aggregate value of partnership property other than section 197 intangibles, $3,000,000). Of the residual section 197 intangibles value, $300,000 is assigned to each of Intangible 1 and Intangible 2, and $400,000 is assigned to goodwill and going concern value (the amount by which the residual section 197 intangibles value, $1,000,000, exceeds the fair market value of section 197 intangibles other than goodwill and going concern value, $600,000). E’s section 743(b) adjustment must be allocated under paragraph (b)(5) of this section using these assigned fair market values.

Example 5 . G is the sole general partner in PRS, a limited partnership having three equal partners (G, H, and I). PRS has goodwill and going concern value, two section 197 intangibles other than goodwill and going concern value (Intangible 1 and Intangible 2), and two capital assets with fair market values (determined using all the facts and circumstances) as follows: vacant land worth $1,000,000, and a building worth $2,000,000. The fair market value of each of Intangible 1 and Intangible 2 is $300,000. PRS has one liability of $1,000,000, for which G bears the entire risk of loss under section 752 and the regulations thereunder. PRS distributes the land to H in liquidation of H’s interest in PRS. Immediately prior to the distribution, PRS’s basis in the land is $800,000, and H’s basis in its interest in PRS is $750,000. The distribution causes the partnership to increase the basis of its remaining property by $50,000 under sec

tion 734(b)(1)(B). PRS determines that its value as a going concern immediately following the distribution is $2,000,000. Under paragraph (a)(4)(iii) of this section, partnership gross value is $3,000,000 (the value of PRS as a going concern, $2,000,000, increased by the partnership’s liability, $1,000,000, immediately after the distribution). Under paragraph (a)(5) of this section, the residual section 197 intangibles value of PRS’s section 197 intangibles is $1,000,000 (the amount by which partnership gross value, $3,000,000, exceeds the aggregate value of partnership property other than section 197 intangibles, $2,000,000). Of the residual section 197 intangibles value, $300,000 is assigned to each of Intangible 1 and Intangible 2, and $400,000 is assigned to goodwill and going concern value (the amount by which the residual section 197 intangibles value, $1,000,000, exceeds the fair market value of section 197 intangibles other than goodwill and going concern value, $600,000). PRS’s section 734(b) adjustment must be allocated under paragraph (c) of this section using these assigned fair market values.

(b) Adjustments under section 743(b) (1) Generally —(i) Application . For basis adjustments under section 743(b) resulting from substituted basis transactions, paragraph (b)(5) of this section shall apply. For basis adjustments under section 743(b) resulting from all other transfers, paragraphs (b)(2) through (4) of this section shall apply. - -

* * * * * (3) - - (iii) Special rules —(A) Assets in which partner has no interest . An asset with respect to which the transferee partner has no interest in income, gain, losses, or deductions shall not be taken into account in applying paragraph (b)(3)(ii)(B) of this section.

(B) Limitation in decrease of basis . In no event may the amount of any decrease in basis allocated to an item of capital gain property under paragraph (b)(3)(ii)(B) of this section exceed the partnership’s adjusted basis in that item (or in the case of property subject to the remedial allocation method, the transferee’s share of any remedial loss under §1.704–3(d) from the hypothetical transaction). In the event that a decrease in basis allocated under paragraph (b)(3)(ii)(B) of this section to an item of capital gain property would otherwise exceed the partnership’s adjusted basis in that item, the excess must be applied to reduce the remaining basis, if any, of other capital gain assets pro rata in proportion to the bases of such assets (as adjusted under this paragraph (b)(3)).

* * * * * (4) - - (ii) - -

June 30, 2003 1113 2003–26 I.R.B.

Example . (i) A and B are equal partners in personal service partnership PRS.

