[Federal Register Volume 65, Number 7 (Tuesday, January 11, 2000)]
[Proposed Rules]
[Pages 1572-1580]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-111119-99]
RIN 1545-AX32
Partnership Mergers and Divisions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations on the tax
consequences of partnership mergers and divisions. The proposed
regulations affect partnerships and their partners. This document also
contains a notice of public hearing on these proposed regulations.
DATES: Written comments must be received by April 10, 2000. Requests to
speak (with outlines of oral comments) at the public hearing scheduled
for May 4, 2000, must be submitted by April 13, 2000.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-111119-99), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. In the alternative, submissions may be hand
delivered Monday through Friday between the hours of 8 a.m. and 5 p.m.
to: CC:DOM:CORP:R (REG-111119-99), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue, NW, Washington, DC. Alternatively,
taxpayers may submit comments electronically via the Internet by
selecting the ``Tax Regs'' option of the IRS Home Page, or by
submitting comments directly to the IRS Internet site at: http://
www.irs.ustreas.gov/tax__regs/regslist.html. The public hearing will be
held in room 2615, Internal Revenue Building, 1111 Constitution Avenue,
NW, Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Dan
Carmody, (202) 622-3080; concerning submissions of comments, the
hearing, and/or to be placed on the building access list to attend the
hearing, LaNita VanDyke, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION: This document proposes to amend sections
708, 743, and 752 of the Income Tax Regulations (26 CFR part 1)
regarding partnership mergers and divisions.
Partnership Mergers
Background
Section 708(b)(2)(A) provides that in the case of a merger or
consolidation of two or more partnerships, the resulting partnership
is, for purposes of section 708, considered the continuation of any
merging or consolidating partnership whose members own an interest of
more than 50 percent in the capital and profits of the resulting
partnership. Section 1.708-1(b)(2)(i) of the Income Tax Regulations
provides that if the resulting partnership can be considered a
continuation of more than one of the merging partnerships, the
resulting partnership is the continuation of the partnership that is
credited with the contribution of the greatest dollar value of assets
to the resulting partnership. If none of the members of the merging
[[Page 1573]]
partnerships own more than a 50 percent interest in the capital and
profits of the resulting partnership, all of the merged partnerships
are considered terminated, and a new partnership results. The taxable
years of the merging partnerships that are considered terminated are
closed under section 706(c).
Although section 708 and the applicable regulations provide which
partnership continues when two or more partnerships merge, the statute
and regulations do not prescribe a form for the partnership merger.
(Often, state merger statutes do not provide a particular form for a
partnership merger.) In revenue rulings, however, the IRS has
prescribed the form of a partnership merger for Federal income tax
purposes.
In Rev. Rul. 68-289 (1968-1 C.B. 314), three existing partnerships
(P1, P2, and P3) merged into one partnership with P3 continuing under
section 708(b)(2)(A). The revenue ruling holds that P1 and P2, the two
terminating partnerships, are treated as having contributed all of
their respective assets and liabilities to P3, the resulting
partnership, in exchange for a partnership interest in P3. P1 and P2
are considered terminated and the partners of P1 and P2 receive
interests in P3 with a basis under section 732(b) in liquidation of P1
and P2 (Assets-Over Form). Rev. Rul. 77-458 (1977-2 C.B. 220), and Rev.
Rul. 90-17 (1990-1 C.B. 119), also follow the Assets-Over Form for a
partnership merger.
Explanation of Provisions
A. Form of a Partnership Merger
The IRS and Treasury are aware that taxpayers may accomplish a
partnership merger by undertaking transactions in accordance with
jurisdictional laws that follow a form other than the Assets-Over Form.
For example, the terminating partnership could liquidate by
distributing its assets and liabilities to its partners who then
contribute the assets and liabilities to the resulting partnership
(Assets-Up Form). In addition, the partners in the terminating
partnership could transfer their terminating partnership interests to
the resulting partnership in exchange for resulting partnership
interests, and the terminating partnership could liquidate into the
resulting partnership (Interest-Over Form).
In the partnership incorporation area, a taxpayer's form generally
is respected if the taxpayer actually undertakes, under the relevant
jurisdictional law, all the steps of a form that is set forth in one of
three situations provided in Rev. Rul. 84-111 (1984-2 C.B. 88). The
three situations that Rev. Rul. 84-111 sets forth are the Assets-Over
Form, Assets-Up Form, and Interest-Over Form. Rev. Rul. 84-111 explains
that, depending on the form chosen to incorporate the partnership, the
adjusted basis and holding periods of the various assets received by
the corporation and the adjusted basis and holding periods of the stock
received by the former partners can vary. Like partnership
incorporations, each form of a partnership merger has potentially
different tax consequences.
Under the Assets-Up Form, partners could recognize gain under
sections 704(c)(1)(B) and 737 (and incur state or local transfer taxes)
when the terminating partnership distributes the assets to the
partners. However, under the Assets-Over Form, gain under sections
704(c)(1)(B) and 737 is not triggered. See Secs. 1.704-4(c)(4) and
1.737-2(b). Additionally, under the Assets-Up Form, because the
adjusted basis of the assets contributed to the resulting partnership
is determined first by reference to section 732 (as a result of the
liquidation) and then section 723 (by virtue of the contribution), in
certain circumstances, the adjusted basis of the assets contributed may
not be the same as the adjusted basis of the assets in the terminating
partnership. These circumstances occur if the partners' aggregate
adjusted basis of their interests in the terminating partnership does
not equal the terminating partnership's adjusted basis in its assets.
Under the Assets-Over Form, because the resulting partnership's
adjusted basis in the assets it receives is determined solely under
section 723, the adjusted basis of the assets in the resulting
partnership is the same as the adjusted basis of the assets in the
terminating partnership.
The regulations propose to respect the form of a partnership merger
for Federal income tax purposes if the partnerships undertake, pursuant
to the laws of the applicable jurisdiction, the steps of either the
Assets-Over Form or the Assets-Up Form. (This rule applies even if none
of the merged partnerships are treated as continuing for Federal income
tax purposes.) Generally, when partnerships merge, the assets move from
one partnership to another at the entity level, or in other words, like
the Assets-Over Form. However, if as part of the merger, the
partnership titles the assets in the partners' names, the proposed
regulations treat the transaction under the Assets-Up Form. If
partnerships use the Interest-Over Form to accomplish the result of a
merger, the partnerships will be treated as following the Assets-Over
Form for Federal income tax purposes.
