[Federal Register Volume 75, Number 110 (Wednesday, June 9, 2010)]
[Rules and Regulations]
[Pages 32659-32661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-13790]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9485]
RIN 1545-BF28
Contributed Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 704(c)
of the Internal Revenue Code (Code) providing that the section 704(c)
anti-abuse rule takes into account the tax liabilities of both the
partners in a partnership and certain direct and indirect owners of
such partners. These final regulations further provide that a section
704(c) allocation method cannot be used to achieve tax results
inconsistent with the intent of subchapter K of the Code. The final
regulations affect partnerships and their partners.
DATES: Effective Date: These final regulations are effective June 9,
2010.
Applicability Date: These final regulations are applicable for
taxable years beginning after June 9, 2010.
FOR FURTHER INFORMATION CONTACT: Bryan A. Rimmke at (202) 622-3050 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to 26 CFR part 1 under section
704 of the Internal Revenue Code (Code). On May 19, 2008, a notice of
proposed rulemaking (REG-100798-06, 2008-23 IRB 1135) was published in
the Federal Register (73 FR 28765) in response to the Joint Committee
on Taxation's recommendation that the partnership rules be strengthened
to ensure that the allocation rules in the regulations under section
704(c) are not used to generate unwarranted benefits. See The Report of
Investigation of Enron Corporation and Related Entities Regarding
Federal Tax and Compensation Issues, and Policy Recommendations, (JCS-
3-03) February 2003 at pg. 220. Because no requests to speak were
submitted by August 18, 2008, no public hearing was held. Written
comments, however, were
[[Page 32660]]
received in response to the notice of proposed rulemaking. After
consideration of these comments, the proposed regulations are adopted
without change by this Treasury decision.
Summary of Comments and Explanation of Provisions
The comments on the proposed regulations requested that examples be
given to specifically describe the types of transactions to which these
regulations apply. Additionally, the comments requested examples to
describe the types of transactions which would not be abusive under
this regulation but would be abusive under the general subchapter K
anti-abuse rule found in Sec. 1.701-2. In light of the fact that these
regulations are anti-abuse provisions and the factually intensive
analysis needed to determine whether this regulation is applicable, the
Treasury Department and the IRS decline to adopt these comments.
Additional comments requested that the Treasury Department and the
IRS consider both a de minimis partner rule for direct partners similar
to Sec. 1.704-1(b)(2)(iii) and a rule for indirect partners where the
owners would need to be related to the look-through entity within the
meaning of sections 267 or 707 in order to be considered indirect
partners for the purposes of the regulation. For purposes of Sec.
1.704-1(b)(2)(iii), a de minimis partner is any partner, including a
look-through entity, that owns less than 10 percent of the capital and
profits of a partnership, and who is allocated less than 10 percent of
each partnership item. The Treasury Department and the IRS have
determined that neither a de minimis partner provision nor a related
partner provision for indirect partners would conform to the intent of
this anti-abuse provision and therefore decline to adopt such rules.
This Treasury decision adopts the proposed regulations without
substantive change. Accordingly, the regulations amend Sec. 1.704-
3(a)(10) to provide that, for purposes of applying the anti-abuse rule,
both direct and indirect partners are considered. The final regulations
provide that an indirect partner is any direct or indirect owner of a
partnership, S corporation, or controlled foreign corporation (as
defined in section 957(a) or 953(c)), or direct or indirect beneficiary
of a trust or estate, that is a partner in the partnership, and any
consolidated group of which the partner in the partnership is a member
(within the meaning of Sec. 1.1502-1(h)). However, an owner of a
controlled foreign corporation is treated as an indirect partner only
with respect to the allocation of items that enter into the computation
of a United States shareholder's inclusion under section 951(a) with
respect to the controlled foreign corporation, enter into any person's
income attributable to a United States shareholder's inclusion under
section 951(a) with respect to the controlled foreign corporation, or
would enter into the computations described in this paragraph if such
items were allocated to the controlled foreign corporation.
These final regulations further provide that the principles of
section 704(c), together with the allocation methods described in Sec.
