Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income Housing Credit

26 CFR 1.42–14: Allocation rules for post-2000 State housing credit ceiling amount.

Rev. Rul. 2016–29

ISSUE

When state housing credit agencies allocate housing credit dollar amounts, does § 42(m)(1)(A)(ii) of the Internal Revenue Code (Code) require or encourage these agencies to reject any proposal that does not obtain the approval of the locality where the project developer proposes to place the project? ¹

FACTS

Agency, a housing credit agency in State X, is responsible for allocating housing credit dollar amounts to applicants that seek to develop affordable housing projects that will be eligible to earn lowincome housing tax credits (LIHTCs). To guide Agency in making these allocations, Agency adopted, and the relevant governmental unit approved, a qualified allocation plan (QAP).

This QAP contains provisions that strongly favor applications from affordable housing projects that demonstrate affirmative local support. For example, under the point system that Agency uses in judging among applicant projects, points are granted to projects that—

• Manifest quantifiable community participation with respect to the project, especially as evidenced by written statements from neighborhood organizations in the area of the proposed project.

• Receive a commitment of development funding by the local political subdivision.

• Receive community support for the application, as evidenced by a written statement from the state legislator elected from the district in which the project is proposed to be developed. Agency believes that § 42(m)(1)(A)(ii) requires that allocations be made only to proposals that receive the approval of the locality where the proposed project is to be located. Accordingly, Agency will reject an application if evidence of affirmative local support is lacking, and Agency uses factors such as the ones in its QAP to determine whether or not that support exists. Requiring local approval empowers jurisdictions to exercise what some call a “local veto.”

In State X, local approval is much more likely to be secured for proposed LIHTC developments in areas with greater proportions of minority residents and fewer economic opportunities than in higheropportunity, non-minority communities. Agency’s practice of requiring local approval has created a pattern of allocating housing credit dollar amounts to projects in the predominantly lower-income or minority areas, with the result of perpetuating residential racial and economic segregation in State X .

LAW

If a building is constructed and operated consistent with the requirements of § 42, the building’s owners generally receive a 10-year stream of LIHTCs.

Under § 42(h), however, the LIHTCs determined in any year with respect to a building may not exceed the housing credit dollar amount that a State housing credit agency has allocated to the building.

Section 42(m) requires these allocations to be made pursuant to a QAP. Each QAP must contain certain preferences,

and selection criteria, specified in the Code, but other factors may be added.

Section 42(m)(1)(A)(ii) prevents a housing credit dollar amount from being allocated to a building unless the allocating “agency notifies the chief executive officer (or the equivalent) of the local jurisdiction within which the building is located of such project and provides such individual a reasonable opportunity to comment on the project.”

ANALYSIS

Although Agency believes that the local veto provisions in its QAP respond to the requirement in § 42(m)(1)(A)(ii), Agency misinterprets this provision. Agency’s interpretation is inconsistent with (1) the language of § 42(m)(1)(A)(ii) and (2) general Federal fair-housing policy.

1. The Language of Section 42(m)(1) (A)(ii)

The Code requires that each local jurisdiction have a “reasonable opportunity” to comment on any proposal to allocate a housing credit dollar amount to a project within that jurisdiction. This requirement is not the same as requiring the jurisdiction’s approval. The clear meaning of “reasonable opportunity to comment” is that the jurisdiction has a chance to weigh in, or even object, but not that every objection will be honored.

Thus, § 42(m)(1)(A)(ii) ensures only the opportunity for local input to the allocation decision. It does not authorize an allocating agency to abandon the responsibility to exercise its own judgment. In particular, it does not require or encourage allocating agencies to bestow veto power over LIHTC projects either on local communities or on local public officials.

1Section 147(f) requires public approval for all issuances of proposed qualified private activity bonds, including bonds used to finance qualified residential rental projects. These bond issuances must be approved both (a) by the governmental unit which is to issue the bonds or on behalf of which they are to be issued (issuer approval) and (b) by a governmental unit the geographic jurisdiction of which includes the site of the facility to be financed (host approval). Although the host-approval component of public approval means approval by a governmental unit whose jurisdiction includes the site of the financed facility, “public approval” (including “host approval”) does not include “local approval.” To illustrate, bonds issued by (or on behalf of) a State may be approved by the State alone in its capacities as issuer and as a host governmental unit whose jurisdiction includes the site of the financed facility. So there is no requirement for local approval by the county or municipality in which the financed facility is to be located. See § 5f.103–2(c) of the Temporary Income Tax Regulations Under the Tax Equity and Fiscal Responsibility Act of 1982. Thus, § 42(m)(1)(A)(ii) neither requires nor encourages local approval for these bond-financed projects, although § 147 does require public approval for issuing the bonds.

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2. General Federal Fair-Housing Policy

Agency’s practice of requiring local approval has created a pattern of allocating housing credit dollar amounts that has perpetuated residential racial segregation in State X . Agency’s practice, therefore, has a discriminatory effect based on race, which is a protected characteristic under 42 USC 3604. Thus, the practice is inconsistent with at least the policy ² of the Fair Housing Act of 1968 (the Act), 42 USC 3601–3619. Nevertheless, Agency interprets § 42 (m)(1)(A)(ii) as forcing Agency to require local approval, despite the discriminatory effect of that practice in State X . This interpretation assumes that, in creating LIHTCs, Congress silently reversed wellestablished, fundamental Federal fairhousing policy. Eighteen years before the 1986 enactment of § 42, the Act had firmly established this policy. See 42 USC 3601 (“ Declaration of policy. It is the policy of the United States to provide, within constitutional limitations, for fair housing throughout the United States.”). Without legislative commentary or other persuasive evidence, one cannot conclude that Congress intended to reverse this well-established policy.

In the summer of 2015, the United States Department of Housing and Urban Development (HUD) issued new final regulations regarding obligations under the Act to Affirmatively Further Fair Housing (AFFH). See 80 Fed. Reg. 42272 (2015) (issuing HUD’s AFFH final rule, which is codified at various locations in 24 CFR Parts 5, 91, 92, 570, 574, 576, and 903). Discussing the many decades during which AFFH had been firmly established Federal policy, HUD states in the preamble, “ From its inception [in 1968], the

[Act] . . . has not only prohibited discrimination in housing related activities and transactions but has also provided, through the duty to affirmatively further fair housing . . ., for meaningful actions to be taken to overcome the legacy of segregation, unequal treatment, and historic lack of access to opportunity in housing.” Id. at 42272 (emphasis added).

AFFH was firmly established Federal housing policy when § 42 was enacted,

and there is no suggestion that Congress intended § 42 to diverge from that policy. Section 42(m)(1)(A)(ii), therefore, does not require or even encourage conduct inconsistent with that policy.

HOLDING

When state housing credit agencies allocate housing credit dollar amounts, § 42(m)(1)(A)(ii) does not require or encourage these agencies to reject all proposals that do not obtain the approval of the locality where the project developer proposes to place the project. That is, it neither requires nor encourages housing credit agencies to honor local vetoes.

DRAFTING INFORMATION

The principal author of this revenue ruling is James W. Rider of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, please contact Mr. Rider at (202) 3174137 (not a toll-free number).

Rev. Rul. 2016–30

This revenue ruling provides the dollar amounts, increased by the 2017 inflation adjustment, for § 1274A of the Internal Revenue Code.

BACKGROUND

In general, §§ 483 and 1274 determine the principal amount of a debt instrument given in consideration for the sale or exchange of nonpublicly traded property. In addition, any interest on a debt instrument subject to § 1274 is taken into account under the original issue discount provisions of the Code. Section 1274A, however, modifies the rules under §§ 483 and 1274 for certain types of debt instruments. In the case of a “qualified debt instrument,” the discount rate used for purposes of §§ 483 and 1274 may not exceed nine percent, compounded semiannually. Section 1274A(b) defines a qualified debt instrument as any debt instrument given in consideration for the sale or exchange of property (other than new § 38 property within the meaning of § 48(b), as in effect

on the day before the date of enactment of the Revenue Reconciliation Act of 1990) if the stated principal amount of the instrument does not exceed the amount specified in § 1274A(b). For debt instruments arising out of sales or exchanges before January 1, 1990, this amount is $2,800,000.

In the case of a “cash method debt instrument,” as defined in § 1274A(c), the borrower and lender may elect to use the cash receipts and disbursements method of accounting. In particular, for any cash method debt instrument, § 1274 does not apply, and interest on the instrument is accounted for by both the borrower and the lender under the cash receipts and disbursements method of accounting. A cash method debt instrument is a qualified debt instrument that meets the following additional requirements: (A) in the case of a debt instrument arising out of a sale or exchange before January 1, 1990, the stated principal amount does not exceed $2,000,000; (B) the lender does not use an accrual method of accounting and is not a dealer with respect to the property sold or exchanged; (C) § 1274 would have applied to the debt instrument but for an election under § 1274A(c); and (D) an election under § 1274A(c) is jointly made with respect to the debt instrument by the borrower and the lender. Section 1.1274A–1(c)(1) of the Income Tax Regulations provides rules concerning the time for, and manner of, making this election.

Section 1274A(d)(2) provides that, for any debt instrument arising out of a sale or exchange during any calendar year after 1989, the dollar amounts stated in § 1274A(b) and § 1274A(c)(2)(A) are increased by the inflation adjustment for the calendar year. Any increase due to the inflation adjustment is rounded to the nearest multiple of $100 (or, if the increase is a multiple of $50 and not of $100, the increase is increased to the nearest multiple of $100). The inflation adjustment for any calendar year is the percentage (if any) by which the CPI for the preceding calendar year exceeds the CPI for calendar year 1988. Section 1274A(d)(2)(B) defines the CPI for any calendar year as the average of the Con

2The practice may also violate specific nondiscrimination provisions of the Act. See Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507 (2015).

December 27, 2016 876 Bulletin No. 2016–52

sumer Price Index as of the close of the 12-month period ending on September 30 of that calendar year.

INFLATION-ADJUSTED AMOUNTS UNDER § 1274A

For debt instruments arising out of sales or exchanges after December 31,

1989, the inflation-adjusted amounts under § 1274A are shown in Table 1.

Rev. Rul. 2016–30 Table 1 Inflation-Adjusted Amounts Under Section 1274A

1274A(c)(2)(A) Amount

Calendar Year of 1274A(b) Amount (cash method Sale or Exchange (qualified debt instrument) debt instrument)

1990 $2,933,200 $2,095,100

1991 $3,079,600 $2,199,700

1992 $3,234,900 $2,310,600

1993 $3,332,400 $2,380,300

1994 $3,433,500 $2,452,500

1995 $3,523,600 $2,516,900

1996 $3,622,500 $2,587,500

1997 $3,723,800 $2,659,900

1998 $3,823,100 $2,730,800

1999 $3,885,500 $2,775,400

2000 $3,960,100 $2,828,700

2001 $4,085,900 $2,918,500

2002 $4,217,500 $3,012,500

2003 $4,280,800 $3,057,700

2004 $4,381,300 $3,129,500

2005 $4,483,000 $3,202,100

2006 $4,630,300 $3,307,400

2007 $4,800,800 $3,429,100

2008 $4,913,400 $3,509,600

2009 $5,131,700 $3,665,500

2010 $5,115,100 $3,653,600

2011 $5,201,300 $3,715,200

2012 $5,339,300 $3,813,800

2013 $5,468,200 $3,905,900

2014 $5,557,200 $3,969,500

2015 $5,647,300 $4,033,800

2016 $5,664,800 $4,046,300

2017 $5,717,400 $4,083,800

Note: These inflation adjustments were computed using the All-Urban, Consumer Price Index, 1982–1984 base, published by the Bureau of Labor Statistics.

Calendar Year of Sale or Exchange

1274A(b) Amount (qualified debt instrument)

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2015–24, 2015–48 I.R.B. 687, is supplemented and superseded.

DRAFTING INFORMATION

The author of this revenue ruling is Bernard Audet of the Office of Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact Bernard

Audet at (202) 317-7053 (not a toll-free number).

Bulletin No. 2016–52 877 December 27, 2016

Section 483.—Interest on Certain Deferred Payments.

This ruling provides the dollar amounts, increased by the 2017 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2015–24 supplemented and superseded. See Rev. Rul. 2016–30, page 876.

Section 1274.—Determina- tion of Issue Price in the Case of Certain Debt Instruments Issued for Property.

This ruling provides the dollar amounts, increased by the 2017 inflation adjustment, for section 1274A of the Code. Rev. Rul. 2015–24 supplemented and superseded. See Rev. Rul. 2016–30, page 876.

26 CFR 1.704–2; 1.707–3 through 1.707–6, and 1.707–9; and 1.752–3: Section 707 regarding dis- guised sales, generally.

T.D. 9787

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Section 707 Regarding Disguised Sales, Generally

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under sections 707 and 752 of the Internal Revenue Code (Code). The final regulations under section 707 provide guidance relating to disguised sales of property to or by a partnership and the final regulations under section 752 provide guidance relating to allocations of excess nonrecourse liabilities of a partnership to partners for disguised sale purposes. The final regulations affect partnerships and their partners.

DATES: Effective date : These regulations are effective on October 5, 2016.

Comment date : Comments will be accepted until January 3, 2017.

Applicability dates : For dates of applicability, see §§ 1.707–9(a)(1) and 1.752– 3(d).

ADDRESSES: Send submissions to: CC: PA:LPD:PR (REG–122855–15), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be handdelivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–122855–15), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, DC, or sent electronically, via the Federal eRulemaking Portal site at http://www. regulations.gov (indicate IRS and REG– 122855–15).

FOR FURTHER INFORMATION CONTACT: Deane M. Burke or Caroline E. Hay at (202) 317-5279 (not a toll-free number).

SUPPLEMENTARY INFORMATION: In addition to these final regulations, the Treasury Department and the IRS are publishing temporary regulations concerning a partner’s share of partnership liabilities for purposes of section 707 (the 707 Temporary Regulations) and the treatment of certain payment obligations under section 752 (the 752 Temporary Regulations) in the Rules and Regulations section in this issue of the Bulletin, and, in the Proposed Rules section in this issue of the Bulletin, proposed regulations (REG–122855–15) that incorporate the text of the temporary regulations, withdraw a portion of a notice of proposed rulemaking (REG–119305– 11) to the extent not adopted by the final regulations, and contain new proposed regulations (the 752 Proposed Regulations) addressing (1) when certain obligations to restore a deficit balance in a partner’s capital account are disregarded under section 704 and (2) when a partnership’s liabilities are treated as recourse liabilities under section 752.

Paperwork Reduction Act

The collection of information contained in these final regulations has been reviewed in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) and approved by the Office of Management

and Budget under control number 15450889. The collection of information in these final regulations under section 707 is in § 1.707–5(a)(7)(ii) (regarding a liability incurred within two years prior to a transfer of property) and is reported on Form 8275, Disclosure Statement. This information is required by the IRS to ensure that section 707(a)(2)(B) of the Code and applicable regulations are properly applied to transfers between a partner and a partnership.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103.

Background

1. Overview

This Treasury decision contains amendments to the Income Tax Regulations (26 CFR part 1) under sections 707 and 752 of the Code related to a notice of proposed rulemaking published on January 30, 2014 in the Federal Register (REG–119305–11, 79 FR 4826) to amend regulations under sections 707 and 752 (the 2014 Proposed Regulations). A public hearing on the 2014 Proposed Regulations was not requested or held, but the Treasury Department and the IRS received written comments. After full consideration of the comments, the final regulations contained in this Treasury decision substantially adopt the 2014 Proposed Regulations under section 707 with revisions to certain proposed rules in response to comments. The revisions to the 2014 Proposed Regulations under section 707 adopted in these final regulations are discussed in the Summary of Comments and Explanation of Revisions section of this preamble. In addition, after considering comments on the 2014 Proposed Regulations under section 752, this Treasury decision adopts as final regulations provisions of the 2014 Proposed Regulations

December 27, 2016 878 Bulletin No. 2016–52

that amend § 1.752–3, revised in response to the comments received. Finally, these final regulations adopt provisions of the 2014 Proposed Regulations revising § 1.704–2(d)(2)(ii) and (m) Example 1, to comport with the provisions in the 752 Proposed Regulations and the 752 Temporary Regulations relating to “bottom dollar payment obligations.”

However, based on a comment received on the 2014 Proposed Regulations requesting that guidance regarding a partner’s share of partnership liabilities apply solely for disguised sale purposes, the Treasury Department and the IRS have reconsidered the rules under § 1.707–5(a)(2) of the 2014 Proposed Regulations for determining a partner’s share of partnership liabilities for purposes of section 707. Accordingly, in a separate Treasury decision (TD 9788), the Treasury Department and the IRS are also publishing the 707 Temporary Regulations that require a partner to apply the same percentage used to determine the partner’s share of excess nonrecourse liabilities under § 1.752–3(a)(3) (with certain limitations) in determining the partner’s share of partnership liabilities for disguised sale purposes. That Treasury decision also contains the 752 Temporary Regulations providing guidance on the treatment of “bottom dollar payment obligations.” Cross-referencing proposed regulations providing additional opportunity for comment are contained in the related notice of proposed rulemaking (REG– 122855–15) published in the Proposed Rules section in this issue of the Bulletin.

Finally, after considering comments on the 2014 Proposed Regulations under section 752, the Treasury Department and the IRS are withdrawing § 1.752–2 of the 2014 Proposed Regulations and are publishing the new 752 Proposed Regulations contained in the related notice of proposed rulemaking (REG–122855–15) published in the Proposed Rules section in this issue of the Bulletin.

2. Summary of Applicable Law

A. Section 707

Section 707 provides rules concerning “disguised sales” of property to or by a partnership. Section 707(a)(2)(B) generally provides that, under regulations prescribed by the Secretary, related transfers

to and by a partnership that, when viewed together, are more properly characterized as a sale or exchange of property, will be treated either as a transaction between the partnership and one who is not a partner or between two or more partners acting other than in their capacity as partners. Generally under § 1.707–3, a transfer of property by a partner to a partnership followed by a transfer of money or other consideration from the partnership to the partner will be treated as a sale of property by the partner to the partnership (a disguised sale), if based on all the facts and circumstances, the transfer of money or other consideration would not have been made but for the transfer of property and, for non-simultaneous transfers, the subsequent transfer is not dependent on the entrepreneurial risks of the partnership.

The existing regulations under section 707, however, provide several exceptions. One exception is in § 1.707–4(d) for reimbursements of capital expenditures. Section 1.707–4(d) excepts transfers of money or other consideration from a partnership to reimburse a partner for certain capital expenditures and costs incurred by the partner from being treated as part of a disguised sale of property under § 1.707–3 (exception for preformation capital expenditures). The exception for preformation capital expenditures generally applies only to the extent that the reimbursed capital expenditures do not exceed 20 percent of the fair market value of the property transferred by the partner to the partnership (the 20-percent limitation). The 20percent limitation, however, does not apply if the fair market value of the transferred property does not exceed 120 percent of the partner’s adjusted basis in the property at the time of the transfer (the 120-percent test). Another exception is in § 1.707–5(b), which generally provides that if a partner transfers property to a partnership, the partnership incurs a liability and all or a portion of the proceeds of that liability are traceable to a transfer of money or other consideration to the partner, the transfer of money or other consideration is taken into account for purposes of § 1.707–3 only to the extent that the amount of money or the fair market value of other consideration exceeds the partner’s allocable share of

the partnership liability (the debt-financed distribution exception).

In addition to the exception for preformation capital expenditures and the debtfinanced distribution exception, the disguised sale rules generally exclude certain types of liabilities from disguised sale treatment. Generally under § 1.707– 5(a)(5), a partnership’s assumption of a qualified liability, or a partnership’s taking property subject to a qualified liability, in connection with a transfer of property by a partner to the partnership is not treated as part of a disguised sale. Section 1.707–5(a)(6) of the existing regulations defines four types of liabilities that are qualified liabilities. One type of qualified liability is a liability that is allocable under the rules of § 1.163–8T to capital expenditures with respect to the property transferred to the partnership. Another type is one incurred in the ordinary course of the trade or business in which property transferred to the partnership was used or held, but only if all of the assets that are material to that trade or business are transferred to the partnership. The other two types of qualified liabilities are liabilities incurred more than two years before the transfer of property to the partnership and liabilities incurred within two years of the transfer of the property to the partnership, but not in anticipation of transfer to the partnership. In order to qualify as one of these types of liabilities, it is required that the liability encumber the transferred property.

B. Determining a partner’s share of liability for disguised sale purposes

In determining a partner’s share of a partnership liability for disguised sale purposes, the existing regulations under section 707 prescribe separate rules for a partnership’s recourse liability and a partnership’s nonrecourse liability. Under § 1.707–5(a)(2)(i), a partner’s share of a partnership’s recourse liability equals the partner’s share of the liability under section 752 and the regulations thereunder. A partnership liability is a recourse liability under section 707 to the extent that the obligation is a recourse liability under § 1.752–1(a)(1). Under § 1.707–5(a)(2) (ii), a partner’s share of a partnership’s nonrecourse liability is determined by ap

Bulletin No. 2016–52 879 December 27, 2016

plying the same percentage used to determine the partner’s share of the excess nonrecourse liabilities under § 1.752– 3(a)(3). Generally, a partner’s share of excess nonrecourse liabilities is determined in accordance with the partner’s share of partnership profits taking into account all facts and circumstances relating to the economic arrangement of the partners. A partnership liability is a nonrecourse liability under section 707 to the extent that the obligation is a nonrecourse liability under § 1.752–1(a)(2). Also for purposes of the rules under section 707, a partner’s share of a liability assumed or taken subject to by a partnership is determined by taking into account certain subsequent reductions in the partner’s share of the liability under an anticipated reduction rule.