In the context of partnership incorporations, Rev. Rul. 84-111
distinguishes among all three forms of incorporation. However, with
respect to the Interest-Over Form, the revenue ruling respects only the
transferors' conveyances of partnership interests, while treating the
receipt of the partnership interests by the transferee corporation as
the receipt of the partnership's assets (i.e., the Assets-Up Form). The
theory for this result, based largely on McCauslen v. Commissioner, 45
T.C. 588 (1966), is that the transferee corporation can only receive
assets since it is not possible, as a sole member, for it to receive
and hold interests in a partnership (i.e., a partnership cannot have
only one member; so, the entity is never a partnership in the hands of
the transferee corporation).
Adherence to the approach followed in Rev. Rul. 84-111 creates
problems in the context of partnership mergers that are not present
with respect to partnership incorporations. Unlike the corporate rules,
the partnership rules impose certain tax results on partners based upon
a concept that matches a contributed asset to the partner that
contributed the asset. Sections 704(c) and 737 are examples of such
rules. The operation of these rules breaks down if the partner is
treated as contributing an asset that is different from the asset that
the partnership is treated as receiving.
Given that the hybrid treatment of the Interest-Over Form
transactions utilized in Rev. Rul. 84-111 is difficult to apply in the
context of partnership mergers, another characterization will be
applied to such transactions. The Assets-Over Form generally will be
preferable for both the IRS and taxpayers. For example, when
partnerships merge under the Assets-Over Form, gain under sections
704(c)(1)(B) and 737 is not triggered. Moreover, the basis of the
assets in the resulting partnership is the same as the basis of the
assets in the terminating partnership, even if the partners' aggregate
adjusted basis of their interests in the terminating partnership does
not equal the terminating partnership's adjusted basis in its assets.
If partnerships merge under applicable law without implementing a
form, the proposed regulations treat the partnerships as following the
Assets-Over Form. This approach is consistent with the treatment of
partnership to corporation elective conversions under the check-the-box
regulations and technical terminations under section
[[Page 1574]]
708(b)(1)(B), other formless movements of a partnership's assets.
B. Adverse Tax Consequences of the Assets-Over Form
The IRS and Treasury are aware that certain adverse tax
consequences may occur for partnerships that merge in a transaction
that will be taxed in accordance with the Assets-Over Form. These
proposed regulations address some of the adverse tax consequences
regarding section 752 liability shifts and buyouts of exiting partners.
1. Section 752 Revisions
If a highly leveraged partnership (the terminating partnership)
merges with another partnership (the resulting partnership), all of the
partners in the terminating partnership could recognize gain because of
section 752 liability shifts. Under the Assets-Over Form, the
terminating partnership becomes a momentary partner in the resulting
partnership when the terminating partnership contributes its assets and
liabilities to the resulting partnership in exchange for interests in
the resulting partnership. If the terminating partnership (as a
momentary partner in the resulting partnership) is considered to
receive a deemed distribution under section 752 (after netting
increases and decreases in liabilities under Sec. 1.752-1(f)) that
exceeds the terminating partnership's adjusted basis of its interests
in the resulting partnership, the terminating partnership would
recognize gain under section 731. The terminating partnership's gain
then would be allocated to each partner in the terminating partnership
under section 704(b). In this situation, a partner in the terminating
partnership could recognize gain even though the partner's adjusted
basis in its resulting partnership interest or its share of partnership
liabilities in the resulting partnership is large enough to avoid the
recognition of gain, provided that the decreases in liabilities in the
terminating partnership are netted against the increases in liabilities
in the resulting partnership.
The proposed regulations clarify that when two or more partnerships
merge under the Assets-Over Form, increases or decreases in partnership
liabilities associated with the merger are netted by the partners in
the terminating partnership and the resulting partnership to determine
the effect of the merger under section 752. The IRS and Treasury
consider it appropriate to treat the merger as a single transaction for
determining the net liability shifts under section 752. Therefore, a
partner in the terminating partnership will recognize gain on the
contribution under section 731 only if the net section 752 deemed
distribution exceeds that partner's adjusted basis of its interest in
the resulting partnership.
2. Buyout of a Partner
Another adverse tax consequence may occur when a partner in the
terminating partnership does not want to become a partner in the
resulting partnership and would like to receive money or property
instead of an interest in the resulting partnership. Under the Assets-
Over Form, the terminating partnership will not recognize gain or loss
under section 721 when it contributes its property to the resulting
partnership in exchange for interests in the resulting partnership.
However, if, in order to facilitate the buyout of the exiting partner,
the resulting partnership transfers money or other consideration to the
terminating partnership in addition to the resulting partnership
interests, the terminating partnership may be treated as selling part
of its property to the resulting partnership under section
707(a)(2)(B). Any gain or loss recognized by the terminating
partnership generally would be allocated to all the partners in the
terminating partnership even though only the exiting partner would
receive the consideration.
The IRS and Treasury believe that, under certain circumstances,
when partnerships merge and one partner does not become a partner in
the resulting partnership, the receipt of cash or property by that
partner should be treated as a sale of that partner's interest in the
terminating partnership to the resulting partnership, not a disguised
sale of the terminating partnership's assets. Accordingly, the proposed
regulations provide that if the merger agreement (or similar document)
specifies that the resulting partnership is purchasing the exiting
partner's interest in the terminating partnership and the amount paid
for the interest, the transaction will be treated as a sale of the
exiting partner's interest to the resulting partnership. This treatment
will apply even if the resulting partnership sends the consideration to
the terminating partnership on behalf of the exiting partner, so long
as the designated language is used in the relevant document.
In this situation, the exiting partner is treated as selling a
partnership interest in the terminating partnership to the resulting
partnership (and the resulting partnership is treated as purchasing the
partner's interest in the terminating partnership) immediately prior to
the merger. Immediately after the sale, the resulting partnership
becomes a momentary partner in the terminating partnership.
Consequently, the resulting partnership and ultimately its partners
(determined prior to the merger) inherit the exiting partner's capital
account in the terminating partnership and any section 704(c) liability
of the exiting partner. If the terminating partnership has an election
in effect under section 754 (or makes an election under section 754),
the resulting partnership will have a special basis adjustment
regarding the terminating partnership's property under section 743. The
proposed regulations provide that the resulting partnership's basis
adjustments under section 743 must be ultimately allocated solely to
the partners who were partners in the resulting partnership immediately
before the merger; the adjustments do not affect the common basis of
the resulting partnership's assets.