In 2004, as a result of B’s death, B’s partnership interest is transferred to T when PRS’s balance sheet (reflecting a cash receipts and disbursements method

Adjusted

Basis

of accounting) is as follows (based on all the facts and circumstances):

Assets

Fair Market

Value

Section 197 Intangible .................................................... $2,000 $ 5,000

Unrealized Receivables ................................................... 0 15,000

Total ...................................................... $2,000 $20,000

Liabilities and Capital

Adjusted Per Books

Fair Market

Per Books Value

Capital:

A ...................................................................................... 1,000 10,000

B....................................................................................... 1,000 10,000

Total ...................................................... $2,000 $20,000

(ii) None of the assets owned by PRS is section 704(c) property, and the section 197 intangible is not amortizable. The fair market value of T’s partnership interest on the applicable date of valuation set forth in section 1014 is $10,000. Of this amount, $2,500 is attributable to T’s 50% share of the partnership’s section 197 intangible, and $7,500 is attributable to T’s 50% share of the partnership’s unrealized receivables. The partnership’s unrealized receivables represent income in respect of a decedent. Accordingly, under section 1014(c), T’s basis in its partnership interest is not adjusted for that portion of the interest which is attributable to the unrealized receivables. Therefore, T’s basis in its partnership interest is $2,500.

(iii) Under paragraph (a)(4)(i)(C) of this section, solely for purposes of determining partnership gross value, T’s basis in its partnership interest is deemed to be $10,000. Under paragraph (a)(4)(i) of this section, partnership gross value is $20,000 (the amount that, if assigned to all partnership property, would result in a liquidating distribution to T equal to $10,000).

(iv) Under paragraph (a)(5) of this section, the residual section 197 intangibles value is $5,000 (the excess of partnership gross value, $20,000, over the aggregate value of assets other than section 197 intangibles, $15,000). The residual section 197 intangibles value is assigned first to section 197 intangibles other than goodwill and going concern value, and then to goodwill and going concern value. Thus, $5,000 is assigned to the section 197 intangible, and $0 is assigned to goodwill and going concern value. T’s section 743(b) adjustment must be allocated using these assigned fair market values.

(v) At the time of the transfer, B’s share of the partnership’s basis in partnership assets is $1,000. Accordingly, T receives a $1,500 basis adjustment under section 743(b). Under this paragraph (b)(4), the entire basis adjustment is allocated to the partnership’s section 197 intangible.

(5) Substituted basis transactions —(i) In general . This paragraph (b)(5) applies to ba

sis adjustments under section 743(b) that result from exchanges in which the transferee’s basis in the partnership interest is determined in whole or in part by reference to the transferor’s basis in that interest. For exchanges on or after June 9, 2003, this paragraph (b)(5) also applies to basis adjustments under section 743(b) that result from exchanges in which the transferee’s basis in the partnership interest is determined by reference to other property held at any time by the transferee. For example, this paragraph (b)(5) applies if a partnership interest is contributed to a corporation in a transaction to which section 351 applies, if a partnership interest is contributed to a partnership in a transaction to which section 721(a) applies, or if a partnership interest is distributed by a partnership in a transaction to which section 731(a) applies.

* * * * * (c) - - (5) - -
Example . (i) A, B, and C form equal partnership PRS. A contributes $50,000 and Asset 1, nondepreciable capital gain property with a fair market value of $50,000 and an adjusted tax basis of $25,000. B and C each contributes $100,000. PRS uses the cash to purchase Assets 2, 3, 4, 5, and 6. Assets 2 and 3 are nondepreciable capital assets, and Assets 4, 5, and 6 are inventory that has not appreciated substantially in value within the meaning of section 751(b)(3). Assets 4, 5, and 6 are the only assets held by the partnership that are subject to section 751. The partnership has an election in effect under section 754. Af

ter seven years, the adjusted basis and fair market value of PRS’s assets are as follows:

* * * * * (d) Required statements . See §1.743– 1(k)(2) for provisions requiring the transferee of a partnership interest to provide information to the partnership relating to the transfer of an interest in the partnership. See §1.743–1(k)(1) for a provision requiring the partnership to attach a statement to the partnership return showing the computation of a basis adjustment under section 743(b) and the partnership properties to which the adjustment is allocated under section 755. See §1.732–1(d)(3) for a provision requiring a transferee partner to attach a statement to its return showing the computation of a basis adjustment under section 732(d) and the partnership properties to which the adjustment is allocated under section 755. See §1.732–1(d)(5) for a provision requiring the partnership to provide information to a transferee partner reporting a basis adjustment under section 732(d).

(e) Effective Date —(1) Generally . Except as provided in paragraphs (b)(5) and (e)(2) of this section, this section applies to transfers of partnership interests and distributions of property from a partnership that occur on or after December 15, 1999.

(2) Special rules . Paragraphs (a) and (b)(3)(iii) of this section apply to transfers of partnership interests and distributions of property from a partnership that occur on or after June 9, 2003.