C. Section 752 allocation of excess nonrecourse liabilities

Section 1.752–3(a)(3) provides various methods to determine a partner’s share of excess nonrecourse liabilities. Under one method, a partner’s share of excess nonrecourse liabilities of the partnership is determined in accordance with the partner’s share of partnership profits, which takes into account all facts and circumstances relating to the economic arrangement of the partners. For this purpose, the partnership agreement may specify the partners’ interests in partnership profits so long as the interests so specified are reasonably consistent with allocations (that have substantial economic effect under the section 704(b) regulations) of some other significant item of partnership income or gain (the significant item method). Alternatively, excess nonrecourse liabilities may be allocated among partners in a manner that deductions attributable to those liabilities are reasonably expected to be allocated (alternative method). Additionally, the partnership may first allocate an excess nonrecourse liability to a partner up to the amount of built-in gain that is allocable to the partner on section 704(c) property (as defined under § 1.704–3(a)(3)(ii)) or property for which reverse section 704(c) allocations are applicable (as described in § 1.704– 3(a)(6)(i)) where such property is subject to the nonrecourse liability, to the extent

that such built-in gain exceeds the gain described in § 1.752–3(a)(2) with respect to such property (additional method). This additional method does not apply in determining a partner’s share of a liability for disguised sale purposes.

3. The 2014 Proposed Regulations

As discussed in greater detail in the Summary of Comments and Explanation of Provisions section of this preamble, the 2014 Proposed Regulations, as they pertained to section 707, were intended to address certain deficiencies and ambiguities under existing regulations §§ 1.707–3, 1.707–4, and 1.707–5. The 2014 Proposed Regulations, among other things, provided rules that (1) clarified that in the case of multiple property contributions to a partnership, the exception for preformation capital expenditures applies on a property-by-property basis, (2) clarified the definition of capital expenditures for the purpose of the exception for preformation capital expenditures, (3) coordinated the exception for preformation capital expenditures and the rules regarding liabilities traceable to capital expenditures, (4) added a new type of qualified liability, (5) prescribed an ordering rule for applying the debt-financed distribution exception where other exceptions also potentially applied, (6) specified that a reduction that is subject to the entrepreneurial risks of the partnership is not an anticipated reduction for purposes of the rule taking into account an anticipated reduction in a partner’s share of a liability, (7) clarified, with respect to tiered partnerships, the application of the debt-financed distribution exception and the application of the rules for qualified liabilities, and (8) extended the principles of § 1.752–1(f) providing for netting of increases and decreases in a partner’s share of liabilities resulting from a single transaction to the disguised sale rules.

Summary of Comments and Explanation of Revisions

1. Preformation Capital Expenditures

As explained above, § 1.707–4(d) excepts transfers of money or other consideration from a partnership to reimburse a partner for certain capital expenditures

and costs incurred by the partner from being treated as part of a disguised sale of property under § 1.707–3, subject to the 20 percent limitation and the 120 percent test.

The 2014 Proposed Regulations under section 707 provided that the determination of whether the 20 percent limitation and the 120 percent test apply to reimbursements of capital expenditures is made, in the case of multiple property transfers, separately for each property that qualifies for the exception (property-byproperty rule). Commenters generally supported the property-by-property rule but noted that in some circumstances the approach may be burdensome and recommended limited aggregation of certain property. After considering the comments, the Treasury Department and the IRS have determined that limited aggregation of property is warranted in certain cases to reduce the burden of separately accounting for each property under the propertyby-property rule. Thus, the final regulations adopt the proposed rule but permit aggregation to the extent: (i) the total fair market value of the aggregated property (of which no single property’s fair market value exceeds 1 percent of the total fair market value of such aggregated property) is not greater than the lesser of 10 percent of the total fair market value of all property, excluding money and marketable securities (as defined under section 731(c)), transferred by the partner to the partnership, or $1,000,000; (ii) the partner uses a reasonable aggregation method that is consistently applied; and (iii) the aggregation of property is not part of a plan a principal purpose of which is to avoid §§ 1.707–3 through 1.707–5. Additionally, the final regulations add an example to illustrate the application of the property-by-property rule when a partner transfers both tangible and intangible property to a partnership.

In addition to the property-by-property rule, the 2014 Proposed Regulations provided a rule coordinating the exception for preformation capital expenditures with a rule regarding one type of qualified liability (within the meaning of § 1.707– 5(a)(6)) under § 1.707–5(a)(6)(i)(C). Under § 1.707–5(a)(6)(i)(C), a liability that is allocable under the rules of § 1.163–8T to capital expenditures with respect to the

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property transferred to the partnership by the partner is a qualified liability (capital expenditure qualified liability). Generally under § 1.707–5(a)(5), a partnership’s assumption of a qualified liability, or a partnership’s taking property subject to a qualified liability, in connection with a transfer of property by a partner to the partnership is not treated as part of a disguised sale. To coordinate the exception for preformation capital expenditures and the capital expenditure qualified liability rule under § 1.707–5(a)(6)(i)(C), the 2014 Proposed Regulations provided that to the extent a partner funded a capital expenditure through a capital expenditure qualified liability and economic responsibility for that borrowing shifts to another partner, the exception for preformation capital expenditures would not apply because there is no outlay by the partner to reimburse.

A commenter suggested that the final regulations broaden this proposed rule to include any qualified liability under § 1.707–5(a)(6) used to fund capital expenditures, not just a capital expenditure qualified liability under § 1.707–5(a) (6)(i)(C). The final regulations adopt the suggestion and provide that to the extent any qualified liability under § 1.707– 5(a)(6) is used by a partner to fund capital expenditures and economic responsibility for that borrowing shifts to another partner, the exception for preformation capital expenditures does not apply. Under the final regulations, capital expenditures are treated as funded by the proceeds of a qualified liability to the extent the proceeds are either traceable to the capital expenditures under § 1.163–8T or are actually used to fund the capital expenditures, irrespective of the tracing requirements under § 1.163–8T. However, under an anti-abuse provision, if capital expenditures and a qualified liability are incurred under a plan a principal purpose of which is to avoid the requirements of this coordinating rule, the capital expenditures are deemed funded by the qualified liability.

Finally, it has come to the attention of the Treasury Department and the IRS that some partners have taken the position that the disclosure requirements of § 1.707– 3(c)(2) are not applicable to situations in which the partners believe that one or

more of the exceptions for disguised sale treatment are applicable, including the exception for preformation capital expenditures. The Treasury Department and the IRS remind taxpayers that disclosure is required whenever money or other consideration is transferred by a partnership to a partner within two years of the transfer of property by the partner to the partnership, except in the limited situations described in § 1.707–3(c)(2)(iii).

Notwithstanding the final regulations, the Treasury Department and the IRS continue to study the appropriateness of the exception for preformation capital expenditures. Specifically, because the receipt of “boot” in the context of other nonrecognition transactions, for example, transfers of property to corporations in section 351 transactions, is generally taxable to the transferor, the Treasury Department and the IRS are considering whether the exception for preformation capital expenditures is appropriate and request comments on whether the regulations should continue to include the exception, including any policy justifications for keeping the exception, and on the effects that removing the exception may have. In addition, the Treasury Department and the IRS are concerned that partners and partnerships may be attempting to apply the exception in an unintended manner such that the exception may be subject to potential abuses in certain circumstances that could effectively refresh expenditures not incurred within the two-year period preceding a contribution to a partnership (for example, where an entity treats as a capital expenditure an issuance of its own interest in exchange for property contributed to it in a nonrecognition transaction). Also, the Treasury Department and the IRS are aware that a contribution to a partnership of an intangible such as goodwill, may, in certain circumstances, give rise to an unintended benefit under the exception. The Treasury Department and the IRS are studying the potential for abuse under the exception for preformation capital expenditures, including any unintended benefits with respect to intangibles, for which the final regulations reserve a section under the exception.

2. Partner’s Share of Partnership Liabilities

As is discussed in the preamble to the 707 Temporary Regulations, after considering the comments on the 2014 Proposed Regulations under both sections 707 and 752, the Treasury Department and the IRS have determined that, for disguised sale purposes only, it is appropriate for partners to determine their share of any liability, whether recourse or nonrecourse, in the manner in which excess nonrecourse liabilities are allocated under § 1.752– 3(a)(3). Accordingly, under the 707 Temporary Regulations a partner’s share of any partnership liability for disguised sale purposes is determined using the same percentage used to determine the partner’s share of the partnership’s excess nonrecourse liabilities under § 1.752–3(a)(3) based on the partner’s share of partnership profits. Thus, the 707 Temporary Regulations treat all partnership liabilities, whether recourse or nonrecourse, as nonrecourse liabilities solely for disguised sale purposes under section 707. These final regulations, however, provide limitations on the available allocation methods under § 1.752–3(a)(3), applicable solely for disguised sale purposes under section 707, for determining a partner’s share of excess nonrecourse liabilities.

For purposes of allocating excess nonrecourse liabilities under § 1.752–3(a)(3), proposed § 1.752–3(a)(3) removed the significant item method and the alternative method, but provided a new approach based on a partner’s liquidation value percentage. Under the 2014 Proposed Regulations, a partner’s liquidation value percentage was a ratio (expressed as a percentage) of the liquidation value of the partner’s interest in the partnership to the liquidation value of all of the partners’ interests in the partnership. The liquidation value of a partner’s interest in a partnership was defined as the amount of cash the partner would receive with respect to the interest if, immediately after formation of the partnership or the occurrence of an event described in § 1.704–1(b)(2)(iv) ( f )( 5 ), as the case may be, the partnership sold all of its assets for cash equal to the fair market value of such property (taking into account section 7701(g)), satisfied all of its liabilities (other than those described

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in § 1.752–7), paid an unrelated third party to assume all of its § 1.752–7 liabilities in a fully taxable transaction, and then liquidated.

Commenters expressed concerns with the scope of changes to § 1.752–3(a)(3) in the 2014 Proposed Regulations and suggested that such changes should be adopted, if at all, for disguised sale purposes only. Additionally, one commenter noted that in all but the simplest of partnerships the liquidation value percentage may have little or no relationship to the partners’ share of profits and therefore is inconsistent with the general rule for allocating excess nonrecourse liabilities. Another commenter thought the liquidation value percentage approach could be subject to manipulation. Partially in response to commenters’ concerns about both the liquidation value percentage and the relationship between the methods and certain rules under § 1.704–2, the final regulations under § 1.752–3 retain the significant item method and the alternative method, but do not adopt the liquidation value percentage approach for determining partners’ interests in partnership profits. However, the Treasury Department and the IRS have concluded that the allocation of excess nonrecourse liabilities in accordance with the significant item method and the alternative method has been abused by partnerships and their partners for disguised sale purposes under section 707. Therefore, as suggested by some commenters, the final regulations under § 1.752–3 provide that, along with the additional method, the significant item method and the alternative method do not apply for purposes of determining a partner’s share of a partnership liability for disguised sale purposes.

In addition to the changes to § 1.752–3, the final regulations revise Example 1 under § 1.707–5(f) and Example 2 under § 1.707–6(d) to update some of the cross references to the liability allocation rule in the 707 Temporary Regulations. The final regulations also revise Examples 5 and 6 under § 1.707–5(f) and Examples 10 and 12 under proposed § 1.707–5(f) to remove the assumption that the liability is a recourse liability.

Finally, because, under the 707 Temporary Regulations, a partner’s share of a partnership liability for disguised sale pur

poses is based on the partner’s share of partnership profits, a partner cannot be allocated 100 percent of the liabilities for purposes of section 707. As a result, some amount of the liabilities, both qualified liabilities and nonqualified liabilities, may shift among partners. The shifting of even a minimal amount of a nonqualified liability that triggers a disguised sale can cause a portion of the qualified liability to be treated as consideration under § 1.707– 5(a)(5). Section 1.707–5(a)(5) provides a special rule when a partnership’s assumption of, or taking property subject to, a qualified liability is treated as a transfer of consideration made pursuant to a sale due solely to the partnership’s assumption of, or taking property subject to, a liability other than a qualified liability. To mitigate the effect of the allocation method for disguised sales, the final regulations include a rule under § 1.707–5(a)(5) that does not take into account qualified liabilities as consideration in transfers of property treated as a sale when the total amount of all liabilities other than qualified liabilities that the partnership assumes or takes subject to is the lesser of 10 percent of the total amount of all qualified liabilities the partnership assumes or takes subject to, or $1,000,000.

3. Step-in-the-Shoes Rule Regarding Preformation Capital Expenditures and Liabilities Incurred by Another Person

For purposes of applying the exception for preformation capital expenditures and determining whether a liability is a qualified liability under § 1.707–5(a)(6), commenters suggested that the final regulations clarify how the rules under §§ 1.707–4(d) and 1.707–5 apply if the transferor partner acquired the transferred property in a nonrecognition transaction, assumed a liability in a nonrecognition transaction, or took property subject to a liability in a nonrecognition transaction from a person who incurred the preformation capital expenditures or the liability. Commenters noted that Rev. Rul. 2000– 44 (2000–2 CB 336) allowed “step-inthe-shoes” treatment when a corporation that acquires assets in a transaction described in section 381(a) succeeds to the status of the transferor corporation for purposes of applying the exception for

preformation capital expenditures and determining whether a liability is a qualified liability under § 1.707–5(a)(6). Similar to a corporation that acquires assets in a section 381(a) transaction, a partner that acquires property, assumes a liability, or takes property subject to a liability from another person in connection with certain other nonrecognition transactions should succeed to the status of the other person for purposes of applying the exception for preformation capital expenditures and determining whether a liability is a qualified liability under § 1.707–5(a)(6). Thus, the final regulations provide a “step-in-theshoes” rule for applying the exception for preformation capital expenditures and for determining whether a liability is a qualified liability under § 1.707–5(a)(6) when a partner acquires property, assumes a liability, or takes property subject to a liability from another person in connection with a nonrecognition transaction under section 351, 381(a), 721, or 731. As a result, Rev. Rul. 2000–44, relating to preformation capital expenditures and qualified liabilities involved in a transaction described in section 381(a), is superseded by these final regulations.

4. Anticipated Reduction

Under the existing regulations, for purposes of the rules under section 707, a partner’s share of a liability assumed or taken subject to by a partnership is determined by taking into account certain subsequent reductions in the partner’s share of the liability. See § 1.707–5(a)(3) and (b)(2)(iii). The 2014 Proposed Regulations provided that if, within two years of the partnership assuming, taking property subject to, or incurring a liability, a partner’s share of the liability is reduced due to a decrease in the partner’s or a related person’s net value, then the reduction will be presumed to be anticipated and must be disclosed under § 1.707–8, unless the facts and circumstances clearly establish that the decrease in the net value was not anticipated. Because the 707 Temporary Regulations provide that a partner’s share of any liability for disguised sale purposes is determined in accordance with the partner’s interest in partnership profits under § 1.752–3(a)(3), net value is not relevant in determining a partner’s share of part

December 27, 2016 882 Bulletin No. 2016–52

nership liabilities for disguised sale purposes. Accordingly, the final regulations do not retain the net value component of the anticipated reduction of share of liabilities rule.

5. Tiered Partnerships

The existing regulations in § 1.707– 5(e), and § 1.707–6(b) by applying rules similar to § 1.707–5(e), provide only a limited tiered-partnership rule for cases in which a partnership succeeds to a liability of another partnership. The 2014 Proposed Regulations added additional rules regarding tiered partnerships. One rule related to the characterization of liabilities attributable to a contributed partnership interest. Under that proposed rule, a contributing partner’s share of a liability from a lower-tier partnership is treated as a qualified liability to the extent the liability would be a qualified liability had the liability been assumed or taken subject to by the upper-tier partnership in connection with a transfer of all of the lower-tier partnership’s property to the upper-tier partnership by the lower-tier partnership. The final regulations retain this proposed rule but, in response to comments, address whose intent, the partner’s or the lowertier partnership’s, is relevant when applying the anticipated transfer of property rule in § 1.707–5(a)(6) for purposes of determining whether a liability constitutes a qualified liability. The comments suggested that it should be the intent of the partner as to whether the partner anticipated transferring its interest in the lowertier partnership to the upper-tier partnership at the time the lower-tier partnership incurred the liability.

The Treasury Department and the IRS agree that the intent of the partner is the appropriate inquiry in applying the anticipated transfer of property rule under § 1.707–5(a)(6) in the context of contributions of a partnership interest. Thus, the final regulations provide that in determining whether a liability would be a qualified liability under § 1.707–5(a)(6)(i)(B) or (E), the determination of whether the liability was incurred in anticipation of the transfer of property to the upper-tier partnership is based on whether the partner in the lower-tier partnership anticipated transferring the partner’s interest in the

lower-tier partnership to the upper-tier partnership at the time the liability was incurred by the lower-tier partnership.

Commenters also requested that the final regulations allow for the application of the exception for preformation capital expenditures when a person incurs capital expenditures with respect to property, transfers the property to a partnership (lower-tier partnership), and then transfers an interest in the lower-tier partnership to another partnership (upper-tier partnership) within the two-year period in which the person incurred the capital expenditures. The Treasury Department and the IRS have determined that such a rule is warranted, subject to certain limitations. Therefore, the final regulations provide that, in such circumstances, and provided such expenditures are not otherwise reimbursed to the person, the upper-tier partnership “steps in the shoes” of the person with respect to the property for which the capital expenditures were incurred and may be reimbursed for the capital expenditures by the lower-tier partnership to the same extent that the person could have been reimbursed by the lower-tier partnership. In addition, the person is deemed to have transferred the property, rather than the partnership interest, to the upper-tier partnership for purposes of the exception for preformation capital expenditures and, accordingly, may be reimbursed by the upper-tier partnership to the extent the person could have been previously reimbursed by the lower-tier partnership. The aggregate reimbursements for capital expenditures under this rule cannot exceed the amount that the person could have been reimbursed for such capital expenditures under § 1.707–4(d)(1).

6. Treatment of Liabilities in Assets- Over Merger

The 2014 Proposed Regulations extended the netting principles of § 1.752– 1(f) in a provision for determining the effect of an assets-over merger or consolidation under the disguised sale rules. Although comments were generally favorable, they did request clarification on the specific rule provided.

Upon further consideration of the area, the Treasury Department and the IRS have determined that no rule on the treat

ment of liabilities in an assets-over merger is needed in § 1.707–5. In many instances, liabilities involved in such a merger will constitute qualified liabilities, especially given that the final regulations adopt a “step-in-the-shoes” rule for liabilities acquired by a partner from another person in certain nonrecognition transactions. In cases in which liabilities involved in an assets-over merger do not constitute qualified liabilities, the facts and circumstances test in § 1.707–3 should reach the proper result. Thus, the final regulations do not retain the proposed rule for partnership assets-over mergers or consolidations.

7. Disguised Sales of Property by a Partnership to a Partner

Under § 1.707–6, rules similar to those provided in § 1.707–3 apply in determining whether a transfer of property by a partnership to a partner and one or more transfers of money or other consideration by that partner to the partnership are treated as a disguised sale of property, in whole or in part, to the partner. The Treasury Department and the IRS requested in the preamble to the 2014 Proposed Regulations comments on whether, for purposes of § 1.707–6, it is inappropriate to take into account a transferee partner’s share of a partnership liability immediately prior to a distribution if the transferee partner did not have economic exposure with respect to the partnership liability for a meaningful period of time before appreciated property is distributed to that partner subject to the liability. Commenters suggested that § 1.707–6 should be amended to take into account the transitory nature of a partner’s share of nonqualified liabilities.

Because under the 707 Temporary Regulations a partner’s share of all liabilities is determined for disguised sale purposes in accordance with the partner’s interest in partnership profits under § 1.752–3(a)(3), the transitory nature of a partner’s share of nonqualified liabilities is no longer an issue. Under that allocation method, an allocation of a 100 percent share of a liability to a partner immediately before a transfer of property by the partnership to the partner in which the transferee partner assumes the liability

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will not be taken into account. Therefore, the final regulations do not make any changes to the rules under § 1.707–6, other than revising Example 2 under § 1.707–6(d) to update a cross reference to the liability allocation rule in the 707 Temporary Regulations.

Effective/Applicability Dates

With respect to amendments to §§ 1.707– 3 through 1.707–6, the final regulations under section 707 apply to any transaction with respect to which all transfers occur on or after October 5, 2016.

With respect to amendments to § 1.752–3, the final regulations under section 752 apply to liabilities that are incurred by a partnership, that a partnership takes property subject to, or that are assumed by a partnership on or after October 5, 2016, other than liabilities incurred by a partnership, that a partnership takes property subject to, or that are assumed by a partnership pursuant to a written binding contract in effect prior to that date.