C. Merger as Part of a Larger Transaction
The proposed regulations provide that if the merger is part of a
larger series of transactions, and the substance of the larger series
of transactions is inconsistent with following the form prescribed for
the merger, the form may not be respected, and the larger series of
transactions may be recast in accordance with their substance. An
example illustrating the application of this rule is included in the
proposed regulations.
D. Measurement of Dollar Value of Assets
As discussed above, the regulations currently provide that in a
merger of partnerships, if the resulting partnership can be considered
a continuation of more than one of the merging partnerships, the
resulting partnership is the continuation of the partnership that is
credited with the contribution of the greatest dollar value of assets
to the resulting partnership. Commentators have questioned whether this
rule refers to the gross or net value of the assets of a partnership.
The proposed regulations provide that the value of assets of a
partnership is determined net of the partnership's liabilities.
E. Effective Date
The regulations are proposed to apply to mergers occurring on or
after the date final regulations are published in the Federal Register.
Partnership Divisions
Background
Section 708(b)(2)(B) provides that, in the case of a division of a
partnership into two or more partnerships, the resulting partnerships
(other than any
[[Page 1575]]
resulting partnership the members of which had an interest of 50
percent or less in the capital and profits of the prior partnership)
are considered a continuation of the prior partnership. Section 1.708-
1(b)(2)(ii) provides that any other resulting partnership is not
considered a continuation of the prior partnership but is considered a
new partnership. If the members of none of the resulting partnerships
owned an interest of more than 50 percent in the capital and profits of
the prior partnership, the prior partnership is terminated. Where
members of a partnership that has been divided do not become members of
a resulting partnership that is considered a continuation of the prior
partnership, such partner's interest is considered liquidated as of the
date of the division.
Section 708(b)(2)(B) and the applicable regulations do not
prescribe a particular form for the division involving continuing
partnerships. The IRS has not addressed in published guidance how the
assets and liabilities of the prior partnership move into the resulting
partnerships. Taxpayers generally have followed either the Assets-Over
Form or the Assets-Up Form for partnership divisions.
Under the Assets-Over Form, the prior partnership transfers certain
assets to a resulting partnership in exchange for interests in the
resulting partnership. The prior partnership then immediately
distributes the resulting partnership interests to partners who are
designated to receive interests in the resulting partnership.
Under the Assets-Up Form, the prior partnership distributes certain
assets to some or all of its partners who then contribute the assets to
a resulting partnership in exchange for interests in the resulting
partnership.
Explanation of Provisions
A. Form of a Partnership Division
As with partnership mergers, the IRS and Treasury recognize that
different tax consequences can arise depending on the form of the
partnership division. Because of the potential different tax results
that could occur depending on the form followed by the partnership, the
regulations propose to respect for Federal income tax purposes the form
of a partnership division accomplished under laws of the applicable
jurisdiction if the partnership undertakes the steps of either the
Assets-Over Form or the Assets-Up Form. Thus, the same forms allowed
for partnership mergers will be allowed for partnership divisions.
Generally, an entity cannot be classified as a partnership if it
has only one member. This universally has been held to be the case in
classifying transactions where interests in a partnership are
transferred to a single person, so that the partnership goes out of
existence. McCauslen v. Commissioner, 45 T.C. 588 (1966); Rev. Rul. 99-
6, 1999-6 I.R.B. 6; Rev. Rul.
67-65, 1967-1 C.B. 168; Rev. Rul. 55-68, 1955-1 C.B. 372.
However, in at least one instance involving the contribution of
assets by an existing partnership to a newly-formed partnership,
regulations have provided that the momentary existence of the new
partnership will be respected for Federal income tax purposes. See
Sec. 1.708-1(b)(1)(iv). Pursuant to the proposed regulations, under the
Assets-Over Form of a partnership division, the prior partnership's
momentary ownership of all the interests in a resulting partnership
will not prevent the resulting partnership from being classified as a
partnership on formation.
The example in current Sec. 1.708-1(b)(2)(ii) indicates that when a
partnership is not considered a continuation of the prior partnership
under section 708(b)(2)(B) (partnership considered a new partnership
under current Sec. 1.708-1(b)(2)(ii)), the new partnership is created
under the Assets-Up Form. The regulations propose to modify this result
and provide examples illustrating that partnerships can divide and
create a new partnership under either the Assets-Over Form or the
Assets-Up Form.
Consistent with partnership mergers, if a partnership divides using
a form other than the two prescribed, it will be treated as undertaking
the Assets-Over Form.
These proposed regulations use four terms to describe the form of a
partnership division. Two of these terms, prior partnership and
resulting partnership, describe partnerships that exist under the
applicable jurisdictional law. The prior partnership is the partnership
that exists under the applicable jurisdictional law before the
division, and the resulting partnerships are the partnerships that
exist under the applicable jurisdictional law after the division. The
other two terms, divided partnership and recipient partnership, are
Federal tax concepts. A divided partnership is a partnership that is
treated, for Federal income tax purposes, as transferring assets in
connection with a division, and a recipient partnership is a
partnership that is treated, for Federal income tax purposes, as
receiving assets in connection with a division. The divided partnership
must be a continuation of the prior partnership. Although the divided
partnership is considered one continuing partnership for Federal income
tax purposes, it may actually be two different partnerships under the
applicable jurisdictional law (i.e., the prior partnership and a
different resulting partnership that is considered a continuation of
the prior partnership for Federal income tax purposes).
Finally, because in a formless division it generally will be
unclear which partnership should be treated, for Federal income tax
purposes, as transferring assets (i.e., the divided partnership) to
another partnership (i.e., the recipient partnership) where more than
one partnership is a continuation of the prior partnership, the
proposed regulations provide that the continuing resulting partnership
with the assets having the greatest fair market value (net of
liabilities) will be treated as the divided partnership. This issue
also is present where the partnership that, in form, transfers assets
is not a continuation of the prior partnership, but more than one of
the other resulting partnerships are continuations of the prior
partnership. The same rule applies to these situations.
B. Consequences under Sections 704(c)(1)(B) and 737
Gain under sections 704(c)(1)(B) and 737 may be triggered when
section 704(c) property or substituted section 704(c) property is
distributed to certain partners. These rules often will be implicated
in the context of partnership divisions.