2003–26 I.R.B. 1114 June 30, 2003

ting forth the aggregate amount of such payments and the name and address of the recipient of such payments. For purposes of the preceding sentence, the term “servicerecipient” means the person for whom the service is performed. This information must be filed on Form 1099–MISC, Miscella- neous Income .

Section 6041A(d)(1) provides that the term “person” includes any governmental unit (and any agency or instrumentality thereof). Section 6041A(d)(2) provides that in the case of any payment by a governmental entity or any agency or instrumentality thereof (A) section 6041A(a) shall be applied without regard to the trade or business requirement contained therein, and (B) any return under section 6041A shall be made by the officer or employee having control of the payment or appropriately designated for the purpose of making such return.

Section 6041A(d)(3)(A) provides that section 6041A(a) shall apply to remuneration paid to a corporation by any federal executive agency (as defined in section 6050M(b)). Section 6050M(a) provides that the head of every federal executive agency which enters into any contract shall make a return setting forth (1) the name, address, and TIN of each person with which such agency entered into a contract during the calendar year, and (2) such other information as the Secretary may require. This information must be filed on Form 8596, Information Return for Federal Contracts . See Treas. Reg. § 1.6050M–1(d).

Section 1.6050M–1(b)(2) of the Income Tax Regulations defines a “contract” as an obligation of a federal executive agency to make payment of money (or other property) to a person in return for the sale of property, the rendering of services, or other consideration.

Section 1.6050M–1(c)(1)(i) limits the information reporting requirement of section 6050M by providing that any contract or contract action for which the amount obligated is $25,000 or less does not have to be reported.

Sections 6041A and 6050M are separate reporting requirements and differ in their primary purpose. The purpose of section 6041A is to identify unreported income. See S. Rep. No. 494, 97th Cong, 2d Sess. 247 (1982), July 12, 1982 (Senate Report). The purpose of section 6050M is to

§1.755–2T [Removed]

Par. 3. Section 1.755–2T is removed. Par. 4. In §1.1060–1, paragraph (e)(2) is revised to read as follows:

§1.1060–1 Special allocation rules for certain asset acquisitions.

* * * * *

(e) - - (2) Transfers of interests in partner- ships . For reporting requirements relating to the transfer of a partnership interest, see §1.755–1(d).

PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 5. The authority citation for part 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

602.101 [Amended]

Par. 6. In §602.101, paragraph (b), the entry for “1.755–2T” is removed.

David A. Mader, Assistant Deputy Commissioner of

Internal Revenue.

Approved May 22, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on June 6, 2003, 8:45 a.m., and published in the issue of the Federal Register for June 9, 2003, 68 F.R. 34293)

Section 6041A.—Returns Regarding Payments of Remuneration for Services and Direct Sales

(Also: 6050M.)

26 CFR 1.6041A–1: Return of information as to payments of $600 or more. (Also: 1.6050M–1.)

Information reporting requirements. This ruling provides guidance to federal agencies about the information reporting requirements under sections 6041A and 6050M of the Code for the payment of services.

Rev. Rul. 2003–66

PURPOSE

This revenue ruling provides guidance to federal agencies about the information

reporting requirements under sections 6041A and 6050M of the Internal Revenue Code. This revenue ruling clarifies that sections 6041A and 6050M impose separate information reporting requirements and have different underlying purposes and that, in some cases, the required information may overlap.

ISSUE

When is a federal executive agency required to report under sections 6041A and 6050M?

FACTS

Agency X is a federal executive agency of the United States as defined by section 6050M(b), which is (1) any Executive agency (as defined in section 105 of title 5, United States Code) other than the General Accounting Office, (2) any military department (as defined in section 102 of such title), and (3) the United States Postal Service and the Postal Rate Commission of the United States. All payments are made during the same calendar year.

Situation 1 . Agency X pays Corporation A for cleaning services. The contract between Agency X and Corporation A provides that the total payment for the services is $30,000.

Situation 2 . Agency X pays Corporation B for the purchase of computer equipment. The contract requires a total payment of $25,000 for the computer equipment.

Situation 3 . Agency X pays Corporation C for repairs to one of the agency’s automobiles. The repairs include the replacement of parts. The agency pays $1000 for the repairs of which $700 is for services.

None of the situations described above fall within the exception under section 6050M(e).

