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Bulletin No.

2005-26
June 27, 2005

HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

INCOME TAX Announcement 2005–45, page 1377.


This announcement discusses comments received in response
to a revenue procedure proposed in Notice 2003–15, 2003–1
Rev. Rul. 2005–37, page 1343. C.B. 540, and differences between the proposed revenue pro-
LIFO; price indexes; department stores. The April 2005 cedure and Rev. Proc. 2005–31.
Bureau of Labor Statistics price indexes are accepted for use
by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing inventories for tax years
ended on, or with reference to, April 30, 2005.
EMPLOYEE PLANS

T.D. 9207, page 1344. Rev. Rul. 2005–36, page 1368.


REG–106736–00, page 1376. Individual Retirement Account (IRA); decedent; benefi-
Final, temporary, and proposed regulations under section 752 ciary’s disclaimer. This ruling discusses whether a benefi-
of the Code relate to the definition of liabilities. These reg- ciary’s disclaimer of a beneficial interest in a decedent’s IRA
ulations provide rules regarding a partnership’s assumption is a qualified disclaimer under section 2518 of the Code even
of certain fixed and contingent obligations in connection with though prior to making the disclaimer, the beneficiary receives
the issuance of a partnership interest and provide conforming from the IRA the required minimum distribution for the year of
changes to certain regulations. These regulations also pro- the decedent’s death.
vide rules under section 358(h) for assumptions of liabilities
by corporations from partners and partnerships. In addition, Notice 2005–46, page 1372.
to prevent the abuse that section 358(h) was designed to pre- Weighted average interest rate update; corporate bond
vent, these regulations also provide rules that, with respect to indices; 30-year Treasury securities. The weighted aver-
an exchange to which section 358(a)(1) applies, remove the age interest rate for June 2005 and the resulting permissible
exception for transfers in which substantially all of the assets range of interest rates used to calculate current liability and to
associated with a liability are transferred to the person assum- determine the required contribution are set forth.
ing the liability as part of the exchange.

Rev. Proc. 2005–31, page 1374. EXEMPT ORGANIZATIONS


This procedure provides safe harbors for determining the final-
ity of the adoption of eligible foreign-born children for purposes
of the adoption credit and the exclusion for employer-provided Announcement 2005–44, page 1377.
assistance for qualified adoption expenses. The expenses of E.N.Y.P. Charity Fund of Brooklyn, NY, no longer qualifies as an
a re-adoption proceeding may be qualified adoption expenses. organization to which contributions are deductible under sec-
Notice 2003–15 modified and superseded. tion 170 of the Code.

(Continued on the next page)

Finding Lists begin on page ii.


Index for January through June begins on page vi.
ESTATE TAX

Rev. Rul. 2005–36, page 1368.


Individual Retirement Account (IRA); decedent; benefi-
ciary’s disclaimer. This ruling discusses whether a benefi-
ciary’s disclaimer of a beneficial interest in a decedent’s IRA
is a qualified disclaimer under section 2518 of the Code even
though prior to making the disclaimer, the beneficiary receives
from the IRA the required minimum distribution for the year of
the decedent’s death.

GIFT TAX

Rev. Rul. 2005–36, page 1368.


Individual Retirement Account (IRA); decedent; benefi-
ciary’s disclaimer. This ruling discusses whether a benefi-
ciary’s disclaimer of a beneficial interest in a decedent’s IRA
is a qualified disclaimer under section 2518 of the Code even
though prior to making the disclaimer, the beneficiary receives
from the IRA the required minimum distribution for the year of
the decedent’s death.

ADMINISTRATIVE

Notice 2005–47, page 1373.


This notice provides an interim definition of state or local bond
opinions under section 10.35(b)(9) of Treasury Department Cir-
cular No. 230 and provides information relating to changes to
the proposed requirements for state or local bond opinions that
are under consideration.

Announcement 2005–43, page 1376.


The IRS announces that effective upon the publication of this
announcement, filers of Form 8693 no longer have to attach
the approved and returned copy to their income tax return.

June 27, 2005 2005–26 I.R.B.


The IRS Mission
Provide America’s taxpayers top quality service by helping applying the tax law with integrity and fairness to all.
them understand and meet their tax responsibilities and by

Introduction
The Internal Revenue Bulletin is the authoritative instrument of court decisions, rulings, and procedures must be considered,
the Commissioner of Internal Revenue for announcing official and Service personnel and others concerned are cautioned
rulings and procedures of the Internal Revenue Service and for against reaching the same conclusions in other cases unless
publishing Treasury Decisions, Executive Orders, Tax Conven- the facts and circumstances are substantially the same.
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
The Bulletin is divided into four parts as follows:
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis. Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
It is the policy of the Service to publish in the Bulletin all sub- the Internal Revenue Code of 1986.
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod- Part II.—Treaties and Tax Legislation.
ify, or amend any of those previously published in the Bulletin. This part is divided into two subparts as follows: Subpart A,
All published rulings apply retroactively unless otherwise indi- Tax Conventions and Other Related Items, and Subpart B, Leg-
cated. Procedures relating solely to matters of internal man- islation and Related Committee Reports.
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published. Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
Revenue rulings represent the conclusions of the Service on the included in this part are Bank Secrecy Act Administrative Rul-
application of the law to the pivotal facts stated in the revenue ings. Bank Secrecy Act Administrative Rulings are issued by
ruling. In those based on positions taken in rulings to taxpayers the Department of the Treasury’s Office of the Assistant Sec-
or technical advice to Service field offices, identifying details retary (Enforcement).
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements. Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be The last Bulletin for each month includes a cumulative index
relied on, used, or cited as precedents by Service personnel in for the matters published during the preceding months. These
the disposition of other cases. In applying published rulings and monthly indexes are cumulated on a semiannual basis, and are
procedures, the effect of subsequent legislation, regulations, published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2005–26 I.R.B. June 27, 2005


Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 137.—Adoption section 2518 of the Code of a beneficial interest in issued by the Bureau of Labor Statistics.
Assistance Programs the IRA. See Rev. Rul. 2005-36, page 1368. The indexes are accepted by the Inter-
nal Revenue Service, under § 1.472–1(k)
Safe harbors are provided for determining the fi- of the Income Tax Regulations and Rev.
nality of the adoption of eligible foreign-born chil- Section 472.—Last-in,
First-out Inventories Proc. 86–46, 1986–2 C.B. 739, for ap-
dren for purposes of the exclusion for employer-pro-
vided assistance for qualified adoption expenses. The propriate application to inventories of
expenses of a re-adoption proceeding may be qual- 26 CFR 1.472–1: Last-in, first-out inventories. department stores employing the retail
ified adoption expenses. See Rev. Proc. 2005-31, inventory and last-in, first-out inventory
page 1374. LIFO; price indexes; department methods for tax years ended on, or with
stores. The April 2005 Bureau of Labor reference to, April 30, 2005.
Statistics price indexes are accepted for The Department Store Inventory Price
Section 401.—Qualified use by department stores employing the Indexes are prepared on a national basis
Pension, Profit-Sharing, retail inventory and last-in, first-out in- and include (a) 23 major groups of depart-
and Stock Bonus Plans ventory methods for valuing inventories ments, (b) three special combinations of
for tax years ended on, or with reference the major groups — soft goods, durable
26 CFR 1.401(a)(9)–5: Required minimum distribu-
to, April 30, 2005. goods, and miscellaneous goods, and (c) a
tions from defined contribution plans.
store total, which covers all departments,
Where a beneficiary accepts the required min- Rev. Rul. 2005–37 including some not listed separately, ex-
imum distribution from a decedent’s individual
The following Department Store In- cept for the following: candy, food, liquor,
retirement account (IRA), the beneficiary is not
precluded from making a qualified disclaimer under ventory Price Indexes for April 2005 were tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE


INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
from Apr 2004
Groups Apr 2004 Apr 2005 to Apr 20051
1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 491.0 469.8 -4.3
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539.7 539.1 -0.1
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 654.5 679.7 3.9
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 856.4 876.6 2.4
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 586.1 582.7 -0.6
6. Women’s Underwear. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493.2 545.2 10.5
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336.2 342.9 2.0
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . . 564.2 599.6 6.3
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . . 389.2 376.2 -3.3
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 545.9 565.6 3.6
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 592.7 586.6 -1.0
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 459.4 440.4 -4.1
13. Jewelry. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 893.0 879.9 -1.5
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 799.3 779.0 -2.5
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 987.5 994.4 0.7
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 618.0 604.2 -2.2
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 598.8 601.0 0.4
18. Housewares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 715.3 714.1 -0.2
19. Major Appliances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201.8 202.8 0.5
20. Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.7 39.5 -7.5
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81.2 78.3 -3.6
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128.0 136.4 6.6
23. Automotive Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112.1 114.4 2.1

2005–26 I.R.B. 1343 June 27, 2005


BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Percent Change
from Apr 2004
Groups Apr 2004 Apr 2005 to Apr 20051
Groups 1–15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 572.0 572.4 0.1
Groups 16–20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385.6 380.8 -1.2
Groups 21–23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93.6 93.0 -0.6

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504.8 503.5 -0.3

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

DRAFTING INFORMATION of a partnership interest and provide con- 1995 (44 U.S.C. 3507(d)) under control
forming changes to certain regulations. number 1545–1843. Responses to these
The principal author of this revenue These regulations also provide rules under collections of information are mandatory
ruling is Michael Burkom of the Office section 358(h) for assumptions of liabil- and are required to obtain a benefit. The
of Associate Chief Counsel (Income Tax ities by corporations from partners and collections of information in this final
and Accounting). For further informa- partnerships. Finally, this document also regulation is in §1.752–7(e), (f), (g), and
tion regarding this revenue ruling, contact contains temporary regulations relating to (h). This information is required for a
Mr. Burkom at (202) 622–7924 (not a the assumption of certain liabilities under former or current partner of a partnership
toll-free call). section 358(h). The text of the temporary to take deductions, losses, or capital ex-
regulations also serves as the text of the penses attributable to the satisfaction of
proposed regulations (REG–106736–00) the §1.752–7 liability. This information
Section 752.—Treatment set forth in the notice of proposed rule- will be used by the partner in order to
of Certain Liabilities making on this subject in this issue of the take a deduction, loss, or capital expense.
26 CFR 1.752–1: Treatment of partnership liabilities. Bulletin. An additional collection of information in
this final regulation is in §1.752–7(k)(2).
T.D. 9207 DATES: Effective Date: These regulations This information is required to inform the
are effective May 26, 2005. IRS of partnerships making the designated
DEPARTMENT OF Applicability Dates: The final election and to report income appropri-
§1.752–6 regulations apply to assumptions ately. The collection of information is
THE TREASURY
of liabilities by a partnership occurring af- required to obtain a benefit, i.e., to elect
Internal Revenue Service ter October 18, 1999, and before June 24, to apply the provisions of §1.752–7 of
26 CFR Parts 1 and 602 2003. All of the other final regulations the regulations in lieu of §1.752–6. The
in this Treasury Decision, as well as the likely respondents are business or other
Assumption of Partner temporary regulations under section 358, for-profit institutions and small businesses
Liabilities apply to liabilities assumed on or after or organizations.
June 24, 2003, except as otherwise noted. An agency may not conduct or sponsor,
AGENCY: Internal Revenue Service
and a person is not required to respond to, a
(IRS), Treasury. FOR FURTHER INFORMATION collection of information unless it displays
CONTACT: Laura Fields at (202) a valid control number assigned by the Of-
ACTION: Final and temporary regula- 622–3050 (not a toll-free number).
tions; and removal of temporary regula- fice of Management and Budget.
tions. Estimated total annual reporting bur-
SUPPLEMENTARY INFORMATION:
den: 125 hours.
SUMMARY: This document contains fi- Paperwork Reduction Act The estimated annual burden per re-
nal regulations relating to the definition of spondent varies from 20 to 40 minutes, de-
liabilities under section 752 of the Internal The collection of information con- pending on individual circumstances, with
Revenue Code (Code). These regulations tained in these final regulations has been an estimated average of 30 minutes.
provide rules regarding a partnership’s reviewed and approved by the Office of Estimated number of respondents: 250.
assumption of certain fixed and contingent Management and Budget in accordance Estimated annual frequency of re-
obligations in connection with the issuance with the Paperwork Reduction Act of sponses: On occasion.

June 27, 2005 1344 2005–26 I.R.B.


Comments concerning the accuracy person assuming the liability as part of the contributions of “substantially all of the as-
of this burden estimate and sugges- exchange; or (2) substantially all of the sets with which the liability is associated”
tions for reducing this burden should assets with which the liability is associ- does not apply to certain abusive transac-
be sent to the Internal Revenue Service, ated are transferred to the person assuming tions described in Notice 2000–44, 2000–2
Attn: IRS Reports Clearance Officer, the liability as part of the exchange. The C.B. 255, released to the public on August
SE:W:CAR:MP:T:T:SP, Washington, DC Secretary, however, has the authority to 11, 2000, and published on September 5,
20224, and to the Office of Manage- limit these exceptions. The term liability 2000.
ment and Budget, Attn: Desk Officer for for purposes of section 358(h) includes The proposed regulations deviate some-
the Department of the Treasury, Office any fixed or contingent obligation to make what from the rules of section 358(h). In
of Information and Regulatory Affairs, payment without regard to whether the particular, the proposed regulations do not
Washington, DC 20503. obligation is otherwise taken into account reduce the partner’s basis in the partner-
Books or records relating to this col- for purposes of the Code. ship at the time of the assumption of a
lection of information must be retained as Congress recognized that taxpayers §1.752–7 liability by the partnership, but
long as their contents may become mate- were attempting to use partnerships and S delay that reduction until an event occurs
rial in the administration of any internal corporations to carry out the same types of that separates the partner from the liability
revenue law. Generally, tax returns and tax abuses that section 358(h) was designed (triggering event). The triggering events
return information are confidential, as re- to deter. Therefore, in sections 309(c) are: (1) a disposition (or partial disposi-
quired by 26 U.S.C. 6103. and (d)(2) of the Act, Congress directed tion) of the partnership interest by the part-
the Secretary to prescribe rules to provide ner; (2) a liquidation of the partner’s inter-
Background “appropriate adjustments under subchap- est in the partnership; and (3) the assump-
ter K of chapter 1 of the Code to prevent tion of the liability by another partner. Af-
This document contains amendments to the acceleration or duplication of losses ter a triggering event, the partnership’s (or
26 CFR part 1 under sections 358, 704, through the assumption of (or transfer of the assuming partner’s) deduction on the
705, 737 and 752 of the Internal Revenue assets subject to) liabilities described in economic performance of the §1.752–7 li-
Code (Code). section 358(h)(3) . . . in transactions ability is limited. However, if the part-
As part of the Community Renewal Tax involving partnerships.” Under the statute, nership (or the assuming partner) notifies
Relief Act of 2000 (the Act) (114 Stat. these rules are to “apply to assumptions of the partner of the economic performance
2763), Congress enacted, on December 15, liability after October 18, 1999, or such of the §1.752–7 liability, then the partner
2000, section 358(h), effective October 18, later date as may be prescribed in such may take a loss or deduction in the amount
1999, to address certain situations in which rules.” of the prior basis reduction.
property is transferred to a corporation in In response to this directive, a notice of The proposed regulations include an ex-
exchange for both stock and the corpora- proposed rulemaking (REG–106736–00, ception, similar to the exception in section
tion’s assumption of certain obligations of 2003–2 C.B. 60) under sections 358, 704, 358(h)(2)(A), for transactions in which the
the transferor. In these situations, transfer- 705, and 752 was published in the Federal partner contributes to the partnership the
ors took the position that the obligations Register (68 FR 37434) on June 24, 2003. trade or business with which the liability
were not liabilities within the meaning of In addition, temporary regulations (T.D. is associated as part of the exchange (the
section 357(c) or that they were described 9062, 2003–2 C.B. 46) were published trade or business exception), but do not in-
in section 357(c)(3), and, therefore, the on that same day (68 FR 37414). The clude an exception, similar to the excep-
obligations did not reduce the basis of the proposed and temporary regulations pro- tion in section 358(h)(2)(B), for transac-
transferor’s stock. These assumed obliga- vide rules to prevent the duplication and tions in which the partner contributes to
tions, however, did reduce the value of the acceleration of loss through the assump- the partnership substantially all of the as-
stock. The transferors then sold the stock tion by a partnership of certain liabilities sets associated with the liability as part
and claimed a loss. In this way, taxpay- from a partner. Section 1.752–6T of the of the exchange. The proposed regula-
ers attempted to duplicate a loss in corpo- temporary regulations (the temporary reg- tions also include an additional exception
rate stock and to accelerate deductions that ulations) applies to liabilities assumed by for situations in which, immediately be-
typically are allowed only on the economic a partnership after October 18, 1999, and fore the triggering event, the amount of the
performance of these types of obligations. before June 24, 2003. Section 1.752–7 remaining built-in loss with respect to all
Section 358(h) addresses these transac- of the proposed regulations (the proposed §1.752–7 liabilities assumed by the part-
tions by requiring that, after the applica- regulations) applies to liabilities assumed nership (other than §1.752–7 liabilities as-
tion of section 358(d), the basis in stock by a partnership on or after June 24, 2003. sumed by the partnership with an asso-
received in an exchange to which section However, taxpayers may elect to apply the ciated trade or business) in one or more
351, 354, 355, 356, or 361 applies be re- proposed regulations, instead of the tem- §1.752–7 liability transfers is less than the
duced (but not below the fair market value porary regulations, to liabilities assumed lesser of 10% of the gross value of partner-
of the stock) by the amount of any liability by a partnership after October 18, 1999, ship assets or $1,000,000 (the de minimis
assumed in the exchange. Exceptions to and before June 24, 2003. exception).
section 358(h) are provided where: (1) The temporary regulations adopt the ap- In addition, the proposed regulations
the trade or business with which the li- proach of section 358(h), with some mod- provide detailed rules to address the treat-
ability is associated is transferred to the ifications. For example, the exception for ment of the liability between the date of the

2005–26 I.R.B. 1345 June 27, 2005


assumption of that liability by the partner- vides that, for purposes of section 743, a Explanation of Provisions
ship and the date of a triggering event and partnership has a substantial built-in loss
to address tiered entity situations. with respect to a transfer of a partnership These final regulations generally fol-
The proposed regulations distinguish interest if the partnership’s adjusted basis low the proposed and temporary regula-
between a §1.752–1 liability, for which a in the partnership’s property exceeds by tions with the changes described below.
basis reduction is required when the liabil- more than $250,000 the fair market value
ity is assumed by the partnership from a of such property. Exceptions are provided 1. Comments on §1.752–6T
partner, and a §1.752–7 liability, for which for electing investment partnerships and
a basis reduction is not required until the for securitization partnerships, as defined Several commentators suggested that
occurrence of a triggering event. Under in the Act. See also sections 734(b) and the issuance of §1.752–6T exceeded the
the proposed regulations, an obligation is (d), as amended by section 833(c) of the authority granted to the Secretary in
a §1.752–1 liability to the extent the obli- Act (requiring a basis adjustment to be section 309 of the Act. More specifi-
gation creates or increases the basis of any made following a distribution from a part- cally, some commentators suggested that
of the obligor’s assets (including cash), nership for which no section 754 election §1.752–6T results in the inappropriate
gives rise to an immediate deduction to the is in effect in the case of a “substantial ba- denial of a bona fide loss, that §1.752–6T
obligor, or gives rise to an expense that is sis reduction”). was issued to bootstrap the IRS’s litigating
not deductible in computing the obligor’s The IRS and the Treasury Department position regarding transactions described
taxable income and is not properly charge- are aware of certain similarities between in Notice 2000–44, 2000–2 C.B. 255, and
able to capital. All remaining obligations the treatment of §1.752–7 liabilities in that section 309 of the Act only granted the
are §1.752–7 liabilities. Under the pro- these regulations and the treatment of Secretary the authority to prescribe rules
posed regulations, §1.752–7 liabilities are built-in losses under sections 704(c)(1)(C), to address situations in which a partner-
subject to the rules of section 704(c) and 734, and 743 of the Code, as added by the ship liability is assumed by a corporation.
the regulations thereunder. Act. For example, it is possible to view the In addition, several commentators argued
The American Jobs Creation Act of contribution of property with an adjusted that the Treasury Department and the
2004, Public Law 108–357 (118 Stat. tax basis equal to the fair market value of IRS exceeded their authority in providing
1418) (the Act), was enacted on Octo- the property, determined without regard that §1.752–6T applies retroactively to
ber 22, 2004. Section 833(a) of the Act to any §1.752–7 liabilities, as “built-in assumptions of liabilities occurring after
amended section 704(c) of the Code by loss” property after the §1.752–7 liability October 18, 1999, and before June 24,
adding section 704(c)(1)(C), effective for is taken into account in those cases where 2003, the date the regulations were issued.
contributions of property to a partnership the §1.752–7 liability is related to the The Treasury Department and the IRS
after October 22, 2004. Under new section contributed property. Although a partner- believe that §1.752–6T does not result in
704(c)(1)(C), if “built-in loss” property is ship’s assumption of a §1.752–7 liability the inappropriate denial of a bona fide
contributed to a partnership, the built-in as part of the contribution of property to loss. The exceptions in §1.752–6T gener-
loss shall be taken into account only in the partnership can be analogized to a ally limit the application of the regulations
determining the items allocated to the con- property with an adjusted tax basis greater to transactions that are abusive in nature
tributing partner, and, except as provided than fair market value, the purposes of and that lack a business purpose. In ad-
in regulations, in determining the amount section 704(c)(1)(C) and §1.752–7 are dition, the regulations allow taxpayers to
of items allocated to the other partners, different in certain respects. Section elect into §1.752–7 so as to avoid the im-
the basis of the contributed property shall 704(c)(1)(C) and the other changes in sec- mediate basis reduction under §1.752–6T.
be treated as being equal to its fair market tion 833 of the Act are directed toward Recognizing, however, that some taxpay-
value at the time of contribution. For this loss duplication whereas §1.752–7 is di- ers may not have expected the approach
purpose, a “built-in loss” is defined to rected at both loss duplication and loss taken in §1.752–7 when engaging in trans-
mean the excess of the adjusted basis of acceleration. Therefore, to the extent of actions in prior years, §1.752–6T employs
the property in the hands of the contribut- any built-in loss attributable to a §1.752–7 rules similar to section 358(h) for partner-
ing partner over its fair market value at the liability, §1.752–7 shall be applied with- ship transactions.
time of its contribution to the partnership. out regard to the amendments made by the Those commentators who suggested
Section 833(b) of the Act requires basis Act, unless future guidance provides to that the IRS issued §1.752–6T to “boot-
adjustments to be made following certain the contrary. Any such guidance would be strap” its litigating position in Notice
transfers of interests in partnerships for prospective in application. 2000–44 pointed to the fact that Notice
which no section 754 election is in effect. Written comments were received in re- 2000–44 did not mention that regulations
As amended by the Act, section 743(a) and sponse to the notice of proposed rulemak- would be issued in the future to challenge
(b) of the Code requires a partnership to re- ing, and a public hearing was held on Oc- the transactions described in that notice.
duce the basis of partnership property upon tober 14, 2003. Two commentators re- As discussed earlier, the Act was en-
the transfer of an interest in the partner- quested to speak at that hearing. After con- acted with a retroactive effective date and
ship by sale or exchange or upon the death sideration of the comments, the proposed granted the Treasury Department and the
of a partner, if, at the time of the relevant and temporary regulations are adopted as IRS the authority to issue retroactive regu-
transfer, the partnership has a “substan- modified by this Treasury decision. lations. The Treasury Department and the
tial built-in loss.” Section 743(d)(1) pro- IRS believe that they have appropriately

June 27, 2005 1346 2005–26 I.R.B.