Where a division is accomplished in a transaction that is taxed in
accordance with the Assets-Over Form, the partnership interest in the
recipient partnership will be treated as a section 704(c) asset to the
extent that the interest is received by the divided partnership in
exchange for section 704(c) property. Section 1.704-4(d)(1).
Accordingly, the distribution of the partnership interests in the
recipient partnership by the divided partnership generally will trigger
section 704(c)(1)(B) where the interests in the recipient partnership
are received by a partner of the divided partnership other than the
partner who contributed the section 704(c) property to the divided
partnership. In addition, section 737 may be triggered if a partner who
contributed section 704(c) property to the divided partnership receives
an interest in the recipient partnership that is not attributable to
the section 704(c) property.
Where a division is accomplished under the Assets-Up Form, assets
are distributed directly to the partners who will hold interests in the
recipient partnership. The distribution could trigger section
704(c)(1)(B) or 737 depending on the identity of the
[[Page 1576]]
distributed asset and the distributee partner.
The regulations under section 737 provide an exception for certain
partnership divisions. Section 737 does not apply when a transferor
partnership transfers all the section 704(c) property contributed by a
partner to a second partnership in a section 721 exchange, followed by
a distribution of an interest in the transferee partnership in complete
liquidation of the interest of the partner that originally contributed
the section 704(c) property to the transferor partnership. Section
1.737-2(b)(2). This rule, however, may not apply to many partnership
divisions because the original contributing partner often remains a
partner in the divided partnership. No similar rule is provided under
section 704(c)(1)(B).
In many instances, the application of sections 704(c)(1)(B) and 737
will be appropriate when a partnership divides under either the Assets-
Over Form or the Assets-Up Form. Consider the following example: A, B,
C, and D form a partnership. A contributes appreciated property X ($0
basis and $200 value), B contributes property Y ($200 basis and $200
value), and C and D each contribute $200 cash. The partnership
subsequently divides into two partnerships using the Assets-Over Form,
distributing interests in the recipient partnership in accordance with
each partner's pro rata interest in the prior partnership. Property X
remains in the prior partnership, and property Y is contributed to the
recipient partnership. Under these facts, section 737 could be avoided
if an exception were created for the distribution of the recipient
partnership interests. If, subsequent to the division, half of property
Y is distributed to A, section 737 would not be triggered because
property X (the section 704(c) property) is no longer in the same
partnership as property Y.
While the IRS and Treasury generally believe that it is appropriate
to apply sections 704(c)(1)(B) and 737 in the context of partnership
divisions, comments are invited on whether it would be appropriate to
expand the exceptions to these sections in certain circumstances
relating to divisive transactions.
C. Division as Part of a Larger Transaction
The proposed regulations provide the same rule for partnership
divisions that applies to partnership mergers.
D. Effective Date
The regulations are proposed to apply to divisions occurring on or
after the date final regulations are published in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
these regulations do not impose on small entities a collection of
information requirement, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis
is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and the Department of Treasury specifically request
comments on the clarity of the proposed regulations and how they may be
made easier to understand. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for May 4, 2000, beginning at
10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution
Avenue, NW, Washington, DC. Due to building security procedures,
visitors must enter at the 10th Street entrance, located between
Constitution and Pennsylvania Avenues, NW. In addition, all visitors
must present photo identification to enter the building. Because of
access restrictions, visitors will not be admitted beyond the immediate
entrance area more than 15 minutes before the hearing starts. For
information about having your name placed on the building access list
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section
of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons
that wish to present oral comments at the hearing must submit timely
written comments and must submit an outline of the topics to be
discussed and the time to be devoted to each topic (preferably a signed
original and eight (8) copies) by April 13, 2000.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting information: The principal author of these regulations is
Mary Beth Collins, Office of Chief Counsel (Passthroughs and Special
Industries). 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.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.708-1 is amended as follows:
1. Paragraph (b) is amended by removing paragraph (b)(2) and by
redesignating each paragraph listed in the first column of the
following table as the paragraph listed in the second column:
------------------------------------------------------------------------
Old paragraph Redesignated paragraph
------------------------------------------------------------------------
(b)(1)(i)................................. (b)(1)
(b)(1)(i)(a).............................. (b)(1)(i)
(b)(1)(i)(b).............................. (b)(1)(ii)
(b)(1)(ii)................................ (b)(2)
(b)(1)(iii)............................... (b)(3)
(b)(1)(iii)(a)............................ (b)(3)(i)
(b)(1)(iii)(b)............................ (b)(3)(ii)
(b)(1)(iv)................................ (b)(4)
(b)(1)(v)................................. (b)(5)
------------------------------------------------------------------------
2. Paragraphs (c) and (d) are added to read as follows:
Sec. 1.708-1 Continuation of partnership.
* * * * *
(c) Merger or consolidation--(1) General rule. If two or more
partnerships merge or consolidate into one partnership, the resulting
partnership shall be considered a continuation of the merging or
consolidating partnership the members of which own an interest of more
than 50 percent in the capital and profits of the resulting
partnership. If the resulting partnership can, under the preceding
sentence, be considered a continuation of more than one of the merging
or
[[Page 1577]]
consolidating partnerships, it shall, unless the Commissioner permits
otherwise, be considered the continuation of that partnership which is
credited with the contribution of assets having the greatest fair
market value (net of liabilities) to the resulting partnership. Any
other merging or consolidating partnerships shall be considered as
terminated. If the members of none of the merging or consolidating
partnerships have an interest of more than 50 percent in the capital
and profits of the resulting partnership, all of the merged or
consolidated partnerships are terminated, and a new partnership
results. The taxable years of such merging or consolidating
partnerships which are considered terminated shall be closed in
accordance with the provisions of section 706(c), and such partnerships
shall file their returns for a taxable year ending upon the date of
termination, i.e., the date of merger or consolidation. The resulting
partnership shall file a return for the taxable year of the merging or
consolidating partnership that is considered as continuing. The return
shall state that the resulting partnership is a continuation of such
merging or consolidating partnership and shall include the names and
addresses of the merged or consolidated partnerships. The respective
distributive shares of the partners for the periods prior to and
subsequent to the date of merger or consolidation shall be shown as a
part of the return.