Effect on Other Documents

The following publication is superseded on October 5, 2016: Rev. Rul. 2000–44 (2000–2 CB 336).

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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. It is hereby certified that the collection of information in these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that the amount of time necessary to report the required information will be minimal in that it requires partners to provide information they already maintain or can easily obtain to the IRS. Moreover, it should take a partner no more than 1 hour to satisfy the information requirement in these regulations. Accordingly, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6)

does not apply. Pursuant to section 7805(f) of the 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 business.

Drafting Information

The principal authors of these regulations are Deane M. Burke and Caroline E. Hay of the Office of the Associate Chief Counsel (Passthroughs & Special Industries), IRS. However, other personnel from the Treasury Department and the IRS participated in their development.

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Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 - - Sections 1.707–2 through 1.707–9 also issued under 26 U.S.C. 707(a)(2)(B).

§ 1.704–2 [Amended]

Par. 2. Section 1.704–2 is amended by:

1. Removing the language “and (vii)” in paragraph (d)(2)(ii).

2. Removing the language “ Example (1)(viii) and (ix)” in paragraph (i)(2) and adding the language “ Example (1)(vii) and (viii)” in its place.

3. Removing the language “ Example (1)(viii)” in paragraph (i)(5) and adding the language “ Example (1)(vii)” in its place.

4. Removing Example (1)(vii) in paragraph (m) and redesignating Examples (1)(viii) and (ix) as Examples (1)(vii) and (viii) respectively.

5. Removing the language “ Example (1)(viii)” in newly redesignated Example (1)(viii) in paragraph (m) and adding the language “ Example (1)(vii)” in its place.

Par. 3. Section 1.707–0 is amended by:

1. Adding entries for §§ 1.707–4(d)(1), (d)(2) through (4), (d)(4)(i) and (ii), (d)(5) and (6), and (f).

2. Adding entries for §§ 1.707–5(a)(8) and (b)(3).

The additions read as follows:

§ 1.707–0 Table of contents .

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§ 1.707–4 Disguised sales of property to partnership; special rules applicable to guaranteed payments, preferred returns, operating cash flow distributions, and reimbursements of preformation expenditures .

• • • • (d) - - (1) In general. (2) Capital expenditures incurred by another person. (3) Contribution of a partnership interest with capital expenditures property. (4) Special rule for qualified liabilities. (i) In general. (ii) Anti-abuse rule. (5) Scope of capital expenditures. (6) Example.
• • • • (f) Ordering rule cross reference.

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§ 1.707–5 Disguised sales of property to partnership; special rules relating to liabilities .

(a) - - (8) Liability incurred by another person. (b) - - (3) Ordering rule.

• • • • Par. 4. Section 1.707–4 is amended by:

1. Redesignating the text of paragraph (d) introductory text after its subject heading as paragraph (d)(1) and adding a paragraph (d)(1) subject heading.

2. Redesignating paragraph (d)(1) as paragraph (d)(1)(i).

3. Redesignating paragraph (d)(2) introductory text as paragraph (d)(1)(ii).

4. Redesignating paragraph (d)(2)(i) as paragraph (d)(1)(ii)(A).

5. Redesignating paragraph (d)(2)(ii) as paragraph (d)(1)(ii)(B) and revising it.

6. Adding reserved paragraph (d) (1)(ii)(C) and paragraphs (d)(2) through (6) and (f).

The additions and revisions read as follows:

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§ 1.707–4 Disguised sales of property to partnership; special rules applicable to guaranteed payments, preferred returns, operating cash flow distributions, and reimbursements of preformation expenditures .

• • • • (d) - - (1) In general . - - (ii) - - (B) Property transferred to the partnership by the partner, but only to the extent the reimbursed capital expenditures do not exceed 20 percent of the fair market value of such property at the time of the transfer (the 20-percent limitation). However, the 20-percent limitation of this paragraph (d)(1)(ii)(B) does not apply if the fair market value of the transferred property does not exceed 120 percent of the partner’s adjusted basis in the transferred property at the time of the transfer (the 120-percent test). This paragraph (d)(1)(ii)(B) shall be applied on a property-by-property basis, except that a partner may aggregate any of the transferred property under this paragraph (d)(1) to the extent—

( 1 ) The total fair market value of such aggregated property (of which no single property’s fair market value exceeds 1 percent of the total fair market value of such aggregated property) is not greater than the lesser of 10 percent of the total fair market value of all property, excluding money and marketable securities (as defined under section 731(c)), transferred by the partner to the partnership, or $1,000,000;

( 2 ) The partner uses a reasonable aggregation method that is consistently applied; and

( 3 ) Such aggregation of property is not part of a plan a principal purpose of which is to avoid §§ 1.707–3 through 1.707–5.

(C) [Reserved]. (2) Capital expenditures incurred by another person . For purposes of paragraph (d)(1) of this section, a partner steps in the shoes of a person (to the extent the person was not previously reimbursed under paragraph (d)(1) of this section) with respect to capital expenditures the person incurred with respect to property transferred to the partnership by the partner to the extent the partner acquired the property from the person in a nonrecognition

transaction described in section 351, 381(a), 721, or 731. (3) Contribution of a partnership inter- est with capital expenditures property . If a person transfers property with respect to which the person incurred capital expenditures (capital expenditures property) to a partnership (lower-tier partnership) and, within the two-year period beginning on the date upon which the person incurred the capital expenditures, transfers an interest in the lower-tier partnership to another partnership (upper-tier partnership) in a nonrecognition transaction under section 721, the upper-tier partnership steps in the shoes of the person who transferred the capital expenditures property to the lower-tier partnership with respect to the capital expenditures that are not otherwise reimbursed to the person. The upper-tier partnership may be reimbursed by the lower-tier partnership under paragraph (d)(1) of this section to the extent the person could have been reimbursed for the capital expenditures by the lower-tier partnership under paragraph (d)(1) of this section. In addition, for purposes of paragraph (d)(1) of this section, the person is deemed to have transferred the capital expenditures property to the upper-tier partnership and may be reimbursed by the upper-tier partnership under paragraph (d)(1) of this section to the extent the person could have been reimbursed for the capital expenditures by the lower-tier partnership under paragraph (d)(1) of this section and has not otherwise been previously reimbursed. The aggregate reimbursements for capital expenditures under this paragraph (d)(3) shall not exceed the amount that the person could have been reimbursed for such capital expenditures under paragraph (d)(1) of this section.

(4) Special rule for qualified liabili- ties —(i) In general . For purposes of paragraph (d)(1) of this section, if capital expenditures were funded by the proceeds of a qualified liability defined in § 1.707– 5(a)(6)(i) that a partnership assumes or takes property subject to in connection with a transfer of property to the partnership by a partner, a transfer of money or other consideration by the partnership to the partner is not treated as made to reimburse the partner for such capital expenditures to the extent the transfer of money or other consideration by the partnership

to the partner exceeds the partner’s share of the qualified liability (as determined under § 1.707–5(a)(2), (3), and (4)). Capital expenditures are treated as funded by the proceeds of a qualified liability to the extent the proceeds are either traceable to the capital expenditures under § 1.163–8T or were actually used to fund the capital expenditures, irrespective of the tracing requirements under § 1.163–8T.

(ii) Anti-abuse rule . If capital expenditures and a qualified liability are incurred under a plan a principal purpose of which is to avoid the requirements of paragraph (d)(4)(i) of this section, the capital expenditures are deemed funded by the qualified liability.

(5) Scope of capital expenditures . For purposes of this section and § 1.707–5, the term capital expenditures has the same meaning as the term capital expenditures has under the Internal Revenue Code and applicable regulations, except that it includes capital expenditures taxpayers elect to deduct, and does not include deductible expenses taxpayers elect to treat as capital expenditures.

(6) Example . The following example illustrates the application of paragraph (d) of this section:

Example . Intangible treated as separate prop- erty . (i) Z transfers to a partnership a business the material assets of which include a tangible asset and goodwill from the reputation of the business. At the time Z transfers the business to the partnership, the tangible asset has a fair market value of $550,000 and an adjusted basis of $450,000. The goodwill is a section 197 intangible with a fair market value of $100,000 and an adjusted basis of $0. Z incurred $130,000 of capital expenditures with respect to improvements to the tangible asset (which amount is reflected in its adjusted basis) one year preceding the transfer. Z would like to be reimbursed by the partnership for the capital expenditures with an amount that qualifies for the exception for reimbursement of preformation expenditures under paragraph (d)(1) of this section.

(ii) Under paragraph (d)(1)(ii)(B) of this section, the 20-percent limitation on reimbursed capital expenditures applies on a property-by-property basis. The 120-percent test also applies on a property-byproperty basis. Accordingly, the tangible asset and the goodwill each constitutes a separate property. Z incurred the capital expenditures with respect to the tangible asset only. The $550,000 fair market value of the tangible asset exceeds 120 percent of Z’s $450,000 adjusted basis in the asset at the time of the transfer (120 percent x $450,000 � $540,000). Thus, the 20-percent limitation applies so that the reimbursement of Z’s $130,000 of capital expenditures is limited to 20 percent of the fair market value of the tangible asset, or $110,000 (20 percent x $550,000).

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• • • • (f) Ordering rule cross reference . For payments or transfers by a partnership to a partner to which the rules under this section and § 1.707–5(b) apply, see the ordering rule under § 1.707–5(b)(3).

Par. 5. Section 1.707–5 is amended by:

1. Revising paragraph (a)(3).

2. Adding paragraph (a)(5)(iii).

3. Revising paragraph (a)(6)(i)(C).

4. Removing “and” at the end of paragraph (a)(6)(i)(D) and adding “or” in its place.

5. Adding paragraph (a)(6)(i)(E).

6. Revising paragraph (a)(7)(ii).

7. Adding paragraph (a)(8).

8. Adding a sentence at the end of paragraph (b)(1).

9. Removing the word “property” in paragraph (b)(2)(i)(A) and adding the word “consideration” in its place.

10. Revising paragraph (b)(2)(iii).

11. Adding paragraph (b)(3).

12. Designating the text of paragraph (e) after its subject heading as paragraph (e)(1) and adding paragraph (e)(2).

13. Revising Examples 1, 5, 6, and 10 in paragraph (f).

14. Redesignating Example 11 in paragraph (f) as Example 13 and adding new Examples 11 and 12 .

The additions and revisions read as follows:

§ 1.707–5 Disguised sales of property to partnership; special rules relating to liabilities .

(a) - - (3) Reduction of partner’s share of li- ability . For purposes of this section, a partner’s share of a liability, immediately after a partnership assumes or takes property subject to the liability, is determined by taking into account a subsequent reduction in the partner’s share if—

(i) At the time that the partnership assumes or takes property subject to the liability, it is anticipated that the transferring partner’s share of the liability will be subsequently reduced;

(ii) The anticipated reduction is not subject to the entrepreneurial risks of partnership operations; and

(iii) The reduction of the partner’s share of the liability is part of a plan that has as one of its principal purposes mini

mizing the extent to which the assumption of or taking property subject to the liability is treated as part of a sale under § 1.707–3.

• • • • (5) - - (iii) Notwithstanding paragraph (a)(5) (i) of this section, in connection with a transfer of property by a partner to a partnership that is treated as a sale due solely to the partnership’s assumption of or taking property subject to a liability other than a qualified liability, the partnership’s assumption of or taking property subject to a qualified liability is not treated as a transfer of consideration made pursuant to the sale if the total amount of all liabilities other than qualified liabilities that the partnership assumes or takes subject to is the lesser of 10 percent of the total amount of all qualified liabilities the partnership assumes or takes subject to, or $1,000,000.

(6) - - (i) - - (C) A liability that is allocable under the rules of § 1.163–8T to capital expenditures (as described under § 1.707– 4(d)(5)) with respect to the property;

• • • • (E) A liability that was not incurred in anticipation of the transfer of the property to a partnership, but that was incurred in connection with a trade or business in which property transferred to the partnership was used or held but only if all the assets related to that trade or business are transferred other than assets that are not material to a continuation of the trade or business (see paragraph (a)(7) of this section for further rules regarding a liability incurred within two years of a transfer presumed to be in anticipation of the transfer); and
• • • • (7) - - (ii) Disclosure of transfers of property subject to liabilities incurred within two years of the transfer . A partner that treats a liability assumed or taken subject to by a partnership in connection with a transfer of property as a qualified liability under paragraph (a)(6)(i)(B) of this section or under paragraph (a)(6)(i)(E) of this section (if the liability was incurred by the partner within the two-year period prior to the earlier of the date the partner agrees in

writing to transfer the property or the date the partner transfers the property to the partnership) must disclose such treatment to the Internal Revenue Service in accordance with § 1.707–8.

(8) Liability incurred by another per- son . Except as provided in paragraph (e)(2) of this section, a partner steps in the shoes of a person for purposes of paragraph (a) of this section with respect to a liability the person incurred or assumed to the extent the partner assumed or took property subject to the liability from the person in a nonrecognition transaction described in section 351, 381(a), 721, or 731. (b) - - (1) * * * For purposes of paragraph (b) of this section, an upper-tier partnership’s share of the liability of a lower-tier partnership as described under § 1.707– 5(a)(2) that is treated as a liability of the upper-tier partnership under § 1.752–4(a) shall be treated as a liability of the uppertier partnership incurred on the same day the liability was incurred by the lower-tier partnership.

(2) - - (iii) Reduction of partner’s share of liability . For purposes of paragraph (b)(2) of this section, a partner’s share of a liability immediately after a partnership incurs the liability is determined by taking into account a subsequent reduction in the partner’s share if—

(A) At the time that the partnership incurs the liability, it is anticipated that the partner’s share of the liability that is allocable to a transfer of money or other consideration to the partner will be reduced subsequent to the transfer;

(B) The anticipated reduction is not subject to the entrepreneurial risks of partnership operations; and

(C) The reduction of the partner’s share of the liability is part of a plan that has as one of its principal purposes minimizing the extent to which the partnership’s distribution of the proceeds of the borrowing is treated as part of a sale.

(3) Ordering rule . The treatment of a transfer of money or other consideration under paragraph (b) of this section is determined before applying the rules under § 1.707–4.

• • • • (e) - -

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(iii) F’s net equity percentage with respect to property Z equals the fraction determined by dividing—

(A) The aggregate amount of money or other consideration (other than the qualified liability) transferred to F and treated as part of a sale of property Z under § 1.707–3(a) ($30,000 transfer of money); by

(B) F’s net equity in property Z ($90,000 (that is, the excess of the $165,000 fair market value over the $75,000 qualified liability)).

(iv) Accordingly, the partnership’s assumption of the qualified liability of F encumbering property Z is treated as a transfer of $25,000 (one-third of $75,000) of consideration to F pursuant to a sale. Therefore, F is treated as having sold $55,000 of the fair market value of property Z to the partnership in exchange for $30,000 in money and the partnership’s assumption of $25,000 of the qualified liability. Accordingly, F must recognize $30,000 of gain on the sale (the excess of the $55,000 amount realized over $25,000 of F’s adjusted basis for property Z (that is, one-third of F’s adjusted basis for the property, because F is treated as having sold one-third of the property to the partnership)).

• • • • Example 10 . Treatment of debt-financed trans- fers of consideration by partnership . (i) K transfers property Z to partnership KL in exchange for a 50 percent interest therein on April 9, 2017. On September 13, 2017, the partnership incurs a nonrecourse liability of $20,000. On November 17, 2017, the partnership transfers $20,000 to K, and $10,000 of this transfer is allocable under the rules of § 1.163–8T to proceeds of the partnership liability incurred on September 13, 2017. The remaining $10,000 is paid from other partnership funds. Assume that on November 17, 2017, for disguised sale purposes, K’s share of the $20,000 liability incurred on September 13, 2017, is $10,000 in accordance with § 1.707–5(a)(2).

(ii) Because a portion of the transfer made to K on November 17, 2017, is allocable under § 1.163–8T to proceeds of a partnership liability that was incurred by the partnership within 90 days of that transfer, K is required to take the transfer into account in applying the rules of this section and § 1.707–3 only to the extent that the amount of the transfer exceeds K’s allocable share of the liability used to fund the transfer. K’s allocable share of the $20,000 liability used to fund $10,000 of the transfer to K is $5,000 (K’s share of the liability ($10,000) multiplied by the fraction obtained by dividing—

(A) The amount of the liability that is allocable to the distribution to K ($10,000); by

(B) The total amount of such liability ($20,000)).

(iii) Therefore, K is required to take into account $15,000 of the $20,000 partnership transfer to K for purposes of this section and § 1.707–3. Under these facts, assuming no other exception applies and the within-two-year presumption is not rebutted, this $15,000 transfer will be treated under the rule in § 1.707–3 as part of a sale by K of property Z to the partnership.

Example 11 . Treatment of debt-financed transfers of consideration and transfers characterized as guar- anteed payments by a partnership . (i) The facts are the same as in Example 10, except that the entire $20,000

(2) If an interest in a partnership that has one or more liabilities (the lower-tier partnership) is transferred to another partnership (the upper-tier partnership), the upper-tier partnership’s share of any liability of the lower-tier partnership that is treated as a liability of the upper-tier partnership under § 1.752–4(a) is treated as a qualified liability under paragraph (a) (6)(i) of this section to the extent the liability would be a qualified liability under paragraph (a)(6)(i) of this section had the liability been assumed or taken subject to by the upper-tier partnership in connection with a transfer of all of the lower-tier partnership’s property to the upper-tier partnership by the lower-tier partnership. For purposes of determining whether the liability constitutes a qualified liability under paragraphs (a)(6)(i)(B) and (E) of this section, a determination that the liability was not incurred in anticipation of the transfer of property to the upper-tier partnership is based on whether the partner in the lower-tier partnership anticipated transferring its interest in the lower-tier partnership to the upper-tier partnership at the time the liability was incurred by the lower-tier partnership.

(f) - - Example 1 . Partnership’s assumption of nonre- course liability encumbering transferred property . (i) A and B form partnership AB, which will engage in renting office space. A transfers $500,000 in cash to the partnership, and B transfers an office building to the partnership. At the time it is transferred to the partnership, the office building has a fair market value of $1,000,000, has an adjusted basis of $400,000, and is encumbered by a $500,000 nonrecourse liability, which B incurred 12 months earlier to finance the acquisition of other property and which the partnership assumed. No facts rebut the presumption that the liability was incurred in anticipation of the transfer of the property to the partnership. Assume that this liability is a nonrecourse liability of the partnership within the meaning of section 752 and the regulations thereunder. The partnership agreement provides that partnership items will be allocated equally between A and B, including excess nonrecourse liabilities under § 1.752–3(a)(3). The partnership agreement complies with the requirements of § 1.704–1(b)(2)(ii)( b ).

(ii) The nonrecourse liability secured by the office building is not a qualified liability within the meaning of paragraph (a)(6) of this section. B would be allocated 50 percent of the excess nonrecourse liability under the partnership agreement. Accordingly, immediately after the partnership’s assumption of that liability, B’s share of the liability as determined under paragraph (a)(2) of this section is $250,000 (B’s 50 percent share of the partnership’s excess nonrecourse liability as determined in accor

dance with B’s share of partnership profits under § 1.752–3(a)(3)).

(iii) The partnership’s assumption of the liability encumbering the office building is treated as a transfer of $250,000 of consideration to B (the amount by which the liability ($500,000) exceeds B’s share of that liability immediately after the partnership’s assumption of the liability ($250,000)). B is treated as having sold $250,000 of the fair market value of the office building to the partnership in exchange for the partnership’s assumption of a $250,000 liability. This results in a gain of $150,000 ($250,000 minus ($250,000/$1,000,000 multiplied by $400,000)).

• • • • Example 5 . Partnership’s assumption of a qual- ified liability as sole consideration . (i) F purchases property Z in 2012. In 2017, F transfers property Z to a partnership. At the time of its transfer to the partnership, property Z has a fair market value of $165,000 and an adjusted tax basis of $75,000. Also, at the time of the transfer, property Z is subject to a $75,000 nonrecourse liability that F incurred more than two years before transferring property Z to the partnership. The liability has been secured by property Z since it was incurred by F. Upon the transfer of property Z to the partnership, the partnership assumed the liability encumbering that property. The partnership made no other transfers to F in consideration for the transfer of property Z to the partnership. Assume that immediately after the partnership’s assumption of the liability encumbering property Z, F’s share of that liability for disguised sale purposes is $25,000 in accordance with § 1.707– 5(a)(2). (ii) The $75,000 liability secured by property Z is a qualified liability of F because F incurred the liability more than two years prior to the partnership’s assumption of the liability and the liability has encumbered property Z for more than two years prior to F’s transfer. See paragraph (a)(6) of this section. Therefore, since no other transfer to F was made as consideration for the transfer of property Z, under paragraph (a)(5) of this section, the partnership’s assumption of the qualified liability of F encumbering property Z is not treated as part of a sale.

Example 6 . Partnership’s assumption of a qual- ified liability in addition to other consideration . (i) The facts are the same as in Example 5, except that the partnership makes a transfer to F of $30,000 in money that is consideration for F’s transfer of property Z to the partnership under § 1.707–3.