LAW

Section 6041A(a) provides that if (1) any service-recipient engaged in a trade or business pays in the course of such trade or business during any calendar year remuneration to any person for services performed by such person, and (2) the aggregate of such remuneration paid to such person during such calendar year is $600 or more, then the service-recipient must file a return, according to the forms or regulations prescribed by the Secretary, set

June 30, 2003 1115 2003–26 I.R.B.

ture no longer needs, for conducting the census of agriculture. The text of the temporary regulations serves as the text of the proposed regulations (REG–103809–03) set forth on page 1132 of this issue of the Bulletin.

DATES: Effective Date: These regulations are effective on June 6, 2003.

FOR FURTHER INFORMATION CONTACT: Christine Irwin at (202) 622–4570 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

These temporary regulations incorporate the phrase “return information reflected on returns” into §301.6103(j)(5)–1 in conformance with the statutory language that describes the type of return information that the IRS may disclose to the Department of Agriculture under section 6103(j)(5) of the Code. These temporary regulations are consistent with a recent clarification of the same phrase ( i.e., return information reflected on returns) in §301.6103(j)(1)–1, involving the disclosure of return information to the Bureau of the Census. See 68 FR 2691 (T.D. 9037, 2003–9 I.R.B. 535). Also, currently §301.6103(j)(5)–1 provides an itemized description of the return information authorized for disclosure in conjunction with the census of agriculture. These temporary regulations remove certain items of return information currently listed in §301.6103(j)(5)–1 that the Department of Agriculture no longer needs in conjunction with the census of agriculture.

Explanation of Provisions

These temporary regulations adopt the phrase “return information reflected on returns” in lieu of the phrase “return information” that currently appears in §301.6103(j)(5)–1. (The phrase “return information reflected on returns” encompasses the phrase “return information reflected thereon” in section 6103(j)(5) of the Code.) These temporary regulations clarify the phrase “return information reflected on returns” by explaining that the phrase includes, but is not limited to, information on returns, information derived from processing such returns, and information derived from other sources for the purposes of establishing and maintaining taxpayer infor

provide the IRS with information concerning sources from which it can collect delinquent taxes owed by federal contractors. See H.R. Rep. No. 426, 99th Congress, 1st Sess. 855 (1985), 1986–3 (Vol. 2) C.B. 855.

ANALYSIS

Situation 1 . The payment for the contracted cleaning services is subject to information reporting under section 6041A because the agency’s payment for services exceeds the $600 threshold. Agency X must file Form 1099–MISC. In addition, upon entering into the contract, Agency X is subject to information reporting under section 6050M because the contracted amount exceeds the $25,000 threshold. Agency X must file Form 8596.

Situation 2 . The payment for the purchase of computer equipment is not subject to information reporting under section 6041A because the payment is not for services. The contract is not subject to information reporting under section 6050M because the agency did not enter into a contract obligating an amount exceeding $25,000. Agency X does not have to file either Form 1099–MISC or Form 8596.

Situation 3 . The payment for the automobile repairs is subject to information reporting under section 6041A because the portion attributable to services exceeds the $600 threshold. Agency X must file Form 1099–MISC. Agency X is not subject to section 6050M because the agency did not enter into a contract obligating an amount exceeding $25,000. Agency X does not have to file Form 8596.

HOLDING

Sections 6041A and 6050M are separate information reporting requirements. Thus, with respect to a contract and the payments under that contract, a federal agency may be required, depending on the circumstances, to make an information return only under section 6041A, only under section 6050M, under both provisions, or under neither provision.

DRAFTING INFORMATION

The principal author of this revenue procedure is Tiffany P. Smith of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provi

sions and Judicial Practice Division. For further information regarding this revenue procedure, contact Tiffany P. Smith at (202) 622–4910 (not a toll-free call).

Section 6050M.—Returns Relating to Persons Receiving Contracts From Federal Executive Agencies

Guidance is provided to federal agencies about the information reporting requirements under sections 6041A and 6050M of the Internal Revenue Code. This ruling clarifies that sections 6041A and 6050M impose separate information reporting requirements and have different underlying purposes and that, in some cases, the required information may overlap. See Rev. Rul. 2003–66, page 1115.

Section 6103.—Confiden- tiality and Disclosure of Returns and Return Information

26 CFR 301.6103(j)(5)–1T: Disclosures of return information reflected on returns to officers and employees of the Department of Agriculture for conducting the census of agriculture (temporary).