1.704-3, paragraphs (b), (c) and (d), apply only with respect to the
contributions of property to the partnership. In that regard, the anti-
abuse rule of Sec. 1.701-2(b) provides that, if a partnership is
formed or availed of in connection with a transaction a principal
purpose of which is to reduce substantially the present value of the
partners' Federal tax liability in a manner inconsistent with the
intent of subchapter K, the IRS may recast the transaction for Federal
tax purposes as appropriate to achieve tax results that are consistent
with the intent of subchapter K. Thus, even though a transaction may
satisfy the literal words of the statute or regulations, the IRS may
recast a transaction as appropriate to avoid tax results that are
inconsistent with the intent of subchapter K, including but not limited
to: (i) Disregarding purported partnerships, in whole or part, so that
partnership assets are treated as owned by the partner; (ii)
disregarding one or more contributions or (iii) disregarding one or
more purported partners. The final regulations also provide that, in
determining if a purported contribution of property to a partnership
should be recast to avoid results that are inconsistent with subchapter
K, one factor that may be relevant is the use of the remedial method in
which allocations of remedial items of income, gain, loss or deduction
are made to one partner and allocations of offsetting remedial items
are made to a related partner.
Effective/Applicability Date
These regulations apply to taxable years beginning after June 9,
2010. No inference should be drawn from this effective date with
respect to prior law.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking 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 author of these final regulations is Bryan A. Rimmke,
Office of the Associate Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.704-3 is amended by:
0
1. Adding four sentences to paragraph (a)(1) at the end of the last
sentence and revising paragraph (a)(10).
0
2. Revising the first sentence of paragraph (f) and adding one sentence
to the end of the paragraph.
The revisions and additions read as follows:
Sec. 1.704-3 Contributed property.
(a) * * * (1) * * * The principles of this paragraph (a)(1),
together with the methods described in paragraphs (b), (c) and (d) of
this section, apply only to contributions of property that are
otherwise respected. See for example Sec. 1.701-2. Accordingly, even
though a partnership's allocation method may be described in the
literal language of paragraphs (b), (c) or (d) of this section, based
on the particular facts and circumstances, the Commissioner can recast
the contribution as appropriate to avoid tax results inconsistent with
the intent of subchapter K. One factor that
[[Page 32661]]
may be considered by the Commissioner is the use of the remedial
allocation method by related partners in which allocations of remedial
items of income, gain, loss or deduction are made to one partner and
the allocations of offsetting remedial items are made to a related
partner.
* * * * *
(10) Anti-abuse rule--(i) In general. An allocation method (or
combination of methods) is not reasonable if the contribution of
property (or event that results in reverse section 704(c) allocations)
and the corresponding allocation of tax items with respect to the
property are made with a view to shifting the tax consequences of
built-in gain or loss among the partners in a manner that substantially
reduces the present value of the partners' aggregate tax liability. For
purposes of this paragraph (a)(10), all references to the partners
shall include both direct and indirect partners.
(ii) Definition of indirect partner. An indirect partner is any
direct or indirect owner of a partnership, S corporation, or controlled
foreign corporation (as defined in section 957(a) or 953(c)), or direct
or indirect beneficiary of a trust or estate, that is a partner in the
partnership, and any consolidated group of which the partner in the
partnership is a member (within the meaning of Sec. 1.1502-1(h)). An
owner (whether directly or through tiers of entities) of a controlled
foreign corporation is treated as an indirect partner only with respect
to allocations of items of income, gain, loss, or deduction that enter
into the computation of a United States shareholder's inclusion under
section 951(a) with respect to the controlled foreign corporation,
enter into any person's income attributable to a United States
shareholder's inclusion under section 951(a) with respect to the
controlled foreign corporation, or would enter into the computations
described in this sentence if such items were allocated to the
controlled foreign corporation.
* * * * *
(f) Effective/Applicability Dates. With the exception of paragraphs
(a)(1), (a)(8)(ii), (a)(8)(iii), (a)(10), and (a)(11) of this section,
this section applies to properties contributed to a partnership and to
restatements pursuant to Sec. 1.704-1(b)(2)(iv)(f) on or after
December 21, 1993. * * * Paragraphs (a)(1) and (a)(10) of this section
are applicable for taxable years beginning after June 9, 2010.
Approved: May 28, 2010.
Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-13790 Filed 6-8-10; 8:45 am]
BILLING CODE 4830-01-P