exercised this grant of authority. Also, to the general rule in section 7805(b)(1) §1.752–7 (other than the de minimis ex-
Notice 2000–44 was released on August is section 7805(b)(3). Section 7805(b)(3) ception). The preamble indicated that such
11, 2000. The Act was not enacted into states that the “Secretary may provide that regulations would be retroactive to the ex-
law until December 15, 2000, after the any regulation may take effect or apply tent necessary to prevent abuse. No com-
release of Notice 2000–44. Therefore, the retroactively to prevent abuse.” ments were received regarding the appro-
Treasury Department and the IRS could The retroactive effective date of priate scope or substance of such regula-
not reference regulations promulgated un- §1.752–6T is in accordance with the direc- tions. The Treasury Department and the
der the Act in Notice 2000–44. tive in section 309(c) and (d)(2) of the Act IRS have determined that removing the ex-
The Treasury Department and the IRS and section 7805(b)(6). Furthermore, pur- ception of §358(h)(2)(B) (which applies
have concluded that the Secretary’s au- suant to section 7805(b)(3), the Secretary where substantially all of the assets with
thority under section 309(c) is not limited has determined that a retroactive effective which the liability is associated are trans-
to addressing assumptions of liabilities by date is appropriate to prevent abuse. ferred to the person assuming the liability
corporations from partnerships. The plain For these reasons, the Treasury De- as part of the exchange) is necessary to pre-
language of the legislative directive is not partment and the IRS have concluded that vent the abuse that §358(h) was designed
so limited and the legislative history does §1.752–6T is a valid exercise of the Secre- to prevent. Therefore, with respect to an
not support such a limitation. tary’s regulatory authority under the Code exchange to which §358(a)(1) applies, this
To the contrary, the Treasury Depart- and section 309 of the Act. document contains temporary regulations
ment and the IRS believe that the rules providing that the exception contained in
of §1.752–6T carry out the explicit di- 2. Extension of Time to Adopt the §358(h)(2)(B) does not apply to exchanges
rective of section 309(c) of the Act by Provisions of §1.752–7 in lieu of under §358(a)(1) in which liabilities are
applying to partnership transactions rules §1.752–6T assumed on or after June 24, 2003.
that are analogous to the rules that ap-
Section 1.752–6T(d)(2) provides that
ply to corporate transactions under sec- 4. Section 1.752–7 Liability
partnerships may elect to apply the provi-
tion 358(h). For example, if the transac-
sions of §1.752–7 of the proposed regu-
tions described in Notice 2000–44 were ef- Commentators have asked for clarifica-
lations to all assumptions of liabilities by
fected through a contribution to a corpora- tion on whether an obligation could be a
the partnership occurring after October 18,
tion, rather than a contribution to a partner- §1.752–1 liability in part and a §1.752–7
1999, and before June 24, 2003, in lieu of
ship, section 358(h) would generally ap- liability in part. Certain obligations that
applying §1.752–6T of the temporary reg-
ply to such a transaction, causing a ba- create liabilities under §1.752–1 may also
ulations. The election must be filed with
sis reduction identical to that provided by create §1.752–7 liabilities. For example,
the first Federal income tax return filed by
§1.752–6T. a fixed obligation that gives rise to basis
the partnership on or after September 24,
Section 7805(b) addresses when a reg- can have a component portion that changes
2003.
ulation (temporary, proposed, or final) in value between the time the obligation is
Several commentators expressed a need
may be effective retroactively. Section first incurred by the partner and the time
for additional time to make this election.
7805(b)(1) generally provides that no that the partnership assumes the obligation
In response to these comments, the elec-
temporary, proposed, or final regulations due to changes in interest rates, stock price,
tion period described in §1.752–6T(d)(2)
relating to the internal revenue laws shall or other similar factors. In these and other
has been extended. Under the extension,
apply to any taxable period ending before cases, the value of the obligation to the
an election to apply the regulations under
the earliest of the following dates: (A) holder has increased and, as a result, the
§1.752–7, rather than the regulations un-
the date on which such regulation is filed cost to the obligor has increased by a like
der §1.752–6, to all liabilities assumed by
with the Federal Register; (B) in the case amount. The final regulations clarify that
a partnership after October 18, 1999, and
of any final regulation, the date on which an obligation can be treated in part as a
before June 24, 2003, must be filed with a
any proposed or temporary regulation to §1.752–7 liability and in part as a §1.752–1
Federal income tax return filed by the part-
which such final regulation relates was liability.
nership on or after September 24, 2003,
filed with the Federal Register; or (C) the
and on or before December 31, 2005.
date on which any notice substantially 5. Satisfaction Other than by Economic
describing the expected contents of any 3. Section 1.358–5T, Special Rules For Performance
temporary, proposed, or final regulation Assumption of Liabilities
is issued to the public. However, section The proposed regulations allow the
7805(b) provides a list of exceptions to the The preamble to the proposed regula- §1.752–7 liability partner to claim a
general rule stated above. Included in that tions advised taxpayers that, with respect loss or deduction upon “economic per-
list, and relevant in this context, is section to an exchange to which §358(a)(1) ap- formance” of the obligation. Certain
7805(b)(6). Section 7805(b)(6) provides plies, the Treasury Department and the §1.752–7 liabilities may be settled in
that the limitation may be superseded IRS were considering exercising their au- cash or in kind, extinguished, satisfied or
“by a legislative grant from Congress au- thority under §358(h)(2) to issue regula- otherwise resolved under circumstances
thorizing the Secretary to prescribe the tions that would limit the exceptions to where there may not be an “economic
effective date with respect to any regula- §358(h)(1) to follow the exceptions set performance” of the obligation within the
tion.” Also included among the exceptions forth in the proposed regulations under meaning of that term. See section 461(h)

2005–26 I.R.B. 1347 June 27, 2005


and §1.461–4. In addition, economic per- amended to provide that §1.752–7 lia- capitalized into the basis of one or more
formance only applies to “liabilities” as bilities are section 704(c) property and assets of the partnership. Under the final
defined in §1.446–1(c)(1)(ii)(B), and it to provide that in general, the successor regulations, no reduction in the partner’s
is possible that some §1.752–7 liabilities partner rule does not apply to §1.752–7 basis in the partnership interest is required
may not come within the meaning of that liabilities. with respect to such a capitalized amount
term. As a result, the final regulations Comments were also received regard- as a result of the triggering event, but, af-
allow the §1.752–7 liability partner to ing the application of section 704(c) prin- ter the triggering event, neither the partner-
claim a loss or deduction under §1.752–7 ciples to the extent that a §1.752–7 liabil- ship nor the remaining partners may use
upon the “satisfaction of the §1.752–7 li- ity has decreased after the partnership’s the capitalized basis.
ability”. A §1.752–7 liability is treated as assumption of the liability. Consistent
satisfied on the date upon which, but for with the principles of §1.704–3, the fi- 8. Exception for Trading and Investment
§1.752–7, the partnership, or the assum- nal regulations provide that, if there is a Partnerships.
ing partner, would have been allowed to post-assumption change in the value of the
The proposed regulations contain an
take the §1.752–7 liability into account for §1.752–7 liability, resulting in an obliga-
exception to §1.752–7(e), (f), and (g) for
federal tax purposes. The final regulations tion amount that is either greater or less
assumptions of liabilities in connection
provide a nonexclusive list of examples than the initial amount of the obligation,
with the contribution of an associated
of when the §1.752–7 liability would be the change in the amount will be treated as
trade or business, provided that the part-
taken into account for these purposes. a section 704(b) and not a section 704(c)
nership continues to carry on that trade
item, thereby creating book income or
6. Application of Section 704(c) or business after the contribution. The
loss to be allocated to the partners. The
proposed regulations provide that, for this
final regulations also provide that, if the
Under §1.752–7(c), any §1.752–7 li- purpose, a trade or business generally does
value of the §1.752–7 liability decreases
ability assumed by a partnership in a not include the activity of acquiring, hold-
after the assumption of the obligation by
§1.752–7 liability transfer is treated un- ing, or disposing of financial instruments,
the partnership, the “ceiling rule” applies,
der section 704(c) principles as having a unless such activity is carried on by an
and the partnership and the partners are
built-in loss equal to the amount of the entity registered with the Securities and
entitled to adopt one of the reasonable
§1.752–7 liability as of the date of the Exchange Commission as a management
methods specified in §1.704–3 to correct
partnership’s assumption of the §1.752–7 company under the Investment Company
any ceiling rule disparities.
liability. The proposed regulations pro- Act of 1940, as amended (15 U.S.C. 80a).
vide that, if a §1.752–7 liability is assumed 7. Section 1.752–7 Liabilities that are The exception for entities registered as
from the partnership by a partner other Capitalized and Not Deducted management companies was intended to
than the §1.752–7 liability partner, and the apply narrowly to master-feeder partner-
trade or business or de minimis exceptions The proposed regulations make refer- ships; however, it appears that the excep-
do not apply, then section 704(c)(1)(B) ence in several places to a “deduction or tion could apply to a broader range of en-
does not apply to the assumption and capital expense”, but no rules are provided tities, some of which could be carrying
instead the rules of §1.752–7(g) apply. as to how the capital expense is taken into on the types of transactions that section
Commentators asked whether section account. For example, no rules are pro- 309 of the Act and these regulations were
704(c)(1)(B) applies to the assumption of vided in the proposed regulations for situa- intended to address. Consequently, the
a §1.752–7 liability by another partner if tions where the contributing partner is still Treasury Department and the IRS have re-
the trade or business or de minimis excep- a partner in the partnership at the time that moved the exception for entities registered
tions apply to that assumption. In addition, the obligation is recognized for federal tax as management companies.
commentators questioned whether the purposes and capitalized into the tax basis The Treasury Department and the IRS
successor partner rule of §1.704–3(a)(7) of one or more assets of the partnership. do not believe that eliminating the ex-
applies to the built-in loss amount of the The final regulations add a rule to ception will create a substantial burden
§1.752–7 liability. The successor part- §1.704–3 providing that, to the extent a for master-feeder partnerships, because
ner rule provides that, if a contributing partnership properly capitalizes all or a interests in these partnerships are not reg-
partner transfers a partnership interest, portion of an item as described in para- ularly sold, and because distributions by
built-in gain or loss must be allocated to graph §1.704–3(a)(12), then the item these partnerships typically take the form
the transferee partner as it would have or items to which such cost is properly of nonliquidating distributions of cash.
been allocated to the transferor partner. capitalized is treated as section 704(c) Accordingly, master-feeder partnerships
The intent of the Treasury Department property with the same amount of built-in are unlikely to engage in triggering events
and the IRS was that all of the rules of loss as corresponds to the amount capi- that would implicate this regulation.
section 704(c), §1.704–3, and §1.704–4, talized. Similar rules are provided under Therefore, under the final regulations,
including section 704(c)(1)(B), apply §§1.704–4 and 1.737–2. the activity of acquiring, holding, dealing
to §1.752–7 liabilities unless otherwise In addition, the proposed regulations do in, or disposing of financial instruments is
specifically stated. The §1.752–7 regu- not provide any guidance as to the appro- not treated as a trade or business even if en-
lations have been modified to make this priate tax treatment if a triggering event gaged in by an entity registered as a man-
clear. In addition, §1.704–3 has been occurs after a §1.752–7 liability has been agement company. For assumptions of li-

June 27, 2005 1348 2005–26 I.R.B.


abilities on or after June 24, 2003, and be- bility from another partnership (up- tion between two or more partners acting
fore May 26, 2005, however, entities regis- per-tier partnership), then any partners other than in their capacity as members
tered as management companies may rely that were §1.752–7 liability partners of the partnership. Section 1.752–7(a)(2)
on the exception to the trade or business of the upper-tier partnership continue of the proposed regulations provides that
definition in the proposed regulations. to be §1.752–7 liability partners of the the assumption of a §1.752–7 liability is
lower-tier partnership with respect to the not treated as an assumption of a liability
9. Technical Terminations, Mergers, and remaining built-in loss associated with the or as a transfer of cash for purposes of
Divisions §1.752–7 liability at the time of the as- section 707(a)(2)(B). One commentator
sumption of the §1.752–7 liability by the noted that the language contained in the
Section 1.708–1(b)(4) provides that if
lower-tier partnership from the upper-tier proposed regulations was not consistent
a partnership is terminated under section
partnership. Any new built-in loss asso- with §1.707–5(a), which takes into ac-
708(b)(1)(B) by a sale or exchange of an
ciated with the §1.752–7 liability that is count all liabilities, regardless of whether
interest, the partnership is deemed to con-
created on the assumption of the §1.752–7 those liabilities are taken into account un-
tribute all of its assets and liabilities to a
liability from the upper-tier partnership by der section 752.
new partnership in exchange for an inter-
the lower-tier partnership is shared by all The intent of the proposed regulations
est in the new partnership; and, immedi-
the partners of the upper-tier partnership under section 752 was not to override the
ately thereafter, the terminated partnership
in accordance with their interests in the disguised sale rules under section 707,
is deemed to distribute interests in the new
upper-tier partnership, and each partner of which may include §1.752–7 liabilities as
partnership to the purchasing partner and
the upper-tier partnership is treated as a consideration. Therefore, §1.752–7(a)(2)
the other remaining partners.
§1.752–7 liability partner with respect to has been removed.
A commentator asked whether the
that new built-in loss.
rules provided in §1.752–7 apply to the 11. Revisions to §1.704–1(b)(2)(iv)
The definition of §1.752–7 liability
contribution and distribution of partner-
partner has also been amended to pro-
ship interests deemed to occur under Under section 704(b), a partner’s dis-
vide that, if, in a transaction described in
§1.708–1(b)(4). Rules have been added tributive share of income, gain, loss, de-
§1.752–7(e)(3), an interest in a partnership
to the final regulations to clarify how the duction, or credit (or item thereof) is deter-
(lower-tier partnership) that has assumed
regulations apply to technical terminations mined in accordance with the partnership
a §1.752–7 liability is distributed by a
and partnership mergers and divisions. agreement provided that those allocations
partnership (upper-tier partnership) that is
These rules are designed to ensure that, have substantial economic effect. If the al-
the §1.752–7 liability partner with respect
after a technical termination, merger, or locations under the partnership agreement
to that liability, then the persons receiving
division, the partners that were §1.752–7 do not have substantial economic effect or
interests in the lower-tier partnership are
liability partners of the prior partnership the partnership agreement does not pro-
§1.752–7 liability partners with respect
continue to be §1.752–7 liability partners vide as to a partner’s distributive share of
to the lower-tier partnership to the same
of the new partnership, and that built-in partnership items, then the partner’s dis-
extent that they were prior to the distri-
loss associated with the §1.752–7 liability tributive share of such items is determined
bution. In addition, §1.752–7(e)(3) has
does not shift from one partner to another in accordance with the partner’s interest in
been amended to provide that a distribu-
partner. In addition, these rules are de- the partnership (determined by taking into
tion of an interest in a lower-tier partner-
signed to ensure that a deemed assumption account all facts and circumstances).
ship is exempt from the application of
of a liability as a result of a technical ter- Section 1.704–1(b) describes various
§1.752–7(e) only if the partners that were
mination of a partnership does not create requirements that must be met for part-
§1.752–7 liability partners with respect
any new §1.752–7 liabilities that did not nership allocations to have substantial
to the lower-tier partnership prior to the
exist prior to the technical termination. economic effect. Among these require-
distribution continue to be §1.752–7 liabil-
Accordingly, §1.752–7(b)(6)(ii) of the ments is that (except as otherwise provided
ity partners with respect to the lower-tier
final regulations provides that, in deter- in §1.704–1(b)) the partnership agreement
partnership after the distribution.
mining if a deemed contribution of as- must provide for the determination and
sets and assumption of liability as a result 10. Disguised Sale Rules maintenance of capital accounts in accor-
of a technical termination is treated as a dance with the rules of §1.704–1(b)(2)(iv).
§1.752–7 liability transfer, only liabilities Section 707(a)(2)(B) provides that Section 1.704–1(b)(2)(iv)(b) generally
that were §1.752–7 liabilities of the termi- where there is a direct or indirect transfer requires that a partner’s capital account
nating partnership are taken into account of money or other property by a partner be increased by the value of property con-
and, then, only to the extent of the amount to a partnership and a related direct or tributed by the partner to the partnership
of the liability that was subject to §1.752–7 indirect transfer of money or property by net of liabilities secured by such con-
prior to the technical termination. the partnership to such partner and the tributed property that the partnership is
In addition, the definition of a §1.752–7 transfers, when viewed together, are prop- considered to assume or take subject to
liability partner has been amended to clar- erly characterized as a sale or exchange, under section 752, and be decreased by
ify that, if, in a transaction described in such transfers shall be treated either as a the value of property distributed by the
§1.752–7(e)(3), a partnership (lower-tier transaction between the partnership and partnership to the partner net of liabilities
partnership) assumes a §1.752–7 lia- one who is not a partner, or as a transac- secured by such distributed property that

2005–26 I.R.B. 1349 June 27, 2005


the partner is considered to assume or keep contact information current with the methodology to apply to these obligations.
take subject to under section 752. Section assuming partnership or partner. Accordingly, the final regulations do not
1.704–1(b)(2)(iv)(c) requires that a part- The Treasury Department and the IRS adopt this comment.
ner’s capital account be increased by lia- do not believe that imposing additional re- However, the final regulations clar-
bilities of the partnership that are assumed quirements is necessary in these circum- ify that, if the obligation arose under a
by such partner (other than liabilities stances. It is anticipated that the §1.752–7 contract in exchange for rights granted
described in §1.704–1(b)(2)(iv)(b)(5)), liability partner, upon entering the partner- to the obligor under that contract, and
and be decreased by liabilities of the ship, will negotiate with the partnership for those contractual rights are contributed
partner that are assumed by the partner- the necessary notification. Therefore, this to the partnership in connection with the
ship (other than liabilities described in comment was not adopted. partnership’s assumption of the contrac-
§1.704–1(b)(2)(iv)(b)(2)). The proposed tual obligation, then the amount of the
regulations revised §1.704–1(b)(2)(iv)(b) 13. Treatment of §1.752–7 Liabilities §1.752–7 liability is the amount of cash,
to take into account all liabilities to which if any, that a willing assignor would pay
Commentators have requested that
the contributed or distributed property is to a willing assignee to assume the entire
the final regulations include guidance on
subject, not just liabilities described in contract.
the recourse or nonrecourse treatment of
section 752. The proposed regulations did
§1.752–7 liabilities for all purposes of Effective Date
not revise §1.704–1(b)(2)(iv)(c), because
subchapter K. Under the proposed regula-
that section is not limited to assumptions
tions, a §1.752–7 liability is treated as a The final §1.752–6 regulations apply to
of liabilities described in section 752.
nonrecourse liability solely for purposes assumptions of liabilities by a partnership
A commentator suggested
of §1.704–2, dealing with the allocation occurring after October 18, 1999, and be-
that, if all liabilities are covered
of nonrecourse deductions among the fore June 24, 2003. All of the other final
by §1.704–1(b)(2)(iv)(b), then
partners. The only other provision that regulations in this Treasury decision apply
§1.704–1(b)(2)(iv)(c) did not have
the Treasury Department and the IRS are to liabilities assumed on or after June 24,
any effect and should be removed.
aware of for which the characterization of 2003, except as otherwise noted.
The final regulations do not adopt
a §1.752–7 liability as recourse or nonre-
this comment, because the Treasury Special Analyses
course is §1.707–5 (addressing the treat-
Department and the IRS believe that
ment of liabilities for purposes of the dis-
§1.704–1(b)(2)(iv)(c) has significance These final and temporary regulations
guised sale rules of section 707(a)(2)(B)),
even though §1.704–1(b)(2)(iv)(b) is no are necessary to prevent abusive transac-
and §1.707–5 already provides adequate
longer limited to liabilities described in tions involving transfers to partnerships
rules for determining if a §1.752–7 liabil-
section 752. Section 1.704–1(b)(2)(iv)(b) and corporations of the type section 358(h)
ity is recourse or nonrecourse. Because
applies only to situations in which liabili- was enacted to prevent. Accordingly, good
a §1.752–7 liability is not, by definition,
ties are assumed by the partnership or the cause is found for dispensing with notice
a §1.752–1 liability, the recourse or non-
partner in connection with the contribution and public procedure pursuant to 5 U.S.C.
recourse nature of a §1.752–7 liability is
or distribution of property, or contributed 553(b)(B) with respect to the temporary
not relevant for purposes of §§1.752–1
or distributed property is taken subject to regulations, and for dispensing with a de-
through 1.752–5. For this reason, this
liabilities. Section 1.704–1(b)(2)(iv)(b) layed effective date pursuant to 5 U.S.C.
comment was not adopted.
does not apply if liabilities are assumed 553(d)(1) and (3) with respect to the final
by the partnership or a partner other 14. Valuation of §1.752–7 Liabilities and temporary regulations.
than in connection with a contribution It has been determined that this Trea-
or distribution; these assumptions are Comments were received requesting sury decision is not a significant regula-
covered by §1.704–1(b)(2)(iv)(c). that the final regulations include guidance tory action as defined in Executive Order
on acceptable methods for identifying 12866. Therefore, a regulatory assessment
12. Notification upon Satisfaction of the and valuing §1.752–7 liabilities, as well is not required. It is hereby certified that
§1.752–7 Liability as identifying the appropriate discount the final regulations in this document will
rate for determining the liability’s present not have a significant economic impact
One commentator suggested that, to value. on a substantial number of small entities.
prevent the loss of a deduction to the The Treasury Department and the IRS This certification is based upon the fact
§1.752–7 partner, the regulations should believe that such matters are best left to that few partnerships engage in the type of
require the assuming partnership or part- the negotiation of the financial arrange- transactions that are subject to these regu-
ner to notify the §1.752–7 liability partner ment among the parties and are beyond lations (assumptions of liabilities not de-
of the satisfaction of the §1.752–7 lia- the scope of this regulation. In an arm’s scribed in section 752(a) and (b) from a
bility. The proposed regulations impose length transaction, the parties will take the partner). In addition, available data in-
no penalty on the partnership for failure potential occurrence of these obligations dicates that most partnerships that engage
to notify the §1.752–7 liability partner. into account in arriving at the agreement in the type of transactions that are subject
The commentator also suggested that the among the parties that will govern their af- to these regulations are large partnerships.
§1.752–7 liability partner be required to fairs, including the appropriate valuation Certain broad exceptions to the application

June 27, 2005 1350 2005–26 I.R.B.