T.D. 9060

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 301

Disclosure of Return Information to the Department of Agriculture

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains regulations that incorporate and clarify the phrase “return information reflected on returns” in conformance with the terms of section 6103(j)(5) of the Internal Revenue Code (Code). These temporary regulations also remove certain items of return information that the IRS currently discloses, but the Department of Agricul

2003–26 I.R.B. 1116 June 30, 2003

paragraph (b) for individuals, partnerships and corporations with agricultural activity, as determined generally by industry code classification or the filing of returns for such activity, to officers and employees of the Department of Agriculture for purposes of, but only to the extent necessary in, structuring, preparing, and conducting, as authorized by chapter 55 of title 7, United States Code, the census of agriculture.

(2) From Form 1040 (Schedule F)— (i) Taxpayer identity information (as defined in section 6103(b)(6) of the Internal Revenue Code);

(ii) Spouse’s Social Security Number; (iii) Annual accounting period; (iv) Principal Business Activity (PBA) code;

(v) Taxable cooperative distributions; (vi) Income from custom hire and machine work;

(vii) Gross income; (viii) Master File Tax (MFT) code; (ix) Document Locator Number (DLN); (x) Cycle posted; (xi) Final return indicator; (xii) Part year return indicator; and (xiii) Taxpayer telephone number. (3) From Form 943— (i) Taxpayer identity information; (ii) Annual accounting period; (iii) Total wages subject to Medicare taxes;

(iv) MFT code; (v) DLN; (vi) Cycle posted; (vii) Final return indicator; and (viii) Part year return indicator. (4) From Form 1120 series (i) Taxpayer identity information; (ii) Annual accounting period; (iii) Gross receipts less returns and allowances;

(iv) PBA code; (v) MFT Code; (vi) DLN; (vii) Cycle posted; (viii) Final return indicator; (ix) Part year return indicator; and (x) Consolidated return indicator. (5) From Form 1065 series (i) Taxpayer identity information; (ii) Annual accounting period; (iii) PBA code; (iv) Gross receipts less returns and allowances;

(v) Net farm profit (loss); (vi) MFT code;

mation relating to returns. The phrase includes information derived from returns, monthly corrections of, and additions to, taxpayer information contained in IRS databases ( e.g., taxpayer address and name changes) that are obtained from other sources, and computer codes the IRS derives from returns and/or tax forms and integrates within taxpayer data bases.

On March 4, 2003, and March 17, 2003, the Department of Agriculture’s National Agriculture Statistics Service (NASS) notified the IRS that certain items of return information that are currently listed in §301.6103(j)(5)–1 are no longer needed in conjunction with the census of agriculture. Specifically, the Department of Agriculture no longer needs the following items currently extracted from IRS forms: (1) From Form 1040, Schedule F ( Profit or Loss From Farming ): sales of livestock and produce raised; (2) From Form 1120 series: Parent corporation Employer Identification Number, and related Name and Principal Business Activity (PBA) code for entities with agricultural activity; and (3) From Form 851 ( Affiliations Schedule ): subsidiary taxpayer identity information, annual accounting period, subsidiary PBA code, parent taxpayer identity information, parent PBA code, Master File Tax Code, Document Locator Number, and cycle posted. As a result, these items of return information currently listed in §301.6103(j)(5)–1 will be removed by this document.

Special Analyses

It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because no preceding notice of proposed rulemaking is required for this temporary regulation, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, the IRS will submit this Treasury decision to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is Christine Irwin, Office of the As

sociate Chief Counsel, Procedure & Administration (Disclosure & Privacy Law Division).

* * * * *

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 301 is amended as follows:

PART 301— PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 is amended by removing the entry for “Section 301.6103(j)(5)–1” and adding an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 - - Section 301.6103(j)(5)–1T also issued under 26 U.S.C. 6103(j)(5). - -

§301.6103(j)(5)–1 [Removed]

Par. 2. Section 301.6103(j)(5)–1 is removed.

Par. 3. Section 301.6103(j)(5)–1T is added to read as follows:

§301.6103(j)(5)–1T Disclosures of return information reflected on returns to officers and employees of the Department of Agriculture for conducting the census of agriculture (temporary).