(2) Form of a merger or consolidation--(i) Assets-over form. When
two or more partnerships merge or consolidate into one partnership
under the applicable jurisdictional law without undertaking a form for
the merger or consolidation, or undertake a form for the merger or
consolidation that is not described in paragraph (c)(2)(ii) of this
section, any merged or consolidated partnership that is considered
terminated under paragraph (c)(1) of this section is treated as
undertaking the assets-over form for Federal income tax purposes. Under
the assets-over form, the merged or consolidated partnership that is
considered terminated under paragraph (c)(1) of this section
contributes all of its assets and liabilities to the resulting
partnership in exchange for an interest in the resulting partnership;
and, immediately thereafter, the terminated partnership distributes
interests in the resulting partnership to its partners in liquidation
of the terminated partnership.
(ii) Assets-up form. Despite the partners' transitory ownership of
the terminated partnership's assets and liabilities, the form of a
partnership merger or consolidation will be respected for Federal
income tax purposes if the merged or consolidated partnership that is
considered terminated under paragraph (c)(1) of this section
distributes its assets and liabilities to its partners in liquidation
of the partners' interests in the terminated partnership; and,
immediately thereafter, the partners in the terminated partnership
contribute the distributed assets and liabilities to the resulting
partnership in exchange for interests in the resulting partnership.
(3) Sale of an interest in the merging or consolidating
partnership. In a transaction characterized under the assets-over form,
a sale of an interest in the terminated partnership to the resulting
partnership that occurs as part of a merger or consolidation under
section 708(b)(2)(A), as described in paragraph (c)(2)(i) of this
section, will be respected as a sale of a partnership interest if the
merger agreement (or similar document) specifies that the resulting
partnership is purchasing interests from a particular partner in the
merging or consolidating partnership and the consideration that is
transferred for each interest sold. See section 741 and Sec. 1.741-1
for determining the selling partner's gain or loss on the sale or
exchange of the partnership interest.
(4) Examples. The following examples illustrate the rules in
paragraphs (c)(1) through (3) of this section:
Example 1. Partnership AB, in whose capital and profits A and B
each own a 50-percent interest, and partnership CD, in whose capital
and profits C and D each own a 50-percent interest, merge on
September 30, 1999, and form partnership ABCD. Partners A, B, C, and
D are on a calendar year, and partnership AB and partnership CD are
also on a calendar year. After the merger, the partners have capital
and profits interests as follows: A, 30 percent; B, 30 percent; C,
20 percent; and D, 20 percent. Since A and B together own an
interest of more than 50 percent in the capital and profits of
partnership ABCD, such partnership shall be considered a
continuation of partnership AB and shall continue to file returns on
a calendar year basis. Since C and D own an interest of less than 50
percent in the capital and profits of partnership ABCD, the taxable
year of partnership CD closes as of September 30, 1999, the date of
the merger, and partnership CD is terminated as of that date.
Partnership ABCD is required to file a return for the taxable year
January 1 to December 31, 1999, indicating thereon that, until
September 30, 1999, it was partnership AB. Partnership CD is
required to file a return for its final taxable year, January 1
through September 30, 1999.
Example 2. (i) Partnership X, in whose capital and profits A
owns a 40-percent interest and B owns a 60-percent interest, and
partnership Y, in whose capital and profits B owns a 60-percent
interest and C owns a 40-percent interest, merge on September 30,
1999. The dollar-value of the partnership X assets (net of
liabilities) is $100X, and the dollar-value of the partnership Y
assets (net of liabilities) is $200X. The merger is accomplished
under state law by partnership Y contributing its assets and
liabilities to partnership X in exchange for interests in
partnership X, with partnership Y then liquidating, distributing
interests in partnership X to B and C.
(ii) B, a partner in both partnerships prior to the merger, owns
a greater than 50-percent interest in the resulting partnership
following the merger. Accordingly, because the dollar-value of
partnership Y's assets (net of liabilities) was greater than that of
partnership X's, under paragraph (c)(1) of this section, X will be
considered to terminate in the merger. As a result, even though, for
state law purposes, the transaction was undertaken with partnership
Y contributing its assets and liabilities to partnership X and
distributing interests in partnership X to its partners, pursuant to
paragraph (c)(2)(i) of this section, for Federal income tax
purposes, the transaction will be treated as if partnership X
contributed its assets to partnership Y in exchange for interests in
partnership Y and then liquidated, distributing interests in
partnership Y to A and B.
Example 3. (i) Partnership X and partnership Y merge when the
partners of partnership X transfer their partnership X interests to
partnership Y in exchange for partnership Y interests. Immediately
thereafter, partnership X liquidates into partnership Y. The
resulting partnership is considered a continuation of partnership Y,
and partnership X is considered terminated.
(ii) The partnerships are treated as undertaking the assets-over
form described in paragraph (c)(2)(i) of this section because the
partnerships undertook a form that is not the assets-up form
described in paragraph (c)(2)(ii) of this section. Accordingly, for
Federal income tax purposes, partnership X is deemed to contribute
its assets and liabilities to partnership Y in exchange for
interests in partnership Y; and, immediately thereafter, partnership
X is deemed to have distributed the interests in partnership Y to
its partners in liquidation of their interests in partnership X.
Example 4. (i) A, B, and C are partners in partnership X. D, E,
and F are partners in Partnership Y. Partnership X and partnership Y
merge within the meaning of section 708(b)(2)(A), and the resulting
partnership is considered a continuation of partnership Y.
Partnership X is considered terminated. Under state law,
partnerships X and Y undertake the assets-over form of paragraph
(c)(2)(i) of this section to accomplish the partnership merger. C
does not want to become a partner in partnership Y, and partnership
X does not have the resources to buy C's interest before the merger.
C, partnership X, and partnership Y enter into an agreement that
specifies that partnership Y will purchase C's interest in
partnership X for $150 immediately before the merger. As
[[Page 1578]]
part of the merger, partnership X receives from partnership Y $150
that will be distributed to C immediately before the merger, and
interests in partnership Y in exchange for partnership X's assets
and liabilities. Partnership X has made an election under section
754.
(ii) Because the merger agreement satisfies the requirements of
paragraph (c)(3) of this section, C will be treated as selling its
interest in partnership X to partnership Y for $150 immediately
before the merger. See section 741 and Sec. 1.741-1 to determine the
amount and character of C's gain or loss on the sale or exchange of
its interest in partnership X.