of these regulations (including a de min- §1.358–5T Special rules for assumption and, subsequently, the partner transfers all
imis exception) further limit the economic of liabilities (temporary). or part of the partner’s partnership interest
impact of these regulations on small en- to a corporation in an exchange to which
tities. Therefore, a Regulatory Flexibil- (a) In general. Section 358(h)(2)(B) section 358(a) applies, then, for purposes
ity Analysis under the Regulatory Flexi- does not apply to an exchange occurring of applying section 358(h)(2), the section
bility Act (5 U.S.C. chapter 6) is not re- on or after June 24, 2003. 358(h) liability is treated as associated
quired. For the applicability of the Regula- (b) Effective dates. This section applies only with the contribution made to the
tory Flexibility Act to the temporary regu- to exchanges occurring on or after June 24, partnership by that partner. See paragraph
lations in this document (§1.358–5T), refer 2003. (e) Example 2 of this section. Similar
to the cross-reference notice of proposed Par. 3. Section 1.358–7 is added to read rules apply where a partnership assumes
rulemaking published in this issue of the as follows: a section 358(h) liability of a partner and
Bulletin. Pursuant to section 7805(f) of the a corporation subsequently assumes that
Code, the notice of proposed rulemaking §1.358–7 Transfers by partners and section 358(h) liability from the part-
that preceded these regulations was sub- partnerships to corporations. nership in an exchange to which section
mitted to the Chief Counsel for Advocacy 358(a) applies.
of the Small Business Administration for (a) Transfers by partners of partnership (d) Section 358(h) liabilities defined.
comment on its impact on small business. interests. For purposes of section 358(h), For purposes of this section, section 358(h)
a transfer of a partnership interest to a cor- liabilities are liabilities described in sec-
Drafting Information poration is treated as a transfer of the part- tion 358(h)(3).
ner’s share of each of the partnership’s as- (e) Examples. The following examples
The principal author of these regula- sets and an assumption by the corporation illustrate the provisions of this section. As-
tions is Laura Nash, Office of Associate of the partner’s share of partnership liabili- sume, for purposes of these examples, that
Chief Counsel (Passthroughs and Special ties (including section 358(h) liabilities, as the obligation assumed by the corporation
Industries), IRS. However, other person- defined in paragraph (d) of this section). does not reduce the shareholder’s basis in
nel from the IRS and Treasury Department See paragraph (e) Example 2 of this sec- the corporate stock under section 358(d).
participated in their development. tion. The examples are as follows:
(b) Transfers by partnerships. If a cor- Example 1. Transfer of partnership property to
***** poration assumes a section 358(h) liabil- corporation.
ity from a partnership in an exchange to In 2004, in an exchange to which section
Adoption of Amendments to the 351(a) applies, PRS, a cash basis taxpayer, transfers
which section 358(a) applies, then, for pur-
Regulations $2,000,000 cash to Corporation X, also a cash basis
poses of applying section 705 (determi- taxpayer, in exchange for Corporation X shares and
nation of basis of partner’s interest) and the assumption by Corporation X of $1,000,000 of
Accordingly, 26 CFR parts 1 and 602
§1.704–1(b), any reduction, under section accounts payable incurred by PRS. At the time of the
are amended as follows: exchange, PRS has two partners, A, a 90% partner,
358(h)(1), in the partnership’s basis in cor-
who has a $2,000,000 basis in the PRS interest, and
PART 1—INCOME TAXES porate stock received in the transaction
B, a 10% partner, who has a $50,000 basis in the
is treated as an expenditure of the part- PRS interest. Assume that, under section 358(h)(1),
Paragraph 1. The authority citation for nership described in section 705(a)(2)(B). PRS’s basis in the Corporation X stock is reduced
part 1 is amended by adding entries in nu- See paragraph (e) Example 1 of this sec- by the accounts payable assumed by Corporation X
tion. This expenditure must be allocated ($1,000,000). Under paragraph (b) of this section,
merical order to read, in part, as follows:
A’s and B’s bases in PRS must be reduced, but not
among the partners in accordance with sec-
below zero, by their respective shares of the section
Authority: 26 U.S.C. 7805 * * * tion 704(b) and (c) and §1.752–7(c). If 358(h)(1) basis reduction. If either partner’s share
a partner’s share of the reduction, under of the section 358(h)(1) basis reduction exceeds the
Section 1.358–5T also issued under 26 section 358(h)(1), in the partnership’s ba- partner’s basis in the partnership interest, then the
U.S.C. 358(h)(2). * * * sis in corporate stock exceeds the partner’s partner recognizes gain equal to the excess. A’s share
of the section 358(h) basis reduction is $900,000
Section 1.358–7 also issued under basis in the partnership interest, then the
(90% of $1,000,000). Therefore, A’s basis in the
Public Law 106–554, 114 Stat. 2763, partner recognizes gain equal to the excess, PRS interest is reduced to $1,100,000 ($2,000,000
2763A–638 (2001) * * * which is treated as gain from the sale or - $900,000). B’s share of the section 358(h) basis
Section 1.752–1(a) also issued under exchange of a partnership interest. This reduction is $100,000 (10% of $1,000,000). Be-
Public Law 106–554, 114 Stat. 2763, paragraph does not apply to the extent that cause B’s share of the section 358(h) basis reduction
($100,000) exceeds B’s basis in the PRS interest
2763A–638 (2001). §1.752–7(j)(4) applies to the assumption
($50,000), B’s basis in the PRS interest is reduced
Section 1.752–6 also issued under of the §1.752–7 liability by the corpora- to $0 and B recognizes $50,000 of gain. This gain is
Public Law 106–554, 114 Stat. 2763, tion. treated as gain from the sale of the PRS interest.
2763A–638 (2001). (c) Assumption of section 358(h) liabil- Example 2. Transfer of partnership interest to
Section 1.752–7 also issued under ity by partnership followed by transfer of corporation. In 2004, A contributes undeveloped
land with a value and basis of $4,000,000 in exchange
Public Law 106–554, 114 Stat. 2763, partnership interest or partnership prop-
for a 50% interest in PRS and an assumption by PRS
2763A–638 (2001). * * * erty to a corporation—trade or business of $2,000,000 of pension liabilities from a separate
Par. 2. Section 1.358–5T is added to exception. Where a partnership assumes business that A conducts. A’s basis in the PRS inter-
read as follows: a section 358(h) liability from a partner est immediately after the contribution is A’s basis in

2005–26 I.R.B. 1351 June 27, 2005


the land, $4,000,000, unreduced by the amount of the or distributed property that are taken into the rules of this section. See §1.752–7(c).
pension liabilities. PRS develops the land as a land- account under section 752(a) and (b). To the extent that the built-in loss associ-
fill. Before PRS has economically performed with ated with the §1.752–7 liability exceeds
respect to the pension liabilities, A transfers A’s in- *****
terest in PRS to Corporation X, in an exchange to
the cost of satisfying the §1.752–7 liability
which section 351 applies. At the time of the ex- §1.704–2 [Amended] (as defined in §1.752–7(b)(3)), the excess
change, the value of A’s PRS interest is $2,000,000, creates a “ceiling rule” limitation, within
A’s basis in PRS is $4,000,000, and A has no share Par. 5. In §1.704–2, paragraph (b)(3) the meaning of §1.704–3(b)(1), subject
of partnership liabilities other than the pension lia- is amended by adding the language to the methods of allocation set forth in
bilities. For purposes of applying section 358(h), the
transfer of the PRS interest to Corporation X is treated
“or a §1.752–7 liability (as defined in §1.704–3(b), (c) and (d).
as a transfer to Corporation X of A’s share of PRS as- §1.752–7(b)(3)(i)) assumed by the part- *****
sets and an assumption by Corporation X of A’s share nership from a partner on or after June 24, (f) Effective dates. * * * Except as
of the pension liabilities of PRS ($2,000,000). Be- 2003” at the end of the sentence.
cause the pension liabilities were not assumed by PRS
otherwise provided in §1.752–7(k), para-
Par. 6. Section 1.704–3 is amended as graphs (a)(8)(iv) and (a)(12) apply to
from A in an exchange in which the trade or busi-
ness associated with the liability was transferred to
follows: §1.752–7 liability transfers, as defined in
PRS, the transfer of the PRS interest to Corporation 1. The paragraph heading for (a)(7) is §1.752–7(b)(4), occurring on or after June
X is not excepted from section 358(h) under section revised. 24, 2003. See §1.752–7(k).
358(h)(2). See paragraph (c) of this section. Under 2. Two sentences are added to the end
section 358(h), A’s basis in the Corporation X stock
Par. 7. Section 1.704–4 is amended as
of paragraph (a)(7). follows:
is reduced by the $2,000,000 of pension liabilities.
3. Paragraphs (a)(8)(ii) and (iii) are 1. The paragraph heading for (d)(1) is
(f) Effective date. This section applies
removed and reserved and paragraph revised.
to assumptions of liabilities by a corpora-
(a)(8)(iv) is added. 2. Paragraphs (d)(1)(ii) and (iii) are
tion occurring on or after June 24, 2003.
4. Paragraph (a)(12) is added. removed and reserved and paragraph
Par. 4. Section 1.704–1 is amended as
5. Two additional sentences are added (d)(1)(iv) is added.
follows:
at the end of paragraph (f). 3. Paragraph (g) is revised.
1. Paragraph (b)(1)(ii)(a) is amended
The revisions and additions read as fol- The additions and revisions read as fol-
by removing the language “The” at the be-
lows: lows:
ginning of the first sentence and adding
“Except as otherwise provided in this sec- §1.704–3 Contributed property. §1.704–4 Distribution of contributed
tion, the” in its place.
property.
2. Paragraph (b)(2)(iv)(b) is amended (a) * * *
by adding a sentence at the end of the para- (7) Transfer of a partnership inter- (d) Special rules—(1) Nonrecogni-
graph. est.* * * This rule does not apply to any tion transactions, installment obligations,
3. Paragraph (b)(2)(iv)(b)(2) is person who acquired a partnership inter- contributed contracts, and capitalized
amended by removing the language “se- est from a §1.752–7 liability partner in a costs—(i) Nonrecognition transactions.
cured by such contributed property” in the transaction to which paragraph (e)(1) of ***
parenthetical. §1.752–7 applies. See §1.752–7(c)(1). (ii) [Reserved]
4. Paragraph (b)(2)(iv)(b)(2) is further (8) Special rules—(i) Disposition in a (iii) [Reserved]
amended by removing the language “under nonrecognition transaction.* * * (iv) Capitalized costs. Property to
section 752” in the parenthetical. (ii) [Reserved] which the cost of section 704(c) property
5. Paragraph (b)(2)(iv)(b)(5) is (iii) [Reserved] is properly capitalized is treated as section
amended by removing the language “se- (iv) Capitalized amounts. To the extent 704(c) property for purposes of section
cured by such distributed property” in the that a partnership properly capitalizes all 704(c)(1)(B) and this section to the extent
parenthetical. or a portion of an item as described in para- that such property is treated as section
6. Paragraph (b)(2)(iv)(b)(5) is further graph (a)(12) of this section, then the item 704(c) property under §1.704–3(a)(8)(iv).
amended by removing the language “under or items to which such cost is properly cap- See §1.737–2(d)(3) for a similar rule in
section 752” in the parenthetical. italized is treated as section 704(c) prop- the context of section 737.
The addition reads as follows: erty with the same amount of built-in loss
*****
as corresponds to the amount capitalized.
§1.704–1 Partner’s distributive share. (g) Effective dates. This section applies
***** to distributions by a partnership to a part-
***** (12) §1.752–7 liabilities. Except ner on or after January 9, 1995, except
(b) * * * as otherwise provided in §1.752–7, that paragraph (d)(1)(iv) applies to distri-
(2) * * * §1.752–7 liabilities (within the mean- butions by a partnership to a partner on or
(iv) * * * ing of §1.752–7(b)(2)) are section 704(c) after June 24, 2003.
(b) * * * For liabilities assumed before property (built-in loss property that at the Par. 8. Section 1.705–1 is amended by
June 24, 2003, references to liabilities in time of contribution has a book value that adding paragraph (a)(8) to read as follows:
this paragraph (b)(2)(iv)(b) shall include differs from the contributing partner’s ad-
only liabilities secured by the contributed justed tax basis) for purposes of applying

June 27, 2005 1352 2005–26 I.R.B.


§1.705–1 Determination of basis of 4. Entries for §1.752–6 and §1.752–7 (6) Remaining built-in loss associated
partner’s interest. are added. with a §1.752–7 liability.
The revision and additions read as fol- (i) In general.
(a) * * * lows: (ii) Partial dispositions and assump-
(8) For basis adjustments necessary to tions.
coordinate sections 705 and 358(h), see §1.752–0 Table of contents. (7) §1.752–7 liability reduction.
§1.358–7(b). For certain basis adjustments (i) In general.
with respect to a §1.752–7 liability as- This section lists the major paragraphs (ii) Partial dispositions and assump-
sumed by a partnership from a partner, see that appear in §§1.752–1 through 1.752–7. tions.
§1.752–7. (8) Satisfaction of §1.752–7 liability.
§1.752–1 Treatment of partnership
***** (9) Testing date.
liabilities.
Par. 9. Section 1.737–2 is amended as (10) Trade or business.
follows: (a) * * * (i) In general.
1. The paragraph heading for (d)(3) is (4) Liability defined. (ii) Examples.
revised. (i) In general. (c) Application of section 704(b) and
2. Paragraphs (d)(3)(ii) and (iii) are (ii) Obligation. (c) to assumed §1.752–7 liabilities.
removed and reserved and paragraph (iii) Other liabilities. (1) In general.
(d)(3)(iv) is added. (iv) Effective date. (i) Section 704(c).
The additions and revisions read as fol- (ii)Section 704(b).
***** (2) Example.
lows:
(d) Special rules for transfers of partner-
§1.752–6 Partnership assumption of
§1.737–2 Exceptions and special rules. ship interests, distributions of partnership
partner’s section 358(h)(3) liability after
assets, and assumptions of the §1.752–7 li-
(d) * * * October 18, 1999, and before June 24,
ability after a §1.752–7 liability transfer.
(3) Nonrecognition transactions, in- 2003.
(1) In general.
stallment sales, contributed contracts, (2) Exceptions.
(a) In general.
and capitalized costs—(i) Nonrecognition (i) In general.
(b) Exceptions.
transactions. * * * (ii) Examples.
(1) In general.
(ii) [Reserved] (e) Transfer of §1.752–7 liability part-
(2) Transactions described in Notice
(iii) [Reserved] ner’s partnership interest.
2000–44.
(iv) Capitalized costs. Property to (1) In general.
(c) Example.
which the cost of section 704(c) property (2) Examples.
(d) Effective date.
is properly capitalized is treated as section (3) Exception for nonrecognition trans-
(1) In general.
704(c) property for purposes of section actions.
(2) Election to apply §1.752–7.
737 to the extent that such property is (i) In general.
treated as section 704(c) property under §1.752–7 Partnership assumption of (ii) Examples.
§1.704–3(a)(8)(iv). See §1.704–4(d)(1) partner’s §1.752–7 liability on or after (f) Distribution in liquidation of
for a similar rule in the context of section June 24, 2003. §1.752–7 liability partner’s partnership
704(c)(1)(B). interest.
***** (a) Purpose and structure. (1) In general.
Par. 10. Section 1.737–5 is revised to (b) Definitions. (2) Example.
read as follows: (1) Assumption. (g) Assumption of §1.752–7 liability by
(2) Adjusted value. a partner other than §1.752–7 liability part-
§1.737–5 Effective dates. (3) §1.752–7 liability. ner.
(i) In general. (1) In general.
Sections 1.737–1, 1.737–2, 1.737–3, (ii) Amount and share of §1.752–7 lia- (2) Consequences to §1.752–7 liability
and 1.737–4 apply to distributions by a bility. partner.
partnership to a partner on or after January (iii) Example. (3) Consequences to partnership.
9, 1995, except that §1.737–2(d)(3)(iv) (4) §1.752–7 liability transfer. (4) Consequences to assuming partner.
applies to distributions by a partnership to (i) In general. (5) Example.
a partner on or after June 24, 2003. (ii) Terminations under section (h) Notification by the partnership
Par. 11. Section 1.752–0 is amended as 708(b)(1)(B). (or successor) of the satisfaction of the
follows: (5) §1.752–7 liability partner. §1.752–7 liability.
1. The section heading and introductory (i) In general. (i) Special rule for amounts that are cap-
text of §1.752–0 are revised. (ii) Tiered partnerships. italized prior to the occurrence of an event
2. An entry for §1.752–1(a)(4) is added. (A) Assumption by a lower-tier partner- described in paragraphs (e), (f), or (g).
3. Entries for §1.752–1(a)(4)(i), (ii), ship. (1) In general.
(iii), and (iv) are added. (B) Distribution of partnership interest. (2) Example.

2005–26 I.R.B. 1353 June 27, 2005


(j) Tiered partnerships. (iv) Effective date. Except as other- and a fixed or contingent obligation of $100 that is
(1) Look-through treatment. wise provided in §1.752–7(k), this para- not a liability to which section 752(a) and (b) applies,
(2) Trade or business exception. graph (a)(4) applies to liabilities that are in exchange for a 50% interest in PRS. Assume that,
after the contribution, A’s share of partnership liabil-
(3) Partnership as a §1.752–7 liability incurred or assumed by a partnership on or ities under §§1.752–1 through 1.752–5 is $25. Also
partner. after June 24, 2003. assume that the $100 liability is not associated with a
(4) Transfer of §1.752–7 liability by ***** trade or business contributed by A to PRS or with as-
partnership to another partnership or cor- sets contributed by A to PRS. After the contribution,
poration after a transaction described in A’s basis in PRS is $175 (A’s basis in the contributed
§1.752–5(a) [Amended]
land ($200) reduced by the nonrecourse debt assumed
paragraphs (e), (f), or (g). by PRS ($50), increased by A’s share of partnership
(i) In general. Par. 13. In §1.752–5, paragraph (a) is liabilities under §§1.752–1 through 1.752–5 ($25)).
(ii) Subsequent transfers. amended by removing the language “Un- Because A’s basis in the PRS interest is greater than
(5) Example. less” at the beginning of the first sentence the adjusted value of A’s interest, $75 (the fair mar-
(k) Effective dates. and adding “Except as otherwise provided ket value of A’s interest ($50) increased by A’s share
of partnership liabilities ($25)), paragraph (a) of this
(1) In general. in §§1.752–1 through 1.752–4, unless” in
section operates to reduce A’s basis in the PRS in-
(2) Election to apply this section to as- its place. terest (but not below the adjusted value of that in-
sumptions of liabilities occurring after Oc- Par. 14. Section 1.752–6 is added to terest) by the amount of liabilities described in sec-
tober 18, 1999, and before June 24, 2003. read as follows: tion 358(h)(3) (other than liabilities to which section
(i) In general. 752(a) and (b) apply) assumed by PRS. Therefore,
§1.752–6 Partnership assumption of A’s basis in PRS is reduced to $75.
(ii) Manner of making election.
partner’s section 358(h)(3) liability after (d) Effective date—(1) In general. This
(iii) Filing of amended returns.
October 18, 1999, and before June 24, section applies to assumptions of liabilities
(iv) Time for making election.
2003. occurring after October 18, 1999, and be-
Par. 12. In §1.752–1, paragraph (a)(4)
fore June 24, 2003.
is added to read as follows: (a) In general. If, in a transaction de- (2) Election to apply §1.752–7.
scribed in section 721(a), a partnership The partnership may elect, under
§1.752–1 Treatment of partnership
assumes a liability (defined in section §1.752–7(k)(2), to apply the provisions
liabilities.
358(h)(3)) of a partner (other than a li- referenced in §1.752–7(k)(2)(ii) to all as-
ability to which section 752(a) and (b) sumptions of liabilities by the partnership
(a) * * *
apply), then, after application of section occurring after October 18, 1999, and be-
(4) Liability defined—(i) In general.
752(a) and (b), the partner’s basis in the fore June 24, 2003. Section 1.752–7(k)(2)
An obligation is a liability for purposes of
partnership is reduced (but not below the describes the manner in which the election
section 752 and the regulations thereunder
adjusted value of such interest) by the is made.
(§1.752–1 liability), only if, when, and to
amount (determined as of the date of the
the extent that incurring the obligation—
exchange) of the liability. For purposes of §1.752–6T [Removed]
(A) Creates or increases the basis of any
this section, the adjusted value of a part-
of the obligor’s assets (including cash); Par. 15. Section 1.752–6T is removed.
ner’s interest in a partnership is the fair
(B) Gives rise to an immediate deduc- Par. 16. Section 1.752–7 is added to
market value of that interest increased by
tion to the obligor; or read as follows:
the partner’s share of partnership liabili-
(C) Gives rise to an expense that is not
ties under §§1.752–1 through 1.752–5.
deductible in computing the obligor’s tax- §1.752–7 Partnership assumption of
(b) Exceptions—(1) In general. Except
able income and is not properly chargeable partner’s §1.752–7 liability on or after
as provided in paragraph (b)(2) of this sec-
to capital. June 24, 2003.
tion, the exceptions contained in section
(ii) Obligation. For purposes of this
358(h)(2)(A) and (B) apply to this section.
paragraph and §1.752–7, an obligation (a) Purpose and structure. The purpose
(2) Transactions described in Notice
is any fixed or contingent obligation to of this section is to prevent the acceler-
2000–44. The exception contained in
make payment without regard to whether ation or duplication of loss through the
section 358(h)(2)(B) does not apply to
the obligation is otherwise taken into ac- assumption of obligations not described in
an assumption of a liability (defined in
count for purposes of the Internal Revenue §1.752–1(a)(4)(i) in transactions involv-
section 358(h)(3)) by a partnership as part
Code. Obligations include, but are not ing partnerships. Under paragraph (c) of
of a transaction described in, or a trans-
limited to, debt obligations, environmen- this section, any such obligation that is
action that is substantially similar to the
tal obligations, tort obligations, contract assumed by a partnership from a partner in
transactions described in, Notice 2000–44,
obligations, pension obligations, obliga- a transaction governed by section 721(a)
2000–2 C.B. 255. See §601.601(d)(2) of
tions under a short sale, and obligations is treated as section 704(c) property. Para-
this chapter.
under derivative financial instruments graphs (e), (f), and (g) of this section
(c) Example. The following example
such as options, forward contracts, futures provide rules for situations where a part-
illustrates the principles of paragraph (a) of
contracts, and swaps. nership assumes such an obligation from
this section:
(iii) Other liabilities. For obliga- Example. In 1999, A and B form partnership
a partner and, subsequently, that partner
tions that are not §1.752–1 liabilities, PRS. A contributes property with a value and basis of transfers all or part of the partnership in-
see §§1.752–6 and 1.752–7. $200, subject to a nonrecourse debt obligation of $50 terest, that partner receives a distribution

June 27, 2005 1354 2005–26 I.R.B.


in liquidation of the partnership interest, or the contractual obligation, then the amount a partner from whom a partnership as-
another partner assumes part or all of that of the §1.752–7 liability or obligation is sumes a §1.752–7 liability as part of a
obligation from the partnership. These the amount of cash, if any, that a willing §1.752–7 liability transfer or any person
rules prevent the duplication of loss by assignor would pay to a willing assignee who acquires a partnership interest from
prohibiting the partnership and any per- to assume the entire contract. A partner’s the §1.752–7 liability partner in a transac-
son other than the partner from whom the share of a partnership’s §1.752–7 liability tion to which paragraph (e)(3) of this sec-
obligation was assumed from claiming a is the amount of deduction that would be tion applies.
deduction, loss, or capital expense to the allocated to the partner with respect to the (ii) Tiered partnerships—(A) Assump-
extent of the built-in loss associated with §1.752–7 liability if the partnership dis- tion by a lower-tier partnership. If, in
the obligation. These rules also prevent posed of all of its assets, satisfied all of a §1.752–7 liability transfer, a partner-
the acceleration of loss by deferring the its liabilities (other than §1.752–7 liabili- ship (lower-tier partnership) assumes a
partner’s deduction or loss attributable to ties), and paid an unrelated person to as- §1.752–7 liability from another partner-
the obligation (if any) until the satisfaction sume all of its §1.752–7 liabilities in a fully ship (upper-tier partnership), then both the
of the §1.752–7 liability (within the mean- taxable arm’s-length transaction (assum- upper-tier partnership and the partners of
ing of paragraph (b)(8) of this section). ing such payment would give rise to an im- the upper-tier partnership are §1.752–7
Paragraph (d) of this section provides a mediate deduction to the partnership). liability partners. Therefore, paragraphs
number of exceptions to paragraphs (e), (iii) Example. In 2005, A, B, and C form part- (e) and (f) of this section apply on a
(f), and (g) of this section, including a de nership PRS. A contributes $10,000,000 in exchange sale or liquidation of any partner’s in-
for a 25% interest in PRS and PRS’s assumption of
minimis exception. Paragraph (i) provides a debt obligation. The debt obligation was issued
terest in the upper-tier partnership and
a special rule for situations in which an for cash and the issue price was equal to the stated on a sale or liquidation of the upper-tier
amount paid to satisfy a §1.752–7 liability redemption price at maturity ($5,000,000). The debt partnership’s interest in the lower-tier
is capitalized into other partnership prop- obligation bears interest, payable quarterly, at a fixed partnership. See paragraph (j)(3) of this
erty. Paragraph (j) of this section provides rate of interest, which was a market rate of interest section. If, in a §1.752–7 liability trans-
when the debt obligation was issued. At the time of
special rules for tiered partnership trans- the assumption, all accrued interest has been paid.
fer, the upper-tier partnership assumes
actions. Prior to the partnership assuming the obligation, in- a §1.752–7 liability from a partner, and,
(b) Definitions. For purposes of this terest rates decrease, resulting in the debt obligation subsequently, in another §1.752–7 liability
section, the following definitions apply: bearing an above-market interest rate. Assume that, transfer, a lower-tier partnership assumes
(1) Assumption. The principles of as a result of the decline in interest rates, A would that §1.752–7 liability from the upper-tier
have had to pay a willing assignee $6,000,000 to as-
§1.752–1(d) and (e) apply in determining sume the debt obligation. The assumption of the debt
partnership, then the partner from whom
if a §1.752–7 liability has been assumed. obligation by PRS from A is treated as an assump- the upper-tier partnership assumed the
(2) Adjusted value. The adjusted value tion of a §1.752–1(a)(4)(i) liability in the amount of §1.752–7 liability continues to be the
of a partner’s interest in a partnership is the $5,000,000 (the portion of the total amount of the §1.752–7 liability partner of the lower-tier
fair market value of that interest increased debt obligation that has created basis in A’s assets, partnership with respect to the remaining
that is, the $5,000,000 that was issued in exchange
by the partner’s share of partnership liabil- for the debt obligation ) and an assumption of a
built-in loss associated with that §1.752–7
ities under §§1.752–1 through 1.752–5. §1.752–7 liability in the amount of $1,000,000 (the liability. Any new built-in loss associated
(3) §1.752–7 liability—(i) In general. difference between the total obligation, $6,000,000, with the §1.752–7 liability that is created
A §1.752–7 liability is an obligation de- and the §1.752–1(a)(4)(i) liability, $5,000,000). on the assumption of the §1.752–7 lia-
scribed in §1.752–1(a)(4)(ii) to the extent (4) §1.752–7 liability transfer—(i) In bility from the upper-tier partnership by
that either — general. Except as provided in paragraph the lower-tier partnership is shared by all
(A) The obligation is not described in (b)(4)(ii) of this section, a §1.752–7 li- the partners of the upper-tier partnership
§1.752–1(a)(4)(i); or ability transfer is any assumption of a in accordance with their interests in the
(B) The amount of the obligation (un- §1.752–7 liability by a partnership from a upper-tier partnership, and each partner
der paragraph (b)(3)(ii) of this section) ex- partner in a transaction governed by sec- of the upper-tier partnership is treated as
ceeds the amount taken into account under tion 721(a). a §1.752–7 liability partner with respect
§1.752–1(a)(4)(i). (ii) Terminations under section to that new built-in loss. See paragraph
(ii) Amount and share of §1.752–7 li- 708(b)(1)(B). In determining if a deemed (e)(3)(ii), Example 3 of this section.
ability. The amount of a §1.752–7 liabil- contribution of assets and assumption of (B) Distribution of partnership in-
ity (or, for purposes of paragraph (b)(3)(i) liability as a result of a technical termi- terest. If, in a transaction described in
of this section, the amount of an obliga- nation is treated as a §1.752–7 liability §1.752–7(e)(3), an interest in a partnership
tion) is the amount of cash that a will- transfer, only §1.752–7 liabilities that (lower-tier partnership) that has assumed
ing assignor would pay to a willing as- were assumed by the terminating partner- a §1.752–7 liability is distributed by a
signee to assume the §1.752–7 liability in ship as part of an earlier §1.752–7 liability partnership (upper-tier partnership) that is
an arm’s-length transaction. If the obli- transfer are taken into account and, then, the §1.752–7 liability partner with respect
gation arose under a contract in exchange only to the extent of the remaining built-in to that liability, then the persons receiving
for rights granted to the obligor under that loss associated with that §1.752–7 liabil- interests in the lower-tier partnership are
contract, and those contractual rights are ity. §1.752–7 liability partners with respect to
contributed to the partnership in connec- (5) §1.752–7 liability partner—(i) In the lower-tier partnership to the same ex-
tion with the partnership’s assumption of general. A §1.752–7 liability partner is tent that they were prior to the distribution.