(ii) As in Example 5, the $75,000 liability secured by property Z is a qualified liability of F. Since the partnership transferred $30,000 to F in addition to assuming the qualified liability under paragraph (a)(5) of this section, assuming no other exception to disguised sale treatment applies to the transfer of the $30,000, the partnership’s assumption of this qualified liability is treated as a transfer of additional consideration to F to the extent of the lesser of—

(A) The amount that the partnership would be treated as transferring to F if the liability were not a qualified liability ($50,000 (that is, the excess of the $75,000 qualified liability over F’s $25,000 share of that liability)); or

(B) The amount obtained by multiplying the qualified liability ($75,000) by F’s net equity percentage with respect to property Z (one-third).

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2. Adding paragraph (d). The revisions and addition read as follows:

§ 1.752–3 Partner’s share of nonrecourse liabilities .

(a) - - (3) - - - The partnership agreement may specify the partners’ interests in partnership profits for purposes of allocating excess nonrecourse liabilities provided the interests so specified are reasonably consistent with allocations (that have substantial economic effect under the section 704(b) regulations) of some other significant item of partnership income or gain (significant item method). Alternatively, excess nonrecourse liabilities may be allocated among the partners in accordance with the manner in which it is reasonably expected that the deductions attributable to those nonrecourse liabilities will be allocated (alternative method). Additionally, the partnership may first allocate an excess nonrecourse liability to a partner up to the amount of built-in gain that is allocable to the partner on section 704(c) property (as defined under § 1.704– 3(a)(3)(ii)) or property for which reverse section 704(c) allocations are applicable (as described in § 1.704–3(a)(6)(i)) where such property is subject to the nonrecourse liability to the extent that such built-in gain exceeds the gain described in paragraph (a)(2) of this section with respect to such property (additional method). The significant item method, alternative method, and additional method do not apply for purposes of § 1.707– 5(a)(2). - -

• • • • (d) Effective/applicability dates . The third, fourth, fifth, and sixth sentences of paragraph (a)(3) of this section apply to liabilities that are incurred, taken subject to, or assumed by a partnership on or after October 5, 2016, other than liabilities incurred, taken subject to, or assumed by a partnership pursuant to a written binding contract in effect prior to October 5, 2016. For liabilities that are incurred, taken subject to, or assumed by a partnership before October 5, 2016, the third, fourth, fifth, and sixth sentences of paragraph (a)(3) of this section as contained in 26 CFR part 1 revised as of April 1, 2016, apply.

transfer to K is allocable under the rules of § 1.163–8T to proceeds of the partnership liability incurred on September 13, 2017. In addition, the partnership agreement provides that K is to receive a guaranteed payment for the use of K’s capital in the amount of $10,000 in each of the three years following the transfer of property Z. Ten thousand dollars of the transfer made to K on November 17, 2017, is pursuant to this provision of the partnership agreement. Assume that the guaranteed payment to K constitutes a reasonable guaranteed payment within the meaning of § 1.707– 4(a)(3). (ii) Under these facts, the rules under both § 1.707–4(a) and § 1.707–5(b) apply to the November 17, 2017 transfer to K by the partnership. Thus, the ordering rule in § 1.707–5(b)(3) requires that the § 1.707–5(b) debt-financed distribution rules apply first to determine the treatment of the $20,000 transfer. Because the entire transfer made to K on November 17, 2017, is allocable under § 1.163–8T to proceeds of a partnership liability that was incurred by the partnership within 90 days of that transfer, K is required to take the transfer into account in applying the rules of this section and § 1.707–3 only to the extent that the amount of the transfer exceeds K’s allocable share of the liability used to fund the transfer. K’s allocable share of the $20,000 liability used to fund the transfer to K is $10,000 (K’s share of the liability ($10,000) multiplied by the fraction obtained by dividing—

(A) The amount of the liability that is allocable to the distribution to K ($20,000); by

(B) The total amount of such liability ($20,000)).

(iii) The remaining $10,000 amount of the transfer to K that exceeds K’s allocable share of the liability is tested to determine whether an exception under § 1.707–4 applies. Because $10,000 of the payment to K is a reasonable guaranteed payment for capital under § 1.707–4(a)(1)(ii), the $10,000 transfer will not be treated as part of a sale by K of property Z to the partnership under § 1.707–3.

Example 12 . Treatment of debt-financed trans- fers of consideration by partnership made pursuant to plan . (i) O transfers property X, and P transfers property Y, to partnership OP in exchange for equal interests therein on June 1, 2017. On October 1, 2017, the partnership incurs two nonrecourse liabilities: Liability 1 of $8,000 and Liability 2 of $4,000. On December 15, 2017, the partnership transfers $2,000 to each of O and P pursuant to a plan. The transfers made to O and P on December 15, 2017 are allocable under § 1.163–8T to the proceeds of either Liability 1 or Liability 2. Assume that under § 1.707–5(a)(2), O’s and P’s share of Liability 1 is $4,000 each and of Liability 2 is $2,000 each on December 15, 2017.

(ii) Because the partnership transferred pursuant to a plan a portion of the proceeds of the two liabilities to O and P, paragraph (b)(1) of this section is applied by treating Liability 1 and Liability 2 as a single $12,000 liability. Pursuant to paragraph (b)(2)(ii)(A) of this section, each partner’s allocable share of the $12,000 liability equals the amount obtained by multiplying the sum of the partner’s share of Liability 1 and Liability 2 ($6,000) ($4,000 for Liability 1 plus $2,000 for Liability 2) by the fraction obtained by dividing—

(A) The amount of the liability that is allocable to the distribution to O and P pursuant to the plan ($4,000); by

(B) The total amount of such liability ($12,000). (iii) Therefore, O’s and P’s allocable share of the $12,000 liability is $2,000 each. Accordingly, because a portion of the proceeds of the $12,000 liability are allocable under § 1.163–8T to the $2,000 transfer made to each of O and P within 90 days of incurring the liability, and the $2,000 transfer does not exceed O’s or P’s $2,000 allocable share of that liability, each is required to take into account $0 of the $2,000 transfer for purposes of this section and § 1.707–3. Under these facts, no part of the transfers to O and P will be treated as part of a sale of property X by O or of property Y by P.

• • • • Par. 6. Section 1.707–6 is amended by revising Example 2 (i) in paragraph (d) to read as follows:

§ 1.707–6 Disguised sales of property by partnership to partner; general rules .

• • • • (d) - - Example 2. Assumption of liability by partner . (i) B is a member of an existing partnership. The partnership transfers property Y to B. On the date of the transfer, property Y has a fair market value of $1,000,000 and is encumbered by a nonrecourse liability of $600,000. B takes the property subject to the liability. The partnership incurred the nonrecourse liability six months prior to the transfer of property Y to B and used the proceeds to purchase an unrelated asset. Assume that under § 1.707–5(a)(2), B’s share of the nonrecourse liability immediately before the transfer of property Y was $100,000.
• • • • Par. 7. Section 1.707–9 is amended by revising paragraph (a)(1) to read as follows:

§ 1.707–9 Effective dates and transitional rules .

(a) - - (1) In general . Except as otherwise provided in this paragraph (a), §§ 1.707–3 through 1.707–6 apply to any transaction with respect to which all transfers occur on or after October 5, 2016. For any transaction with respect to which all transfers that are part of a sale of an item of property occur after April 24, 1991, but before October 5, 2016, §§ 1.707–3 through 1.707–6 as contained in 26 CFR part 1 revised as of April 1, 2016, apply.

• • • • Par. 8. Section 1.752–3 is amended by:

1. Revising the third, fourth, fifth, and sixth sentences in paragraph (a)(3).

December 27, 2016 888 Bulletin No. 2016–52

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: August 29, 2016.

Mark M. Mazur, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 4, 2016, 8:45 a.m., and published in the issue of the Federal Register for October 5, 2016, 81 F.R.69291)

26 CFR 1.707–5T; 1.707–9T; and 1.752–2T: Liabil- ities Recognized as Recourse Partnership Liabilities Under Section 752.

T.D. 9788

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Liabilities Recognized as Recourse Partnership Liabilities Under Section 752

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations concerning how liabilities are allocated for purposes of section 707 of the Internal Revenue Code (Code) and when certain obligations are recognized for purposes of determining whether a liability is a recourse partnership liability under section 752. These regulations affect partnerships and their partners. The text of these temporary regulations serves as part of the text of proposed regulations (REG–122855–15) published in the Proposed Rules section in this issue of the Bulletin .

DATES: Effective date : These regulations are effective on October 5, 2016.

Applicability dates : For dates of applicability, see §§ 1.707–9T(a)(4) and 1.752– 2T(l)(2).

FOR FURTHER INFORMATION CONTACT: Concerning the final and temporary regulations, Caroline E. Hay or

Deane M. Burke, (202) 317-5279 (not a toll-free number).

SUPPLEMENTARY INFORMATION: In addition to these final and temporary regulations, the Treasury Department and the IRS are publishing in the Rules and Regulations section in this issue of the Bulletin, final regulations under section 707 concerning disguised sales and under section 752 regarding the allocation of excess nonrecourse liabilities of a partnership to a partner, and, in the Proposed Rules section in this issue of the Bulletin, proposed regulations (REG–122855–15) that incorporate the text of these temporary regulations, withdraw a portion of a notice of proposed rulemaking (REG– 119305–11) to the extent not adopted by the final regulations, and contain new proposed regulations addressing (1) when certain obligations to restore a deficit balance in a partner’s capital account are disregarded under section 704 and (2) when partnership liabilities are treated as recourse liabilities under section 752.

Paperwork Reduction Act

The collection of information related to these final and temporary regulations under section 752 is reported on Form 8275, Disclosure Statement, and has been reviewed in accordance with the Paperwork Reduction Act (44 U.S.C. 3507) and approved by the Office of Management and Budget under control number 1545-0889.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the Office of Management and Budget.

For further information concerning this collection of information, and where to submit comments on the collection of information and the accuracy of the estimated burden, and suggestions for reducing this burden, please refer to the preamble to the cross-referencing notice of proposed rulemaking published in the Proposed Rules section in this issue of the Bulletin .

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and

tax return information are confidential, as required by section 6103.

Background

1. Overview

This Treasury decision contains final and temporary regulations that amend the Income Tax Regulations (26 CFR part 1) under sections 707 and 752 of the Code. On January 30, 2014, the Treasury Department and the IRS published a notice of proposed rulemaking in the Federal Register (REG–119305–11, 79 FR 4826) to amend the then existing regulations under section 707 relating to disguised sales of property to or by a partnership and under section 752 concerning the treatment of partnership liabilities (the 2014 Proposed Regulations). The 2014 Proposed Regulations provided certain technical rules intended to clarify the application of the disguised sale rules under section 707 and also contained rules regarding the sharing of partnership recourse and nonrecourse liabilities under section 752.

A public hearing on the 2014 Proposed Regulations was not requested or held, but the Treasury Department and the IRS received written comments.

Based on a comment received on the 2014 Proposed Regulations requesting that guidance provided under section 752 regarding a partner’s share of partnership liabilities apply instead solely for disguised sale purposes, the Treasury Department and the IRS have reconsidered the rules under § 1.707–5(a)(2) of the 2014 Proposed Regulations for determining a partner’s share of partnership liabilities for purposes of section 707. Accordingly and as recommended by that commenter, this Treasury decision contains temporary regulations under section 707 (the 707 Temporary Regulations) that require a partner to apply the same percentage used to determine the partner’s share of excess nonrecourse liabilities under § 1.752– 3(a)(3) (with certain limitations) in determining the partner’s share of partnership liabilities for disguised sale purposes. This Treasury decision also contains temporary regulations under section 752 (the 752 Temporary Regulations) providing guidance on the treatment of “bottom dollar payment obligations.” Cross-referencing

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proposed regulations providing additional opportunity for comment are contained in the related notice of proposed rulemaking (REG–122855–15) published in the Proposed Rules section in this issue of the Bulletin . The Summary of Comments and Explanation of Provisions section of the preamble of this Treasury decision discusses the changes for determining a partner’s share of partnership liabilities for disguised sale purposes and also the rules relating to certain “bottom dollar payment obligations.”

The Treasury Department and the IRS are also publishing final regulations under section 707 (the 707 Final Regulations) in a separate Treasury decision (TD 9787) published in the Rules and Regulations section in this issue of the Bulletin that adopt the remaining provisions of the 2014 Proposed Regulations under section 707. That Treasury decision also contains final regulations under section 752 (the 752 Final Regulations) concerning the allocation of a partnership’s excess nonrecourse liabilities as explained in the Summary of Comments and Explanation of Provisions sections of that Treasury decision.

Finally, after considering comments on the 2014 Proposed Regulations under section 752, the Treasury Department and the IRS are withdrawing proposed § 1.752–2 and are issuing new proposed regulations (the 752 Proposed Regulations) contained in the related notice of proposed rulemaking (REG–122855–15) published in the Proposed Rules section in this issue of the Bulletin .

2. Summary of Applicable Law

In determining a partner’s share of a partnership liability for disguised sale purposes, the existing regulations under section 707 prescribe separate rules for a partnership’s recourse liability and a partnership’s nonrecourse liability. Under § 1.707–5(a)(2)(i), a partner’s share of a partnership’s recourse liability equals the partner’s share of the liability under section 752 and the regulations thereunder. A partnership liability is a recourse liability under section 707 to the extent that the obligation is a recourse liability under § 1.752–1(a)(1). Under § 1.707–5(a)(2) (ii), a partner’s share of a partnership’s

nonrecourse liability is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under § 1.752– 3(a)(3). Generally, a partner’s share of the excess nonrecourse liability is determined in accordance with the partner’s share of partnership profits taking into account all facts and circumstances relating to the economic arrangement of the partners. A partnership liability is a nonrecourse liability under section 707 to the extent that the obligation is a nonrecourse liability under § 1.752–1(a)(2). In addition, the existing regulations under section 707 provide that a partnership liability is a recourse or nonrecourse liability to the extent the liability would be recourse under § 1.752–1(a)(1) or nonrecourse under § 1.752–1(a)(2), respectively, if the liability was treated as a partnership liability for purposes of section 752 (§ 1.752–7 contingent liabilities).

Section 1.752–1(a)(1) provides that a partnership liability is a recourse liability to the extent that a partner or related person bears the economic risk of loss (EROL) for that liability under § 1.752–2. Section 1.752–2(a) provides that a partner’s share of a recourse partnership liability equals the portion of the liability, if any, for which the partner or related person bears the EROL. Section 1.752– 1(a)(2) provides that a partnership liability is a nonrecourse liability to the extent that no partner or related person bears the EROL for that liability under § 1.752–2. A partner generally bears the EROL for a partnership liability if the partner or related person has an obligation to make a payment under § 1.752–2(b). A partner generally has an obligation to make a payment to the extent that the partner or related person would have to make a payment if, upon a constructive liquidation of the partnership, the partnership’s assets were worthless and the liability became due and payable (constructive liquidation test). Section 1.752–2(b)(6) presumes partners and related persons will satisfy their payment obligations irrespective of their net worth, unless the facts and circumstances indicate a plan to circumvent or avoid the obligation.

Summary of Comments and Explanation of Provisions

1. Partner’s Share of Partnership Liabilities for Purposes of Section 707

The withdrawn portions of the 2014 Proposed Regulations included proposed changes to § 1.752–2 that were intended to ensure that only genuine commercial payment obligations, including guarantees and indemnities, affected the allocation of partnership liabilities. Although the 2014 Proposed Regulations received some unfavorable comments, one commenter expressed support for the overall objective of those proposed rules. According to the commenter, the clear effect of the 2014 Proposed Regulations under section 752 was to make it more likely that liabilities would be treated as nonrecourse liabilities, and thus allocable under § 1.752–3. The commenter noted that such an effect seems appropriate as an economic matter, because, contrary to the constructive liquidation test in § 1.752–2(b)(1), lenders, borrowers, and credit support providers generally do not expect that the assets of the partnership will become worthless. Rather, lenders, borrowers and credit support providers generally expect borrowers (including partnerships) to satisfy their obligations (in the case of a partnership, with partnership profits). However, the commenter expressed concerns with the proposed section 752 rules. The commenter suggested that the regulations adopt a more narrowly tailored approach that treats all liabilities as nonrecourse liabilities for section 707 disguised sale purposes only.

Other commenters also suggested that changes to the liability allocation rules be limited to the context of disguised sales under section 707 to specifically address the abuses that concern the Treasury Department and the IRS. One abuse relating to disguised sales within the meaning of § 1.707–3 concerns the debt-financed distribution exception under § 1.707–5(b). Under this exception, a distribution of money to a partner by a partnership is not taken into account for purposes of § 1.707–3 to the extent that the distribution is traceable to a partnership borrowing and the amount of the distribution does not exceed the partner’s allocable

December 27, 2016 890 Bulletin No. 2016–52

share of the liability incurred to fund the distribution. The legislative history to section 707, upon which the debt-financed distribution exception in § 1.707–5(b) is based, contemplates a contributing partner borrowing through the partnership rather than engaging in a disguised sale when the partner, in substance, retains liability for repayment of the borrowed amounts. See H.R. Rep. No. 861, 98th Cong., 2d Sess. 859 (1984). This exception, however, has been abused through leveraged partnership transactions in which the contributing partners or related persons enter into payment obligations that are not commercial solely to achieve an allocation of the partnership liability to the partner, with the objective of avoiding a disguised sale. See, for example, Canal Corp. v. Commis- sioner, 135 T.C. 199, 216 (2010) (“We have carefully considered the facts and circumstances and find that the indemnity agreement should be disregarded because it created no more than a remote possibility that [the indemnitor] would actually be liable for payment.”).

After considering the comments on the 2014 Proposed Regulations suggesting that the regulations be narrowly tailored to address abuse concerns relating to disguised sales, the Treasury Department and the IRS have concluded that, for disguised sale purposes only, it is appropriate for partners to determine their share of any partnership liability, whether recourse or nonrecourse under section 752, in the manner in which excess nonrecourse liabilities are allocated under § 1.752– 3(a)(3), as limited for disguised sale purposes in the 752 Final Regulations. For purposes of the disguised sale rules, this allocation method reflects the overall economic arrangement of the partners more accurately than the current regulations or the 2014 Proposed Regulations. In most cases, a partnership will satisfy its liabilities with partnership profits, the partnership’s assets do not become worthless, and the payment obligations of partners or related persons are not called upon. This is true whether: (1) a partner’s liability is assumed by a partnership in connection with a transfer of property to the partnership or by a partner in connection with a transfer of property by the partnership to the partner; (2) a partnership takes property subject to a liability in connection

with a transfer of property to the partnership or a partner takes property subject to a liability in connection with a transfer of property by the partnership to the partner; or (3) a liability is incurred by the partnership to make a distribution to a partner under the debt-financed distribution exception in § 1.707–5(b). Accordingly, under the 707 Temporary Regulations, a partner’s share of any partnership liability for disguised sale purposes is the same percentage used to determine the partner’s share of the partnership’s excess nonrecourse liabilities under § 1.752–3(a)(3), as limited for disguised sale purposes under the 752 Final Regulations.

Commenters also suggested that a partner’s share of a partnership liability for disguised sale purposes should not include any portion of the liability for which another partner bears the EROL, as these liabilities would not be allocated to a partner without EROL under general principles of subchapter K. The Treasury Department and the IRS agree with the commenter that this change should not create a liability allocation not otherwise allowed under general subchapter K principles. Therefore, the 707 Temporary Regulations provide that for purposes of § 1.707–5, a partner’s share of a liability of a partnership, as defined in § 1.752– 1(a) (whether a recourse liability or a nonrecourse liability) is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under § 1.752–3(a)(3) (as limited in its application to § 1.707– 5T(a)(2)), but such share shall not exceed the partner’s share of the partnership liability under section 752 and applicable regulations (as limited in the application of § 1.752–3(a)(3) to § 1.707–5T(a)(2)).

The liability allocation approach for disguised sale purposes in the 707 Temporary Regulations does not conflict with Congress’s directive relating to section 752, which had been raised as a potential concern by some commenters with respect to the 2014 Proposed Regulations. Section 79 of the Deficit Reduction Act of 1984 (Public Law 98–369) overruled the decision in Raphan v. United States, 3 Cl. Ct. 457 (1983) (holding that a guarantee by a general partner of an otherwise nonrecourse liability of the partnership did not require the partner to be treated as person

ally liable for that liability) and directed the Secretary of the Treasury to amend the regulations under section 752 to reflect the overruling of the Raphan decision. At issue in the Raphan case was debt allocation under section 752; accordingly, Congress’s directive related to regulations under section 752 only. As noted, the 707 Temporary Regulations treat all partnership liabilities, whether recourse or nonrecourse, as nonrecourse liabilities solely for purposes of section 707. Thus, the approach adopted in the 707 Temporary Regulations does not conflict with the approach directed by Congress after the Raphan case.