(iii) Because the merger agreement satisfies the requirements of
paragraph (c)(3) of this section, partnership Y is considered to
have purchased C's interest in partnership X for $150 immediately
before the merger. See Sec. 1.704-1(b)(2)(iv)(l) for determining
partnership Y's capital account in partnership X. Partnership Y's
adjusted basis of its interest in partnership X is determined under
section 742 and Sec. 1.742-1. To the extent any built-in gain or
loss on section 704(c) property in partnership X would have been
allocated to C (including any allocations with respect to property
revaluations under section 704(b) (reverse section 704(c)
allocations)), see section 704 and Sec. 1.704-3(a)(7) for
determining the built-in gain or loss or reverse section 704(c)
allocations apportionable to partnership Y. Similarly, after the
merger is completed, the built-in gain or loss and reverse section
704(c) allocations attributable to C's interest are apportioned to
D, E, and F under section 704(c) and Sec. 1.704-3(a)(7).
(iv) Because partnership X has an election under section 754 in
effect, partnership Y, as a momentary partner in partnership X, will
have a special basis adjustment regarding the basis of partnership
X's property under section 743 and Sec. 1.743-1. See section 743 and
Sec. 1.743-1 for determining the amount of the adjustment. After the
merger, the adjustment is allocated solely to D, E, and F--the
partners in partnership Y immediately before the merger.
(v) Under paragraph (c)(2)(i) of this section, partnership X
contributes assets and liabilities attributable to the interests of
A and B to partnership Y in exchange for interests in partnership Y;
and, immediately thereafter, partnership X distributes the interests
in partnership Y to A and B in liquidation of their interests in
partnership X. At the same time, partnership X distributes assets to
partnership Y in liquidation of partnership Y's interest in
partnership X.
(5) Prescribed form not followed in certain circumstances. (i) If
any transactions described in paragraph (c)(2) or (3) of this section
are part of a larger series of transactions, and the substance of the
larger series of transactions is inconsistent with following the form
prescribed in such paragraph, the Commissioner may disregard such form,
and may recast the larger series of transactions in accordance with
their substance.
(ii) The following example illustrates the rule in paragraph (c)(5)
of this section:
Example. A, B, and C are equal partners in partnership ABC. ABC
holds no section 704(c) property. D and E are equal partners in
partnership DE. B and C want to exchange their interest in ABC for
all of the interests in DE. However, rather than exchanging
partnership interests, DE merges with ABC by undertaking the assets-
up form described in paragraph (c)(2)(ii) of this section, with D
and E receiving title to the DE assets and then contributing the
assets to ABC in exchange for interests in ABC. As part of a
prearranged transaction, the assets acquired from DE are contributed
to a new partnership, and the interests in the new partnership are
distributed to B and C in complete liquidation of their interests in
ABC. The merger and division in this example represent a series of
transactions that in substance are an exchange of interests in ABC
for interests in DE. Even though paragraph (c)(2)(ii) of this
section provides that the form of a merger will be respected for
Federal income tax purposes if the steps prescribed under the asset-
up form are followed, and paragraph (d)(2)(i) of this section
provides a form that will be followed for Federal income tax
purposes in the case of partnership divisions, these forms will not
be respected for Federal income tax purposes under these facts, and
the transactions will be recast in accordance with their substance
as a taxable exchange of interests in ABC for interests in DE.
(6) Effective date. This paragraph (c) is applicable to partnership
mergers occurring on or after the date final regulations are published
in the Federal Register.
(d) Division of a partnership--(1) General rule. Upon the division
of a partnership into two or more partnerships, any resulting
partnership (as defined in paragraph (d)(3)(iv) of this section) or
resulting partnerships shall be considered a continuation of the prior
partnership (as defined in paragraph (d)(3)(ii) of this section) if the
members of the resulting partnership or partnerships had an interest of
more than 50 percent in the capital and profits of the prior
partnership. Any other resulting partnership will not be considered a
continuation of the prior partnership but will be considered a new
partnership. If the members of none of the resulting partnerships owned
an interest of more than 50 percent in the capital and profits of the
prior partnership, none of the resulting partnerships will be
considered a continuation of the prior partnership and the prior
partnership will be considered to have terminated. Where members of a
partnership which has been divided into two or more partnerships do not
become members of a resulting partnership which is considered a
continuation of the prior partnership, such partner's interests shall
be considered liquidated as of the date of the division. The resulting
partnership that is regarded as continuing shall file a return for the
taxable year of the partnership that has been divided. The return shall
state that the partnership is a continuation of the prior partnership
and shall set forth separately the respective distributive shares of
the partners for the periods prior to and subsequent to the date of
division.
(2) Form of a division--(i) Assets-over form. When a partnership
divides into two or more partnerships under applicable jurisdictional
law without undertaking a form for the division, or undertakes a form
that is not described in paragraph (d)(2)(ii) of this section, the
transaction will be characterized under the assets-over form for
Federal income tax purposes.
(A) Assets-over form where at least one resulting partnership is a
continuation of the prior partnership. In a division under the assets-
over form where at least one resulting partnership is a continuation of
the prior partnership, the divided partnership (as defined in paragraph
(d)(3)(i) of this section) contributes certain assets and liabilities
to a recipient partnership (as defined in paragraph (d)(3)(iv) of this
section) or recipient partnerships in exchange for interests in such
recipient partnership or partnerships; and, immediately thereafter,
distributes the interests in such recipient partnership or partnerships
to some or all of its partners in partial or complete liquidation of
the partners' interests in the divided partnership.
(B) Assets-over form where none of the resulting partnerships is a
continuation of the prior partnership. In a division under the assets-
over form where none of the resulting partnerships is a continuation of
the prior partnership, the prior partnership will be treated as
contributing all of its assets and liabilities to new resulting
partnerships in exchange for interests in the resulting partnerships;
and, immediately thereafter, the prior partnership will be treated as
liquidating by distributing the interests in the new resulting
partnerships to the prior partnership's partners.
(ii) Assets-up form--(A) Assets-up form where the partnership
distributing assets is a continuation of the prior partnership. Despite
the partners' transitory ownership of some of the prior partnership's
assets and liabilities, the form of a partnership division will be
respected for Federal income tax purposes if the divided partnership,
which by definition is a continuing partnership, distributes certain
assets and liabilities to some or all of its partners in partial or
complete liquidation of the partners' interests in
[[Page 1579]]
the divided partnership; and, immediately thereafter, such partners
contribute the distributed assets and liabilities to a recipient
partnership or partnerships in exchange for interests in such recipient
partnership or partnerships.