(a) General rule . Pursuant to the provisions of section 6103(j)(5) of the Internal Revenue Code and subject to the requirements of paragraph (c) of this section, officers or employees of the Internal Revenue Service will disclose return information reflected on returns to officers and employees of the Department of Agriculture to the extent, and for such purposes, as may be provided by paragraph (b) of this section. “Return information reflected on returns” includes, but is not limited to, information on returns, information derived from processing such returns, and information derived from other sources for the purposes of establishing and maintaining taxpayer information relating to returns.

(b) Disclosure of return information re- flected on returns to officers and employ- ees of the Department of Agriculture . (1) Officers or employees of the Internal Revenue Service will disclose the following return information reflected on returns in this

June 30, 2003 1117 2003–26 I.R.B.

empt from taxation under section 501(a). Z also meets the definition of a C corporation for federal tax purposes.

Situation 2. Partnership B (a domestic partnership required to file returns pursuant to section 6031(a)) consists of three partners, U, V, and W. U is an individual and U.S. citizen, V is a domestic C corporation, and W is a foreign corporation.

LAW AND ANALYSIS:

Section 6231 defines a partnership item as an item required to be taken into account for the partnership’s taxable year under subtitle A, to the extent regulations provide that the item is more appropriately determined at the partnership level than at the partner level. Under section 6221, the tax treatment of any partnership item shall be determined at the partnership level under the TEFRA partnership provisions. As a general rule, the TEFRA partnership provisions apply to any partnership required to file a return of partnership income under section 6031. Section 6231(a)(1)(A). The TEFRA partnership provisions, however, do not apply to a partnership that qualifies as a small partnership under section 6231(a)(1)(B), unless the partnership elects to apply those provisions.

For taxable years ending after August 5, 1997, section 6231(a)(1)(B) defines a small partnership as a partnership in which there are ten or fewer partners each of whom is an individual (other than a nonresident alien), an estate of a deceased partner, or a C corporation. Treas. Reg. § 301.6231 (a)(1)–1, which is effective for partnership taxable years beginning on or after October 4, 2001, addresses the exception for small partnerships and refers to section 1361(a)(2) for the definition of C corporation. Section 1361(a)(2) provides that “for purposes of [the Internal Revenue Code], the term ‘C corporation’ means, with respect to any taxable year, a corporation which is not an S corporation for such year.”

Section 7701(a)(3) defines the term corporation as including “associations, jointstock companies, and insurance companies.” Treas. Reg. § 301.7701–2(b) states that the term corporation means: (1) a business entity organized under federal or state statute (or under a statute of a federally recognized Indian tribe) if the statute refers to the entity as incorporated or as a corporation, body corporate, or body politic; (2) an

(vii) DLN; (viii) Cycle posted; (ix) Final return indicator; and (x) Part year return indicator. (c) Procedures and Restrictions . (1) Disclosure of return information reflected on returns by officers or employees of the Internal Revenue Service as provided by paragraph (b) of this section will be made only upon written request designating, by name and title, the officers and employees of the Department of Agriculture to whom such disclosure is authorized, to the Commissioner of Internal Revenue by the Secretary of Agriculture and describing—

(i) The particular return information reflected on returns for disclosure;

(ii) The taxable period or date to which such return information reflected on returns relates; and

(iii) The particular purpose for the requested return information reflected on returns.

(2) (i) No such officer or employee to whom the Internal Revenue Service discloses return information reflected on returns pursuant to the provisions of paragraph (b) of this section shall disclose such information to any person, other than the taxpayer to whom such return information reflected on returns relates or other officers or employees of the Department of Agriculture whose duties or responsibilities require such disclosure for a purpose described in paragraph (b) of this section, except in a form that cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer.

(ii) If the Internal Revenue Service determines that the Department of Agriculture, or any officer or employee thereof, has failed to, or does not, satisfy the requirements of section 6103(p)(4) of the Internal Revenue Code or regulations or published procedures thereunder, the Internal Revenue Service may take such actions as are deemed necessary to ensure that such requirements are or shall be satisfied, including suspension of disclosures of return information reflected on returns otherwise authorized by section 6103(j)(5) and paragraph (b) of this section, until the Internal Revenue Service determines that such requirements have been or will be satisfied.

(d) Effective date . This section is applicable on June 6, 2003.

David A. Mader, Assistant Deputy Commissioner of

Internal Revenue.