2005–26 I.R.B. 1355 June 27, 2005


(6) Remaining built-in loss associated (8) Satisfaction of §1.752–7 liabil- (ii) Examples. The following examples
with a §1.752–7 liability. (i) In general. ity—In general. A §1.752–7 liability is illustrate the provisions of this paragraph
The remaining built-in loss associated with treated as satisfied (in whole or in part) (b)(10):
a §1.752–7 liability equals the amount of on the date on which the partnership (or Example 1. Corporation Y owns, manages, and
the §1.752–7 liability as of the time of the the assuming partner) would have been derives rental income from an office building and also
owns vacant land that may be subject to environmen-
assumption of the §1.752–7 liability by the allowed to take the §1.752–7 liability into tal liabilities. Corporation Y contributes the land sub-
partnership, reduced by the portion of the account for federal tax purposes but for ject to the environmental liabilities to PRS in a trans-
§1.752–7 liability previously taken into ac- this section. For example, a §1.752–7 lia- action governed by section 721(a). PRS plans to de-
count by the §1.752–7 liability partner un- bility is treated as satisfied when, but for velop the land as a landfill. The contribution of the
der paragraph (j)(3) of this section and ad- this section, the §1.752–7 liability would vacant land does not constitute the contribution of a
trade or business because Corporation Y did not con-
justed as provided in paragraph (c) of this give rise to— duct any significant business or development activi-
section and §1.704–3 for— (i) An increase in the basis of the part- ties with respect to the land prior to the contribution.
(A) Any portion of that built-in loss as- nership’s or the assuming partner’s assets Example 2. For the past 5 years, Corporation X
sociated with the §1.752–7 liability that is (including cash); has owned and operated gas stations in City A, City
satisfied by the partnership on or prior to (ii) An immediate deduction to the part- B, and City C. Corporation X transfers all of the assets
associated with the operation of the gas station in City
the testing date (whether capitalized or de- nership or to the assuming partner; A to PRS for interests in PRS and the assumption by
ducted); and (iii) An expense that is not deductible in PRS of the §1.752–7 liabilities associated with that
(B) Any assumption of all or part of the computing the partnership’s or the assum- gas station. PRS continues to operate the gas station
§1.752–7 liability by the §1.752–7 liabil- ing partner’s taxable income and not prop- in City A after the contribution. The contribution of
ity partner (including any assumption that erly chargeable to capital account; or the gas station to PRS constitutes the contribution of
a trade or business.
occurs on the testing date). (iv) An amount realized on the sale or Example 3. For the past 7 years, Corporation Z
(ii) Partial dispositions and assump- other disposition of property subject to that has engaged in the manufacture and sale of household
tions. In the case of a partial disposition liability if the property was disposed of by products. Throughout this period, Corporation Z has
of the §1.752–7 liability partner’s part- the partnership or the assuming partner at maintained a research department for use in connec-
nership interest or a partial assumption of that time. tion with its manufacturing activities. The research
department has 10 employees actively engaged in the
the §1.752–7 liability by another partner, (9) Testing date. The testing date is— development of new products. Corporation Z con-
the remaining built-in loss associated with (i) For purposes of paragraph (e) of this tributes the research department to PRS in exchange
§1.752–7 liability is prorated based on the section, the date of the sale, exchange, for a PRS interest and the assumption by PRS of pen-
portion of the interest sold or the portion or other disposition of part or all of the sion liabilities with respect to the employees of the re-
of the §1.752–7 liability assumed. §1.752–7 liability partner’s partnership in- search department. PRS continues the research oper-
ations on a contractual basis with several businesses,
(7) §1.752–7 liability reduction—(i) In terest; including Corporation Z. The contribution of the re-
general. The §1.752–7 liability reduction (ii) For purposes of paragraph (f) of this search operations to PRS constitutes a contribution of
is the amount by which the §1.752–7 lia- section, the date of the partnership’s distri- a trade or business.
bility partner is required to reduce the ba- bution in liquidation of the §1.752–7 liabil- (c) Application of section 704(b) and
sis in the partner’s partnership interest by ity partner’s partnership interest; and (c) to assumed §1.752–7 liabilities—(1)
operation of paragraphs (e), (f), and (g) of (iii) For purposes of paragraph (g) of In general—(i) Section 704(c). Except as
this section. The §1.752–7 liability reduc- this section, the date of the assumption (or otherwise provided in this section, sections
tion is the lesser of — partial assumption) of the §1.752–7 liabil- 704(c)(1)(A) and (B), section 737, and the
(A) The excess of the §1.752–7 liability ity by a partner other than the §1.752–7 li- regulations thereunder, apply to §1.752–7
partner’s basis in the partnership interest ability partner. liabilities. See §1.704–3(a)(12). How-
over the adjusted value of that interest (as (10) Trade or business—(i) In general. ever, §1.704–3(a)(7) does not apply to any
defined in paragraph (b)(2) of this section); A trade or business is a specific group of person who acquired a partnership inter-
or activities carried on by a person for the pur- est from a §1.752–7 liability partner in a
(B) The remaining built-in loss associ- pose of earning income or profit, other than transaction to which paragraph (e)(1) of
ated with the §1.752–7 liability (as defined a group of activities consisting of acquir- this section applies.
in paragraph (b)(6) of this section without ing, holding, dealing in, or disposing of (ii) Section 704(b). Section 704(b) and
regard to paragraph (b)(6)(ii) of this sec- financial instruments, if the activities in- §1.704–1(b) apply to a post-contribution
tion). cluded in that group include every opera- change in the value of a §1.752–7 liabil-
(ii) Partial dispositions and assump- tion that forms a part of, or a step in, the ity. If there is a decrease in the value of
tions. In the case of a partial disposition process of earning income or profit. Such a §1.752–7 liability that is reflected in
of the §1.752–7 liability partner’s partner- group of activities ordinarily includes the the capital accounts of the partners un-
ship interest or a partial assumption of the collection of income and the payment of der §1.704–1(b)(2)(iv)(f), the amount of
§1.752–7 liability by another partner, the expenses. The group of activities must the decrease constitutes an item of in-
§1.752–7 liability reduction is prorated constitute the carrying on of a trade or come for purposes of section 704(b) and
based on the portion of the interest sold business under section 162(a) (determined §1.704–1(b). Conversely, if there is an in-
or the portion of the §1.752–7 liability as though the activities were conducted by crease in the value of a §1.752–7 liability
assumed. an individual). that is reflected in the capital accounts of
the partners under §1.704–1(b)(2)(iv)(f),

June 27, 2005 1356 2005–26 I.R.B.


the amount of the increase constitutes an PRS. B contributes $300X cash for a 25% interest traditional method under §1.704–3(b) and also elects
item of loss for purposes of section 704(b) in PRS, and C contributes $600X cash for a 50% to treat the deductions or losses attributable to the
and §1.704–1(b). interest in PRS. Assume that the partnership com- §1.752–7 liability as coming first from the built-in
plies with the substantial economic effect safe harbor loss. In 2005, PRS earns $200X of income and uses it
(2) Example. The following example of §1.704–1(b)(2). Under §1.704–1(b)(2)(iv)(b), to satisfy the §1.752–7 liability which has increased
illustrates the provisions of this paragraph A’s capital account is credited with $300X (the fair in value to $200X. Assume that the cost to PRS of
(c): market value of Property 1, $400X, less the §1.752–7 satisfying the §1.752–7 liability is deductible by
Example—(i) Facts. In 2004, A, B, and C form liability assumed by PRS, $100X). In accordance PRS. The $200X of partnership income is allocated
partnership PRS. A contributes Property 1 with a with §§1.752–7(c)(1)(i) and 1.704–3, the partnership according to the partnership agreement, $50X to A,
fair market value and basis of $400X, subject to a can use any reasonable method for section 704(c) $50X to B, and $100X to C.
§1.752–7 liability of $100X, for a 25% interest in purposes. In this case, the partnership elects the

A B C
Book Tax Book Tax Book Tax

$300 $400 $300 $300 $600 $600 Initial Contribution


50 50 50 50 100 100 Income
(25) (125) (25) (25) (50) (50) Satisfaction of Liability
$325 $325 $325 $325 $650 $650

(ii) Analysis. Pursuant to paragraph (c) of this this section apply to certain partnership tion by PRS of pension liabilities with respect to the
section, $100X of the deduction attributable to the transactions occurring after a §1.752–7 employees engaged in Business A. PRS plans to carry
satisfaction of the §1.752–7 liability is specially al- liability transfer. on Business A after the contribution. Because PRS
located to A, the §1.752–7 liability partner, under has assumed the pension liabilities as part of a con-
section 704(c)(1)(A) and §1.704–3. No book item
(2) Exceptions—(i) In general. Para- tribution to PRS of the trade or business with which
corresponds to this tax allocation. The remaining graphs (e), (f), and (g) of this section do the liabilities are associated, the treatment of the pen-
$100X of deduction attributable to the satisfaction of not apply— sion liabilities is not affected by paragraphs (e), (f),
the §1.752–7 liability is allocated, for both book and (A) If the partnership assumes the and (g) of this section with respect to any transaction
tax purposes, according to the partnership agreement, §1.752–7 liability as part of a contribution occurring after the §1.752–7 liability transfer of the
$25X to A, $25X to B, and $50X to C. If the partner- pension liabilities.
ship, instead, satisfied the §1.752–7 liability over a
to the partnership of the trade or business Example 2. (i) Facts. The facts are the same as in
number of years, the first $100X of deduction with re- with which the liability is associated, and Example 1, except that PRS also assumes from Cor-
spect to the §1.752–7 liability would be allocated to the partnership continues to carry on that poration X certain pension liabilities with respect to
A, the §1.752–7 liability partner, before any deduc- trade or business after the contribution (for the employees of Business B. At the time of the as-
tion with respect to the §1.752–7 liability would be the definition of a trade or business, see sumption, the amount of the pension liabilities with
allocated to the other partners. For example, if PRS respect to the employees of Business A is $3,000,000
were to satisfy $50X of the §1.752–7 liability, the
paragraph (b)(10) of this section); or (the A liabilities) and the amount of the pension liabil-
$50X deduction with respect to the §1.752–7 liability (B) If, immediately before the testing ities associated with the employees of Business B (the
would be allocated to A for tax purposes only. No de- date, the amount of the remaining built-in B liabilities) is $2,000,000. Two years later, Corpo-
duction would arise for book purposes. If PRS later loss with respect to all §1.752–7 liabili- ration X sells its interest in PRS to Y for $9,000,000.
paid a further $100X in satisfaction of the §1.752–7 ties assumed by the partnership (other than At the time of the sale, the remaining built-in loss as-
liability, $50X of the deduction with respect to the sociated with the A liabilities is $2,100,000, the re-
§1.752–7 liability would be allocated, solely for tax
§1.752–7 liabilities assumed by the part- maining built-in loss associated with the B liabilities
purposes, to A and the remaining $50X would be al- nership with an associated trade or busi- is $900,000, and the gross value of PRS’s assets (ex-
located, for both book and tax purposes, according ness) in one or more §1.752–7 liability cluding §1.752–7 liabilities) is $20,000,000. Assume
to the partnership agreement. Under these circum- transfers is less than the lesser of 10% of that PRS has no §1.752–7 liabilities other than those
stances, the partnership’s method of allocating the the gross value of partnership assets or assumed from Corporation X.
built-in loss associated with the §1.752–7 liability is
reasonable.
$1,000,000.
(d) Special rules for transfers of part- (ii) Examples. The following examples
nership interests, distributions of part- illustrate the principles of this paragraph
nership assets, and assumptions of the (d)(2):
Example 1. For the past 5 years, Corporation X,
§1.752–7 liability after a §1.752–7 lia- a C corporation, has been engaged in Business A and
bility transfer—(1) In general. Except as Business B. In 2004, Corporation X contributes Busi-
provided in paragraphs (d)(2) and (i) of ness A, in a transaction governed by section 721(a), to
this section, paragraphs (e), (f), and (g) of PRS in exchange for a PRS interest and the assump-

2005–26 I.R.B. 1357 June 27, 2005


PRS Balance Sheet at Time of X’s Sale of PRS Interest (in millions)
Assets Liabilities
$20 Gross Assets (including Business A)
($2.1) A Liabilities
(0.9) B Liabilities

(ii) Analysis. The only liabilities assumed by PRS For purposes of section 705(a)(2)(B) and deduction or loss is determined as if the
from Corporation X that were not assumed as part §1.704–1(b)(2)(ii)(b) only, the remaining §1.752–7 liability partner had satisfied the
of Corporation X’s contribution of Business A were
built-in loss associated with the §1.752–7 liability. To the extent that the §1.752–7
the B liabilities. Immediately before the testing date,
the remaining built-in loss associated with the B li-
liability is not treated as a nondeductible, liability reduction exceeds the amount that
abilities ($900,000) was less than the lesser of 10% noncapital expenditure of the partnership. the partnership would, but for this section,
of the gross value of PRS’s assets ($2,000,000) or Therefore, the remaining partners’ capital take into account on the satisfaction of
$1,000,000. Therefore, paragraph (d)(2)(i)(B) of this accounts and bases in their partnership the §1.752–7 liability, the character of the
section applies to exclude Corporation X’s sale of the
interests are not reduced by the remaining §1.752–7 liability partner’s loss is capital.
PRS interest to Y from the application of paragraph
(e) of this section.
built-in loss associated with the §1.752–7 (2) Examples. The following examples
(e) Transfer of §1.752–7 liability part- liability. If the partnership (or any succes- illustrate the principles of paragraph (e)(1)
ner’s partnership interest—(1) In general. sor) notifies the §1.752–7 liability partner of this section:
of the satisfaction of the §1.752–7 liabil- Example 1. (i) Facts. In 2004, A, B, and C form
Except as provided in paragraphs (d)(2), partnership PRS. A contributes Property 1 with a fair
(e)(3), and (i) of this section, immedi- ity, then the §1.752–7 liability partner is
market value of $5,000,000 and basis of $4,000,000
ately before the sale, exchange, or other entitled to a loss or deduction. The amount subject to a §1.752–7 liability of $2,000,000 in
disposition of all or a part of a §1.752–7 of that deduction or loss is, in the case of a exchange for a 25% interest in PRS. B contributes
liability partner’s partnership interest, partial satisfaction of the §1.752–7 liabil- $3,000,000 cash in exchange for a 25% interest in
ity, the amount that the partnership would, PRS, and C contributes $6,000,000 cash in exchange
the §1.752–7 liability partner’s basis in for a 50% interest in PRS. In 2006, when PRS has
the partnership interest is reduced by the but for this section, take into account on
a section 754 election in effect, A sells A’s interest
§1.752–7 liability reduction (as defined in the partial satisfaction of the §1.752–7 in PRS to D for $3,000,000. At the time of the
paragraph (b)(7) of this section). No de- liability (but not, in total, more than the sale, the basis of A’s PRS interest is $4,000,000, the
duction, loss, or capital expense is allowed §1.752–7 liability reduction) or, in the case remaining built-in loss associated with the §1.752–7
of a complete satisfaction of the §1.752–7 liability is $2,000,000, and PRS has no liabilities (as
to the partnership on the satisfaction of defined in §1.752–1(a)(4)). Assume that none of the
the §1.752–7 liability (within the mean- liability, the remaining §1.752–7 liability
exceptions of paragraph (d)(2) of this section apply
ing of paragraph (b)(8) of this section) to reduction. To the extent of the amount that and that the satisfaction of the §1.752–7 liability
the extent of the remaining built-in loss the partnership would, but for this section, would have given rise to a deductible expense to A.
associated with the §1.752–7 liability (as take into account on the satisfaction of the In 2007, PRS pays $3,000,000 to satisfy the liability.

defined in paragraph (b)(6) of this section). §1.752–7 liability, the character of that

PRS Balance Sheet (in millions)


Assets Liabilities/Equity
Value Basis Value Basis
$5 $4 Property 1
$9 $9 Cash
$2 — §1.752–7 Liability
Partner’s Equity:

$3 $4 A
$3 $3 B
$6 $6 C

(ii) Sale of A’s PRS interest. Immediately be- with the §1.752–7 liability, $2,000,000. Therefore, of cash that D would receive on a liquidation of the
fore the sale of the PRS interest to D, A’s basis in A neither realizes nor recognizes any gain or loss on partnership, $3,000,000, increased by the amount of
the PRS interest is reduced (to $3,000,000) by the the sale of the PRS interest to D. D’s basis in the tax loss that would be allocated to D in the hypotheti-
§1.752–7 liability reduction, i.e., the lesser of the ex- PRS interest is $3,000,000. D’s share of the adjusted cal transaction, $0, and reduced by the amount of tax
cess of A’s basis in the PRS interest ($4,000,000) basis of partnership property, as determined under gain that would be allocated to D in the hypothetical
over the adjusted value of that interest ($3,000,000), §1.743–1(d), equals D’s interest in the partnership’s transaction, $1,000,000). Therefore, the positive ba-
$1,000,000, or the remaining built-in loss associated previously taxed capital of $2,000,000 (the amount sis adjustment under section 743(b) is $1,000,000.

June 27, 2005 1358 2005–26 I.R.B.


Computation of §1.752–7 Liability Reduction (in millions)
1. Basis of A’s PRS interest $4
2. Less adjusted value of A’s PRS interest (3)
3. Difference $1
4. Remaining built-in loss from §1.752–7 liability 2
5. §1.752–7 liability reduction (lesser of 3 or 4) $1

Gain/Loss on Sale of A’s PRS Interest (in millions)


1. Amount realized on sale $3
2. Less basis of PRS interest
Original 4
§1.752–7 liability reduction 1
Difference ($3)
3. Gain/Loss 0

(iii) Satisfaction of §1.752–7 liability. Neither ever, for the amount by which the cost of satisfying ity, $2,000,000). If PRS notifies A of the satisfaction
PRS nor any of its partners is entitled to a deduc- the §1.752–7 liability exceeds the remaining built-in of the §1.752–7 liability, then A is entitled to an ordi-
tion, loss, or capital expense upon the satisfaction loss associated with the §1.752–7 liability. Therefore, nary deduction in 2007 of $1,000,000 (the §1.752–7
of the §1.752–7 liability to the extent of the remain- in 2007, PRS may deduct $1,000,000 (cost to satisfy liability reduction).
ing built-in loss associated with the §1.752–7 liability the §1.752–7 liability, $3,000,000, less the remain-
($2,000,000). PRS is entitled to a deduction, how- ing built-in loss associated with the §1.752–7 liabil-

PRS’s Deduction on Satisfaction of Liability (in millions)


1. Amount paid by PRS to satisfy §1.752–7 liability $3
2. Remaining built-in loss for §1.752–7 liability (2)
3. Difference $1

Example 2. The facts are the same as in Ex- the adjusted value of that interest ($4,000,000) is $1,000,000). Therefore, A neither realizes nor rec-
ample 1 except that, at the time of A’s sale of the $1,000,000. Therefore, the §1.752–7 liability reduc- ognizes any gain or loss on the sale. D’s basis in the
PRS interest to D, PRS has a nonrecourse liability tion is $1,000,000 (the lesser of this difference or the PRS interest is $4,000,000. Because D’s share of the
of $4,000,000, of which A’s share is $1,000,000. remaining built-in loss associated with the §1.752–7 adjusted basis of partnership property is $3,000,000
A’s basis in PRS is $5,000,000. At the time of the liability, $2,000,000). Immediately before the sale (D’s share of the partnership’s previously taxed
sale of the PRS interest to D, the adjusted value of of the PRS interest to D, A’s basis is reduced from capital, $2,000,000, plus D’s share of partnership
A’s interest is $4,000,000 (the fair market value of $5,000,000 to $4,0000,000. A’s amount realized liabilities, $1,000,000), the basis adjustment under
the interest ($3,000,000), increased by A’s share of on the sale of the PRS interest to D is $4,000,000 section 743(b) is $1,000,000.
partnership liabilities ($1,000,000)). The difference ($3,000,000 paid by D, increased under section
between the basis of A’s interest ($5,000,000) and 752(d) by A’s share of partnership liabilities, or

PRS Balance Sheet (in millions)


Assets Liabilities/Equity
Value Basis Value Basis
$5 $4 Property 1
$13 $13 Cash
$4 —
$2 — Nonrecourse Debt
§1.752–7 Liability
Partner’s Equity

$3 $5 A
$3 $4 B
$6 $8 C

2005–26 I.R.B. 1359 June 27, 2005


Computation of §1.752–7 Liability Reduction (in millions)
$5
1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest
3
Value of PRS interest
A’s share of nonrecourse debt 1
Total (4)
3. Difference between 1 and 2 1
2
4. Remaining built-in loss from §1.752–7 liability
5. §1.752–7 liability reduction (lesser of 3 or 4) $1

Gain/Loss on Sale of A’s PRS Interest (in millions)


1. Amount realized on sale
$3
Value of PRS interest
A’s share of nonrecourse debt 1
Total $4
2. Less basis of PRS interest
$5
Original
§1.752–7 liability reduction $1
Difference ($4)
3. Gain/Loss 0