Finally, in addition to the rule for determining a partner’s share of a § 1.752– 1(a) partnership liability for disguised sale purposes, the 707 Temporary Regulations reserve with respect to the treatment of § 1.752–7 contingent liabilities for disguised sale purposes. The 2014 Proposed Regulations proposed removing the “would be treated” language in § 1.707– 5(a)(2)(i) and (ii) of the existing regulations relating to contingent liabilities. The 707 Temporary Regulations replace the proposed provisions with the previously discussed rule for determining a partner’s share of a partnership liability as defined in § 1.752–1(a). Because the 2014 Proposed Regulations would have removed language relating to § 1.752–7 contingent liabilities, some commenters suggested that the regulations specifically clarify how contingent liabilities are treated for purposes of the disguised sale rules. The Treasury Department and the IRS agree that clarification of the treatment of § 1.752–7 contingent liabilities for disguised sale purposes is warranted.

In many cases, § 1.752–7 contingent liabilities may constitute qualified liabilities that would not be taken into account for purposes of determining a disguised sale. However, some commenters noted that there may be circumstances in which certain transfers of § 1.752–7 contingent liabilities to a partnership may be abusive. Thus, the Treasury Department and the IRS will continue to study the issue of the effect of contingent liabilities with respect to section 707, as well as other sections of the Code, in connection with future guidance projects.

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2. Determining Whether a Liability Is a Recourse Liability of a Partnership

The 752 Temporary Regulations amend § 1.752–2 to address certain payment obligations of a partner or related person. The Treasury Department and the IRS continue to have concerns that partners and related persons are entering into payment obligations that are not commercial solely to achieve an allocation of a partnership liability.

Under the 2014 Proposed Regulations, a partner’s or related person’s payment obligation with respect to a partnership liability would not have been recognized under § 1.752–2(b)(3) unless seven factors (recognition factors) were satisfied. Two of the seven recognition factors imposed certain additional requirements on contractual obligations outside a partnership agreement, such as guarantees, indemnifications, reimbursement agreements, and other obligations running directly to creditors, other partners, or to the partnership (guarantee and indemnity recognition factors). In the case of a guarantee or similar arrangement, the 2014 Proposed Regulations would have required the partner or related person to be liable up to the full amount of such partner’s or related person’s payment obligation, if, and to the extent that, any amount of the partnership liability is not otherwise satisfied. In the case of an indemnity, reimbursement agreement, or similar arrangement, the 2014 Proposed Regulations would have required the partner or related person to be liable up to the full amount of such partner’s or related person’s payment obligation if, and to the extent that, any amount of the indemnitee’s or other benefited party’s payment obligation is satisfied. The terms of the guarantee, indemnity, or reimbursement agreement would be treated as modified by any right of indemnity, reimbursement agreement, or similar arrangement. However, a right of proportionate contribution running between partners or related persons who were co-obligors with respect to a payment obligation for which each of them was jointly and severally liable would not modify a guarantee, indemnity, or reimbursement agreement. If the partner’s or related person’s payment obligation failed to satisfy any of the recognition factors,

the payment obligation was not recognized and the partner would not bear EROL for the partnership liability.

In addition to the guarantee and indemnity recognition factors, a partner’s or related person’s payment obligation with respect to a partnership liability would not be recognized under an anti-abuse rule in the 2014 Proposed Regulations if the facts and circumstances indicated that the partnership liability was part of a plan or arrangement involving the use of tiered partnerships, intermediaries, or similar arrangements to convert a single liability into multiple liabilities with a principal purpose of circumventing the guarantee and indemnity recognition factors.

The Treasury Department and the IRS continue to believe that certain obligations, such as certain so-called “bottomdollar guarantees,” should generally not be recognized as payment obligations under § 1.752–2(b)(3) because they generally lack a significant non-tax commercial business purpose. No commenters suggested that bottom-dollar guarantees were relevant to loan risk underwriting. Accordingly, the 752 Temporary Regulations retain the restriction on certain guarantees and indemnities and provide that these payment obligations are not recognized under § 1.752–2(b)(3). In addition, these regulations remove the Example in § 1.752–2(j)(4) to comport with the provisions in the 752 Temporary Regulations relating to bottom dollar payment obligations. However, after considering the comments received on the 2014 Proposed Regulations, the 752 Temporary Regulations provide for an exception as well as an anti-abuse rule to address arrangements that are not intended to be subject to this rule.

A. General rule: bottom dollar payment obligations

Although the 752 Temporary Regulations retain the restriction relating to certain guarantees and indemnities, these temporary regulations refine the description of non-commercial obligations in response to comments. Commenters expressed concerns with the 2014 Proposed Regulations’ description of so-called “bottom-dollar guarantees and indemnities.” Commenters thought the language

was confusing. In addition, with respect to the anti-abuse rule in the 2014 Proposed Regulations, one commenter believed that “tranches” of debt could be used to effect arrangements that are economically similar to “bottom-dollar guarantees” and recommended that the regulations strengthen the anti-abuse rule. This commenter suggested that two or more liabilities be treated as a single liability if: (1) the liabilities are incurred pursuant to a common plan, as part of a single transaction, or as part of a series of related transactions; (2) the liabilities have the same counterparty or counterparties (or substantially the same group of counterparties); or (3) the guarantee or similar arrangement would fail the guarantee recognition factor if the liabilities were treated as a single liability; and (4) multiple liabilities (rather than a single liability) were incurred with a principal purpose of avoiding the guarantee recognition factor.

In response to comments, the 752 Temporary Regulations clarify the description of so-called “bottom-dollar guarantees and indemnities” by consolidating these non-commercial obligations under one term: bottom-dollar payment obligations. In addition, instead of having an antiabuse rule to address arrangements that use tiered partnerships, intermediaries, senior and subordinate liabilities, or similar arrangements, the 752 Temporary Regulations define these arrangements as bottom dollar payment obligations if certain factors, taking into account the commenter’s suggestion, exist. Therefore, under the 752 Temporary Regulations, the term “bottom dollar payment obligation” includes (subject to certain exceptions): (1) any payment obligation other than one in which the partner or related person is or would be liable up to the full amount of such partner’s or related person’s payment obligation if, and to the extent that (A) any amount of the partnership liability is not otherwise satisfied in the case of an obligation that is a guarantee or other similar arrangement, or (B) any amount of the indemnitee’s or benefited party’s payment obligation is satisfied in the case of an obligation which is an indemnity or similar arrangement; and (2) an arrangement with respect to a partnership liability that uses tiered partnerships, intermediaries, senior and subordinate liabilities, or sim

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ilar arrangements to convert what would otherwise be a single liability into multiple liabilities if, based on the facts and circumstances, the liabilities were incurred (A) pursuant to a common plan, as part of a single transaction or arrangement, or as part of a series of related transactions or arrangements, and (B) with a principal purpose of avoiding having at least one of such liabilities or payment obligations with respect to such liabilities being treated as a bottom dollar payment obligation. Any payment obligation under § 1.752–2, including an obligation to make a capital contribution and to restore a deficit capital account upon liquidation of the partnership as described in § 1.704–1(b)(2)(ii)( b )( 3 ), may be a bottom dollar payment obligation if it meets the requirements set forth above.

The preamble of the 2014 Proposed Regulations requested comments on whether and under what circumstances regulations should permit recognition of a payment obligation for a portion, rather than 100 percent, of each dollar of a partnership liability to which the payment relates (a “vertical slice” of a partnership liability). The commenters believed that regulations under section 752 should recognize a vertical slice of a partnership liability because these payment obligations represent the same economic risk as a guarantee, for example, of the entire partnership liability.

The Treasury Department and the IRS agree with the commenters that certain obligations, including a vertical slice of a partnership liability, should not cause a payment obligation to be a bottom dollar payment obligation and, thus, not recognized under § 1.752–2(b)(3). In addition, the Treasury Department and the IRS have determined that, as long as a partner or related person is or would be liable for the full amount of a payment obligation, such obligation is not a bottom dollar payment obligation merely because a maximum amount is placed on the partner’s or related person’s obligation. Accordingly, the 752 Temporary Regulations specifically except certain payment obligations within those parameters, including obligations with joint and several liability, from being treated as bottom dollar payment obligations.

B. Exception from treatment as a bottom dollar payment obligation

In addition to comments relating to the description of “bottom-dollar guarantees” and the anti-abuse rule in the 2014 Proposed Regulations, commenters expressed concerns that the guaranty and indemnity recognition factors would deprive a partner from being allocated a liability even in situations where there is real EROL. One commenter described the 2014 Proposed Regulations as prejudging all payment obligations to be remote and fictitious if the obligations did not cover 100 percent of any shortfall in repayment. The commenter believed EROL could exist even if 100 percent of the liability was not covered.

Another commenter appreciated the merits of a bright-line rule that would look to every dollar of a liability, but thought that the 100 percent threshold was too high. This commenter recommended that a payment obligation should be respected if a partner or related person (i) is or would be liable up to the full amount of such partner’s or related person’s payment obligation if, and to the extent that, less than 80 percent of the partnership liability is not otherwise satisfied and (ii) either (A) the taxpayer or the IRS clearly establishes that the credit support materially decreased the partnership’s borrowing costs with respect to the liability or materially enhanced the other terms of the borrowing, or (B) the partners (or persons related to one or more of the partners), in the aggregate, are or would be liable up to the full amount of their payment obligations if, and to the extent that, any amount of the partnership liability is not otherwise satisfied. The commenter believed that this lower threshold incorporates the idea that a person may have meaningful risk with respect to the underlying liability, while protecting the legitimate interests of the government in ensuring that the lower threshold is not abused by taxpayers.

The Treasury Department and the IRS recognize that, in certain circumstances, it might be appropriate to treat a partner as bearing EROL with respect to a payment obligation that would be characterized as a bottom dollar payment obligation under the general rule. What otherwise would be a bottom dollar payment obligation can be

distinguished in a situation where the partners have allocated the risk among themselves, and the person making the bottom dollar payment obligation is liable for at least 90 percent of the person’s payment obligation (because the person is not entitled to indemnification or reimbursement for more than 10 percent of the person’s payment obligation). For example, if one partner (Partner A) guarantees 100 percent of a partnership liability and another partner (Partner B) indemnifies Partner A for the first one percent of Partner A’s obligation, Partner A’s obligation would be characterized as a bottom dollar payment obligation under the general rule because Partner A would not be liable to the full extent of the guarantee if any amount of the partnership liability is not otherwise satisfied (because Partner A would be reimbursed due to Partner B’s indemnity). To address this concern, the 752 Temporary Regulations provide an exception if a partner or related person has a payment obligation that would be recognized (initial payment obligation) under § 1.752– 2T(b)(3) but for the effect of an indemnity, reimbursement agreement, or similar arrangement. Such bottom dollar payment obligation is recognized under § 1.752– 2T(b)(3) if, taking into account the indemnity, reimbursement agreement, or similar arrangement, the partner or related person is liable for at least 90 percent of the initial payment obligation. This obligation, like any other payment obligation, must otherwise be recognized under § 1.752–2, including under the anti-abuse rules in § 1.752–2(j).

C. Anti-abuse rule

Some commenters noted that partners could manipulate contractual arrangements to achieve a federal income tax result that is not consistent with the economics of an arrangement. For example, a partner could deliberately fail one of the recognition factors in the 2014 Proposed Regulations (including the guarantee or indemnity recognition factor) to cause a partnership liability to be treated as nonrecourse even when one partner has true EROL. Just as the 752 Temporary Regulations provide an exception for certain obligations that meet the definition of a bottom dollar payment obligation but give

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rise to EROL, the 752 Temporary Regulations also provide an anti-abuse rule in § 1.752–2T(j)(2) that the Commissioner may apply to ensure that if a partner actually bears EROL for a partnership liability, partners may not agree among themselves to create a bottom dollar payment obligation so that the liability will be treated as nonrecourse.

Section 1.752–2(j)(2) of the existing regulations currently provides that, irrespective of the form of a contractual obligation, a partner is considered to bear the EROL with respect to a partnership liability, or a portion thereof, to the extent that: (A) the partner or related person undertakes one or more contractual obligations so that the partnership may obtain a loan; (B) the contractual obligations of the partner or related person eliminate substantially all the risk to the lender that the partnership will not satisfy its obligations under the loan; and (C) one of the principal purposes of using the contractual obligations is to attempt to permit partners (other than those who are directly or indirectly liable for the obligation) to include a portion of the loan in the basis of their partnership interests. The 752 Temporary Regulations expand § 1.752–2(j)(2) to include situations in which a partner is considered to bear the EROL irrespective of a bottom dollar payment obligation.

D. Disclosure requirement

The 752 Temporary Regulations require the partnership to disclose to the IRS all bottom dollar payment obligations with respect to a partnership liability on a completed Form 8275, Disclosure Statement, attached to the partnership return for the taxable year in which the bottom dollar payment obligation is undertaken or modified. That disclosure must identify the payment obligation with respect to which disclosure is made including the amount of the payment obligation and the parties to the payment obligation. If a bottom dollar payment obligation meets the exception, the partnership must also disclose to the IRS on Form 8275 the facts and circumstances that clearly establish that a partner or related person is liable for up to 90 percent of the partner’s or related person’s initial payment obligation and, but for an indemnity, reimbursement

agreement, or similar arrangement, the partner’s or related person’s payment obligation would have been recognized.

Effective/Applicability Date

With respect to changes under § 1.707–5, the 707 Temporary Regulations apply to any transaction with respect to which all transfers occur on or after January 3, 2017. In addition, with respect to the changes under § 1.752–2, the 752 Temporary Regulations apply to liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken with respect to a partnership liability on or after October 5, 2016, other than liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken pursuant to a written binding contract in effect prior to that date.

The 2014 Proposed Regulations provided for an effective date similar to the one in these final and temporary regulations. A commenter recommended that partnerships be permitted to elect to apply all, but not less than all, of the provisions of the final regulations to all of its liabilities and payment obligations with respect to its liabilities after the effective date of the final regulations. These 752 Temporary Regulations adopt that change; therefore, partnerships may apply all the provisions contained in the 752 Temporary Regulations to all of their liabilities as of the beginning of the first taxable year of the partnership ending on or after October 5, 2016. Commenters on the 2014 Proposed Regulations also recommended that partnership liabilities or payment obligations that are modified or refinanced continue to be subject to the provisions of the existing regulations to the extent of the amount and duration of the pre-modification (or refinancing) liability or payment obligation. The 752 Temporary Regulations do not adopt this recommendation as the terms of the partnership liabilities and payment obligations could be changed, which would affect the determination of whether or not an obligation is a bottom dollar payment obligation.

The 752 Temporary Regulations do, however, provide transition relief for any partner whose allocable share of partnership liabilities under § 1.752–2 exceeds its adjusted basis in its partnership interest on

the date the temporary regulations are finalized. Under this transitional relief, the partner can continue to apply the existing regulations under § 1.752–2 with respect to a partnership liability for a seven-year period to the extent that the partner’s allocable share of partnership liabilities exceeds the partner’s adjusted basis in its partnership interest on October 5, 2016. The amount of partnership liabilities subject to transitional relief will be reduced for certain reductions in the amount of liabilities allocated to that partner under the transition rules and, upon the sale of any partnership property, for any tax gain (including section 704(c) gain) allocated to the partner less that partner’s share of amount realized.

Special Analyses

Certain IRS regulations, including this one, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact 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. Although the temporary regulations under sections 707 and 752 respond to comments received in response to the 2014 Proposed Regulations, the Treasury Department and the IRS have determined that the regulations would benefit from additional notice and comment instead of being published as final regulations. In addition, decisions made in the final regulations under section 707 contained in a separate Treasury decision (TD 9787) published in the Rules and Regulations section in this issue of the Bulletin interact with the changes in the 707 Temporary Regulations regarding how liabilities are allocated for disguised sale purposes. Finally, pursuant to authority under section 7805(b) of the Code, the temporary regulations under sections 707 and 752 are necessary to address particular abuses as described in the Summary of Comments and the Explanation of Provisions section of the preamble of this Treasury decision. For these reasons, good cause also exists pursuant to 5 U.S.C. 553 to issue temporary regulations.

For applicability of the Regulatory Flexibility Act, please refer to the cross

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referencing notice of proposed rulemaking published in the Proposed Rules section in this issue of the Bulletin. 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.

Drafting Information

The principal authors of these regulations are Caroline E. Hay and Deane M. Burke of the Office of the Associate Chief Counsel (Passthroughs & Special Industries), IRS. However, other personnel from the Treasury Department and the IRS participated in their development.

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Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 - - Sections 1.707–2 through 1.707–9 also issued under 26 U.S.C. 707(a)(2)(B).

Par. 2. Section 1.707–5 is amended by revising paragraph (a)(2) and Examples 2, 3, 7, and 8 in paragraph (f) to read as follows:

§ 1.707–5 Disguised sales of property to partnership; special rules relating to liabilities .

(a) - - (2) [Reserved]. For further guidance, see § 1.707–5T(a)(2).

• • • • (f) - - Example 2 . [Reserved]. For further guidance, see § 1.707–5T(f) Example 2 .

Example 3 . [Reserved]. For further guidance, see § 1.707–5T(f) Example 3 .

• • • • Example 7 . [Reserved]. For further guidance, see § 1.707–5T(f) Example 7 .

Example 8 . [Reserved]. For further guidance, see § 1.707–5T(f) Example 8 .

• • • • Par. 3. Section 1.707–5T is added to read as follows:

§ 1.707–5T Disguised sales of property to partnership; special rules relating to liabilities (temporary) .

(a)(1) [Reserved]. For further guidance, see § 1.707–5(a)(1).

(2) Partner’s share of liability —(i) In general . For purposes of § 1.707–5, a partner’s share of a liability of a partnership, as defined in § 1.752–1(a) (whether a recourse liability or a nonrecourse liability) is determined by applying the same percentage used to determine the partner’s share of the excess nonrecourse liability under § 1.752–3(a)(3) (as limited in its application to this paragraph (a)(2)), but such share shall not exceed the partner’s share of the partnership liability under section 752 and applicable regulations (as limited in the application of § 1.752– 3(a)(3) to this paragraph (a)(2)). (ii) Partner’s share of § 1.752–7 lia- bility . [Reserved].

(a)(3) through (e) [Reserved]. For further guidance, see § 1.707–5(a)(3) through (e).

(f) Example 1 [Reserved]. For further guidance, see § 1.707–5(f) Example 1 .

Example 2 . Partnership’s assumption of re- course liability encumbering transferred property . (i) C transfers property Y to a partnership in which C has a 50 percent interest. At the time of its transfer to the partnership, property Y has a fair market value of $10,000,000 and is subject to an $8,000,000 liability that C incurred and guaranteed, immediately before transferring property Y to the partnership, in order to finance other expenditures. Upon the transfer of property Y to the partnership the partnership assumed the liability encumbering that property. Under section 752 and the regulations thereunder, immediately after the partnership’s assumption of the liability encumbering property Y, the liability is a recourse liability of the partnership and C’s share of that liability is $8,000,000.

(ii) Under the facts of this example, the liability encumbering property Y is not a qualified liability. Accordingly, the partnership’s assumption of the liability results in a transfer of consideration to C in connection with C’s transfer of property Y to the partnership. Notwithstanding C’s share of the liability for section 752 purposes, for disguised sale purposes, C’s share of the liability immediately after the partnership’s assumption is $4,000,000 (50 percent of $8,000,000) under paragraph (a)(2) of this section (which determines a partner’s share of a liability using the percentage under § 1.752–3(a)(3)). Therefore, the amount of consideration to C is $4,000,000 (the excess of the liability assumed by the partnership ($8,000,000) over C’s share of the liability for purposes of § 1.707–5(a) immediately after the assumption ($4,000,000)). See § 1.707–5(a)(1) and paragraph (a)(2) of this section.

Example 3 . Subsequent reduction of transferring partner’s share of liability . (i) The facts are the same as in Example 2 . In addition, property Y is a fully leased office building, the rental income from property Y is sufficient to meet debt service, and the remaining term of the liability is ten years. It is anticipated that, three years after the partnership’s assumption of the liability, C’s share of the liability under paragraph (a)(2) of this section will be reduced to $2,000,000 because of a shift in the allocation of partnership profits pursuant to the terms of the partnership agreement which provide that C’s share of the partnership profits will be 25 percent at that time. Under the partnership agreement, this shift in the allocation of partnership profits is dependent solely on the passage of time.

(ii) Under § 1.707–5(a)(3), if the reduction in C’s share of the liability was anticipated at the time of C’s transfer, was not subject to the entrepreneurial risks of partnership operations, and was part of a plan that has as one of its principal purposes minimizing the extent of sale treatment under § 1.707–3 (that is, a principal purpose of allocating a larger percentage of profits to C in the first three years when profits were not likely to be realized was to minimize the extent to which C’s transfer would be treated as part of a sale), C’s share of the liability immediately after the partnership’s assumption is treated as equal to C’s reduced share of $2,000,000. Therefore, the amount of consideration to C is $6,000,000 (the excess of the liability assumed by the partnership ($8,000,000) over C’s share of the liability for purposes of § 1.707–5(a) immediately after the assumption ($2,000,000)), taking into account the anticipated reduction in C’s share of the liability pursuant to the terms of the partnership agreement. See § 1.707–5(a)(1) and (3) and paragraph (a)(2) of this section.

Examples 4 through 6 [Reserved]. For further guidance, see § 1.707–5(f) Examples 4 through 6 .