Approved May 12, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on June 5, 2003, 8:45 a.m., and published in the issue of the Federal Register for June 6, 2003, 68 F.R. 33857)

Section 6231(a)(1)(B).—Def- initions and Special Rules — Exception for Small Partnerships

26 CFR 1.6231(a)(1)–1: Exception for small partnerships.

Small partnership exception. This ruling addresses the issue of whether a partnership qualifies for the small partnership exception provided in section 6231(a)(1)(B) of the Code, and thus does not fall within the unified audit and litigation procedures under sections 6221 through 6234 (TEFRA partnership provisions), where one of the partners is either an organization that is exempt from taxation under section 501(a) that meets the definition of a C corporation for federal tax purposes or a foreign corporation.

Rev. Rul. 2003–69

ISSUE:

Whether a partnership qualifies for the small partnership exception provided in I.R.C. § 6231(a)(1)(B), and thus does not fall within the unified audit and litigation procedures under sections 6221 through 6234 (TEFRA partnership provisions), where one of the partners is either an organization that is exempt from taxation under section 501(a) that meets the definition of a C corporation for federal tax purposes or a foreign corporation.

FACTS:

Situation 1. Partnership A (a domestic partnership required to file returns pursuant to section 6031(a)) consists of three partners, X, Y, and Z. X is an individual and U.S. citizen, Y is a domestic C corporation, and Z is an association that is ex

2003–26 I.R.B. 1118 June 30, 2003

obsoletes prior rulings which have been identified as no longer being determinative.

Rev. Rul. 2003–67

The Internal Revenue Service is continuing its program of reviewing rulings (including revenue rulings, revenue procedures and notices) published in the Internal Revenue Bulletin to identify and publish lists of those rulings that, although not specifically revoked or superseded, are no longer considered determinative because: (1) the applicable statutory provisions or regulations have been changed or repealed; (2) the ruling position is specifically covered by statute, regulations, or subsequent published position; or, (3) the facts set forth no longer exist or are not sufficiently described to permit clear application of the current statute and regulations.

This revenue ruling publishes a list of rulings that have been identified under the Service’s review program as no longer being determinative. The rulings are categorized by the Assistant Chief Counsel offices in the Office of Associate Chief Counsel (Procedure and Administration) that have primary jurisdiction over the subject matter of the rulings that have been identified as no longer being determinative.

Accordingly, the rulings listed below are hereby declared obsolete.

association (determined under section 301.7701–3); (3) a business entity organized under state statute, if the statute refers to the entity as a joint-stock company or joint-stock association; (4) an insurance company; (5) a state-chartered business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act (12 U.S.C. § 1811 et seq .), or a similar federal statute; (6) a business entity wholly owned by a state or any political subdivision thereof; (7) a business entity that is taxable as a corporation under a provision of the Internal Revenue Code other than section 7701(a)(3); and (8) certain foreign entities.

Treas. Reg. § 301.7701–3 allows a business entity that is not classified as a corporation under Treas. Reg. § 301.7701– 2(b)(1), (3), (4), (5), (6), (7), or (8) (an eligible entity) to elect its classification for federal tax purposes. Under Treas. Reg. § 301.7701–3(c)(1)(v), an eligible entity that is determined to be, or claims to be, exempt from tax under section 501(a) is treated as having made an election to be classified as a corporation.

As a general matter, an S corporation is defined in section 1361(a) as a “small business corporation.” A “small business corporation” is defined by section 1361(b), in part, as “a domestic corporation.” Treas. Reg. § 301.7701–5 defines a domestic corporation as one organized or created in the United States and a foreign corporation as one that is not domestic.

Thus, an exempt organization under section 501(a) can be a “C corporation” for purposes of the small partnership exception. Similarly, because a foreign corporation cannot be an S corporation, the corporation is a C corporation for purposes of the small partnership exception.

Accordingly, in each of the situations described above, all of the partners in the respective partnerships are either individuals (other than a nonresident alien) or C corporations.

HOLDINGS:

Situation 1. Partnership A qualifies for the small partnership exception to the TEFRA partnership provisions.

Situation 2. Partnership B qualifies for the small partnership exception to the TEFRA partnership provisions.

DRAFTING INFORMATION

The principal author of this revenue ruling is David A. Abernathy of the Office of Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division. For further information regarding this revenue ruling, contact Mr. Abernathy at (202) 622– 7940 (not a toll-free call).