Example 3. The facts are the same as in Exam- to the lower-tier partnership prior to the by X to UTP are not associated with a trade or busi-
ple 1, except that the satisfaction of the §1.752–7 li- distribution continue to be §1.752–7 liabil- ness transferred to UTP for purposes of paragraph
ability would have given rise to a capital expense to (d)(2)(i)(A) of this section, because they were not as-
ity partners with respect to the lower-tier
A or PRS. Neither PRS nor any of its partners are sociated with a trade or business transferred by X to
entitled to a capital expense upon the satisfaction of
partnership after the distribution. See LTP as part of the original §1.752–7 liability transfer.
the §1.752–7 liability to the extent of the remain- paragraphs (b)(4)(ii) and (j)(3) of this sec- See paragraph (j)(2) of this section. Because none of
ing built-in loss associated with the §1.752–7 liabil- tion for rules on the application of this the exceptions described in paragraph (d)(2) of this
ity ($2,000,000). PRS may, however, increase the ba- section to partners of the §1.752–7 liabil- section apply to X’s taxable sale of the UTP interest
sis of appropriate partnership assets by the amount by to A in 2008, paragraph (e)(1) of this section applies
ity partner.
which the cost of satisfying the §1.752–7 liability ex- to that sale.
ceeds the remaining built-in loss associated with the
(ii) Examples. The following examples Example 2. Transfer of partnership interest to
§1.752–7 liability. Therefore, in 2007, PRS may cap- illustrate the provisions of this paragraph corporation. The facts are the same as in Example 1,
italize $1,000,000 (cost to satisfy the §1.752–7 liabil- (e)(3): except that, rather than transferring the LTP interest to
ity, $3,000,000, less the remaining built-in loss asso- Example 1. Transfer of partnership interest to UTP in 2005, X contributes the LTP interest to Corpo-
ciated with the §1.752–7 liability, $2,000,000) to the lower-tier partnership. (i) Facts. In 2004, X con- ration Y in an exchange to which section 351 applies.
appropriate partnership assets. If A is notified by PRS tributes undeveloped land with a value and basis of Because Corporation Y’s basis in the LTP interest is
that the §1.752–7 liability has been satisfied, then A $2,000,000 and subject to environmental liabilities of determined by reference to X’s basis in that interest,
is entitled to a capital loss in 2007 as provided in para- $1,500,000 to partnership LTP in exchange for a 50% X’s contribution of the LTP interest is exempted from
graph (e)(1) of this section, the year of the satisfaction interest in LTP. LTP develops the land as a landfill. In the rules of paragraph (e)(1) of this section. But see
of the §1.752–7 liability. 2005, in a transaction governed by section 721(a), X section 358(h) and §1.358–7 for appropriate basis ad-
(3) Exception for nonrecognition trans- contributes the LTP interest to UTP in exchange for a justments.
50% interest in UTP. In 2008, X sells the UTP interest Example 3. Partnership merger. (i) Facts. In
actions—(i) In general. Paragraph (e)(1)
to A for $500,000. At the time of the sale, X’s basis in 2004, A, B, C, and D form equal partnership PRS1.
of this section does not apply where a UTP is $2,000,000, the remaining built-in loss asso- A contributes Blackacre with a value and basis of
§1.752–7 liability partner transfers all or ciated with the environmental liability is $1,500,000, $2,000,000 to PRS1 and PRS1 assumes from A
part of the partner’s partnership interest and the gross value of UTP’s assets is $2,500,000. $1,500,000 of pension liabilities unrelated to Black-
in a transaction in which the transferee’s The environmental liabilities were not assumed by acre. B, C, and D each contribute $500,000 cash
basis in the partnership interest is deter- LTP as part of a contribution by X to LTP of a trade to PRS1. PRS1 uses the cash contributed by B, C,
or business with which the liabilities were associated. and D ($1,500,000) to purchase Whiteacre. In 2006,
mined in whole or in part by reference to (See paragraph (b)(10)(ii), Example 1 of this section.) PRS1 merges into PRS2 in an assets-over merger un-
the transferor’s basis in the partnership (ii) Analysis. Because UTP’s basis in the LTP in- der §1.708–1(c)(3). Assume that, under §1.708–1(c),
interest. In addition, paragraph (e)(1) of terest is determined by reference to X’s basis in the PRS2 is the surviving partnership and PRS1 is the
this section does not apply to a distri- LTP interest, X’s contribution of the LTP interest to terminating partnership. At the time of the merger,
bution of an interest in the partnership UTP is exempted from the rules of paragraph (e)(1) the value of Blackacre is still $2,000,000, the remain-
of this section. Under paragraph (j)(1) of this section, ing built-in loss with respect to the pension liabilities
(lower-tier partnership) that has assumed X’s contribution of the LTP interest to UTP is treated is still $1,500,000, but the value of Whiteacre has
the §1.752–7 liability by a partnership as a contribution of X’s share of the assets of LTP and declined to $500,000.
that is the §1.752–7 liability partner UTP’s assumption of X’s share of the LTP liabilities (ii) Deemed assumption by PRS2 of PRS1 liabili-
(upper-tier partnership) if the partners (including §1.752–7 liabilities). Therefore, X’s trans- ties. Under §1.708–1(c)(3), the merger is treated as
fer of the LTP interest to UTP is a §1.752–7 liability a contribution of the assets and liabilities of PRS1
of the upper-tier partnership that were
transfer. The §1.752–7 liabilities deemed transferred to PRS2, followed by a distribution of the PRS2 in-
§1.752–7 liability partners with respect

June 27, 2005 1360 2005–26 I.R.B.


terests by PRS1 in liquidation of PRS1. Because does not continue to be a §1.752–7 liability partner of this section, take into account on the par-
PRS2 assumes a §1.752–7 liability (the pension lia- PRS2, because A no longer has an interest in PRS2. tial satisfaction of the §1.752–7 liability
bilities) of PRS1, PRS1 is a §1.752–7 liability part- Therefore, paragraph (e)(1) of this section applies to (but not, in total, more than the §1.752–7
ner of PRS2. Under paragraph (b)(5)(ii)(A) of this the distribution of the PRS2 interests to C and D.
section, A is also §1.752–7 liability partner of PRS2
liability reduction) or, in the case of a
(f) Distribution in liquidation of
to the extent of the remaining $1,500,000 built-in loss complete satisfaction of the §1.752–7 li-
§1.752–7 liability partner’s partnership
associated with the pension liabilities. B, C, and D are ability, the remaining §1.752–7 liability
not §1.752–7 liability partners with respect to PRS1.
interest—(1) In general. Except as pro-
reduction. To the extent of the amount that
If the amount of the pension liabilities had increased vided in paragraphs (d)(2) and (i) of this
the partnership would, but for this section,
between the date of PRS1’s assumption of those li- section, immediately before a distribution
abilities from A and the date of the merger of PRS1
take into account on satisfaction of the
in liquidation of a §1.752–7 liability part-
into PRS2, then B, C, and D would be §1.752–7 li- §1.752–7 liability, the character of that
ner’s partnership interest, the §1.752–7
ability partners with respect to PRS2 to the extent of deduction or loss is determined as if the
their respective shares of that increase. See paragraph
liability partner’s basis in the partnership
§1.752–7 liability partner had satisfied the
(b)(5)(ii) of this section. interest is reduced by the §1.752–7 liability
liability. To the extent that the §1.752–7
(iii) Deemed distribution of PRS2 interests. Para- reduction (as defined in paragraph (b)(7)
graph (e)(1) does not apply to PRS1’s deemed dis-
liability reduction exceeds the amount that
of this section). This rule applies before
tribution of the PRS2 interests, because, under para- the partnership would, but for this section,
section 737. No deduction, loss, or capital
graph (b)(5)(ii)(B) of this section, all of the partners take into account on satisfaction of the
that were §1.752–7 liability partners with respect to
expense is allowed to the partnership on
§1.752–7 liability, the character of the
PRS2 before the distribution, i.e., A, continue to be the satisfaction of the §1.752–7 liability
§1.752–7 liability partner’s loss is capital.
§1.752–7 liability partners after the distribution. Af- (within the meaning of paragraph (b)(8) of
ter the distribution, A’s share of the pension liabilities
(2) Example. The following example
this section) to the extent of the remaining
now held by PRS2 will continue to be $1,500,000. illustrates the provision of this paragraph
built-in loss associated with the §1.752–7
Example 4. Partnership division; no shifting (f):
of §1.752–7 liability. The facts are the same as in
liability (as defined in paragraph (b)(6) Example. (i) Facts. In 2004, A, B, and C form
Example 3, except that PRS1 does not merge with of this section). For purposes of section partnership PRS. A contributes Property 1 with a fair
PRS2, but instead contributes Blackacre to PRS2 in 705(a)(2)(B) and §1.704–1(b)(2)(ii)(b) market value and basis of $5,000,000 subject to a
exchange for PRS2 interests and the assumption by only, the remaining built-in loss associ- §1.752–7 liability of $2,000,000 for a 25% interest
PRS2 of the pension liabilities. Immediately there- ated with the §1.752–7 liability is not in PRS. B contributes $3,000,000 cash for a 25% in-
after, PRS1 distributes the PRS2 interests to A and B terest in PRS, and C contributes $6,000,000 cash for
in liquidation of their interests in PRS1. The analysis
treated as a nondeductible, noncapital ex- a 50% interest in PRS. In 2012, when PRS has a
is the same as in Example 3. After the assumption penditure of the partnership. Therefore, section 754 election in effect, PRS distributes Prop-
of the pension liabilities by PRS2, A is a §1.752–7 the remaining partners’ capital accounts erty 2, which has a basis and fair market value of
liability partner with respect to PRS2. After the and bases in their partnership interests are $3,000,000, to A in liquidation of A’s PRS interest.
distribution of a PRS2 interest to A, A continues to not reduced by the remaining built-in loss At the time of the distribution, the fair market value
be a §1.752–7 liability partner with respect to PRS2, of A’s PRS interest is still $3,000,000, the basis of
and the amount of A’s built-in loss with respect to
associated with the §1.752–7 liability. If that interest is still $5,000,000, and the remaining
the §1.752–7 liabilities continues to be $1,500,000. the partnership (or any successor) noti- built-in loss associated with the §1.752–7 liability is
Therefore, paragraph (e)(1) of this section does not fies the §1.752–7 liability partner of the still $2,000,000. Assume that none of the exceptions
apply to the distribution of the PRS2 interests to A satisfaction of the §1.752–7 liability, then of paragraph (d)(2) of this section apply to the distri-
and B. the §1.752–7 liability partner is entitled to bution and that the satisfaction of the §1.752–7 liabil-
Example 5. Partnership division; shifting of ity would have given rise to a deductible expense to
§1.752–7 liability. The facts are the same as in
a loss or deduction. The amount of that A. In 2013, PRS pays $1,000,000 to satisfy the entire
Example 4, except that PRS1 distributes the PRS2 deduction or loss is, in the case of a partial §1.752–7 liability.
interests not to A and B, but to C and D, in liquidation satisfaction of the §1.752–7 liability, the
of their interests in PRS1. After this distribution, A amount that the partnership would, but for

PRS Balance Sheet (in millions)


Assets Liabilities/Equity
Value Basis Value Basis
$5 $5 Property 1
$9 $9 Cash
$2 — §1.752–7 Liability
Partner’s Equity:

$3 $5 A
$3 $3 B
$6 $6 C

(ii) Liquidation of A’s PRS interest. Immediately ($2,000,000) or the remaining built-in loss associ- distribution, the partnership’s basis adjustment under
before the distribution of Property 2 to A, A’s ba- ated with the §1.752–7 liability ($2,000,000). There- section 734(b) is $0.
sis in the PRS interest is reduced (to $3,000,000) by fore, A’s basis in Property 2 under section 732(b) is
the §1.752–7 liability reduction, i.e., the lesser of the $3,000,000. Because this is the same as the part-
excess of A’s basis in the PRS interest ($5,000,000) nership’s basis in Property 2 immediately before the
over the adjusted value ($3,000,000) of that interest

2005–26 I.R.B. 1361 June 27, 2005


Computation of §1.752–7 Liability Reduction (in millions)
$5
1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest (3)
3. Difference $2
4. Remaining built-in loss from §1.752–7 liability 2
5. §1.752–7 liability reduction (lesser of 3 or 4) $2

(iii) Satisfaction of §1.752–7 liability. PRS is amount exceeds the amount paid by PRS to satisfy deduction in 2013 of $1,000,000 (the amount paid in
not entitled to a deduction, loss, or capital expense the §1.752–7 liability ($1,000,000), PRS is not en- satisfaction of the §1.752–7 liability) and a capital
on the satisfaction of the §1.752–7 liability to the titled to any deduction for the §1.752–7 liability in loss of $1,000,000 (the remaining §1.752–7 liability
extent of the remaining built-in loss associated with 2013. If, however, PRS notifies A of the satisfaction reduction).
the §1.752–7 liability ($2,000,000). Because this of the §1.752–7 liability, A is entitled to an ordinary

PRS’s Deduction on Satisfaction of Liability (in millions)


$1
Amount paid by PRS to satisfy §1.752–7 liability
Remaining built-in loss for §1.752–7 liability (2)
Difference (but not below zero) $0

(g) Assumption of §1.752–7 liability would, but for this section, take into ac- maining built-in loss associated with the
by a partner other than §1.752–7 liability count on the satisfaction of the §1.752–7 §1.752–7 liability. Instead, upon the sat-
partner—(1) In general. If this paragraph liability (but not, in total, more than the isfaction of the §1.752–7 liability, the as-
(g) applies, section 704(c)(1)(B) does not §1.752–7 liability reduction) or, in the case suming partner must adjust the basis of
apply to an assumption of a §1.752–7 lia- of a complete satisfaction of the §1.752–7 the partnership interest, any assets (other
bility from a partnership by a partner other liability, the remaining §1.752–7 liability than cash, accounts receivable, or inven-
than the §1.752–7 liability partner. The reduction. To the extent of the amount that tory) distributed by the partnership to the
rules of paragraph (g)(2) of this section the assuming partner would, but for this partner, or gain or loss on the disposition
apply only if the §1.752–7 liability partner section, take into account on the satisfac- of the partnership interest, as the case may
is a partner in the partnership at the time tion of the §1.752–7 liability, the charac- be. These adjustments are determined as if
of the assumption of the §1.752–7 liability ter of that deduction or loss is determined the assuming partner’s basis in the partner-
from the partnership. The rules of para- as if the §1.752–7 liability partner had sat- ship interest at the time of the assumption
graphs (g)(3) and (4) of this section apply isfied the liability. To the extent that the were increased by the lesser of the amount
to any assumption of the §1.752–7 liability §1.752–7 liability reduction exceeds the paid (or to be paid) to satisfy the §1.752–7
by a partner other than the §1.752–7 lia- amount that the assuming partner would, liability or the remaining built-in loss as-
bility partner, whether or not the §1.752–7 but for this section, take into account on sociated with the §1.752–7 liability. How-
liability partner is a partner in the partner- the satisfaction of the §1.752–7 liability, ever, the assuming partner cannot take into
ship at the time of the assumption from the the character of the §1.752–7 liability part- account any adjustments to depreciable ba-
partnership. ner’s loss is capital. sis, reduction in gain, or increase in loss
(2) Consequences to §1.752–7 liability (3) Consequences to partnership. Im- until the satisfaction of the §1.752–7 lia-
partner. If, at the time of an assumption mediately after the assumption of the bility.
of a §1.752–7 liability from a partnership §1.752–7 liability from the partnership by (5) Example. The following example
by a partner other than the §1.752–7 lia- a partner other than the §1.752–7 liabil- illustrates the provisions of this paragraph
bility partner, the §1.752–7 liability part- ity partner, the partnership must reduce (g):
ner remains a partner in the partnership, the basis of partnership assets by the re- Example. (i) Facts. In 2004, A, B, and C form
partnership PRS. A contributes Property 1, a nonde-
then the §1.752–7 liability partner’s basis maining built-in loss associated with the
preciable capital asset with a fair market value and
in the partnership interest is reduced by the §1.752–7 liability (as defined in paragraph basis of $5,000,000, in exchange for a 25% interest
§1.752–7 liability reduction (as defined in (b)(6) of this section). The reduction in in PRS and assumption by PRS of a §1.752–7 liabil-
paragraph (b)(7) of this section). If the as- the basis of partnership assets must be al- ity of $2,000,000. B contributes $3,000,000 cash for
suming partner (or any successor) notifies located among partnership assets as if that a 25% interest in PRS, and C contributes $6,000,000
cash for a 50% interest in PRS. PRS uses the cash
the §1.752–7 liability partner of the satis- adjustment were a basis adjustment under
contributed to purchase Property 2. In 2007, PRS
faction of the §1.752–7 liability (within the section 734(b). distributes Property 1, subject to the §1.752–7 lia-
meaning of paragraph (b)(8) of this sec- (4) Consequences to assuming partner. bility to B in liquidation of B’s interest in PRS. At
tion), then the §1.752–7 liability partner is No deduction, loss, or capital expense is the time of the distribution, A’s interest in PRS still
entitled to a deduction or loss. The amount allowed to an assuming partner (other than has a value of $3,000,000 and a basis of $5,000,000,
and B’s interest in PRS still has a value and basis
of that deduction or loss is, in the case of a the §1.752–7 liability partner) on the sat-
of $3,000,000. Also at that time, Property 1 still
partial satisfaction of the §1.752–7 liabil- isfaction of the §1.752–7 liability assumed has a value and basis of $5,000,000, Property 2 still
ity, the amount that the assuming partner from a partnership to the extent of the re- has a value and basis of $9,000,000, and the remain-

June 27, 2005 1362 2005–26 I.R.B.


ing built-in loss associated with the §1.752–7 liability the assumption of the §1.752–7 liability by B and that B pays $1,000,000 to satisfy the entire §1.752–7 li-
still is $2,000,000. Assume that none of the excep- the satisfaction of the §1.752–7 liability by A would ability. At that time, B still owns Property 1, which
tions of paragraph (d)(2)(i) of this section apply to have given rise to a deductible expense to A. In 2010, has a basis of $3,000,000.

PRS Balance Sheet (in millions)


Assets Liabilities/Equity
Value Basis Value Basis
$5 $5 Property 1
$9 $9 Property 2
$2 — §1.752–7 Liability
Partner’s Equity:

$3 $5 A
$3 $3 B
$6 $6 C

(ii) Assumption of §1.752–7 liability by B. Sec- ($2,000,000), or the remaining built-in loss associ- $2,000,000 less than PRS’s basis in Property 1 be-
tion 704(c)(1)(B) does not apply to the assumption ated with the §1.752–7 liability as of the time of the fore the distribution of Property 1 to B. If PRS has a
of the §1.752–7 liability by B. Instead, A’s basis in assumption ($2,000,000). PRS’s basis in Property 2 section 754 election in effect for 2007, PRS may in-
the PRS interest is reduced (to $3,000,000) by the is reduced (to $7,000,000) by the $2,000,000 remain- crease the basis of Property 2 under section 734(b) by
§1.752–7 liability reduction, i.e., the lesser of the ex- ing built-in loss associated with the §1.752–7 liabil- $2,000,000.
cess of A’s basis in the PRS interest ($5,000,000) ity. B’s basis in Property 1 under section 732(b) is
over the adjusted value ($3,000,000) of that interest $3,000,000 (B’s basis in the PRS interest). This is

§1.752–7 Liability Reduction (in millions)


$5
1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest (3)
3. Difference $2
4. Remaining built-in loss from §1.752–7 liability 2
5. §1.752–7 liability reduction (lesser of 3 or 4) $2

A’s Basis in PRS after Assumption by B (in millions)


$5
1. Basis before assumption
2. Less §1.752–7 liability reduction (2)
3. Basis after assumption $3

PRS’s Basis in Property 2 after Assumption by B (in millions)


$9
1. Basis before assumption
(2)
2. Less remaining built-in loss from §1.752–7 liability
3. Plus section 734(b) adjustment (if partnership has a section 754 election) 2
4. Basis after assumption $9

(iii) Satisfaction of §1.752–7 liability. B is not B is not entitled to any deduction on the satisfaction basis in Property 1 is increased to $4,000,000. If B
entitled to a deduction on the satisfaction of the of the §1.752–7 liability in 2010. B may, however, notifies A of the satisfaction of the §1.752–7 liability,
§1.752–7 liability in 2010 to the extent of the re- increase the basis of Property 1 by the lesser of the then A is entitled to an ordinary deduction in 2010
maining built-in loss associated with the §1.752–7 remaining built-in loss associated with the §1.752–7 of $1,000,000 (the amount paid in satisfaction of the
liability ($2,000,000). As this amount exceeds the liability ($2,000,000) or the amount paid to satisfy §1.752–7 liability) and a capital loss of $1,000,000
amount paid by B to satisfy the §1.752–7 liability, the §1.752–7 liability ($1,000,000). Therefore, B’s (the remaining §1.752–7 liability reduction).

2005–26 I.R.B. 1363 June 27, 2005


B’s Basis in Property 1 after Satisfaction of Liability (in millions)
$3
1. Basis in Property 1 after distribution
(2)
2. Plus lesser of remaining built-in loss
or amount paid to satisfy liability ($1) 1
3. Basis in Property 1 after satisfaction of liability $4

(h) Notification by the partnership (i) Special rule for amounts that are Example. (i) Facts. In 2004, A and B form
(or successor) of the satisfaction of the capitalized prior to the occurrence of an partnership PRS. A contributes Property 1, a nonde-
§1.752–7 liability. For purposes of para- event described in paragraphs (e), (f), or preciable capital asset, with a fair market value and
basis of 5,000,000, in exchange for a 25% interest
graphs (e), (f), and (g) of this section, (g)—(1) In general. If all or a portion in PRS and an assumption by PRS of a §1.752–7
notification by the partnership (or succes- of a §1.752–7 liability is properly capital- liability of $2,000,000. B contributes $9,000,000 in
sor) of the satisfaction of the §1.752–7 ized (capitalized basis) prior to an event cash in exchange for a 75% interest in PRS. PRS uses
liability must be attached to the §1.752–7 described in paragraph (e), (f), or (g) of this $7,000,000 of the cash to purchase Property 2, also
liability partner’s return (whether an orig- section, then, before an event described in a nondepreciable capital asset. In 2007, when PRS’s
assets have not changed, PRS satisfies the §1.752–7
inal or an amended return) for the year in paragraph (e), (f), or (g) of this section, the liability by paying $2,000,000. Assume that PRS
which the loss is being claimed and must partnership may take the capitalized ba- is required to capitalize the cost of satisfying the
include— sis into account for purposes of comput- §1.752–7 liability. In 2008, A sells his interest in
(1) The amount paid in satisfaction of ing cost recovery and gain or loss on the PRS to C for $3,000,000. At the time of the sale, the
the §1.752–7 liability, and whether the sale of the asset to which the basis has been basis of A’s interest is still $5,000,000.
(ii) Analysis. On the sale of A’s interest to C, A
amounts paid were in partial or complete capitalized (and for any other purpose for realizes a loss of $2,000,000 on the sale of the PRS in-
satisfaction of the §1.752–7 liability; which the basis of the asset is relevant), but terest (the excess of $5,000,000, the basis of the part-
(2) The name and address of the person after an event described in paragraph (e), nership interest, over $3,000,000, the amount realized
satisfying the §1.752–7 liability; (f), or (g) of this section, the partnership on sale). The remaining built-in loss associated with
(3) The date of the payment on the may not take any remaining capitalized ba- the §1.752–7 liability at that time is zero because all
of the §1.752–7 liability as of the time of the assump-
§1.752–7 liability; and sis into account for tax purposes. tion of the §1.752–7 liability by the partnership was
(4) The character of the loss to the (2) Example. The following example capitalized by the partnership. The partnership may
§1.752–7 liability partner with respect to illustrates the provisions of this paragraph not take any remaining capitalized basis into account
the §1.752–7 liability. (i): for tax purposes.