Example 7 . Partnership’s assumptions of liabil- ities encumbering properties transferred pursuant to a plan . (i) Pursuant to a plan, G and H transfer property 1 and property 2, respectively, to an existing partnership in exchange for a one-third interest each in the partnership. At the time the properties are transferred to the partnership, property 1 has a fair market value of $10,000 and an adjusted tax basis of $6,000, and property 2 has a fair market value of $10,000 and an adjusted tax basis of $4,000. At the time properties 1 and 2 are transferred to the partnership, a $6,000 nonrecourse liability (liability 1) is secured by property 1 and a $9,000 recourse liability of H (liability 2) is secured by property 2. Properties 1 and 2 are transferred to the partnership, and the partnership takes property 1 subject to liability 1 and assumes liability 2. After the transfer of liability 2 to the partnership, H bears the economic risk of loss for the entire amount of liability 2 under § 1.752–2. G and H incurred liabilities 1 and 2 immediately prior to transferring properties 1 and 2 to the partnership and used the proceeds for personal expenditures. The liabilities are not qualified liabilities. For disguised sale purposes, assume that G’s and H’s share of liability 1 is $2,000 each in accordance with paragraph (a)(2) of this section (which determines a partner’s share of a liability using the percentage under § 1.752–3(a)(3), but not exceeding the part

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ner’s share of the liability under section 752 and applicable regulations). Also, in accordance with paragraph (a)(2) of this section, G’s share of liability 2 is zero and H’s share of liability 2 is $3,000. (ii) G and H transferred properties 1 and 2 to the partnership pursuant to a plan. Accordingly, pursuant to § 1.707–5(a)(1) and (4), the partnership’s taking property 1 subject to liability 1 is treated as a transfer of only $4,000 of consideration to G (the amount by which liability 1 ($6,000) exceeds G’s share of liabilities 1 and 2 ($2,000)), and the partnership’s assumption of liability 2 is treated as a transfer of only $4,000 of consideration to H (the amount by which liability 2 ($9,000) exceeds H’s share of liabilities 1 and 2 ($5,000)). Under the rule in § 1.707–3, G is treated as having sold $4,000 of the fair market value of property 1 in exchange for the partnership’s taking property 1 subject to liability 1, and H is treated as having sold $4,000 of the fair market value of property 2 in exchange for the partnership’s assumption of liability 2.

Example 8 . Partnership’s assumption of liability pursuant to a plan to avoid sale treatment of part- nership assumption of another liability . (i) The facts are the same as in Example 7, except that—

(A) Liability 2 is a nonrecourse liability; (B) H transferred the proceeds of liability 2 to the partnership; and

(C) H incurred liability 2 in an attempt to reduce the extent to which the partnership’s taking of property 1 subject to liability 1 would be treated as a transfer of consideration to G (and thereby reduce the portion of G’s transfer of property 1 to the partnership that would be treated as part of a sale).

(ii) Because the partnership assumed liability 2 with a principal purpose of reducing the extent to which the partnership’s taking of property 1 subject to liability 1 would be treated as a transfer of consideration to G, liability 2 is ignored in applying § 1.707–5(a)(1). See § 1.707–5(a)(4). Accordingly, the partnership’s taking of property 1 subject to liability 1 is treated as a transfer of $4,000 of consideration to G (the amount by which liability 1 ($6,000) exceeds G’s share of liability 1 ($2,000)). Under § 1.707–5(d), the partnership’s assumption of liability 2 is not treated as a transfer of any consideration to H because the amount of liability 2 that the partnership is treated as assuming is reduced by the money H transferred to the partnership ($9,000).

Examples 9 through 13 [Reserved]. For further guidance, see § 1.707–5(f) Exam- ples 9 through 13 .

(g) Expiration date . This section expires on October 4, 2019.

Par. 4. Section 1.707–9 is amended by adding paragraphs (a)(4) and (5) to read as follows:

§ 1.707–9 Effective dates and transitional rules .

(a) - - (4) Section 1.707–5(a)(2) and (f) Ex- amples 2, 3, 7, and 8 . Section 1.707– 5(a)(2) and (f) Examples 2, 3, 7, and 8, as

contained in 26 CFR part 1 revised as of April 1, 2016, apply to any transaction with respect to which any transfers occur before January 3, 2017. For any transaction with respect to which all transfers occur on or after January 3, 2017, see § 1.707–9T(a)(5).

(5) [Reserved]. For further guidance, see § 1.707–9T(a)(5).

• • • • Par. 5. Section 1.707–9T is added to read as follows:

§ 1.707–9T Effective dates and transitional rules (temporary) .

(a)(1) through (a)(4) [Reserved]. For further guidance, see § 1.707–9(a)(1) through (4).

(5) Section 1.707–5T(a)(2) and (f) Ex- amples 2, 3, 7, and 8 . Section 1.707– 5T(a)(2) and (f) Examples 2, 3, 7, and 8 apply to any transaction with respect to which all transfers occur on or after January 3, 2017. For any transaction with respect to which any transfers occur before January 3, 2017, see § 1.707–5(a)(2) and (f) Examples 2, 3, 7, and 8 as contained in 26 CFR part 1, revised as of April 1, 2016.

(b) [Reserved]. For further guidance, see § 1.707–9(b).

(c) Expiration date . This section expires on October 4, 2019.

Par. 6. Section 1.752–2 is amended by:

1. Revising paragraph (b)(3).

2. Adding Examples 9, 10, and 11 to paragraph (f).

3. Revising paragraph (j)(2).

4. Removing paragraph (j)(4).

5. Redesignating paragraph (l) as (l)(1) and revising the heading to paragraph (l).

6. Adding paragraphs (l)(2) and (3). The revisions and additions read as follows:

§ 1.752–2 Partner’s share of recourse liabilities .

• • • • (b) - - (3) [Reserved]. For further guidance, see § 1.752–2T(b)(3).
• • • • (f) - - Example 9 . [Reserved].

Example 10 . [Reserved]. For further guidance, see § 1.752–2T(f) Example 10 .

Example 11 . [Reserved]. For further guidance, see § 1.752–2T(f) Example 11 .

• • • • (j) - - (2) [Reserved]. For further guidance, see § 1.752–2T(j)(2).
• • • • (l) Effective/applicability dates . - -
• • • • (2) [Reserved]. For further guidance, see § 1.752–2T(l)(2).

(3) [Reserved]. For further guidance, see § 1.752–2T(l)(3).

Par. 7. Section 1.752–2T is added to read as follows:

§ 1.752–2T Partner’s share of recourse liabilities (temporary) .

(a) through (b)(2) [Reserved]. For further guidance, see § 1.752–2(a) through (b)(2).

(3) Obligations recognized —(i) In general . The determination of the extent to which a partner or related person has an obligation to make a payment under § 1.752–2(b)(1) is based on the facts and circumstances at the time of the determination. To the extent that the obligation of a partner or related person to make a payment with respect to a partnership liability is not recognized under this paragraph (b)(3), § 1.752–2(b) is applied as if the obligation did not exist. All statutory and contractual obligations relating to the partnership liability are taken into account for purposes of applying this section, including—

(A) Contractual obligations outside the partnership agreement such as guarantees, indemnifications, reimbursement agreements, and other obligations running directly to creditors, to other partners, or to the partnership;

(B) Obligations to the partnership that are imposed by the partnership agreement, including the obligation to make a capital contribution and to restore a deficit capital account upon liquidation of the partnership as described in § 1.704–1(b)(2) (ii)( b )( 3 ) (taking into account § 1.704– 1(b)(2)(ii)( c )); and (C) Payment obligations (whether in the form of direct remittances to another partner or a contribution to the partner

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ship) imposed by state or local law, including the governing state or local law partnership statute.

(ii) Special rules for bottom dollar pay- ment obligations —(A) In general . For purposes of § 1.752–2, a bottom dollar payment obligation (as defined in paragraph (b)(3)(ii)(C) of this section) is not recognized under this paragraph (b)(3).

(B) Exception . If a partner or related person has a payment obligation that would be recognized under this paragraph (b)(3) (initial payment obligation) but for the effect of an indemnity, reimbursement agreement, or similar arrangement, such bottom dollar payment obligation is recognized under this paragraph (b)(3) if, taking into account the indemnity, reimbursement agreement, or similar arrangement, the partner or related person is liable for at least 90 percent of the partner’s or related person’s initial payment obligation.

(C) Definition of bottom dollar pay- ment obligation —( 1 ) In general . Except as provided in paragraph (b)(3)(ii)(C)( 2 ) of this section, a bottom dollar payment obligation is a payment obligation that is the same as or similar to a payment obligation or arrangement described in this paragraph (b)(3)(ii)(C)( 1 ).

( i ) With respect to a guarantee or similar arrangement, any payment obligation other than one in which the partner or related person is or would be liable up to the full amount of such partner’s or related person’s payment obligation if, and to the extent that, any amount of the partnership liability is not otherwise satisfied.

( ii ) With respect to an indemnity or similar arrangement, any payment obligation other than one in which the partner or related person is or would be liable up to the full amount of such partner’s or related person’s payment obligation, if, and to the extent that, any amount of the indemnitee’s or benefited party’s payment obligation that is recognized under this paragraph (b)(3) is satisfied.

( iii ) An arrangement with respect to a partnership liability that uses tiered partnerships, intermediaries, senior and subordinate liabilities, or similar arrangements to convert what would otherwise be a single liability into multiple liabilities if, based on the facts and circumstances, the liabilities were incurred pursuant to a

common plan, as part of a single transaction or arrangement, or as part of a series of related transactions or arrangements, and with a principal purpose of avoiding having at least one of such liabilities or payment obligations with respect to such liabilities being treated as a bottom dollar payment obligation as described in paragraph (b)(3)(ii)(C)( 1 )( i ) or ( ii ) of this section.

( 2 ) Exceptions . A payment obligation is not a bottom dollar payment obligation merely because a maximum amount is placed on the partner’s or related person’s payment obligation, a partner’s or related person’s payment obligation is stated as a fixed percentage of every dollar of the partnership liability to which such obligation relates, or there is a right of proportionate contribution running between partners or related persons who are coobligors with respect to a payment obligation for which each of them is jointly and severally liable.

( 3 ) Benefited party defined . For purposes of § 1.752–2, a benefited party is the person to whom a partner or related person has the payment obligation.

(D) Disclosure of bottom dollar pay- ment obligations . A partnership must disclose to the Internal Revenue Service a bottom dollar payment obligation (including a bottom dollar payment obligation that is recognized under paragraph (b)(3)(ii)(B) of this section) with respect to a partnership liability on a completed Form 8275, Disclosure Statement, or successor form, attached to the return of the partnership for the taxable year in which the bottom dollar payment obligation is undertaken or modified, that includes all of the following information:

( 1 ) A caption identifying the statement as a disclosure of a bottom dollar payment obligation under section 752.

( 2 ) An identification of the payment obligation with respect to which disclosure is made.

( 3 ) The amount of the payment obligation.

( 4 ) The parties to the payment obligation.

( 5 ) A statement of whether the payment obligation is treated as recognized for purposes of this paragraph (b)(3).

( 6 ) If the payment obligation is recognized under paragraph (b)(3)(ii)(B) of this

section, the facts and circumstances that clearly establish that a partner or related person is liable for up to 90 percent of the partner’s or related person’s initial payment obligation and, but for an indemnity, reimbursement agreement, or similar arrangement, the partner’s or related person’s initial payment obligation would have been recognized under this paragraph (b)(3).

(iii) Special rule for indemnities and reimbursement agreements . An indemnity, reimbursement agreement, or similar arrangement will be recognized under this paragraph (b)(3) only if, before taking into account the indemnity, reimbursement agreement, or similar arrangement, the indemnitee’s or other benefited party’s payment obligation is recognized under this paragraph (b)(3), or would be recognized under this paragraph (b)(3) if such person were a partner or related person.

(b)(4) through (e) [Reserved]. For further guidance, see § 1.752–2(b)(4) through (e).

(f) Examples 1 through 9 [Reserved]. For further guidance, see § 1.752–2(f) Ex- amples 1 through 9 .

Example 10 . Guarantee of first and last dollars . (i) A, B, and C are equal members of a limited liability company, ABC, that is treated as a partnership for federal tax purposes. ABC borrows $1,000 from Bank. A guarantees payment of up to $300 of the ABC liability if any amount of the full $1,000 liability is not recovered by Bank. B guarantees payment of up to $200, but only if the Bank otherwise recovers less than $200. Both A and B waive their rights of contribution against each other.

(ii) Because A is obligated to pay up to $300 if, and to the extent that, any amount of the $1,000 partnership liability is not recovered by Bank, A’s guarantee is not a bottom dollar payment obligation under paragraph (b)(3)(ii)(C) of this section. Therefore, A’s payment obligation is recognized under paragraph (b)(3) of this section. The amount of A’s economic risk of loss under § 1.752–2(b)(1) is $300.

(iii) Because B is obligated to pay up to $200 only if and to the extent that the Bank otherwise recovers less than $200 of the $1,000 partnership liability, B’s guarantee is a bottom dollar payment obligation under paragraph (b)(3)(ii)(C) of this section and, therefore, is not recognized under paragraph (b)(3)(ii)(A) of this section. Accordingly, B bears no economic risk of loss under § 1.752–2(b)(1) for ABC’s liability.

(iv) In sum, $300 of ABC’s liability is allocated to A under § 1.752–2(a), and the remaining $700 liability is allocated to A, B, and C under § 1.752–3.

Example 11 . Indemnification of guarantees . (i) The facts are the same as in Example 10, except that, in addition, C agrees to indemnify A up to $100 that A pays with respect to its guarantee and agrees to indemnify B fully with respect to its guarantee.

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(ii) The determination of whether C’s indemnity is recognized under paragraph (b)(3) of this section is made without regard to whether C’s indemnity itself causes A’s guarantee not to be recognized. Because A’s obligation would be recognized but for the effect of C’s indemnity and C is obligated to pay A up to the full amount of C’s indemnity if A pays any amount on its guarantee of ABC’s liability, C’s indemnity of A’s guarantee is not a bottom dollar payment obligation under paragraph (b)(3)(ii)(C) of this section and, therefore, is recognized under paragraph (b)(3) of this section. The amount of C’s economic risk of loss under § 1.752–2(b)(1) for its indemnity of A’s guarantee is $100.

(iii) Because C’s indemnity is recognized under paragraph (b)(3) of this section, A is treated as liable for $200 only to the extent any amount beyond $100 of the partnership liability is not satisfied. Thus, A is not liable if, and to the extent, any amount of the partnership liability is not otherwise satisfied, and the exception in paragraph (b)(3)(ii)(B) of this section does not apply. As a result, A’s guarantee is a bottom dollar payment obligation under paragraph (b)(3)(ii)(C) of this section and is not recognized under paragraph (b)(3)(ii)(A) of this section. Therefore, A bears no economic risk of loss under § 1.752–2(b)(1) for ABC’s liability.

(iv) Because B’s obligation is not recognized under paragraph (b)(3)(ii) of this section independent of C’s indemnity of B’s guarantee, C’s indemnity is not recognized under paragraph (b)(3)(iii) of this section. Therefore, C bears no economic risk of loss under § 1.752–2(b)(1) for its indemnity of B’s guarantee.

(v) In sum, $100 of ABC’s liability is allocated to C under § 1.752–2(a) and the remaining $900 liability is allocated to A, B, and C under § 1.752–3.

(g) through (j)(1) [Reserved]. For further guidance, see § 1.752–2(g) through (j)(1).

(2) Arrangements tantamount to a guarantee —(i) In general . Irrespective of the form of a contractual obligation, the Commissioner may treat a partner as bearing the economic risk of loss with respect to a partnership liability, or a portion thereof, to the extent that—

(A) The partner or related person undertakes one or more contractual obligations so that the partnership may obtain or retain a loan;

(B) The contractual obligations of the partner or related person significantly reduce the risk to the lender that the partnership will not satisfy its obligations under the loan, or a portion thereof; and

(C) With respect to the contractual obligations described in paragraphs (j)(2) (i)(A) and (B) of this section—

( 1 ) One of the principal purposes of using the contractual obligations is to attempt to permit partners (other than those who are directly or indirectly liable for the

obligation) to include a portion of the loan in the basis of their partnership interests; or

( 2 ) Another partner, or a person related to another partner, enters into a payment obligation and a principal purpose of the arrangement is to cause the payment obligation described in paragraphs (j)(2) (i)(A) and (B) of this section to be disregarded under paragraph (b)(3) of this section.

(ii) Economic risk of loss . For purposes of this paragraph (j)(2), partners are considered to bear the economic risk of loss for a liability in accordance with their relative economic burdens for the liability pursuant to the contractual obligations. For example, a lease between a partner and a partnership that is not on commercially reasonable terms may be tantamount to a guarantee by the partner of the partnership liability.

(j)(3) through (l)(1) [Reserved]. For further guidance, see § 1.752–2(j)(3) through (l)(1).

(2) Paragraph (b)(3), paragraph (f) Ex- amples 10 and 11, and paragraph (j)(2) of this section apply to liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken with respect to a partnership liability on or after October 5, 2016, other than liabilities incurred or assumed by a partnership and payment obligations imposed or undertaken pursuant to a written binding contract in effect prior to that date. Partnerships may apply paragraph (b)(3), paragraph (f) Examples 10 and 11, and paragraph (j)(2) of this section to all of their liabilities as of the beginning of the first taxable year of the partnership ending on or after October 5, 2016. The rules applicable to liabilities incurred or assumed (or subject to a written binding contract in effect) prior to October 5, 2016 are contained in § 1.752–2 in effect prior to October 5, 2016 (see 26 CFR part 1 revised as of April 1, 2016).

(3) If a partner has a share of a recourse partnership liability under § 1.752–2(a) as a result of bearing the economic risk of loss under § 1.752–2(b) immediately prior to October 5, 2016 (Transition Partner), the partnership (Transition Partnership) may choose not to apply paragraph (b)(3), paragraph (f) Examples 10 and 11, and paragraph (j)(2)(i)(C)( 2 ) of this section to

the extent the amount of the Transition Partner’s share of liabilities under § 1.752–2(a) as a result of bearing the economic risk of loss under § 1.752–2(b) immediately prior to October 5, 2016 exceeds the amount of the Transition Partner’s adjusted basis in its partnership interest as determined under § 1.705–1 at such time (Grandfathered Amount). A Transition Partner that is a partnership, S corporation, or a business entity disregarded as an entity separate from its owner under section 856(i) or 1361(b)(3) or §§ 301.7701–1 through 301.7701–3 of this chapter ceases to qualify as a Transition Partner if the direct or indirect ownership of that Transition Partner changes by 50 percent or more. The Transition Partnership may continue to apply the rules under § 1.752–2 in effect prior to October 5, 2016, with respect to a Transition Partner for payment obligations described in § 1.752–2(b) to the extent of the Transition Partner’s adjusted Grandfathered Amount for the seven-year period beginning October 5, 2016. The termination of a Transition Partnership under section 708(b)(1)(B) and applicable regulations does not affect the Grandfathered Amount of a Transition Partner that remains a partner in the new partnership (as described in § 1.708–1(b)(4)), and the new partnership is treated as a continuation of the Transition Partnership for purposes of this paragraph (l)(3). However, a Transition Partner’s Grandfathered Amount is reduced (not below zero), but never increased by—

(i) Upon the sale of any property by the Transition Partnership, an amount equal to the excess of any gain allocated for federal income tax purposes to the Transition Partner by the Transition Partnership (including amounts allocated under section 704(c) and applicable regulations) over the product of the total amount realized by the Transition Partnership from the property sale multiplied by the Transition Partner’s percentage interest in the partnership; and

(ii) An amount equal to any decrease in the Transition Partner’s share of liabilities to which the rules of this paragraph (l)(3) apply, other than by operation of paragraph (l)(3)(i) of this section.

(m) Expiration date . This section expires on October 4, 2019.

December 27, 2016 898 Bulletin No. 2016–52

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: August 29, 2016.

Mark J. Mazur, Assistant Secretary of the

Treasury (Tax Policy).

(Filed by the Office of the Federal Register on October 4, 2016, 8:45 a.m., and published in the issue of the Federal Register for October 5, 2016, 81 F.R.69282)

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

T.D. 9800

Covered Asset Acquisitions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary Income Tax Regulations under section 901(m) of the Internal Revenue Code (Code) with respect to transactions that generally are treated as asset acquisitions for U.S. income tax purposes and either are treated as stock acquisitions or are disregarded for foreign income tax purposes. These regulations are necessary to provide guidance on applying section 901(m). The text of the temporary regulations also serves in part as the text of the proposed regulations under section 901(m) (REG–129128–14) published in the Proposed Rules section of this issue of the Bulletin .

DATES: Effective date : These regulations are effective on December 7, 2016. Applicability dates : For dates of applicability, see §§ 1.901(m)–1T(b), 1.901(m)– 2T(f), 1.901(m)–4T(g), 1.901(m)–5T(i), and 1.901(m)–6T(d).