Section 7805.—Rules and Regulations

26 CFR 301.7805–1: Rules and Regulations.

Obsolete revenue rulings. This ruling

Assistant Chief Counsel (Administrative Provisions and Judicial Practice)

Ruling No. C.B. Citation Rev. Rul. 54–86 1954–1 C.B. 79 Rev. Rul. 54–431 1954–2 C.B. 116 Rev. Rul. 54–571 1954–2 C.B. 235 Rev. Rul. 55–606 1955–2 C.B. 489 Rev. Rul. 59–328 1959–2 C.B. 379 Rev. Rul. 63–248 1963–2 C.B. 623 Rev. Rul. 64–36 1964–1 C.B. 446 Rev. Rul. 65–129 1965–1 C.B. 519 Rev. Rul. 65–248 1965–2 C.B. 432 Rev. Rul. 66–270 1966–2 C.B. 106 Rev. Rul. 67–121 1967–1 C.B. 363 Rev. Rul. 67–197 1967–1 C.B. 319 Rev. Rul. 71–310 1971–2 C.B. 169 Rev. Rul. 73–232 1973–1 C.B. 541 Rev. Rul. 74–126 1974–1 C.B. 337

June 30, 2003 1119 2003–26 I.R.B.

Ruling No. C.B. Citation Rev. Rul. 76–561 1976–2 C.B. 395 Rev. Rul. 77–53 1977–1 C.B. 368 Rev. Rul. 78–157 1978–1 C.B. 431 Rev. Rul. 78–169 1978–1 C.B. 432 Rev. Rul. 81–245 1981–2 C.B. 235 Rev. Rul. 85–37 1985–1 C.B. 362 Rev. Rul. 85–50 1985–1 C.B. 345 Rev. Proc. 88–16 1988–1 C.B. 691 Rev. Rul. 93–70 1993–2 C.B. 294

Assistant Chief Counsel (Collection, Bankruptcy and Summons)

Ruling No. Citation Rev. Rul. 225 (1953) 1953–2 C.B. 467 Rev. Rul. 54–93 1954–1 C.B. 280 Rev. Rul. 54–125 1954–1 C.B. 282 Rev. Rul. 55–134 1955–1 C.B. 196 Rev. Rul. 55–227 1955–1 C.B. 551 Rev. Rul. 56–41 1956–1 C.B. 562 Rev. Rul. 66–383 1966–2 C.B. 502 Rev. Proc. 67–25 1967–1 C.B. 626 Rev. Proc. 71–37 1971–2 C.B. 573 Rev. Proc. 76–23 1976–1 C.B. 562

Assistant Chief Counsel (Disclosure and Privacy Law)

Ruling No. Citation Rev. Rul. 54–598 1954–2 C.B. 121 Rev. Proc. 58–120 1958–1 C.B. 498 Rev. Proc. 66–4 1966–1 C.B. 607 Rev. Proc. 70–11 1970–1 C.B. 437 Rev. Proc. 73–6 1973–1 C.B. 752 Rev. Proc. 85–21 1985–1 C.B. 539 Rev. Proc. 85–33 1985–2 C.B. 414 Rev. Proc. 88–39 1988–2 C.B. 562 Rev. Proc. 89–33 1989–1 C.B. 905 Rev. Proc. 91–42 1991–2 C.B. 717 Rev. Proc. 92–55 1992–2 C.B. 394

The Service will continue to review other rulings to identify those that, for the reasons stated above, are no longer determinative. Therefore, failure to include any particular ruling in the above list should not be construed as an indication that the ruling necessarily is determinative.

DRAFTING INFORMATION

The principal author of this revenue ruling is A. M. Gulas of the Office of Associate Chief Counsel, Procedure and Administration (Disclosure and Privacy Law).

For further information regarding the rulings obsoleted in this revenue ruling, contact the following persons from the appropriate Assistant Chief Counsel offices (not toll-free calls):

Name Assistant Chief Counsel Telephone No.

Blaise Dusenberry Administrative Provisions & Judicial Practice

202–622–7940

Peter Devlin Collection, Bankruptcy & Summons 202–622–3600 A. M. Gulas Disclosure & Privacy Law 202–622–4560

2003–26 I.R.B. 1120 June 30, 2003