Gain/Loss on Sale of A’s PRS Interest (in millions)


$3
1. Amount realized on sale
2. Less basis of PRS interest
$5
Original Basis
§1.752–7 liability reduction $0
Difference ($5)
3. Gain/Loss ($2)

(iii) Partial Satisfaction. Assume that, prior to by the partnership at that time). On the sale of the ($500,000). If PRS notifies A of the satisfaction of
the sale of A’s interest in PRS to C, PRS had paid PRS interest, A realizes a loss of $1,500,000 (the ex- the remaining portion of the §1.752–7 liability, then
$1,500,000 to satisfy a portion of the §1.752–7 lia- cess of $4,500,000, the basis of the PRS interest, over A is entitled to a deduction or loss of $500,000 (the
bility. Therefore, immediately before the sale of the $3,000,000, the amount realized on the sale). Nei- remaining §1.752–7 liability reduction). The partner-
PRS interest to C, A’s basis in the PRS interest would ther PRS nor any of its partners is entitled to a de- ship may not take any remaining capitalized basis into
be reduced (to $4,500,000) by the $500,000 remain- duction, loss, or capital expense upon the satisfaction account for tax purposes.
ing built-in loss associated with the §1.752–7 liability of the §1.752–7 liability to the extent of the remain-
($2,000,000 less the $1,500,000 portion capitalized ing built-in loss associated with the §1.752–7 liability

Gain/Loss on Sale of A’s PRS Interest (in millions)


$3
1. Amount realized on sale
2. Less basis of PRS interest
$5
Original Basis
§1.752–7 liability reduction ($0.5)
Difference ($4.5)
3. Gain/Loss ($1.5)

(j) Tiered partnerships—(1) Look- section, a contribution by a partner of an nership) to another partnership (upper-tier
through treatment. For purposes of this interest in a partnership (lower-tier part- partnership) is treated as a contribution

June 27, 2005 1364 2005–26 I.R.B.


by the partner of the partner’s share of bility reduction in the upper-tier partner- the §1.752–7 liability to the extent of the
each of the lower-tier partnership’s as- ship is equal to that partner’s share of the remaining built-in loss associated with the
sets and an assumption by the upper-tier §1.752–7 liability. The partners of the up- §1.752–7 liability.
partnership of the partner’s share of the per-tier partnership at the time of the trans- (ii) Subsequent transfers. Similar rules
lower-tier partnership’s liabilities (includ- action described in paragraph (e), (f), or apply to subsequent assumptions of the
ing §1.752–7 liabilities). See paragraph (g) of this section, and not the upper-tier §1.752–7 liability in transactions in which
(e)(3)(ii) Example 1 of this section. In partnership, are entitled to the deduction the basis of property is determined, in
addition, a partnership is treated as having or loss on the satisfaction of the §1.752–7 whole or in part, by reference to the basis
its share of any §1.752–7 liabilities of the liability. Similar principles apply where of the property in the hands of the trans-
partnerships in which it has an interest. the upper-tier partnership is itself owned feror. If, subsequent to an assumption of
(2) Trade or business exception. If a by one or a series of partnerships. This the §1.752–7 liability by a partnership in a
partnership (upper-tier partnership) as- paragraph does not apply to the extent that transaction to which paragraph (j)(4)(i) of
sumes a §1.752–7 liability of a partner, §1.752–7(j)(4) applied to the assumption this section applies, the §1.752–7 liability
and, subsequently, another partnership of the §1.752–7 liability by the lower-tier is assumed from the partnership by a part-
(lower-tier partnership) assumes that partnership. ner other than the partner from whom the
§1.752–7 liability from the upper-tier (4) Transfer of §1.752–7 liability by partnership assumed the §1.752–7 liabil-
partnership, then the §1.752–7 liability is partnership to another partnership or cor- ity, then the rules of paragraph (g) of this
treated as associated only with any trade or poration after a transaction described in section apply.
business contributed to the upper-tier part- paragraph (e), (f), or (g)—(i) In general. (5) Example. The following example
nership by the §1.752–7 liability partner. If, after a transaction described in para- illustrates the provisions of paragraphs
The same rule applies where a partnership graph (e), (f), or (g) of this section with (j)(3) and (4) of this section:
assumes a §1.752–7 liability of a partner, respect to a §1.752–7 liability assumed by Example—(i) Assumption of §1.752–7 liability
and, subsequently, the §1.752–7 liability a partnership (the upper-tier partnership), by UTP and transfer of §1.752–7 liability partner’s
interest in UTP. In 2004, A, B, and C form part-
partner transfers that partnership interest another partnership or a corporation as- nership UTP. A contributes Property 1 with a fair
to another partnership. See paragraph sumes the §1.752–7 liability from the up- market value and basis of $5,000,000 subject to a
(e)(3)(ii) Example 1 of this section. per-tier partnership (or the assuming part- §1.752–7 liability of $2,000,000 in exchange for
(3) Partnership as a §1.752–7 liability ner) in a transaction in which the basis of a 25% interest in UTP. B contributes $3,000,000
partner. If a transaction described in para- property is determined, in whole or in part, cash in exchange for a 25% interest in UTP, and C
contributes $6,000,000 cash in exchange for a 50%
graph (e), (f), or (g) of this section oc- by reference to the basis of the property in interest in UTP. UTP invests the $9,000,000 cash in
curs with respect to a partnership (upper- the hands of the upper-tier partnership (or Property 2. In 2006, A sells A’s interest in UTP to
tier partnership) that is a §1.752–7 liabil- assuming partner), then— D for $3,000,000. At the time of the sale, the basis
ity partner of another partnership (lower- (A) The upper-tier partnership (or as- of A’s UTP interest is $5,000,000, the remaining
tier partnership), then such transaction will suming partner) must reduce its basis in built-in loss associated with the §1.752–7 liability is
$2,000,000, and UTP has no liabilities other than the
also be treated as a transaction described any corporate stock or partnership interest §1.752–7 liabilities assumed from A. Assume that
in paragraph (e), (f), or (g) of this sec- received by the remaining built-in loss as- none of the exceptions of paragraph (d)(2) of this
tion, as appropriate, with respect to the sociated with the §1.752–7 liability, at the section apply and that the satisfaction of the §1.752–7
partners of the upper-tier partnership, re- time of the transaction described in para- liability would give rise to a deductible expense to
gardless of whether the upper-tier partner- graph (e), (f), or (g) of this section (but the A and to UTP. Under paragraph (e) of this section,
immediately before the sale of the UTP interest to
ship assumed the §1.752–7 liability from partners of the upper-tier partnership do D, A’s basis in UTP is reduced to $3,000,000 by the
those partners. (See paragraph (b)(5) of not reduce their bases or capital accounts $2,000,000 §1.752–7 liability reduction. Therefore,
this section for rules relating to the treat- in the upper-tier partnership); and A neither realizes nor recognizes any gain or loss on
ment of transactions by the partners of the (B) No deduction, loss, or capital ex- the sale of the UTP interest to D. D’s basis in the
upper-tier partnership). In such a case, pense is allowed to the assuming partner- UTP interest is $3,000,000.

each partner’s share of the §1.752–7 lia- ship or corporation on the satisfaction of

2005–26 I.R.B. 1365 June 27, 2005


UTP Balance Sheet Prior to A’s Sale (in millions)
Assets Liabilities/Equity
Value Basis Value Basis
$5 $5 Property 1
$9 $9 Property 2 $2
§1.752–7 Liability
Partner’s Equity:

$3 $5 A (25%)
$3 $3 B (25%)
$6 $6 C (50%)
$12 $14 Total Equity

Gain/Loss on Sale of A’s PRS Interest to D (in millions)


$3
1. Amount realized on sale
2. Less basis of PRS interest
$5
Original
§1.752–7 liability reduction ($2)
Difference ($3)
3. Gain/Loss 0

(ii) Assumption of §1.752–7 liability by LTP from reduce its basis in LTP by the $2,000,000 remain- ity partners of LTP with respect to the $2,000,000 re-
UTP. In 2008, at a time when the estimated amount ing built-in loss associated with the §1.752–7 liabil- maining built-in loss associated with the §1.752–7 li-
of the §1.752–7 liability has increased to $3,500,000, ity (as of the time of the sale of the UTP interest ability (as of the time of the sale of the UTP interest by
UTP contributes Property 1 and Property 2, subject to by A). The partners in UTP are not required to re- A). The UTP partners (as of the time of the assump-
the §1.752–7 liability, to LTP in exchange for a 50% duce their bases in UTP by this amount. UTP is a tion of the §1.752–7 liability by LTP) are §1.752–7 li-
interest in LTP. At the time of the contribution, Prop- §1.752–7 liability partner of LTP with respect to the ability partners of LTP with respect to the $1,500,000
erty 1 still has a value and basis of $5,000,000 and entire $3,500,000 §1.752–7 liability assumed by LTP. increase in the amount of the §1.752–7 liability of
Property 2 still has a value and basis of $9,000,000. However, as A is no longer a partner of UTP, none of UTP since the assumption of that §1.752–7 liability
UTP’s basis in LTP under section 722 is $14,000,000. the partners of UTP (as of the time of the assumption by UTP from A.
Under paragraph (j)(4)(i) of this section, UTP must of the §1.752–7 liability by LTP) are §1.752–7 liabil-

UTP Balance Sheet Immediately Before Contribution to LTP (in millions)


Assets Liabilities/Equity
Value Basis Value Basis
$5 $5 Property 1
$9 $9 Property 2
§1.752–7 Liability
$2 Assumed from A
$1.5 Additional
$3.5 Total
Partner’s Equity:
$2.625 $3 D (25%)
$2.625 $3 B (25%)
$5.25 $6 C (50%)
$10.5 $12 Total Equity

UTP’s Basis in LTP Immediately After Contribution (in millions)


1. Basis in assets $14
2. Less remaining built-in loss at time of A’s sale ($2)
3. UTP’s basis in LTP $12

(iii) Sale by UTP of LTP interest. In 2010, UTP §1.752–7 liability is $3,500,000. Under paragraph with the §1.752–7 liability is $1,500,000 (remaining
sells its interest in LTP to E for $10,500,000. At (e) of this section, immediately before the sale, UTP built-in loss associated with the §1.752–7 liability,
the time of the sale, the LTP interest still has a must reduce its basis in the LTP interest by the $3,500,000, reduced by the amount of the §1.752–7
value of $10,500,000 and a basis of $12,000,000, §1.752–7 liability reduction. Under paragraph (a)(4) liability taken into account under paragraph (j)(4) of
and the remaining built-in loss associated with the of this section, the remaining built-in loss associated this section, $2,000,000). The difference between the

June 27, 2005 1366 2005–26 I.R.B.


basis of the LTP interest held by UTP ($12,000,000) interest must be reduced to $10,500,000. In addi- of B’s and D’s interest in UTP must be reduced by
and the adjusted value of that interest ($10,500,000) tion, UTP’s partners must reduce their bases in their $375,000 and the basis of C’s interest in UTP must
is also $1,500,000. Therefore, the §1.752–7 liability UTP interests by their proportionate shares of the be reduced by $750,000. In 2011, D sells the UTP
reduction is $1,500,000 and UTP’s basis in the LTP §1.752–7 liability reduction. Thus, the basis of each interest to F.

Computation of §1.752–7 Liability Reduction (in millions)


$12
1. Basis of UTP’s LTP interest
2. Less adjusted value of UTP’s LTP interest ($10.5)
3. Difference between 1 and 2 $1.5
4. Remaining built-in loss from §1.752–7 liability $1.5
5. §1.752–7 liability reduction (lesser of 3 or 4) $1.5

Gain/Loss on Sale of UTP’s PRS Interest to E (in millions)


$10.5
1. Amount realized on sale
2. Less basis of PRS interest
$12
Original
§1.752–7 liability reduction ($1.5)
Difference ($10.5)
3. Gain/Loss $0

Partner’s Bases in UTP Interests after Sale of LTP Interest (in millions)
B C D
Basis prior to sale $3 $6 $3
Share of §1.752–7 liability
Reduction ($0.375) ($0.75) ($0.375)
Basis after sale $2.625 $5.25 $2.625

(iv) Deduction, expense, or loss associated with tions of liabilities (including §1.752–7 lia- the partnership after October 18, 1999 and
the §1.752–7 liability by LTP. In 2012, LTP pays bilities) occurring after October 18, 1999, before June 24, 2003. In the statement,
$3,500,000 to satisfy the §1.752–7 liability. Under
and before June 24, 2003. Such an elec- the partnership must list, with respect to
paragraphs (e) and (j)(4) of this section, LTP is not
entitled to any deduction with respect to the §1.752–7
tion is binding on the partnership and all of each liability (including each §1.752–7
liability. Under paragraph (j)(3) of this section, UTP its partners. A partnership making such an liability) assumed by the partnership after
also is not entitled to any deduction with respect to election must apply all of the provisions October 18, 1999, and before June 24,
the §1.752–7 liability. If LTP notifies A, B, C and D of §1.752–1 and §1.752–7, including 2003—
of the satisfaction of the §1.752–7 liability, then A is
§1.358–5T, §1.358–7, §1.704–1(b)(1)(ii) (A) The name, address, and taxpayer
entitled to a deduction in 2012 of $2,000,000, B and
D are each entitled to deductions in 2012 of $375,000,
and (b)(2)(iv)(b), §1.704–2(b)(3), identification number of the partner from
and C is entitled to a deduction in 2012 of $750,000. §1.704–3(a)(7), (a)(8)(iv), and (a)(12), whom the liability was assumed;
(k) Effective dates—(1) In general. §1.704–4(d)(1)(iv), §1.705–1(a)(8), (B) The date on which the liability was
This section applies to §1.752–7 liability §1.732–2(d)(3)(iv), and §1.737–5. assumed by the partnership;
transfers occurring on or after June 24, (ii) Manner of making election. A (C) The amount of the liability as of the
2003. For assumptions occurring after partnership makes an election under time of its assumption; and
October 18, 1999, and before June 24, this paragraph (k)(2) by attaching the (D) A description of the liability.
2003, see §1.752–6. For §1.752–7 liabil- following statement to its timely filed (iii) Filing of amended returns. An
ity transfers occurring on or after June 24, return: [Insert name and employer election under this paragraph (k)(2) will be
2003 and before May 26, 2005, taxpay- identification number of electing part- valid only if the partnership and its part-
ers may rely on the exception for trading nership] elects under §1.752–7 of the ners promptly amend any returns for open
and investment partnerships in paragraph Income Tax Regulations to be subject taxable years that would be affected by the
(b)(8)(ii) of 1.752–7 (2003–2 C.B. 60; 68 to the rules of §1.358–5T, §1.358–7, election.
FR 37434). §1.704–1(b)(1)(ii) and (2)(iv)(b), (iv) Time for making election. An elec-
(2) Election to apply this section to §1.704–2(b)(3), §1.704–3(a)(7), tion under this paragraph (k)(2) must be
assumptions of liabilities occurring after (a)(8)(iv), and (a)(12), §1.704–4(d)(1)(iv), filed with any timely filed Federal income
October 18, 1999, and before June 24, §1.705–1(a)(8), §1.732–2(d)(3)(iv), and tax return filed by the partnership on or af-
2003—(i) In general. A partnership may §1.737–5 with respect to all liabilities (in- ter September 24, 2003, and on or before
elect to apply this section to all assump- cluding §1.752–7 liabilities) assumed by December 31, 2005.

2005–26 I.R.B. 1367 June 27, 2005


PART 602—OMB CONTROL Authority: 26 U.S.C.7805. §602.101 OMB Control numbers.
NUMBERS UNDER THE PAPERWORK Par. 18. In §602.101, paragraph (b) is
REDUCTION ACT amended by adding an entry to the table in *****
numerical order to read as follows: (b) * * *
Par. 17. The authority for part 602
continues to read as follows:

CFR part or section where Current OMB


identified and described control No.
*****
1.752–7 ........................................................... 1545–1843
*****

Mark E. Matthews, FACTS erty. As soon as the disclaimer is made,


Deputy Commissioner for in accordance with the IRA beneficiary
Services and Enforcement. Decedent dies in 2004. At the time of designation, A, as successor beneficiary is
death, Decedent is the owner of an IRA paid the $600x amount disclaimed, plus
Approved May 16, 2005. described in § 408(a) with assets having a that portion of IRA income earned be-
fair market value of $2,000x. Decedent’s tween the date of death and the date of
Eric Solomon, “required beginning date,” as described in the disclaimer attributable to the $600x
Acting Deputy Assistant Secretary § 401(a)(9)(A), occurred prior to 2004, and amount ($12x).
of the Treasury. accordingly Decedent was receiving an- Situation 2: The facts are the same
(Filed by the Office of the Federal Register on May 23, 2005, nual distributions from the IRA prior to as in Situation 1, except that, instead of
11:17 a.m., and published in the issue of the Federal Register the time of death. However, at the time of disclaiming a pecuniary amount, Spouse
for May 26, 2005, 70 F.R. 30334)
death, Decedent had not received the re- validly disclaims, in the written instru-
quired minimum distribution for the 2004 ment, 30 percent of Spouse’s entire in-
Section 2518.—Disclaimers calendar year. terest in the principal and income of the
Situation 1: Under the terms of the balance of the IRA account remaining
26 CFR 25.2518: Qualified disclaimers of property. IRA beneficiary designation pursuant to after the $100x required minimum dis-
(Also § 401; 1.401(a)(9)–5.) the IRA governing instrument, Dece- tribution for 2004 and after reduction for
dent’s spouse, Spouse, is designated as the the pre-disclaimer income attributable to
Individual Retirement Account
sole beneficiary of the IRA after Dece- the $100x required minimum distribution
(IRA); decedent; beneficiary’s dis-
dent’s death. A, the child of Decedent and ($2x). As soon as the disclaimer is made,
claimer. This ruling discusses whether
Spouse, is designated as the beneficiary in in accordance with the beneficiary desig-
a beneficiary’s disclaimer of a beneficial
the event Spouse predeceases Decedent. nation, A is paid 30 percent of the excess
interest in a decedent’s IRA is a quali-
Three months after Decedent’s death, in of the remaining account balance over
fied disclaimer under section 2518 of the
accordance with § 1.401(a)(9)–5, A–4, $2x.
Code even though prior to making the dis-
of the Income Tax Regulations, the IRA Situation 3: The facts are the same
claimer, the beneficiary receives from the
custodian pays Spouse $100x, the required as in Situation 1, except that A is desig-
IRA the required minimum distribution
minimum distribution for 2004. No other nated as the sole beneficiary of the IRA
for the year of the decedent’s death.
amounts have been paid from the IRA after Decedent’s death, Spouse is desig-
Rev. Rul. 2005–36 since Decedent’s date of death. nated as the beneficiary in the event A
Seven months after Decedent’s death, predeceases Decedent, and the $100x re-
ISSUE Spouse executes a written instrument pur- quired minimum distribution for 2004 is
suant to which Spouse disclaims the pe- paid to A 3 months after Decedent’s death.
Is a beneficiary’s disclaimer of a ben- cuniary amount of $600x of the IRA ac- Seven months after Decedent’s death, A
eficial interest in a decedent’s individual count balance plus the income attributable disclaims the entire remaining balance of
retirement account (IRA) a qualified dis- to the $600x amount earned after the date the IRA account except for $2x, the in-
claimer under § 2518 of the Internal Rev- of death. The income earned by the IRA come attributable to the $100x required
enue Code even though, prior to making between the date of Decedent’s death and minimum distribution paid to A. As soon
the disclaimer, the beneficiary receives the the date of Spouse’s disclaimer is $40x. as the disclaimer is made, in accordance
required minimum distribution for the year The disclaimer is valid and effective un- with the IRA beneficiary designation, the
of the decedent’s death from the IRA? der applicable state law. Under applica- balance of the IRA account, less $2x, is
ble state law, as a result of the disclaimer, distributed to Spouse as successor benefi-
Spouse is treated as predeceasing Dece- ciary. A receives a total of $102x.
dent with respect to the disclaimed prop-

June 27, 2005 1368 2005–26 I.R.B.


LAW AND ANALYSIS Section 1.401(a)(9)–4, A–4, provides son other than the person making the dis-
that the employee’s designated benefi- claimer.
Section 408(a) provides that the term ciary generally will be determined based Section 25.2518–2(d)(1) of the Gift Tax
“individual retirement account” means a on the beneficiaries designated as of the Regulations provides that a qualified dis-
trust created or organized in the United employee’s date of death who remain claimer cannot be made with respect to an
States for the exclusive benefit of an indi- beneficiaries as of September 30th of interest in property if the disclaimant has
vidual or his or her beneficiaries, but only the calendar year following the calendar accepted the interest or any of its benefits,
if the written governing instrument cre- year of the employee’s death. Gener- expressly or impliedly, prior to making the
ating the trust meets certain specified re- ally, any person who was a beneficiary disclaimer. Acceptance is manifested by
quirements. as of the employee’s date of death, but an affirmative act that is consistent with
Section 408(a)(6) provides that, under is not a beneficiary as of that September ownership of the interest in the property.
regulations prescribed by the Secretary, 30th (e.g., because the person receives Acts indicative of acceptance include: us-
rules similar to the rules of § 401(a)(9) and the entire benefit to which the person is ing the property or the interest in the prop-
the incidental death benefit requirements entitled before that September 30th), is erty; accepting dividends, interest, or rents
of § 401(a) shall apply to the distribution not taken into account in determining the from the property; and directing others to
of the entire interest of an individual for employee’s designated beneficiary for act with respect to the property or interest
whose benefit an IRA trust is maintained. purposes of determining the distribution in the property. However, a disclaimant is
Under § 401(a)(9)(A), a trust will not period for required minimum distributions not considered to have accepted the prop-
constitute a qualified trust unless the plan after the employee’s death. Accordingly, erty merely because, under applicable lo-
provides that the entire interest of each em- if a person disclaims entitlement to the cal law, title to the property vests imme-
ployee (i) will be distributed to such em- employee’s benefit by a disclaimer that diately on the decedent’s death in the dis-
ployee not later than the required begin- satisfies § 2518 by that September 30th, claimant.
ning date, or (ii) will be distributed, begin- thereby allowing other beneficiaries to Section 25.2518–3 provides rules re-
ning not later than the required beginning receive the disclaimed benefit instead, the garding the circumstances under which
date, in accordance with regulations, over disclaimant is not taken into account in an individual may make a qualified dis-
the life of such employee or over the lives determining the employee’s designated claimer of less than the individual’s entire
of such employee and a designated bene- beneficiary. interest in property and may accept the bal-
ficiary (or over a period not extending be- Under § 2518(a), if a person makes a ance of the property. Section 25.2518–3(b)
yond the life expectancy of such employee qualified disclaimer with respect to any in- provides that a disclaimer of an undivided
or the life expectancy of such employee terest in property, then for estate, gift, and portion of a separate interest in property
and a designated beneficiary). generation-skipping transfer tax purposes, that meets the other requirements of a
Under § 1.408–8, A–1, an IRA is the disclaimed interest will be treated as if qualified disclaimer under § 2518(b) and
subject to the required minimum distribu- the interest had never been transferred to the corresponding regulations is a qual-
tion rules of § 401(a)(9) and must satisfy the disclaimant. Instead, the interest will ified disclaimer. Under the regulations,
the requirements of §§ 1.401(a)(9)–1 be considered as having passed directly each interest in property that is separately
through 1.401(a)(9)–9 in the same manner from the decedent to the person entitled to created by the transferor is treated as a sep-
as a plan, except as otherwise specified receive the property as a result of the dis- arate interest in property. An undivided
in § 1.408–8. Under § 1.408–8, A–1, claimer. portion of a disclaimant’s separate interest
for purposes of applying the rules of Under § 2518(b), the term “qualified in property must consist of a fraction or
§§ 1.401(a)(9)–1 through 1.401(a)(9)–9, disclaimer” means an irrevocable and un- percentage of each and every substantial
the IRA owner is substituted for the em- qualified refusal by a person to accept an interest or right owned by the disclaimant
ployee. Under § 1.408–8, A–3, the term interest in property, but only if: (1) the re- in the property and must extend over the
“required beginning date” means April 1 fusal is in writing; (2) the writing is re- entire term of the disclaimant’s interest
of the calendar year following the calendar ceived by the transferor of the interest, his in the property and in other property into
year in which the IRA owner attains age or her legal representative, or the holder of which the property is converted.
701/2. the legal title to the property to which the Section 25.2518–3(c) provides that the
Under § 1.401(a)(9)–4, A–1, a desig- interest relates, not later than the date that disclaimer of a specific pecuniary amount
nated beneficiary is an individual who is is 9 months after the later of — (A) the date out of a pecuniary or nonpecuniary bequest
designated as a beneficiary either by the on which the transfer creating the interest or gift can be a qualified disclaimer pro-
terms of the plan or by an affirmative elec- in the person is made, or (B) the day on vided that no income or other benefit of
tion by the employee (or the employee’s which the person attains the age of 21; (3) the disclaimed amount inures to the bene-
surviving spouse) specifying the benefi- the person has not accepted the interest or fit of the disclaimant either prior to or sub-
ciary. A beneficiary designated as such un- any of its benefits; and (4) as a result of the sequent to the disclaimer. Following the
der the plan is an individual who is entitled refusal, the interest passes without any di- disclaimer, the amount disclaimed and any
to a portion of an employee’s benefit, con- rection on the part of the person making income attributable to that amount must be
tingent on the employee’s death or another the disclaimer and passes either—(A) to segregated based on the fair market value
specified event. the spouse of the decedent, or (B) to a per- of the assets on the date of the disclaimer
or on a basis that is fairly representative

2005–26 I.R.B. 1369 June 27, 2005


of the value changes that may have oc- quest that does not preclude a disclaimer claimed amount and cannot be disclaimed.
curred between the date of transfer and the with respect to the balance of the bequest. The regulation provides a formula to de-
date of the disclaimer. The regulation fur- However, the acceptance of a distribution termine the proportionate share of the in-
ther provides that a pecuniary amount that from the bequest is considered an accep- come considered to be accepted by the dis-
is distributed to the disclaimant from the tance of a proportionate amount of the in- claimant, and thus, not eligible to be dis-
bequest prior to the disclaimer is treated come earned by the bequest. That income claimed, as follows:
as a distribution of corpus from the be- must be similarly segregated from the dis-

Total amount of distributions received Total amount of income


by the disclaimant out of gift or bequest earned by the bequest
X between the date of
Total value of the gift or bequest transfer and the date of
on the date of the transfer disclaimer