FOR FURTHER INFORMATION CONTACT: Jeffrey L. Parry, (202) 317-6936 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

I. Section 901(m)

Section 212 of the Education Jobs and Medicaid Assistance Act (EJMAA), enacted on August 10, 2010 (Public Law 111–226), added section 901(m) to the Code. Section 901(m)(1) provides that, in the case of a covered asset acquisition (CAA), the disqualified portion of any foreign income tax determined with respect to the income or gain attributable to relevant foreign assets (RFAs) will not be taken into account in determining the foreign tax credit allowed under section 901(a), and in the case of foreign income tax paid by a section 902 corporation (as defined in section 909(d)(5)), will not be taken into account for purposes of section 902 or 960. Instead, the disqualified portion of any foreign income tax (the disqualified tax amount) is permitted as a deduction. See section 901(m)(6).

Under section 901(m)(2), a CAA is (i) a qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) applies; (ii) any transaction that is treated as an acquisition of assets for U.S. income tax purposes and as the acquisition of stock of a corporation (or is disregarded) for purposes of a foreign income tax; (iii) any acquisition of an interest in a partnership that has an election in effect under section 754; and (iv) to the extent provided by the Secretary, any other similar transaction.

Section 901(m)(3)(A) provides that the term “disqualified portion” means, with respect to any CAA, for any taxable year, the ratio (expressed as a percentage) of (i) the aggregate basis differences (but not below zero) allocable to such taxable year with respect to all RFAs; divided by (ii) the income on which the foreign income tax referenced in section 901(m)(1) is determined. If the taxpayer fails to substantiate the income on which the foreign income tax is determined to the satisfaction of the Secretary, such income will be determined by dividing the amount of such foreign income tax by the highest marginal tax rate applicable to the taxpayer’s income in the relevant jurisdiction.

Section 901(m)(3)(B)(i) provides the general rule that the basis difference with respect to any RFA will be allocated to

taxable years using the applicable cost recovery method for U.S. income tax purposes. Section 901(m)(3)(B)(ii) provides that, except as otherwise provided by the Secretary, if there is a disposition of an RFA, the basis difference allocated to the taxable year of the disposition will be the excess of the basis difference of such asset over the aggregate basis difference of such asset that has been allocated to all prior taxable years. The statute further provides that no basis difference with respect to such asset will be allocated to any taxable year thereafter.

Section 901(m)(3)(C)(i) provides that basis difference means, with respect to any RFA, the excess of (i) the adjusted basis of such asset immediately after the CAA, over (ii) the adjusted basis of such asset immediately before the CAA. If the adjusted basis of an RFA immediately before the CAA exceeds the adjusted basis of the RFA immediately after the CAA (that is, where the adjusted basis of an asset with a built-in loss is reduced in a CAA), such excess is taken into account as a basis difference of a negative amount. See section 901(m)(3)(C)(ii).

Section 901(m)(4) provides that an RFA means, with respect to a CAA, an asset (including goodwill, going concern value, or other intangible) with respect to such acquisition if income, deduction, gain, or loss attributable to such asset is taken into account in determining the foreign income tax referenced in section 901(m)(1). Section 901(m)(7) provides that the Secretary may issue regulations or other guidance as is necessary or appropriate to carry out the purposes of section 901(m).

II. Notices 2014–44 and 2014–45

The Department of the Treasury (Treasury Department) and the IRS issued Notice 2014–44 (2014–32 I.R.B 270 (July 21, 2014)) and Notice 2014–45 (2014–34 I.R.B. 388 (July 29, 2014)), announcing the intent to issue regulations addressing the application of section 901(m) to dispositions of RFAs following CAAs and to CAAs described in section 901(m)(2)(C) (regarding section 754 elections).

The notices were issued in response to certain taxpayers engaging in transactions shortly after a CAA with the intention of invoking the application of the statutory

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disposition rule under section 901(m) (3)(B)(ii) to avoid the purposes of section 901(m). To address these transactions, Notice 2014–44 described the definition of disposition that would be set forth in future regulations, as well as the rules for determining the portion of basis difference that would be taken into account upon a disposition of an RFA (the disposition amount). In addition, Notice 2014–44 described the computation of basis difference and disposition amount with respect to an RFA that is subject to a section 743(b) CAA. Notice 2014–44 also announced that future regulations would provide successor rules for the continued application of section 901(m) after a subsequent transfer of an RFA with remaining basis difference. Notice 2014–44 further provided that future regulations would provide that, if an asset is an RFA with respect to two section 743(b) CAAs involving the same partnership interest, the RFA will be treated as having no remaining basis difference with respect to the first section 743(b) CAA if the basis difference with respect to the second section 743(b) CAA is determined independently from the first section 743(b) CAA. In this regard, see generally § 1.743–1(f) and proposed § 1.743–1(f)(2).

Notice 2014–44 provided that the future regulations described therein would apply (i) concerning dispositions, to dispositions occurring on or after July 21, 2014 (the date Notice 2014–44 was issued), (ii) concerning section 743(b) CAAs, to section 743(b) CAAs occurring on or after July 21, 2014, unless a taxpayer consistently applied those provisions to all section 743(b) CAAs occurring on or after January 1, 2011, and (iii) concerning successor rules, to remaining basis difference with respect to an RFA as of July 21, 2014, and any basis difference with respect to an RFA that arises in a CAA occurring on or after July 21, 2014. Notice 2014–45 provided that the future regulations described in Notice 2014–44 also would apply to determine the tax consequences under section 901(m) of an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014 (the date Notice 2014–45 was issued), including whether a disposition results from the election for purposes of section 901(m) and the treatment of any

remaining basis difference that results from such an election.

III. Proposed Regulations Under Section 901(m)

Proposed regulations under section 901(m) are being issued at the same time as these temporary regulations. In addition to cross-referencing these temporary regulations, the proposed regulations provide guidance under section 901(m) concerning issues not addressed in the temporary regulations. Consulting the preamble to the proposed regulations is recommended for a better understanding of how these temporary regulations are intended to work.

Explanation of Provisions

I. Overview

Section 1.901(m)–1T provides definitions that apply for purposes of the temporary regulations. Section 1.901(m)–2T identifies the transactions that are CAAs and the assets that are RFAs with respect to a CAA. Section 1.901(m)–4T provides the general rule for determining basis difference with respect to an RFA under section 901(m)(3)(C), as well as a special rule for determining basis difference with respect to an RFA that arises as a result of an acquisition of an interest in a partnership that has made a section 754 election (section 743(b) CAA). Section 1.901 (m)–5T provides rules for taking into account basis difference under the applicable cost recovery method or as a result of a disposition of an RFA. Section 1.901(m)–6T provides successor rules for applying section 901(m) to subsequent transfers of RFAs that have basis difference that has not yet been fully taken into account.

II. Effective/Applicability Dates

The applicability dates of the temporary regulations relate back to the issuance of Notices 2014–44 and 2014–45. Accordingly, the temporary regulations apply to CAAs occurring on or after July 21, 2014, and to CAAs occurring before that date resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014 (re

ferred to as the general applicability date). The temporary regulations also apply to CAAs occurring on or after January 1, 2011, and before the general applicability date (the transition period), but only if the basis difference within the meaning of section 901(m)(3)(C)(i) (statutory basis difference) in one or more RFAs with respect to such a CAA had not been fully taken into account under section 901(m)(3)(B) either as of July 21, 2014, or, in the case of an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, prior to the transactions that are deemed to occur under § 301.7701–3(g) as a result of the change in classification.

Taxpayers also may choose to consistently apply § 1.901(m)–4T(d)(1) (regarding the determination of basis difference in an RFA with respect to a section 743(b) CAA) to all section 743(b) CAAs occurring on or after January 1, 2011.

III. CAAs and RFAs

Section 1.901(m)–2T(b) identifies the transactions that are CAAs under section 901(m)(2)(A) through (C). Section 1.901 (m)–2T(c) provides that, with respect to a foreign income tax and a CAA, an RFA is any asset (including goodwill, going concern value, or other intangible) subject to the CAA that is relevant in determining foreign income for purposes of the foreign income tax. An asset is subject to a CAA, if, for example (i) in the case of a qualified stock purchase of a target corporation (as defined in section 338(d)(3)) to which section 338(a) applies, “new” target is treated as purchasing the asset from “old” target; (ii) in the case of a taxable acquisition of a disregarded entity that is treated as an acquisition of stock for foreign income tax purposes, the asset is owned by the disregard entity at that time of the purchase and therefore the buyer is treated as purchasing the asset from the seller; and (iii) in the case of a section 743(b) CAA, the asset is attributable to the partnership interest transferred in the section 743(b) CAA.

Section 1.901(m)–2T(d) provides that the statutory definitions under section 901(m)(2) and 901(m)(4) apply to determine whether a transaction that occurred during the transition period is a CAA and

December 27, 2016 900 Bulletin No. 2016–52

which assets are RFAs with respect to those CAAs, respectively.

IV. Determining Basis Difference with Respect to an RFA

A basis difference is computed separately with respect to each foreign income tax for which an asset is an RFA. Consistent with section 901(m)(3)(C), § 1.901 (m)–4T(b) provides the general rule that basis difference with respect to an RFA is the U.S. basis in the RFA immediately after the CAA, less the U.S. basis in the RFA immediately before the CAA. If, however, an asset is an RFA with respect to a section 743(b) CAA, § 1.901(m)– 4T(d) provides that basis difference with respect to the RFA is the resulting basis adjustment under section 743(b) that is allocated to the RFA under section 755.

Section 1.901(m)–2T(e) “resets” the basis difference in an RFA with respect to a CAA that occurred during the transition period by defining basis difference in the RFA as the portion of statutory basis difference that had not been taken into account under section 901(m)(3)(B) either as of July 21, 2014, or, in the case of an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, prior to the transactions that are deemed to occur under § 301.7701–3(g) as a result of the change in classification. This is the basis difference in the RFA for the period to which the temporary regulations apply.

V. Basis Difference Taken into Account

Section 1.901(m)–5T provides rules for determining the amount of basis difference with respect to an RFA that is taken into account in a given U.S. taxable year (allocated basis difference). The amount of basis difference taken into account in a U.S. taxable year is used to compute a disqualified tax amount for the U.S. taxable year. Basis difference is taken into account in two ways: under an applicable cost recovery method or as a result of a disposition of the RFA. If an asset is an RFA with respect to more than one foreign income tax, basis difference with respect to each foreign income tax is separately taken into account under § 1.901(m)–5T.

A. Determining cost recovery amounts

Consistent with section 901(m)(3) (B)(i), § 1.901(m)–5T(b)(2) provides that a cost recovery amount for an RFA is determined by applying an applicable cost recovery method to the basis difference rather than to the U.S. basis of the RFA.

B. Determining disposition amounts

1. Overview

Section 901(m)(3)(B)(ii) provides that, except as otherwise provided by the Secretary, if there is a disposition of an RFA, the basis difference allocated to the U.S. taxable year of the disposition shall be the excess of the basis difference of such RFA over the total amount of such basis difference that has been allocated to all prior U.S. taxable years (unallocated basis difference). This result is appropriate when all the gain or loss from the disposition is recognized for both U.S. and foreign income tax purposes. In other cases, however, a disposition may not be the appropriate time for all of the unallocated basis difference to be taken into account. For example, it may not be appropriate for all of the unallocated basis difference to be taken into account upon a disposition that is fully taxable for U.S. income tax purposes but not for foreign income tax purposes. Accordingly, under the specific authority granted to the Secretary with respect to dispositions, these temporary regulations provide rules to determine when less than all of the unallocated basis difference is taken into account as a result of a disposition.

2. Definition of disposition

Section 1.901(m)–1T(a)(10) defines a disposition for purposes of section 901(m) as an event that results in gain or loss being recognized with respect to an RFA for purposes of U.S. income tax or foreign income tax, or both. Thus, the definition excludes certain transfers that might otherwise be considered dispositions under the ordinary meaning of that term. For example, an entity classification election by an RFA owner that results in a tax-free deemed liquidation for U.S. income tax purposes but that is disregarded for for

eign income tax purposes does not result in a disposition of the RFAs under section 901(m), because no gain or loss is recognized for U.S. or foreign income tax purposes with respect to the distribution of the RFAs in the deemed liquidation. This is the case even though the deemed liquidation might otherwise be considered a “disposition” of assets under other provisions of the Code.

3. Determining a disposition amount

Section 1.901(m)–5T(c)(2) provides rules for determining a disposition amount. If a disposition of an RFA is fully taxable for U.S. and foreign income tax purposes, the disposition amount will be any remaining unallocated basis difference with respect to that RFA. This is because there generally will no longer be a disparity in the U.S. basis and the foreign basis of the RFA.

If a disposition is not fully taxable for both U.S. and foreign income tax purposes, generally there will continue to be a disparity in the U.S. basis and the foreign basis following the disposition, and it will be appropriate for the RFA to continue to have unallocated basis difference. To the extent that the disparity in the U.S. basis and the foreign basis is reduced as a result of the disposition, however, a portion of the unallocated basis difference (or, in certain cases, all of the unallocated basis difference) should be taken into account. Whether the disposition reduces the basis disparity will depend on whether the basis difference is positive or negative and the jurisdiction in which gain or loss is recognized.

If an RFA has a positive basis difference, a reduction in basis disparity generally will occur upon a disposition of the RFA if (i) a foreign disposition gain is recognized, which generally results in an increase in the foreign basis of the RFA, or (ii) a U.S. disposition loss is recognized, which generally results in a decrease in the U.S. basis of the RFA. Accordingly, if an RFA has a positive basis difference, the disposition amount equals the lesser of (i) any foreign disposition gain plus any U.S. disposition loss (for this purpose, expressed as a positive amount), or (ii) unallocated basis difference. See § 1.901(m)–5T(c)(2)(ii)(A).

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If an RFA has a negative basis difference, a reduction in basis disparity generally will occur upon a disposition of the RFA if (i) a foreign disposition loss is recognized, which generally results in a decrease in the foreign basis of the RFA, or (ii) a U.S. disposition gain is recognized, which generally results in an increase in the U.S. basis of the RFA. Accordingly, if an RFA has a negative basis difference, the disposition amount equals the greater of (i) any U.S. disposition gain (for this purpose, expressed as a negative amount) plus any foreign disposition loss, or (ii) unallocated basis difference. See § 1.901(m)–5T(c)(2)(ii)(B).

For the avoidance of doubt, the determination of whether there is a disposition for U.S. income tax purposes, and the amount of U.S. disposition gain or U.S. disposition loss, is made without regard to whether gain or loss is deferred or disallowed or otherwise not taken into account currently (for example, see section 267, which defers or disallows certain recognized losses, and § 1.1502–13, which provides rules for taking into account items of income, gain, deduction, and loss of members of a U.S. consolidated group from intercompany transactions). This principle also applies if foreign law has an equivalent concept whereby gain or loss that is realized and recognized is deferred or disallowed.

If an asset is an RFA by reason of a section 743(b) CAA and subsequently there is a disposition of the RFA, then for purposes of determining the disposition amount, foreign disposition gain or foreign disposition loss means the amount of gain or loss recognized for purposes of a foreign income tax on the disposition of the RFA that is allocable to the partnership interest that was transferred in the section 743(b) CAA. See § 1.901(m)– 5T(c)(2)(iii). In addition, U.S. disposition gain or U.S. disposition loss means the amount of gain or loss recognized for U.S. income tax purposes on the disposition of the RFA that is allocable to the partnership interest that was transferred in the section 743(b) CAA, taking into account the basis adjustment under section 743(b) that was allocated to the RFA under section 755 in the section 743(b) CAA. See id.

VI. Successor Rules for Unallocated Basis Difference

A. General rules

Section 1.901(m)–6T(b) provides that section 901(m) continues to apply to any unallocated basis difference with respect to an RFA after there is a transfer of the RFA for U.S. income tax purposes (successor transaction), regardless of whether the transfer is a disposition, a CAA, or a non-taxable transaction. A successor transaction does not occur if, as a result of the transfer of an RFA, the entire unallocated basis difference is taken into account because, for example, the transfer results in all realized gain or loss in the RFA being recognized for U.S. and foreign income tax purposes.

Notice 2014–44 stated that the Treasury Department and the IRS are continuing to study whether and to what extent section 901(m) should apply to an asset received in exchange for an RFA in a transaction in which the U.S. basis of the asset is determined by reference to the U.S. basis of the transferred RFA. The Treasury Department and the IRS have determined that an asset should not become an RFA solely because the U.S. basis of that asset is determined by reference to the U.S. basis of an RFA for which the asset is exchanged in a successor transaction. Accordingly, for example, if, in a successor transaction, an RFA owner transfers an RFA to a corporation in a transfer to which section 351 applies, the stock of the transferee corporation received is not an RFA even though the U.S. basis of the stock is determined under section 358 by reference to the U.S. basis of the RFA transferred.

B. Successor transactions that are CAAs

An asset may be an RFA with respect to multiple CAAs if a successor transaction is also a CAA (subsequent CAA). In this case, the subsequent CAA may give rise to additional basis difference. Section 1.901(m)–6T(b)(4)(i) provides generally that the unallocated basis difference with respect to a CAA that occurred prior to the subsequent CAA (referred to in the regulations as a “prior CAA”) will continue to

be taken into account under section 901(m) after the subsequent CAA. Section 1.901(m)–6T(b)(4)(iii) provides an exception to the general rule if an RFA is subject to two section 743(b) CAAs (referred to in the regulations as a “prior section 743(b) CAA” and a “subsequent section 743(b) CAA”). In this case, to the extent the same partnership interest is transferred in the section 743(b) CAAs, the RFA will be treated as having no unallocated basis difference with respect to the prior section 743(b) CAA if basis difference for the subsequent section 743(b) CAA is determined independently from the prior section 743(b) CAA. In this regard, see generally § 1.743–1(f) and proposed § 1.743–1(f)(2). If the subsequent section 743(b) CAA results from the acquisition of only a portion of the partnership interest acquired in the prior section 743(b) CAA, the transferor must equitably apportion the unallocated basis difference attributable to the prior section 743(b) CAA between the portion of the interest retained and the portion of the interest transferred. With respect to the portion transferred, the RFA will be treated as having no unallocated basis difference attributable to the prior section 743(b) CAA.

VII. Definition of Foreign Income Tax

For purposes of section 901(m), the temporary regulations define “foreign income tax” as any income, war profits, or excess profits tax for which a credit is allowable under section 901 or 903, other than any withholding tax determined on a gross basis as described in section 901(k)(1)(B). The Treasury Department and the IRS have determined that a withholding tax should not be subject to disallowance under section 901(m) because a withholding tax is a gross basis tax that is generally unaffected by changes in asset basis.

Effect on Other Documents

The following publications are obsolete as of December 7, 2016:

Notice 2014–44 (2014–32 I.R.B. 270) and Notice 2014–45 (2014–34 I.R.B. 388).

December 27, 2016 902 Bulletin No. 2016–52

Special Analyses

Certain IRS regulations, including these, are exempt from the requirements of Executive Order 12866, as supplemented and reaffirmed by Executive Order 13563. Therefore, a regulatory impact assessment is not required. For the applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analyses section of the preamble of the cross-referenced notice of proposed rulemaking published in this issue of the Fed- eral Register. Pursuant to section 7805(f) of the Internal Revenue Code, these regulations has been 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 Jeffrey L. Parry of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

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Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805 - - Sections 1.901(m)–1T through –8T also issued under 26 U.S.C. 901(m)(7).

Section 1.901(m)–5T also issued under 26 U.S.C. 901(m)(3)(B)(ii). - - Par. 2. Section 1.901(m)–1T is added to read as follows:

§ 1.901(m)–1T Definitions (temporary) .

(a) Definitions . For purposes of section 901(m), this section, and §§ 1.901(m)–2T through 1.901(m)–8T, the following definitions apply:

(1)–(5) [Reserved]. (6) The term basis difference has the meaning provided in § 1.901(m)–4T.

(7) The term cost recovery amount has the meaning provided in § 1.901(m)– 5T(b)(2). (8) The term covered asset acquisition (or CAA ) has the meaning provided in § 1.901(m)–2T.

(9) [Reserved]. (10) The term disposition means an event (for example, a sale, abandonment, or mark-to-market event) that results in gain or loss being recognized with respect to an RFA for purposes of U.S. income tax or a foreign income tax, or both.

(11) The term disposition amount has the meaning provided in § 1.901(m)– 5T(c)(2). (12) [Reserved]. (13) The term disregarded entity means an entity that is disregarded as an entity separate from its owner, as described in § 301.7701–2(c)(2)(i) of this chapter.

(14) The term fiscally transparent en- tity means an entity, including a disregarded entity, that is fiscally transparent under the principles of § 1.894–1(d)(3) for purposes of U.S. income tax or a foreign income tax (or both).