(B) Assets-up form where none of the resulting partnerships are a
continuation of the prior partnership. If none of the resulting
partnerships are a continuation of the prior partnership, then despite
the partners' transitory ownership of some or all of the prior
partnership's assets and liabilities, the form of a partnership
division will be respected for Federal income tax purposes if the prior
partnership distributes certain assets and liabilities to some or all
of its partners in partial or complete liquidation of the partners'
interests in the prior partnership; and, immediately thereafter, such
partners contribute the distributed assets and liabilities to a
resulting partnership or partnerships in exchange for interests in such
resulting partnership or partnerships. If the prior partnership does
not liquidate under the applicable jurisdictional law, then with
respect to the assets and liabilities that, in form, are not
transferred to a new resulting partnership, the prior partnership will
be treated as transferring these assets and liabilities to a new
resulting partnership under the assets over form described in paragraph
(d)(2)(i)(B) of this section.
(3) Definitions--(i) Divided partnership--For purposes of paragraph
(d) of this section, the divided partnership is the partnership which
is treated, for Federal income tax purposes, as transferring the assets
and liabilities to the recipient partnership or partnerships, either
directly (under the assets-over form) or indirectly (under the assets-
up form). If the resulting partnership that, in form, transferred the
assets and liabilities in connection with the division is a
continuation of the prior partnership, then such resulting partnership
will be treated as the divided partnership. If a partnership divides
into two or more partnerships and only one of the resulting
partnerships is a continuation of the prior partnership, then the
resulting partnership that is a continuation of the prior partnership
will be treated as the divided partnership. If a partnership divides
into two or more partnerships without undertaking a form for the
division that is recognized under paragraph (d)(2) of this section, or
if the resulting partnership that had, in form, transferred assets and
liabilities is not considered a continuation of the prior partnership,
and more than one resulting partnership is considered a continuation of
the prior partnership, the continuing resulting partnership with the
assets having the greatest fair market value (net of liabilities) will
be treated as the divided partnership.
(ii) Prior partnership--For purposes of paragraph (d) of this
section, the prior partnership is the partnership subject to division
that exists under applicable jurisdictional law before the division.
(iii) Recipient partnership--For purposes of paragraph (d) of this
section, a recipient partnership is a partnership that is treated as
receiving, for Federal income tax purposes, assets and liabilities from
a divided partnership, either directly (under the assets-over form) or
indirectly (under the assets-up form).
(iv) Resulting partnership--For purposes of paragraph (d) of this
section, a resulting partnership is a partnership resulting from the
division that exists under applicable jurisdictional law after the
division. For example, where a prior partnership divides into two
partnerships, both partnerships existing after the division are
resulting partnerships.
(4) Examples. The following examples illustrate the rules in
paragraphs (d)(1), (2), and (3) of this section:
Example 1. Partnership ABCD is in the real estate and insurance
business. A owns a 40-percent interest, and B, C, and D each owns a
20-percent interest, in the capital and profits of the partnership.
The partnership and the partners report their income on a calendar
year. They agree to separate the real estate and insurance business
as of November 1, 1999, and to form two partnerships; partnership AB
to take over the real estate business, and partnership CD to take
over the insurance business. Because members of resulting
partnership AB owned more than a 50-percent interest in the capital
and profits of partnership ABCD (A, 40 percent, and B, 20 percent),
partnership AB shall be considered a continuation of partnership
ABCD. Partnership AB is required to file a return for the taxable
year January 1 to December 31, 1999, indicating thereon that until
November 1, 1999, it was partnership ABCD. Partnership CD is
considered a new partnership formed on November 1, 1999, and is
required to file a return for the taxable year it adopts pursuant to
section 706(b) and the applicable regulations.
Example 2. (i) Partnership ABCD owns properties W, X, Y, and Z,
and divides into partnership AB and partnership CD. Under paragraph
(d)(1) of this section, partnership AB is considered a continuation
of partnership ABCD and partnership CD is considered a new
partnership. Partnership ABCD distributes property Y to C and titles
property Y in C's name. Partnership ABCD distributes property Z to D
and titles property Z in D's name. C and D then contribute
properties Y and Z, respectively, to partnership CD in exchange for
interests in partnership CD. Properties W and X remain in
partnership AB.
(ii) Under paragraph (d)(2)(ii) of this section, partnership
ABCD will be treated as following the assets-up form for Federal
income tax purposes.
Example 3. (i) Partnership ABCD owns three parcels of property:
property X, with a value of $500; property Y, with a value of $300;
and property Z, with a value of $200. A and B each own a 40-percent
interest in the capital and profits of partnership ABCD, and C and D
each own a 10 percent interest in the capital and profits of
partnership ABCD. On November 1, 1999, partnership ABCD divides into
three partnerships (AB1, AB2, and CD) by contributing property X to
a newly formed partnership (AB1) and distributing all interests in
such partnership to A and B as equal partners, and by contributing
property Z to a newly formed partnership (CD) and distributing all
interests in such partnership to C and D as equal partners in
exchange for all of their interests in partnership ABCD.
(ii) Partnerships AB1 and AB2 both are considered a continuation
of partnership ABCD, while partnership CD is considered a new
partnership formed on November 1, 1999. Under paragraph (d)(2)(i)(A)
of this section, partnership ABCD will be treated as following the
assets-over form, with partnership ABCD contributing property X to
partnership AB1 and property Z to partnership CD, and distributing
the interests in such partnerships to the designated partners.
Example 4. (i) The facts are the same as in example 3, except
that partnership ABCD divides into three partnerships by operation
of state law, without undertaking a form.
(ii) Under the last sentence of paragraph (d)(3)(i) of this
section, partnership AB1 will be treated as the resulting
partnership that is the divided partnership. Under paragraph
(d)(2)(i)(A) of this section, partnership ABCD will be treated as
following the assets-over form, with partnership ABCD contributing
property Y to partnership AB2 and property Z to partnership CD, and
distributing the interests in such partnerships to the designated
partners.
Example 5. (i) The facts are the same as in example 3, except
that partnership ABCD divides into three partnerships by
contributing property X to newly-formed partnership AB1 and property
Y to newly-formed partnership AB2 and distributing all interests in
each partnership to A and B in exchange for all of their interests
in partnership ABCD.
(ii) Because resulting partnership CD is not a continuation of
the prior partnership (partnership ABCD), partnership CD cannot be
treated, for Federal income tax purposes, as the partnership that
transferred assets (i.e., the divided partnership), but instead must
be treated as a recipient partnership. Under the last sentence of
paragraph (d)(3)(i) of this section, partnership AB1 will be treated
as the resulting partnership that is the divided partnership. Under
paragraph (d)(2)(i)(A) of this section, partnership ABCD will be
treated as following the assets-over form, with partnership ABCD
contributing property Y to partnership AB2 and property Z to
[[Page 1580]]
partnership CD, and distributing the interests in such partnerships
to the designated partners.