See § 25.2518–3(d), Example 17 (illustrat- pecuniary disclaimer funded on a basis that $100x of corpus, plus the income attribut-
ing a beneficiary’s qualified disclaimer of is fairly representative of value changes able to that amount. Based on the formula
an interest in a brokerage account passing that occurred between the date of transfer contained in § 25.2518–3(c), the amount of
to the beneficiary when, prior to the dis- and the date of the disclaimer). income attributable to the $100x distribu-
claimer, the beneficiary withdrew a pecu- In Situations 1, 2, and 3, the benefi- tion that the beneficiary is deemed to have
niary amount from the account); see also ciary’s receipt of the $100x distribution accepted, and therefore cannot disclaim, is
§ 25.2518–3(d), Example 19 (regarding a from the IRA constitutes an acceptance of $2x computed as follows:

$100x (distribution)
$40x (IRA income from date of
$2000x (date of death X
death to date of disclaimer)
value of IRA)

However, the beneficiary’s acceptance required minimum distribution for 2004 payment of the required minimum dis-
of these amounts does not preclude the and after reduction for the pre-disclaimer tribution for 2004, except for $2x. As in
beneficiary from making a qualified dis- income attributable to that amount ($2x), Situations 1 and 2, A’s receipt of the $100x
claimer with respect to all or a portion of constitutes a qualified disclaimer to the required minimum distribution also con-
the balance of the IRA. extent of 30 percent of the remaining IRA stitutes an acceptance of the $2x of income
Accordingly, in Situation 1, assuming account balance after reduction for the that is deemed attributable to the required
the other requirements of § 2518(b) are $2x of income Spouse is deemed to have minimum distribution that is distributed.
satisfied, Spouse’s disclaimer constitutes a accepted (that is, .30 X [value of remain- A may not disclaim any portion of the $2x.
qualified disclaimer under § 2518(b) of the ing account balance on date of disclaimer Therefore, in Situation 3, assuming the
$600x pecuniary amount, plus $12x (the - $2x]). other requirements of § 2518(b) are satis-
IRA income attributable to the disclaimed The results in Situations 1 and 2 would fied, A’s disclaimer of the entire principal
amount ($600x/$2000x X $40x)). be the same if the amount disclaimed, plus and income balance of the IRA remaining
In Situation 2, Spouse disclaims, in that portion of the post-death IRA income after the payment of the required minimum
accordance with § 25.2518–3(b), an un- attributable to the disclaimed amount, is distribution for 2004, except for $2x (that
divided portion (30 percent) of Spouse’s not distributed outright to A, but instead is, 100% of value of the remaining account
principal and income interest in the re- is segregated and maintained in a separate balance on the date of the disclaimer, less
maining IRA account balance, rather than IRA account of which A is the beneficiary $2x) constitutes a qualified disclaimer.
a pecuniary amount as in Situation 1. as described in § 1.401(a)(9)–8, A–3. See In addition, under § 1.401(a)(9)–4,
However, as in Situation 1, Spouse’s re- also, § 1.401(a)(9)–8, A–2(a)(2). Separate A–4, any person who was a beneficiary
ceipt of the $100x distribution also consti- accounts for A and Spouse may be made of the employee’s benefit as of the date
tutes acceptance of $2x of income deemed effective as of the date of Decedent’s death of the employee’s death, but is not a
attributable to the amount distributed. in 2004, and the 2004 required minimum beneficiary as of September 30th of the
Spouse may not disclaim any portion of distribution does not have to be allocated calendar year following the calendar year
the $2x. Therefore, in Situation 2, assum- among the beneficiaries of the separate ac- of the employee’s death, is not considered
ing the other requirements of § 2518(b) counts for purposes of the separate account a designated beneficiary for purposes of
are satisfied, Spouse’s disclaimer of 30 rules under § 1.401(a)(9)–8, A–3. § 401(a)(9). In Situation 3, A both re-
percent of Spouse’s entire interest in the In Situation 3, A disclaims A’s entire ceived the required minimum distribution
principal and income of the balance of the principal and income interest in the re- amount and timely disclaimed entitlement
IRA account remaining after the $100x maining IRA account balance after the to the entire balance of the IRA account

June 27, 2005 1370 2005–26 I.R.B.


on or before September 30, 2005. Ac- The beneficiary may make a qualified 30th, the disclaimant is paid the income at-
cordingly, if A is paid the $2x of income disclaimer under § 2518 with respect to tributable to the required minimum distri-
attributable to the required minimum dis- all or a portion of the balance of the ac- bution amount, so that the disclaimant is
tribution amount on or before September count, other than the income attributable not entitled to any further benefit in the
30, 2005, A will be treated as not entitled to the required minimum distribution that IRA after September 30th of the calendar
to any further benefit as of September 30, the beneficiary received, provided that year following the calendar year of the em-
2005, and therefore, A will not be consid- at the time the disclaimer is made, the ployee’s death.
ered a designated beneficiary of the IRA disclaimed amount and the income attrib-
for purposes of § 401(a)(9). utable to the disclaimed amount are paid DRAFTING INFORMATION
to the beneficiary entitled to receive the
The principal author of this revenue rul-
HOLDINGS disclaimed amount, or are segregated in a
ing is Susan H. Levy of the Office of As-
separate account.
sociate Chief Counsel (Passthroughs and
A beneficiary’s disclaimer of a ben- Further, a person disclaiming his or her
Special Industries). For further informa-
eficial interest in a decedent’s IRA is a entire remaining interest in an IRA will not
tion regarding this revenue ruling, contact
qualified disclaimer under § 2518 (if all be considered a designated beneficiary of
Susan H. Levy at (202) 622–3090 (not a
of the requirements of that section are the IRA for purposes of § 401(a)(9), if the
toll-free call).
met), even though, prior to making the qualified disclaimer is made on or before
disclaimer, the beneficiary receives the September 30th of the calendar year fol-
required minimum distribution for the lowing the calendar year of the employee’s
year of the decedent’s death from the IRA. death, and if, on or before that September

2005–26 I.R.B. 1371 June 27, 2005


Part III. Administrative, Procedural, and Miscellaneous
Weighted Average Interest CORPORATE BOND WEIGHTED and the resulting permissible range of in-
Rates Update AVERAGE INTEREST RATE terest rates used to calculate current liabil-
ity. That notice establishes that the corpo-
Notice 2005–46 Sections 412(b)(5)(B)(ii) and 412(l)(7) rate bond weighted average is based on the
(C)(i), as amended by the Pension Funding monthly composite corporate bond rate de-
This notice provides guidance as to the Equity Act of 2004, provide that the inter- rived from designated corporate bond in-
corporate bond weighted average interest est rates used to calculate current liability dices.
rate and the permissible range of interest and to determine the required contribution The composite corporate bond rate for
rates specified under § 412(b)(5)(B)(ii)(II) under § 412(l) for plan years beginning in May 2005 is 5.41 percent. Pursuant to No-
of the Internal Revenue Code. In ad- 2004 or 2005 must be within a permissible tice 2004–34, the Service has determined
dition, it provides guidance as to the range based on the weighted average of the this rate as the average of the monthly
interest rate on 30-year Treasury securi- rates of interest on amounts invested con- yields for the included corporate bond in-
ties under § 417(e)(3)(A)(ii)(II), and the servatively in long term investment grade dices for that month.
weighted average interest rate and permis- corporate bonds during the 4-year period The following corporate bond weighted
sible ranges of interest rates based on the ending on the last day before the beginning average interest rate was determined for
30-year Treasury securities rate. of the plan year. plan years beginning in the month shown
Notice 2004–34, 2004–1 C.B. 848, pro- below.
vides guidelines for determining the cor-
porate bond weighted average interest rate

Corporate
For Plan Years Bond 90% to 100%
Beginning in: Weighted Permissible
Month Year Average Range
June 2005 5.94 5.35 to 5.94

30-YEAR TREASURY SECURITIES Tax Regulations provides that the applica- imum amount of the deduction allowed
WEIGHTED AVERAGE INTEREST ble interest rate for a month is the annual under § 404(a)(1).
RATE interest rate on 30-year Treasury securi- The rate of interest on 30-year Treasury
ties as specified by the Commissioner for securities for May 2005 is 4.49 percent.
Section 417(e)(3)(A)(ii)(II) defines that month in revenue rulings, notices or Pursuant to Notice 2002–26, 2002–1 C.B.
the applicable interest rate, which must other guidance published in the Internal 743, the Service has determined this rate
be used for purposes of determining the Revenue Bulletin. as the monthly average of the daily deter-
minimum present value of a participant’s Section 404(a)(1) of the Code, as mination of yield on the 30-year Treasury
benefit under § 417(e)(1) and (2), as the amended by the Pension Funding Eq- bond maturing in February 2031.
annual rate of interest on 30-year Treasury uity Act of 2004, permits an employer The following 30-year Treasury rates
securities for the month before the date to elect to disregard subclause (II) of were determined for the plan years begin-
of distribution or such other time as the § 412(b)(5)(B)(ii) to determine the max- ning in the month shown below.
Secretary may by regulations prescribe.
Section 1.417(e)–1(d)(3) of the Income

30-Year
For Plan Years Treasury 90% to 105% 90% to 110%
Beginning in: Weighted Permissible Permissible
Month Year Average Range Range
June 2005 5.00 4.50 to 5.25 4.50 to 5.50

Drafting Information please contact the Employee Plans’ tax- 1–202–283–9703. Mr. Montanaro may
payer assistance telephone service at be reached at 1–202–283–9714. The tele-
The principal authors of this notice 1–877–829–5500 (a toll-free number), phone numbers in the preceding sentences
are Paul Stern and Tony Montanaro of between the hours of 8:00 a.m. and are not toll-free.
the Employee Plans, Tax Exempt and 6:30 p.m. Eastern time, Monday through
Government Entities Division. For fur- Friday. Mr. Stern may be reached at
ther information regarding this notice,

June 27, 2005 1372 2005–26 I.R.B.


Application of Circular 230 to plan, (2) is a State or local bond opinion, under section 10.35(b)(9) until the Trea-
State or Local Bond Opinions or (3) is included in documents required to sury Department and the IRS amend the
be filed with the Securities and Exchange regulations:
Notice 2005–47 Commission. The Final Covered Opinion § 10.35 Requirements for covered opin-
Regulations also adopt an exclusion for ions.
The purpose of this notice is to provide certain preliminary advice and allow prac-
interim guidance and information con- titioners to provide limited scope opinions *****
cerning State or local bond opinions under in some circumstances. (b) * * *
Treasury Department Circular No. 230, 31 A State or local bond opinion is not sub- (9) State or local bond opinion. A State
C.F.R. part 10 (Circular 230). Specifically, ject to the requirements of section 10.35, or local bond opinion is written advice (in-
this notice provides (1) interim guidance but will be subject to proposed section cluding electronic communications) that
relating to the definition of State or local 10.39 when it is finalized. Under the Fi- concerns —
bond opinion in section 10.35(b)(9) of Cir- nal Covered Opinion Regulations, a State (i) The excludability of interest on a
cular 230 and (2) information on changes or local bond opinion is defined as writ- State or local bond from gross income un-
to the requirements that are under consid- ten advice with respect to a Federal tax der section 103 of the Internal Revenue
eration for State or local bond opinions. issue included in any materials delivered Code;
to a purchaser of a State or local bond in (ii) The status of a State or local bond as
BACKGROUND connection with the issuance of the bond a qualified zone academy bond under sec-
in a public or private offering, including tion 1397E of the Internal Revenue Code;
On December 20, 2004, the Treasury (iii) One or more other Federal tax is-
an official statement (if one is prepared),
Department and the IRS published in the sues reasonably related and ancillary to ad-
that concerns only the excludability of in-
Federal Register final regulations setting vice described in paragraph (b)(9)(i) or (ii)
terest on a State or local bond from gross
standards for practice before the IRS relat- of this section. Such issues include, but are
income under section 103 of the Internal
ing to written advice provided by tax prac- not limited to—
Revenue Code, the application of section
titioners (the Final Covered Opinion Reg- (A) The application of section 55 of the
55 of the Internal Revenue Code to a State
ulations). The Treasury Department and Internal Revenue Code to a State or local
or local bond, the status of a State or lo-
the IRS simultaneously issued a notice of bond;
cal bond as a qualified tax-exempt obli-
proposed rulemaking (the Proposed Reg- (B) Whether a State or local bond has
gation under section 265(b)(3) of the In-
ulations) proposing standards for practice been reissued for Federal tax purposes;
ternal Revenue Code, the status of a State
before the IRS relating to State or local (C) The status of a State or local bond
or local bond as a qualified zone academy
bond opinions. Section 10.35 of the Final as a qualified tax-exempt obligation under
bond under section 1397E of the Internal
Covered Opinion Regulations is effective section 265(b)(3) of the Internal Revenue
Revenue Code, or any combination of the
for written advice rendered after June 20, Code;
above. Under the Final Covered Opinion
2005, and section 10.39 of the Proposed (D) The treatment of original issue dis-
Regulations, written advice with respect to
Regulations is proposed to be effective no count or premium on a State or local bond
a Federal tax issue involving a State or lo-
sooner than 120 days after final regulations under the Internal Revenue Code; and
cal bond that does not meet this definition
are published in the Federal Register. (E) Whether the organization that is
is subject generally to the standards in sec-
Section 10.35 sets forth the require- borrowing the proceeds of the State or lo-
tion 10.35. Written advice with respect to
ments applicable to covered opinions. cal bond is described in section 501(c)(3)
one of the four enumerated issues involv-
A covered opinion is written advice (in- of the Internal Revenue Code; or
ing a State or local bond that is delivered
cluding electronic communications) that (iv) Any combination of the above.
other than at the time of issuance is subject
concerns one or more Federal tax issues
generally to the standards in section 10.35.
arising from: (1) a listed transaction; (2) EFFECTIVE DATE FOR INTERIM
any plan or arrangement, the principal pur- INTERIM GUIDANCE GUIDANCE
pose of which is the avoidance or evasion
of any tax; or (3) any plan or arrange- Commentators have requested clarifi- This interim definition of State or lo-
ment, a significant purpose of which is the cation regarding the scope of the defini- cal bond opinion is applicable to opin-
avoidance or evasion of tax if the written tion of State or local bond opinion and the ions rendered after June 20, 2005. Thus,
advice (A) is a reliance opinion, (B) is a treatment of opinions relating to State or when the Final Covered Opinion Regula-
marketed opinion, (C) is subject to condi- local bonds that may be subject to the stan- tions go into effect, the requirements in
tions of confidentiality, or (D) is subject dards in section 10.35. In response to these section 10.35 for covered opinions will not
to contractual protection. Written advice comments, the Treasury Department and apply to an opinion that meets the interim
regarding a plan or arrangement having the IRS have determined that the definition definition of State or local bond opinion
a significant purpose of tax avoidance or of State or local bond opinion in section set forth in this notice. This relief applies
evasion is excluded from the definition of 10.35 should be amended. Accordingly, regardless of whether the amendment to
covered opinion if the written advice (1) the IRS will apply the following interim section 10.35 has been published prior to
concerns the qualification of a qualified definition of State or local bond opinion June 20, 2005.

2005–26 I.R.B. 1373 June 27, 2005


CHANGES TO PROPOSED SECTION SECTION 2. BACKGROUND force in the United States, the IAA gen-
10.39 UNDER CONSIDERATION erally will apply to Convention adoptions
.01 Section 23 of the Internal Revenue (adoptions in which both the sending and
The Treasury Department and the IRS Code allows a credit for qualified adoption the receiving countries are parties to the
also are considering other modifications to expenses (QAE) paid or incurred by an in- Convention).
the requirements for State or local bond dividual in connection with the adoption .06 Section 301 of the IAA (42 U.S.C.
opinions in the Proposed Regulations, in- of an eligible child. Section 137 provides § 14931) provides rules for certification
cluding, but not limited to: adding a provi- an exclusion from an employee’s gross in- of Convention adoptions. A Convention
sion that would permit a practitioner under come for QAE paid or incurred by the em- adoption subject to the IAA will be final
certain circumstances to render an opinion ployer under an adoption assistance pro- for federal income tax purposes (1) in the
that addresses less than all the significant gram. See Notice 97–9, 1997–1 C.B. 365, taxable year for which the Secretary of
Federal tax issues raised by a State or lo- for general guidance concerning the credit State certifies as final an adoption subject
cal bond issue; and permitting exclusions under § 23 and the exclusion under § 137. to § 301(b), or (2) in the year in which the
from the requirements of section 10.39 for .02 QAE are defined in § 23(d)(1) and state court enters a final decree of adoption
opinions that would otherwise be State or Notice 97–9 as reasonable and necessary for an adoption subject to § 301(c).
local bond opinions if the opinion is a pre- adoption fees, court costs, attorney’s fees, .07 A discussion of the IAA and the
liminary, post-filing, or negative opinion, traveling expenses (including amounts ex- Convention can be found in Hague Con-
or is in-house counsel advice, similar to the pended for meals and lodging) while away vention on Intercountry Adoption; Inter-
exclusions for these opinions from the re- from home, and other expenses directly re- country Adoption Act of 2000; Accredita-
quirements for covered opinions in section lated to, and for the principal purpose of, tion of Agencies; Approval of Persons;
10.35. the legal adoption of an eligible child by Preservation of Convention Records,
the taxpayer. 68 Fed. Reg. 54064 (September 15,
DRAFTING INFORMATION .03 Under § 23(d)(2), an eligible child is 2003) (proposed rules to be codified at 22
an individual who has not attained age 18 C.F.R. pts. 96, 98). General information
The principal authors of this notice are or who is physically or mentally incapable about foreign adoptions can be accessed
Heather L. Dostaler of the Office of As- of caring for himself. Section 23(d)(1)(C) through the Department of State web site
sociate Chief Counsel (Procedure & Ad- provides that a stepchild is not an eligible at http://www.state.gov and the Depart-
ministration) and Vicki Tsilas of the Of- child. ment of Homeland Security web site at
fice of Associate Chief Counsel (Tax Ex- .04 Section 23(a)(2)(A) provides the http://www.immigration.gov.
empt/Government Entities). For further general rule that, for QAE paid or incurred
information regarding this notice, contact before the taxable year in which the adop- SECTION 3. SCOPE
Heather L. Dostaler at (202) 622–4940 or tion is final, the credit is allowed in the
Vicki Tsilas at (202) 622–3980 (not toll- taxable year that follows the taxable year This revenue procedure applies to tax-
free numbers). in which the QAE are paid or incurred. For payers who claim the adoption credit or ex-
QAE paid or incurred during or after the clusion for QAE paid or incurred in con-
taxable year in which the adoption is final, nection with the adoption of a foreign-born
26 CFR 601.105: Examination of returns and claims the credit is allowed for the taxable year in child, except adoptions for which the Con-
for refund, credit, or abatement; determination of
correct tax liability.
which the QAE are paid or incurred. Sec. vention and the IAA determine finality.
(Also Part 1, §§ 23, 137.) 23(a)(2)(B). For a foreign adoption, how- This revenue procedure does not apply to
ever, § 23(e) provides that (1) the credit the adoption of a child who is a citizen or
Rev. Proc. 2005–31 is allowed only if the adoption becomes resident of the United States at the time the
final, and (2) QAE paid or incurred in adoption process commences.
any taxable year before the taxable year
SECTION 1. PURPOSE in which the adoption becomes final are SECTION 4. DEFINITIONS
treated as paid or incurred in the taxable
This revenue procedure provides safe year in which the adoption becomes fi- The following definitions apply for pur-
harbors for determining the finality of nal. Rules similar to those under § 23(e) poses of this revenue procedure.
an adoption of a foreign-born child for apply under § 137(e) for purposes of the .01 Foreign-born child. An eligible
federal income tax purposes. It final- exclusion for employer-provided adoption child (within the meaning of § 23(d)(2))
izes the revenue procedure proposed in assistance. who is not a citizen or resident of the
Notice 2003–15, 2003–1 C.B. 540. An- .05 The Intercountry Adoption Act United States at the time the adoption
nouncement 2005–45, 2005–26 I.R.B. of 2000, Pub. L. 106–279, 42 U.S.C. process commences.
1377, discusses the comments received §§ 14901–14954 (IAA), will implement .02 Orphan. A foreign-born child who
in response to Notice 2003–15 and the the Hague Convention on Protection of is under the age of 16 at the time an immi-
changes made by this revenue procedure Children and Co-operation in Respect of gration petition is filed on the child’s be-
to the proposed revenue procedure. This Intercountry Adoption (the Convention). half, and
revenue procedure also provides guidance See Senate Treaty Doc. 105–51 (Sept. 20, (1) who has suffered the death or disap-
on the treatment of re-adoption expenses. 2000). When the Convention enters into pearance of, or abandonment or desertion

June 27, 2005 1374 2005–26 I.R.B.


by, or separation from or loss of, both par- try while under the age of 16 years, and IR2, IR3, or IR4 (if the child was adopted
ents, or who has been in the legal custody of, and in a simple adoption) visa as final in:
(2) for whom the sole or surviving par- has resided with, the adoptive parent or (i) The taxable year in which the com-
ent is incapable of providing the proper parents for at least 2 years. petent authority enters a decree of adop-
care and has in writing irrevocably re- .10 IR3 visa. A visa issued to an orphan tion; or
leased the foreign-born child for emigra- after a full and final adoption of the orphan (ii) The taxable year in which a home
tion and adoption. has occurred in the foreign-sending coun- state court enters a decree of re-adoption
.03 Foreign-sending country. The try. An IR3 visa is issued if (1) the compe- or the home state otherwise recognizes the
country of citizenship of a foreign-born tent authority of the foreign-sending coun- decree of the foreign-sending country, if
child, or if the foreign-born child is not try severs the parental rights of the biolog- that taxable year is one of the next two tax-
permanently residing in the country of ical or any previous adoptive parents and able years after the taxable year in which
citizenship, the country of the child’s ha- establishes a parent-child relationship be- the competent authority enters the decree.
bitual residence before adoption. See 8 tween the orphan and the adoptive parent (b) Children who receive an IR4 visa
C.F.R. § 204.3(b) (2005). or parents, and (2) both adoptive parents (guardianship or legal custody). The Ser-
.04 Competent authority. A court or (in adoptions by two parents) or the sole vice will not challenge a taxpayer’s treat-
governmental agency of the foreign-send- adoptive parent (in adoptions by one par- ment of the adoption of a child who was
ing country with jurisdiction and authority ent) see the orphan before or during the subject to a guardianship or legal custody
to make decisions in matters of child wel- adoption proceeding. arrangement and who receives an IR4 visa
fare, including adoption (as provided in 8 .11 IR4 visa. A visa issued to an or- as final in the taxable year in which a home
C.F.R. § 204.3(b) (2005)). phan if (1) a simple adoption occurs in the state court enters a decree of adoption.
.05 Home state. The state (including foreign-sending country, or (2) the compe- .02 Re-adoption expenses. Otherwise
the District of Columbia and possessions) tent authority of the foreign-sending coun- qualified expenses paid or incurred in
in which the adopted child and adoptive try grants legal guardianship or custody ei- connection with a re-adoption satisfy the
parents make their habitual residence in ther to the prospective adoptive parent or requirement that expenses be “reasonable
the United States, or in which the child is parents or to an individual or agency act- and necessary” for purposes of determin-
adopted. ing on behalf of the prospective adoptive ing whether the expenses are QAE.
.06 Full and final adoption. An adop- parent or parents.
tion of an orphan in which the compe- SECTION 6. EFFECTIVE DATE
tent authority of the foreign-sending coun- SECTION 5. APPLICATION
try enters a decree of adoption establishing This revenue procedure is effective for
a parent-child relationship under the laws .01 Finality of adoption of foreign-born QAE paid or incurred after June 15, 2005.
of the foreign-sending country and both child. However, the Service will not challenge
adoptive parents (in adoptions by two par- (1) In general. For purposes of the the time of finality of adoptions by taxpay-
ents) or the sole adoptive parent (in adop- adoption credit and the exclusion for em- ers who apply this revenue procedure or
tions by one parent) see the orphan before ployer-provided assistance for QAE, the Notice 2003–15 to QAE paid or incurred
or during the adoption proceeding. Internal Revenue Service will treat an on or before June 15, 2005, in a taxable
.07 Simple adoption. An adoption of adoption of a foreign-born child for which year for which the period of limitation un-
an orphan in which the competent author- the Convention and the IAA do not deter- der § 6511 has not expired.
ity of the foreign-sending country enters mine finality as final if:
a decree of adoption establishing a par- (a) a competent authority of a for- SECTION 7. EFFECT ON OTHER
ent-child relationship under the laws of the eign-sending country has entered a de- DOCUMENTS
foreign-sending country, in which one or cree of adoption with respect to the for-
both of the adoptive parents do not see the eign-born child or has authorized the child Notice 2003–15 is modified and, as
orphan before or during the adoption pro- to leave the foreign-sending country under modified, is superseded.
ceeding. a guardianship or legal custody arrange-
.08 Re-adoption. An adoption or other ment; and DRAFTING INFORMATION
recognition proceeding under home state (b) the child receives an IR visa from
law occurring after the entry of a foreign- the Department of State. The principal author of this revenue
born child into the United States under (2) Taxable year of finality safe har- procedure is Marilyn E. Brookens of the
an “immediate relative” IR2, IR3, or IR4 bors. Office of the Associate Chief Counsel
(simple adoption) visa. (a) Children who receive an IR2, IR3, (Income Tax & Accounting). For further
.09 IR2 visa. A visa issued to a for- or IR4 (simple adoption) visa. The Service information regarding this revenue pro-
eign-born child who is not an orphan, who will not challenge a taxpayer’s treatment cedure, contact Ms. Brookens at (202)
was adopted in the foreign-sending coun- of the adoption of a child who receives an 622–4920 (not a toll-free number).