(15)–(17) [Reserved]. (18) The term foreign disposition gain means, with respect to a foreign income tax, the amount of gain recognized on a disposition of an RFA in determining foreign income, regardless of whether the gain is deferred or otherwise not taken into account currently. Notwithstanding the foregoing, if after a section 743(b) CAA there is a disposition of an asset that is an RFA with respect to that section 743(b) CAA, foreign disposition gain has the meaning provided in § 1.901(m)– 5T(c)(2)(iii). (19) The term foreign disposition loss means, with respect to a foreign income tax, the amount of loss recognized on a disposition of an RFA in determining foreign income, regardless of whether the loss is deferred or disallowed or otherwise not taken into account currently. Notwithstanding the foregoing, if after a section 743(b) CAA there is a disposition of an asset that is an RFA with respect to that section 743(b) CAA, foreign disposition loss has the meaning provided in § 1.901(m)–5T(c)(2)(iii).

(20) The term foreign income means, with respect to a foreign income tax, the

taxable income (or loss) reflected on a foreign tax return (as properly amended or adjusted), even if the taxable income (or loss) is reported by an entity that is a fiscally transparent entity for purposes of the foreign income tax. If, however, foreign law imposes tax on the combined income (within the meaning of § 1.901– 2(f)(3)(ii)) of two or more foreign payors, foreign income means the combined taxable income (or loss) of such foreign payors, regardless of whether such income (or loss) is reflected on a single foreign tax return.

(21) The term foreign income tax means an income, war profits, or excess profits tax for which a credit is allowable under section 901 or 903, except that it does not include any withholding tax determined on a gross basis as described in section 901(k)(1)(B).

(22)–(25) [Reserved]. (26) The term prior CAA has the meaning provided in § 1.901(m)–6T(b)(2).

(27) The term prior section 743(b) CAA has the meaning provided in § 1.901(m)–6T(b)(4)(iii).

(28) The term relevant foreign asset (or RFA ) has the meaning provided in § 1.901(m)–2T.

(29–(32) [Reserved]. (33) The term section 338 CAA has the meaning provided in § 1.901(m)– 2T(b)(1). (34) The term section 743(b) CAA has the meaning provided in § 1.901(m)– 2T(b)(3). (35) [Reserved]. (36) The term subsequent CAA has the meaning provided in § 1.901(m)– 6T(b)(4)(i). (37) The term subsequent section 743(b) CAA has the meaning provided in § 1.901(m)–6T(b)(4)(iii).

(38) The term successor transaction has the meaning provided in § 1.901(m)– 6T(b)(2). (39) [Reserved]. (40) The term unallocated basis differ- ence means, with respect to an RFA and a foreign income tax, the basis difference reduced by the sum of the cost recovery amounts and the disposition amounts that have been computed under § 1.901(m)– 5T.

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(41) The term U.S. basis means the adjusted basis of an asset determined for U.S. income tax purposes.

(42) [Reserved]. (43) The term U.S. disposition gain means the amount of gain recognized for U.S. income tax purposes on a disposition of an RFA, regardless of whether the gain is deferred or otherwise not taken into account currently. Notwithstanding the foregoing, if after a section 743(b) CAA there is a disposition of an asset that is an RFA with respect to that section 743(b) CAA, U.S. disposition gain has the meaning provided in § 1.901(m)–5T(c)(2)(iii).

(44) The term U.S. disposition loss means the amount of loss recognized for U.S. income tax purposes on a disposition of an RFA, regardless of whether the loss is deferred or disallowed or otherwise not taken into account currently. Notwithstanding the foregoing, if after a section 743(b) CAA there is a disposition of an asset that is an RFA with respect to that section 743(b) CAA, U.S. disposition loss has the meaning provided in § 1.901(m)– 5T(c)(2)(iii). (45) The term U.S. taxable year means a taxable year as defined in section 7701(a)(23). (b) Effective/applicability date . (1)

[Reserved].

(2) Paragraphs (a)(6), (7), (8), (10), (11), (13), (14), (18), (19), (20), (21), (26), (27), (28), (33), (34), (36), (37), (38), (40), (41), (43), (44), and (45) of this section apply to CAAs occurring on or after July 21, 2014, and to CAAs occurring before that date resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Paragraphs (a)(6), (7), (8), (10), (11), (13), (14), (18), (19), (20), (21), (26), (27), (28), (33), (34), (36), (37), (38), (40), (41), (43), (44), and (45) of this section also apply to CAAs occurring on or after January 1, 2011, and before July 21, 2014, other than CAAs occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, but only if the basis difference (within the meaning of section 901(m) (3)(C)(i)) in one or more RFAs with respect to the CAA had not been fully taken

into account under section 901(m)(3)(B) either as of July 21, 2014, or, in the case of an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, prior to the transactions that are deemed to occur under § 301.7701–3(g) as a result of the change in classification.

(3) [Reserved]. (c) Expiration date . The applicability of this section expires on December 6, 2019. Par. 3. Section 1.901(m)–2T is added to read as follows:

§ 1.901(m)–2T Covered asset acquisitions and relevant foreign assets (temporary) .

(a) In general . Paragraph (b) of this section sets forth the transactions that are covered asset acquisitions (or CAAs). Paragraph (c) of this section provides rules for identifying assets that are relevant foreign assets (or RFAs) with respect to a CAA. Paragraph (d) of this section provides special rules for identifying CAAs and RFAs with respect to transactions to which paragraphs (b) and (c) of this section do not apply. Paragraph (e) of this section provides examples illustrating the rules of this section. Paragraph (f) of this section provides the effective/applicability date, and paragraph (g) of this section provides the expiration date.

(b) Covered asset acquisitions . Except as provided in paragraph (d) of this section, the transactions set forth in this paragraph (b) are CAAs.

(1) A qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) applies (section 338 CAA);

(2) Any transaction that is treated as an acquisition of assets for U.S. income tax purposes and as an acquisition of stock of a corporation (or the transaction is disregarded) for foreign income tax purposes;

(3) Any acquisition of an interest in a partnership that has an election in effect under section 754 (section 743(b) CAA);

(4)–(6) [Reserved]. (c) Relevant foreign asset —(1) In gen- eral . Except as provided in paragraph (d) of this section, an RFA means, with respect to a foreign income tax and a CAA, any asset (including goodwill, going con

cern value, or other intangible) subject to the CAA that is relevant in determining foreign income for purposes of the foreign income tax.

(2) RFA status with respect to a foreign income tax [Reserved].

(3) Subsequent RFA status with respect to another foreign income tax [Reserved].

(d) Identifying covered asset acquisi- tions and relevant foreign assets to which paragraphs (b) and (c) of this section do not apply . For transactions occurring on or after January 1, 2011, and before July 21, 2014, other than transactions occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, the transactions set forth under section 901(m)(2) are CAAs and the assets that are relevant foreign assets with respect to the CAA under section 901(m)(4) are RFAs.

(e) Examples . [Reserved]. (f) Effective/applicability date —(1) Paragraphs (a), (b)(1) through (3), and (c)(1) of this section apply to transactions occurring on or after July 21, 2014, and to transactions occurring before that date resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Paragraph (d) of this section applies to transactions occurring on or after January 1, 2011, and before July 21, 2014, other than transactions occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014.

(2)–(3) [Reserved]. (g) Expiration date . The applicability of this section expires on December 6, 2019. Par. 4. Section 1.901(m)–3T is added and reserved to read as follows:

§ 1.901(m)–3T Disqualified tax amount and aggregate basis difference carryover (temporary) . [Reserved].

Par. 5. Section 1.901(m)–4T is added to read as follows:

December 27, 2016 904 Bulletin No. 2016–52

§ 1.901(m)–4T Determination of basis difference (temporary) .

(a) In general . This section provides rules for determining for each RFA the basis difference that arises as a result of a CAA. A basis difference is computed separately with respect to each foreign income tax for which an asset subject to a CAA is an RFA. Paragraph (b) of this section provides the general rule for determining basis difference that references only U.S. basis in the RFA. Paragraph (c) of this section provides for an election to determine basis difference by reference to foreign basis and sets forth the procedures for making the election. Paragraph (d) of this section provides special rules for determining basis difference in the case of a section 743(b) CAA. Paragraph (e) of this section provides a special rule for determining basis difference in an RFA with respect to a CAA to which paragraphs (b) through (d) of this section do not apply. Paragraph (f) of this section provides examples illustrating the rules of this section. Paragraph (g) of this section provides the effective/applicability date, and paragraph (h) of this section provides the expiration date.

(b) General rule . Except as otherwise provided in paragraphs (c), (d), and (e) of this section, basis difference is the U.S. basis in the RFA immediately after the CAA, less the U.S. basis in the RFA immediately before the CAA. Basis difference is an attribute that attaches to an RFA.

(c) Foreign basis election . [Reserved]. (d) Determination of basis difference in a section 743(b) CAA —(1) In general . Except as provided in paragraphs (d)(2) and (e) of this section, if there is a section 743(b) CAA, basis difference is the resulting basis adjustment under section 743(b) that is allocated to the RFA under section 755. (2) Foreign basis election . [Reserved]. (e) Determination of basis difference in an RFA with respect to a CAA with re- spect to which paragraphs (b), (c), and (d) of this section do not apply . For CAAs occurring on or after January 1, 2011, and before July 21, 2014, other than CAAs occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 of this chapter that is

filed on or after July 29, 2014, and that is effective on or before July 21, 2014, basis difference in an RFA with respect to the CAA is the amount of any basis difference (within the meaning of section 901 (m)(3)(C)(i)) that had not been taken into account under section 901(m)(3)(B) either as of July 21, 2014, or, in the case of an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, prior to the transactions that are deemed to occur under § 301.7701–3(g) as a result of the change in classification.

(f) Examples . [Reserved]. (g) Effective/applicability date . (1) Paragraphs (a), (b), and (d)(1) of this section apply to CAAs occurring on or after July 21, 2014, and to CAAs occurring before that date resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Paragraph (e) of this section applies to CAAs occurring on or after January 1, 2011, and before July 21, 2014, other than CAAs occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Taxpayers may, however, consistently apply paragraph (d)(1) of this section to all section 743(b) CAAs occurring on or after January 1, 2011. For this purpose, persons that are related (within the meaning of section 267(b) or 707(b)) will be treated as a single taxpayer.

(2)–(3) [Reserved]. (h) Expiration date . The applicability of this section expires on December 6, 2019. Par. 6. Section 1.901(m)–5T is added to read as follows:

§ 1.901(m)–5T Basis difference taken into account (temporary) .

(a) In general . [Reserved]. (b) Basis difference taken into account under applicable cost recovery method (1) In general . [Reserved].

(2) Determining a cost recovery amount —(i) General rule . A cost recovery amount for an RFA is determined by applying the applicable cost recovery

method to the basis difference rather than to the U.S. basis.

(ii) U.S. basis subject to multiple cost recovery methods . [Reserved].

(3) Applicable cost recovery method .

[Reserved].

(c) Basis difference taken into account as a result of a disposition —(1) In gen- eral . [Reserved].

(2) Determiningadispositionamount (i) Disposition is fully taxable for pur- poses of both U.S. income tax and the foreign income tax . If a disposition of an RFA is fully taxable (that is, results in all gain or loss, if any, being recognized with respect to the RFA) for purposes of both U.S. income tax and the foreign income tax, the disposition amount is equal to the unallocated basis difference with respect to the RFA.

(ii) Disposition is not fully taxable for purposes of U.S. income tax or the foreign income tax (or both) . If the disposition of an RFA is not fully taxable for purposes of both U.S. income tax and the foreign income tax, the disposition amount is determined under this paragraph (c)(2)(ii). See § 1.901(m)–6T for rules regarding the continued application of section 901(m) if the RFA has any unallocated basis difference after determining the disposition amount under paragraph (c)(2)(ii)(A) or (B) of this section, as applicable.

(A) Positive basis difference . If the disposition of an RFA is not fully taxable for purposes of both U.S. income tax and the foreign income tax, and the RFA has a positive basis difference, the disposition amount equals the lesser of:

( 1 ) Any foreign disposition gain plus any U.S. disposition loss (for this purpose, expressed as a positive amount), or

( 2 ) Unallocated basis difference with respect to the RFA.

(B) Negative basis difference . If the disposition of an RFA is not fully taxable for purposes of both U.S. income tax and the foreign income tax, and the RFA has a negative basis difference, the disposition amount equals the greater of:

( 1 ) Any U.S. disposition gain (for this purpose, expressed as a negative amount) plus any foreign disposition loss, or

( 2 ) Unallocated basis difference with respect to the RFA.

(iii) Disposition of an RFA after a sec- tion 743(b) CAA . If an RFA was subject to

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a section 743(b) CAA and subsequently there is a disposition of the RFA, then, for purposes of determining the disposition amount, foreign disposition gain or foreign disposition loss are specially defined to mean the amount of gain or loss recognized for purposes of the foreign income tax on the disposition of the RFA that is allocable to the partnership interest that was transferred in the section 743(b) CAA. In addition, U.S. disposition gain or U.S. disposition loss are specially defined to mean the amount of gain or loss recognized for U.S. income tax purposes on the disposition of the RFA that is allocable to the partnership interest that was transferred in the section 743(b) CAA, taking into account the basis adjustment under section 743(b) that was allocated to the RFA under section 755.

(d) General rules for allocating and assigning a cost recovery amount or a disposition amount when the RFA owner (U.S.) is a fiscally transparent entity . [Reserved].

(e) Special rules for certain section 743(b) CAAs . [Reserved]. (f) Mid-year transactions . [Reserved]. (g) Reverse hybrids . [Reserved]. (h) Examples . [Reserved]. (i) Effective/applicability date . (1) [Reserved].

(2) Paragraphs (b)(2)(i) and (c)(2) of this section apply to CAAs occurring on or after July 21, 2014, and to CAAs occurring before that date resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Paragraphs (b)(2)(i) and (c)(2) of this section also apply to CAAs occurring on or after January 1, 2011, and before July 21, 2014, other than CAAs occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, but only with respect to basis difference determined under § 1.901(m)– 4T(e) with respect to the CAA. (3) [Reserved]. (j) Expiration date . The applicability of this section expires on December 6, 2019.

Par. 7. Section 1.901(m)–6T is added to read as follows:

§ 1.901(m)–6T Successor rules (temporary) .

(a) In general . This section provides successor rules applicable to section 901(m). Paragraph (b) of this section provides rules for the continued application of section 901(m) after an RFA that has unallocated basis difference has been transferred, including special rules applicable to successor transactions that are also CAAs or that involve partnerships. Paragraph (c) of this section provides rules for determining when an aggregate basis difference carryover of a section 901(m) payor either becomes an aggregate basis difference carryover of the section 901(m) payor with respect to another foreign payor or is transferred to another section 901(m) payor. Paragraph (d) of this section provides the effective/applicability date, and paragraph (e) of this section provides the expiration date.

(b) Successor rules for unallocated ba- sis difference —(1) In general . Except as provided in paragraph (b)(4) of this section, section 901(m) continues to apply after a successor transaction to any unallocated basis difference attached to a transferred RFA until the entire basis difference has been taken into account as a cost recovery amount or a disposition amount (or both) under § 1.901(m)–5T.

(2) Definition of a successor transac- tion . A successor transaction occurs with respect to an RFA if, after a CAA (prior CAA), there is a transfer of the RFA for U.S. income tax purposes and the RFA has unallocated basis difference with respect to the prior CAA, determined immediately after the transfer. A successor transaction may occur regardless of whether the transfer of the RFA is a disposition, a CAA, or a non-taxable transaction for purposes of U.S. income tax. If the RFA was subject to multiple prior CAAs, a separate determination must be made with respect to each prior CAA as to whether the transfer is a successor transaction.

(3) Special considerations . [Reserved]. (4) Successor transaction is a CAA (i) In general . An asset may be an RFA with respect to multiple CAAs if a successor transaction is also a CAA (subsequent CAA). Except as otherwise provided in this paragraph (b)(4), if there is a

subsequent CAA, unallocated basis difference with respect to any prior CAAs will continue to be taken into account under section 901(m) after the subsequent CAA. Furthermore, the subsequent CAA may give rise to additional basis difference subject to section 901(m).

(ii) Foreign basis election . [Reserved]. (iii) Multiple section 743(b) CAAs . If an RFA is subject to two section 743(b) CAAs (prior section 743(b) CAA and subsequent section 743(b) CAA) and the same partnership interest is acquired in both the CAAs, the RFA will be treated as having no unallocated basis difference with respect to the prior section 743(b) CAA if the basis difference for the section 743(b) CAA is determined independently from the prior section 743(b) CAA. In this regard, see generally § 1.743–1(f). If the subsequent section 743(b) CAA results from the acquisition of only a portion of the partnership interest acquired in the prior section 743(b) CAA, then the transferor will be required to equitably apportion the unallocated basis difference attributable to the prior section 743(b) CAA between the portion retained by the transferor and the portion transferred. In this case, with respect to the portion transferred, the RFAs will be treated as having no unallocated basis difference with respect to the prior section 743(b) CAA if basis difference for the subsequent section 743(b) CAA is determined independently from the prior section 743(b) CAA.

(5) Example . The following example illustrates the rules of paragraph (b) of this section.

Example . (i) Facts . USP, a domestic corporation, wholly owns CFC, a foreign corporation organized in Country A and treated as a corporation for both U.S. and Country A tax purposes. FT is an unrelated foreign corporation organized in Country A and treated as a corporation for both U.S. and Country A tax purposes. FT owns one asset, a parcel of land (Asset). Country A imposes a single tax that is a foreign income tax. On January 1, Year 1, CFC acquires all of the stock of FT in exchange for 300u in a qualified stock purchase (as defined in section 338(d)(3)) to which section 338(a) applies (Acquisition). Immediately before the Acquisition, Asset had a U.S. basis of 100u, and immediately after the Acquisition, Asset had a U.S. basis of 300u. Effective on February 1, Year 1, FT elects to be a disregarded entity pursuant to § 301.7701–3. As a result of the election, FT is deemed, for U.S. income tax purposes, to distribute Asset to CFC in liquidation (Deemed Liquidation) immediately before the closing of the day before the election is effective pursuant to § 301.7701–3(g)(1)(iii) and (3)(ii). The

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Deemed Liquidation is disregarded for Country A tax purposes. No gain or loss is recognized on the Deemed Liquidation for either U.S. or Country A tax purposes.

(ii) Result . Under § 1.901(m)–2T(b)(1), the Acquisition by CFC of the stock of FT is a section 338 CAA. Under § 1.901(m)–2T(c)(1), Asset is an RFA with respect to Country A tax and the Acquisition, because immediately after the Acquisition, Asset is relevant in determining foreign income of FT for Country A tax purposes, and FT owned Asset when the Acquisition occurred. Under § 1.901(m)–4T(b), the basis difference with respect to Asset is 200u (300u - 100u). Under § 1.901(m)–2T(b)(2), the Deemed Liquidation is a CAA (subsequent CAA) because the Deemed Liquidation is treated as an acquisition of assets for U.S. income tax purposes and is disregarded for Country A tax purposes. Because the U.S. basis in Asset is 300u immediately before and after the Deemed Liquidation, the subsequent CAA does not give rise to any additional basis difference. The Deemed Liquidation is not a disposition under § 1.901(m)–1T(a)(10) because it did not result in gain or loss being recognized with respect to Asset for U.S. or Country A tax purposes. Accordingly, no basis difference with respect to Asset is taken into account under § 1.901(m)–5T as a result of the Deemed Liquidation, and the unallocated basis difference with respect to Asset immediately after the Deemed Liquidation is 200u (200u – 0u). Under paragraph (b)(2) of this section, the Deemed Liquidation is a successor transaction because there is a transfer of Asset for U.S. income tax purposes from FT to CFC and Asset has unallocated basis difference with respect to the Acquisition immediately

after the Deemed Liquidation. Accordingly, under paragraph (b)(1) of this section, section 901(m) will continue to apply to the unallocated basis difference with respect to Asset until the entire 200u basis difference has been taken into account under § 1.901(m)–5T.

(c) Successor rules for aggregate basis difference carryover [Reserved].

(d) Effective/applicability date . (1) Paragraphs (a), (b)(1), (b)(2), (b)(4)(i), (b)(4)(iii), and (b)(5) of this section apply to CAAs occurring on or after July 21, 2014, and to CAAs occurring before that date resulting from an entity classification election made under § 301.7701–3 of this chapter that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014. Paragraphs (a), (b)(1), (b)(2), (b)(4)(i), (b)(4)(iii), and (b)(5) of this section also apply to CAAs occurring on or after January 1, 2011, and before July 21, 2014, other than CAAs occurring before July 21, 2014, resulting from an entity classification election made under § 301.7701–3 that is filed on or after July 29, 2014, and that is effective on or before July 21, 2014, but only with respect to basis difference determined under § 1.901(m)–4T(e) with respect to the CAA.

(2)–(3) [Reserved].

(e) Expiration date . The applicability of this section expires on December 6 , 2019. Par. 8. Sections 1.901(m)–7T and 1.901 (m)–8T are added and reserved to read as follows:

§ 1.901(m)–7T De minimis rules .

[Reserved].

§ 1.901(m)–8T Miscellaneous .

[Reserved].

John Dalrymple, Deputy Commissioner for Services and Enforcement.

Approved: November 4, 2016.

Mark J. Mazur, Assistant Secretary of the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on December 6, 2016, 8:45 a.m., and published in the issue of the Federal Register for December 7, 2016, 81 F.R. 88103)

Bulletin No. 2016–52 907 December 27, 2016