Example 6. (i) Partnership ABCDE owns Blackacre, Whiteacre, and
Redacre, and divides into partnership AB, partnership CD, and
partnership DE. Under paragraph (d)(1) of this section, partnership
ABCDE is considered terminated (and, hence, none of the resulting
partnerships are a continuation of the prior partnership) because
none of the members of the new partnerships (partnership AB,
partnership CD, and partnership DE) owned an interest of more than
50 percent in the capital and profits of partnership ABCDE.
(ii) Partnership ABCDE distributes Blackacre to A and B and
titles Blackacre in the names of A and B. A and B then contribute
Blackacre to partnership AB in exchange for interests in partnership
AB. Partnership ABCDE will be treated as following the assets-up
form described in paragraph (d)(2)(ii)(B) of this section for
Federal income tax purposes.
(iii) Partnership ABCDE distributes Whiteacre to C and D and
titles Whiteacre in the names of C and D. C and D then contribute
Whiteacre to partnership CD in exchange for interests in partnership
CD. Partnership ABCDE will be treated as following the assets-up
form described in paragraph (d)(2)(ii)(B) of this section for
Federal income tax purposes.
(iv) Partnership ABCDE does not liquidate under state law so
that, in form, the assets in new partnership DE are not considered
to have been transferred under state law. Partnership ABCDE will be
treated as undertaking the assets-over form described in paragraph
(d)(2)(i)(B) of this section for Federal income tax purposes with
respect to the assets of partnership DE. Thus, partnership ABCDE
will be treated as contributing Redacre to partnership DE in
exchange for interests in partnership DE; and, immediately
thereafter, partnership ABCDE will be treated as distributing
interests in partnership DE to D and E in liquidation of their
interests in partnership ABCDE. Partnership ABCDE then terminates.
(5) Prescribed form not followed in certain circumstances. If any
transactions described in paragraph (d)(2) of this section are part of
a larger series of transactions, and the substance of the larger series
of transactions is inconsistent with following the form prescribed in
such paragraph, the Commissioner may disregard such form, and may
recast the larger series of transactions in accordance with their
substance.
(6) Effective date. This paragraph (d) is applicable to partnership
divisions occurring on or after the date final regulations are
published in the Federal Register.
Par. 3. Section 1.743-1 is amended by adding two sentences to the
end of paragraph (h)(1).
Sec. 1.743-1 Optional adjustment to basis of partnership property.
* * * * *
(h) * * *
(1) * * * When a resulting partnership that is considered a
continuation of a merged or consolidated partnership under section
708(b)(2)(A) has a basis adjustment in property held by the merged or
consolidated partnership that is considered terminated under
Sec. 1.708-1(c)(1) (as a result of the resulting partnership acquiring
an interest in such merged or consolidated partnership, see Sec. 1.708-
1(c)(3)), the resulting partnership will continue to have the same
basis adjustments with respect to property distributed (see Sec. 1.708-
1(c)(4), Example 4(v)) by the terminated partnership to the resulting
partnership, regardless of whether the resulting partnership makes a
section 754 election. The portion of the resulting partnership's
adjusted basis in its assets attributable to the basis adjustment with
respect to the property distributed by the terminating partnership must
be segregated and allocated solely to the partners who were partners in
the resulting partnership immediately before the merger or
consolidation.
* * * * *
Par. 4. Section 1.752-1 is amended as follows:
1. A sentence is added to the end of paragraph (f).
2. The current Example in paragraph (g) is redesignated as Example
1.
3. Example 2 is added in paragraph (g).
Sec. 1.752-1 Treatment of partnership liabilities.
* * * * *
(f) * * * When two or more partnerships merge or consolidate under
section 708(b)(2)(A), as described in Sec. 1.708-1(c)(2)(i), increases
and decreases in partnership liabilities associated with the merger or
consolidation are netted by the partners in the terminating partnership
and the resulting partnership to determine the effect of the merger
under section 752.
(g) * * *
Example 1. * * *
Example 2. Merger or consolidation of partnerships holding
property encumbered by liabilities. (i) B owns a 70 percent interest
in partnership T. Partnership T's sole asset is property X, which is
encumbered by a $900 liability. Partnership T's adjusted basis in
property X is $600, and the value of property X is $1,000. B's
adjusted basis in its partnership T interest is $420. B also owns a
20 percent interest in partnership S. Partnership S's sole asset is
property Y, which is encumbered by a $100 liability. Partnership S's
adjusted basis in property Y is $200, the value of property Y is
$1,000, and B's adjusted basis in its partnership S interest is $40.
(ii) Partnership T and partnership S merge under section
708(b)(2)(A). Under section 708(b)(2)(A) and Sec. 1.708-1(c)(1),
partnership T is considered terminated and the resulting partnership
is considered a continuation of partnership S. Partnerships T and S
undertake the form described in Sec. 1.708-1(c)(2)(i) for the
partnership merger. Under Sec. 1.708-1(c)(2)(i), partnership T
contributes property X and its $900 liability to partnership S in
exchange for an interest in partnership S. Immediately thereafter,
partnership T distributes the interests in partnership S to its
partners in liquidation of their interests in partnership T. B owns
a 25 percent interest in partnership S after partnership T
distributes the interests in partnership S to B.
(iii) Under paragraph (f) of this section, B nets the increases
and decreases in its share of partnership liabilities associated
with the merger of partnership T and partnership S. Before the
merger, B's share of partnership liabilities was $650 (B had a $630
share of partnership liabilities in partnership T and a $20 share of
partnership liabilities in partnership S immediately before the
merger). B's share of S's partnership liabilities after the merger
is $250 (25 percent of S's total partnership liabilities of $1,000).
Accordingly, B has a $400 net decrease in its share of S's
partnership liabilities. Thus, B is treated as receiving a $400
distribution from partnership S under section 752(b). Because B's
adjusted basis in its partnership S interest before the deemed
distribution under section 752(b) is $460 ($420 + $40), B will not
recognize gain under section 731. After the merger, B's adjusted
basis in its partnership S interest is $60.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-14 Filed 1-10-00; 8:45 am]
BILLING CODE 4830-01-U