2005–26 I.R.B. 1375 June 27, 2005


Part IV. Items of General Interest
Notice of Proposed SUPPLEMENTARY INFORMATION: Drafting Information
Rulemaking by
Explanation of Provisions The principal author of these regula-
Cross-Reference to tions is Douglas Bates, Office of the As-
Temporary Regulations Temporary regulations in this issue of sociate Chief Counsel (Corporate), IRS.
the Bulletin amend 26 CFR Part 1 relat- However, other personnel from the IRS
Assumption of Liabilities ing to section 358(h)(1). The temporary and Treasury Department participated in
regulations make unavailable the excep- their development.
tion to section 358(h)(1) that is set forth in
REG–106736–00 *****
section 358(h)(2)(B) (which applies where
AGENCY: Internal Revenue Service substantially all of the assets with which
the liability is associated are transferred to Proposed Amendments to the
(IRS), Treasury Regulations
the person assuming the liability as part of
ACTION: Notice of proposed rulemaking the exchange). The text of those temporary
Accordingly, 26 CFR part 1 is proposed
by cross-reference to temporary regula- regulations also serves as the text of these
to be amended as follows:
tions. proposed regulations. The preamble to the
temporary regulations explains the amend- PART 1—INCOME TAXES
SUMMARY: In this issue of the Bulletin, ments.
the IRS is issuing final and temporary reg- Paragraph 1. The authority citation for
Special Analyses part 1 is amended by adding an entry in
ulations (T.D. 9207) relating to the as-
sumption of liabilities under section 752 of It has been determined that this notice numerical order to read, in part, as follows:
the Internal Revenue Code (Code). Those of proposed rulemaking is not a significant Authority: 26 U.S.C. 7805 * * *
temporary regulations contain rules related regulatory action as defined in Executive §1.358–5 also issued under 26 U.S.C.
to the assumption of certain liabilities un- Order 12866. Therefore, a regulatory as- 358(h)(2). * * *
der section 358(h). The text of those tem- sessment is not required. It is hereby cer- Par. 2. Section 1.358–5 is added to read
porary regulations also serves as the text of tified that these regulations will not have a as follows:
these proposed regulations. significant economic impact on a substan-
§1.358–5 Special rules for assumption of
tial number of small entities. This certifi-
DATES: Written or electronic comments liabilities.
cation is based upon the fact that the only
and requests for a public hearing must be impact of the regulations is to require tax-
received by August 24, 2005. [The text of proposed §1.358–5 is the
payers to calculate the basis of stock re- same as the text of §1.358–5T published
ceived in certain transactions more accu- elsewhere in this issue of the Bulletin].
ADDRESSES: Send submissions to:
rately. Therefore, a Regulatory Flexibility
CC:PA:LPD:PR (REG–106736–00),
Analysis under the Regulatory Flexibility Mark E. Matthews,
room 5203, Internal Revenue Ser-
Act (5 U.S.C. Chapter 6) is not required. Deputy Commissioner for
vice, PO Box 7604, Ben Franklin Sta-
Pursuant to section 7805(f) of the Code, Services and Enforcement.
tion, Washington, DC 20044. Submis-
this notice of proposed rulemaking will be
sions may be hand-delivered Monday (Filed by the Office of the Federal Register on May 23, 2005,
submitted to the Chief Counsel for Advo- 11:17 a.m., and published in the issue of the Federal Register
through Friday between the hours of
cacy of the Small Business Administration for May 26, 2005, 70 F.R. 30380)
8 a.m. and 4 p.m. to CC:PA:LPD:PR
for comment on its impact.
(REG–106736–00), Courier’s Desk, In-
ternal Revenue Service, 1111 Constitution Comments and Requests for a Public
Avenue, NW, Washington, DC, or sent New Procedure for Filing Form
Hearing
electronically, via the IRS Internet site at 8693, Low-Income Housing
www.irs.gov/regs or via the Federal eRule- Before these regulations are adopted Credit Disposition Bond
making Portal at www.regulations.gov as final regulations, consideration will be
(IRS–REG–106736–00). given to any written comments (a signed Announcement 2005–43
original with eight (8) copies) or electronic
FOR FURTHER INFORMATION comments that are submitted timely to the Form 8693, Low-Income Housing
CONTACT: Concerning the proposed reg- IRS. All comments will be made available Credit Disposition Bond, is to be filed
ulations, Doug Bates, at (202) 622–7550; for public inspection and copying. A pub- with the Internal Revenue Service within
concerning submissions of comments lic hearing may be scheduled. If a public 60 days after the date of disposition of the
and/or requests for a public hearing, Sonya hearing is scheduled, notice of the date, building or interest therein.
Cruse, (202) 622–7180 (not toll-free num- time, and place for the public hearing will Effective upon publication of this an-
bers). be published in the Federal Register. nouncement, Form 8693 (original and one

June 27, 2005 1376 2005–26 I.R.B.


copy) is to be filed at the following ad- would end on the date the court first deter- (3) If the child receives an IR4 visa and
dress: mines that the organization is not described enters the United States under a guardian-
in section 170(c)(2) as more particularly ship or legal custody arrangement, the
Internal Revenue Service set forth in section 7428(c)(1). For indi- adoption will be treated as final in the
P.O. Box 331 vidual contributors, the maximum deduc- taxable year in which a home state court
Attn: LIHC Unit, DP 607 South tion protected is $1,000, with a husband enters a decree of adoption.
Philadelphia Campus and wife treated as one contributor. This The Service requested comments on
Bensalem, PA 19020 benefit is not extended to any individual, in the proposed revenue procedure. Several
whole or in part, for the acts or omissions comments were received.
The IRS will return a copy of the ap-
of the organization that were the basis for
proved form. However, taxpayers are COMMENTS
revocation.
no longer required to attach that copy to
their income tax return. Instead, taxpayers E.N.Y.P. Charity Fund Time of finality and alternative provisions
should keep the returned copy in their Brooklyn, NY
records. This treatment supersedes the Commentators disagreed that the adop-
current revision (February 1997) of Form tion of a foreign-born child who receives
8693, which instructs taxpayers to attach an IR2 visa or who receives an IR4 visa
the approved copy to their income tax Finality of Foreign Adoptions and enters the United States under a de-
return. cree of simple adoption should be final
Announcement 2005–45 only upon action of the home state. The
commentators suggested that the credit
Deletions From Cumulative The Internal Revenue Service has is- should be available earlier, when the for-
sued Rev. Proc. 2005–31, 2005–26 I.R.B. eign-sending country enters a decree of
List of Organizations
1374, which finalizes, with modifications, adoption. The final revenue procedure
Contributions to Which a revenue procedure proposed in Notice adopts this suggestion and provides alter-
are Deductible Under Section 2003–15, 2003–1 C.B. 540 (the proposed native dates of finality for the adoption
170 of the Code revenue procedure). This announcement of a child who receives an IR2 or an IR3
discusses issues raised by comments re- visa, or who receives an IR4 visa and
Announcement 2005–44 ceived in response to Notice 2003–15 and enters the United States under a decree
the modifications to the proposed revenue of simple adoption. Taxpayers may treat
The name of an organization that no procedure. these adoptions as final for federal income
longer qualifies as an organization de-
tax purposes:
scribed in section 170(c)(2) of the Internal BACKGROUND (a) In the taxable year in which the com-
Revenue Code of 1986 is listed below.
petent authority enters a decree of adop-
Generally, the Service will not disallow Section 23 of the Internal Revenue
tion; or
deductions for contributions made to a Code provides a credit for qualified adop-
(b) In the taxable year in which a home
listed organization on or before the date tion expenses (QAE) paid or incurred in
state enters a decree of re-adoption or oth-
of announcement in the Internal Revenue connection with the adoption of an eligible
erwise recognizes the decree of the for-
Bulletin that an organization no longer child. Section 137 provides an exclusion
eign-sending country, if that taxable year
qualifies. However, the Service is not from income for employer-provided adop-
is one of the next two taxable years after
precluded from disallowing a deduction tion assistance. Notice 2003–15 proposed
the taxable year in which the competent
for any contributions made after an or- a revenue procedure to establish certain
authority enters the decree.
ganization ceases to qualify under section safe harbors for determining the finality of
170(c)(2) if the organization has not timely the adoption of a foreign-born child who Retroactivity
filed a suit for declaratory judgment under has received an “immediate relative” (IR)
section 7428 and if the contributor (1) had visa from the Department of State. The A commentator expressed concern that
knowledge of the revocation of the ruling proposed revenue procedure provided: the proposed revenue procedure, if ap-
or determination letter, (2) was aware that (1) If the child receives an IR2 or an plied retroactively, would require taxpay-
such revocation was imminent, or (3) was IR4 visa and enters the United States un- ers who had taken positions inconsistent
in part responsible for or was aware of the der a decree of simple adoption, the adop- with the proposed revenue procedure to
activities or omissions of the organization tion will be treated as final in the tax- file amended returns. Specifically, the
that brought about this revocation. able year in which a home state court en- commentator asserted that many taxpay-
If on the other hand a suit for declara- ters a decree of re-adoption or otherwise ers whose children received IR4 visas and
tory judgment has been timely filed, con- recognizes the adoption decree of the for- entered the United States under a decree of
tributions from individuals and organiza- eign-sending country; simple adoption had claimed the credit in
tions described in section 170(c)(2) that (2) If the child receives an IR3 visa, the the year the competent authority of the for-
are otherwise allowable will continue to adoption will be treated as final in the tax- eign-sending country entered the decree
be deductible. Protection under section able year in which the competent authority of adoption, rather than in the year that a
7428(c) would begin on June 27, 2005, and enters the decree of adoption; and state court re-adoption occurred. The final

2005–26 I.R.B. 1377 June 27, 2005


revenue procedure permits taxpayers to OTHER MODIFICATIONS TO THE Effective date
treat these adoptions as final in the year PROPOSED REVENUE PROCEDURE
the competent authority enters the decree Notice 2003–15 proposed that the final
of adoption, and permits taxpayers to ap- Treatment of re-adoption expenses as QAE revenue procedure would be effective for
ply Notice 2003–15 or the final revenue expenses paid or incurred after the date of
Section 23(d)(1) and Notice 97–9 de- its publication. The final revenue proce-
procedure to prior taxable years.
fine QAE to include reasonable and neces- dure is effective for QAE paid or incurred
The Intercountry Adoption Act sary expenses relating to the legal adoption after the date of its publication. However,
of an eligible child. In most adoptions of the Service will not challenge the time of
A commentator questioned whether foreign-born children, the foreign-sending finality of adoptions by taxpayers who ap-
the proposed revenue procedure would country has entered a decree of adop- ply the final revenue procedure or Notice
apply after the Intercountry Adoption Act tion before the child has been issued a 2003–15 to QAE paid or incurred on or be-
of 2000 (IAA), Pub. L. 106–279, 114 visa. Many adoptive parents pay or incur fore June 15, 2005, in a taxable year for
Stat. 825, 42 U.S.C. §§ 14901–14954, expenses in connection with home state which the period of limitation under § 6511
implements the 1993 Hague Convention re-adoptions of their foreign-born children has not expired.
on Protection of Children and Co-opera- for practical reasons, such as obtaining a
tion in Respect of Intercountry Adoption birth certificate issued in English, rather DRAFTING INFORMATION
(the Convention). See Senate Treaty Doc. than because re-adoption is required by
105–51 (Sept. 20, 2000). In response to law. Therefore, the revenue procedure The principal author of this notice is
this comment, the final revenue procedure clarifies that otherwise qualified expenses Marilyn E. Brookens of the Office of As-
states that it does not apply to adoptions paid or incurred in connection with a sociate Chief Counsel (Income Tax & Ac-
for which the Convention and the IAA re-adoption do not fail the requirement counting). For further information regard-
determine finality. that QAE must be “reasonable and neces- ing this notice, contact Ms. Brookens at
sary.” (202) 622–4920 (not a toll-free call).

June 27, 2005 1378 2005–26 I.R.B.


Definition of Terms
Revenue rulings and revenue procedures and B, the prior ruling is modified because of a prior ruling, a combination of terms
(hereinafter referred to as “rulings”) that it corrects a published position. (Compare is used. For example, modified and su-
have an effect on previous rulings use the with amplified and clarified, above). perseded describes a situation where the
following defined terms to describe the ef- Obsoleted describes a previously pub- substance of a previously published ruling
fect: lished ruling that is not considered deter- is being changed in part and is continued
Amplified describes a situation where minative with respect to future transac- without change in part and it is desired to
no change is being made in a prior pub- tions. This term is most commonly used in restate the valid portion of the previously
lished position, but the prior position is be- a ruling that lists previously published rul- published ruling in a new ruling that is self
ing extended to apply to a variation of the ings that are obsoleted because of changes contained. In this case, the previously pub-
fact situation set forth therein. Thus, if in laws or regulations. A ruling may also lished ruling is first modified and then, as
an earlier ruling held that a principle ap- be obsoleted because the substance has modified, is superseded.
plied to A, and the new ruling holds that the been included in regulations subsequently Supplemented is used in situations in
same principle also applies to B, the earlier adopted. which a list, such as a list of the names of
ruling is amplified. (Compare with modi- Revoked describes situations where the countries, is published in a ruling and that
fied, below). position in the previously published ruling list is expanded by adding further names in
Clarified is used in those instances is not correct and the correct position is subsequent rulings. After the original rul-
where the language in a prior ruling is be- being stated in a new ruling. ing has been supplemented several times, a
ing made clear because the language has Superseded describes a situation where new ruling may be published that includes
caused, or may cause, some confusion. the new ruling does nothing more than re- the list in the original ruling and the ad-
It is not used where a position in a prior state the substance and situation of a previ- ditions, and supersedes all prior rulings in
ruling is being changed. ously published ruling (or rulings). Thus, the series.
Distinguished describes a situation the term is used to republish under the Suspended is used in rare situations
where a ruling mentions a previously pub- 1986 Code and regulations the same po- to show that the previous published rul-
lished ruling and points out an essential sition published under the 1939 Code and ings will not be applied pending some
difference between them. regulations. The term is also used when future action such as the issuance of new
Modified is used where the substance it is desired to republish in a single rul- or amended regulations, the outcome of
of a previously published position is being ing a series of situations, names, etc., that cases in litigation, or the outcome of a
changed. Thus, if a prior ruling held that a were previously published over a period of Service study.
principle applied to A but not to B, and the time in separate rulings. If the new rul-
new ruling holds that it applies to both A ing does more than restate the substance

Abbreviations
The following abbreviations in current use ER—Employer. PRS—Partnership.
and formerly used will appear in material ERISA—Employee Retirement Income Security Act. PTE—Prohibited Transaction Exemption.
EX—Executor. Pub. L.—Public Law.
published in the Bulletin.
F—Fiduciary. REIT—Real Estate Investment Trust.
FC—Foreign Country. Rev. Proc.—Revenue Procedure.
A—Individual.
FICA—Federal Insurance Contributions Act. Rev. Rul.—Revenue Ruling.
Acq.—Acquiescence.
B—Individual. FISC—Foreign International Sales Company. S—Subsidiary.
FPH—Foreign Personal Holding Company. S.P.R.—Statement of Procedural Rules.
BE—Beneficiary.
F.R.—Federal Register. Stat.—Statutes at Large.
BK—Bank.
B.T.A.—Board of Tax Appeals. FUTA—Federal Unemployment Tax Act. T—Target Corporation.
FX—Foreign corporation. T.C.—Tax Court.
C—Individual.
G.C.M.—Chief Counsel’s Memorandum. T.D. —Treasury Decision.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations. GE—Grantee. TFE—Transferee.
GP—General Partner. TFR—Transferor.
CI—City.
GR—Grantor. T.I.R.—Technical Information Release.
COOP—Cooperative.
Ct.D.—Court Decision. IC—Insurance Company. TP—Taxpayer.
I.R.B.—Internal Revenue Bulletin. TR—Trust.
CY—County.
LE—Lessee. TT—Trustee.
D—Decedent.
DC—Dummy Corporation. LP—Limited Partner. U.S.C.—United States Code.
LR—Lessor. X—Corporation.
DE—Donee.
M—Minor. Y—Corporation.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation. Nonacq.—Nonacquiescence. Z —Corporation.
O—Organization.
DR—Donor.
P—Parent Corporation.
E—Estate.
EE—Employee. PHC—Personal Holding Company.
PO—Possession of the U.S.
E.O.—Executive Order.
PR—Partner.

2005–26 I.R.B. i June 27, 2005


Numerical Finding List1 Notices— Continued: Proposed Regulations— Continued:
2005-2, 2005-3 I.R.B. 337 REG-129709-03, 2005-3 I.R.B. 351
Bulletins 2005–1 through 2005–26 2005-3, 2005-5 I.R.B. 447 REG-148701-03, 2005-13 I.R.B. 802
Announcements: 2005-4, 2005-2 I.R.B. 289 REG-148867-03, 2005-9 I.R.B. 646
2005-5, 2005-3 I.R.B. 337 REG-159243-03, 2005-20 I.R.B. 1075
2005-1, 2005-1 I.R.B. 257 2005-6, 2005-5 I.R.B. 448 REG-160315-03, 2005-14 I.R.B. 833
2005-2, 2005-2 I.R.B. 319 2005-7, 2005-3 I.R.B. 340 REG-163314-03, 2005-14 I.R.B. 835
2005-3, 2005-2 I.R.B. 270 2005-8, 2005-4 I.R.B. 368 REG-168892-03, 2005-25 I.R.B. 1293
2005-4, 2005-2 I.R.B. 319 2005-9, 2005-4 I.R.B. 369 REG-102144-04, 2005-25 I.R.B. 1297
2005-5, 2005-3 I.R.B. 353 2005-10, 2005-6 I.R.B. 474 REG-122847-04, 2005-13 I.R.B. 804
2005-6, 2005-4 I.R.B. 377 2005-11, 2005-7 I.R.B. 493 REG-127740-04, 2005-24 I.R.B. 1254
2005-7, 2005-4 I.R.B. 377 2005-12, 2005-7 I.R.B. 494 REG-130370-04, 2005-8 I.R.B. 608
2005-8, 2005-4 I.R.B. 380 2005-13, 2005-9 I.R.B. 630 REG-130671-04, 2005-10 I.R.B. 694
2005-9, 2005-4 I.R.B. 380 2005-14, 2005-7 I.R.B. 498 REG-131128-04, 2005-11 I.R.B. 733
2005-10, 2005-5 I.R.B. 450 2005-15, 2005-7 I.R.B. 527 REG-134030-04, 2005-25 I.R.B. 1339
2005-11, 2005-5 I.R.B. 451 2005-16, 2005-8 I.R.B. 605 REG-139683-04, 2005-4 I.R.B. 371
2005-12, 2005-7 I.R.B. 555 2005-17, 2005-8 I.R.B. 606 REG-147195-04, 2005-15 I.R.B. 888
2005-13, 2005-8 I.R.B. 627 2005-18, 2005-9 I.R.B. 634 REG-148521-04, 2005-18 I.R.B. 995
2005-14, 2005-9 I.R.B. 653 2005-19, 2005-9 I.R.B. 634 REG-152354-04, 2005-13 I.R.B. 805
2005-15, 2005-9 I.R.B. 654 2005-20, 2005-9 I.R.B. 635 REG-152914-04, 2005-9 I.R.B. 650
2005-16, 2005-10 I.R.B. 702 2005-21, 2005-11 I.R.B. 727 REG-152945-04, 2005-6 I.R.B. 484
2005-17, 2005-10 I.R.B. 673 2005-22, 2005-12 I.R.B. 756 REG-154000-04, 2005-19 I.R.B. 1009
2005-18, 2005-9 I.R.B. 660 2005-23, 2005-11 I.R.B. 732 REG-158138-04, 2005-25 I.R.B. 1341
2005-19, 2005-11 I.R.B. 744 2005-24, 2005-12 I.R.B. 757 REG-159824-04, 2005-4 I.R.B. 372
2005-20, 2005-12 I.R.B. 772 2005-25, 2005-14 I.R.B. 827 REG-162813-04, 2005-19 I.R.B. 1010
2005-21, 2005-12 I.R.B. 776 2005-26, 2005-12 I.R.B. 758
Revenue Procedures:
2005-22, 2005-14 I.R.B. 826 2005-27, 2005-13 I.R.B. 795
2005-23, 2005-14 I.R.B. 845 2005-28, 2005-13 I.R.B. 796 2005-1, 2005-1 I.R.B. 1
2005-24, 2005-15 I.R.B. 889 2005-29, 2005-13 I.R.B. 796 2005-2, 2005-1 I.R.B. 86
2005-25, 2005-15 I.R.B. 891 2005-30, 2005-14 I.R.B. 827 2005-3, 2005-1 I.R.B. 118
2005-26, 2005-17 I.R.B. 969 2005-31, 2005-14 I.R.B. 830 2005-4, 2005-1 I.R.B. 128
2005-27, 2005-16 I.R.B. 918 2005-32, 2005-16 I.R.B. 895 2005-5, 2005-1 I.R.B. 170
2005-28, 2005-17 I.R.B. 969 2005-33, 2005-17 I.R.B. 960 2005-6, 2005-1 I.R.B. 200
2005-29, 2005-17 I.R.B. 969 2005-34, 2005-17 I.R.B. 960 2005-7, 2005-1 I.R.B. 240
2005-30, 2005-18 I.R.B. 988 2005-35, 2005-21 I.R.B. 1087 2005-8, 2005-1 I.R.B. 243
2005-31, 2005-18 I.R.B. 996 2005-36, 2005-19 I.R.B. 1007 2005-9, 2005-2 I.R.B. 303
2005-32, 2005-19 I.R.B. 1012 2005-37, 2005-20 I.R.B. 1049 2005-10, 2005-3 I.R.B. 341
2005-33, 2005-19 I.R.B. 1013 2005-38, 2005-22 I.R.B. 1100 2005-11, 2005-2 I.R.B. 307
2005-34, 2005-19 I.R.B. 1014 2005-39, 2005-21 I.R.B. 1087 2005-12, 2005-2 I.R.B. 311
2005-35, 2005-21 I.R.B. 1095 2005-40, 2005-21 I.R.B. 1088 2005-13, 2005-12 I.R.B. 759
2005-36, 2005-21 I.R.B. 1095 2005-41, 2005-23 I.R.B. 1203 2005-14, 2005-7 I.R.B. 528
2005-37, 2005-21 I.R.B. 1096 2005-42, 2005-23 I.R.B. 1204 2005-15, 2005-9 I.R.B. 638
2005-38, 2005-21 I.R.B. 1097 2005-43, 2005-24 I.R.B. 1221 2005-16, 2005-10 I.R.B. 674
2005-39, 2005-22 I.R.B. 1151 2005-44, 2005-25 I.R.B. 1287 2005-17, 2005-13 I.R.B. 797
2005-40, 2005-22 I.R.B. 1152 2005-45, 2005-24 I.R.B. 1228 2005-18, 2005-13 I.R.B. 798
2005-41, 2005-23 I.R.B. 1212 2005-46, 2005-26 I.R.B. 1372 2005-19, 2005-14 I.R.B. 832
2005-42, 2005-24 I.R.B. 1257 2005-47, 2005-26 I.R.B. 1373 2005-20, 2005-18 I.R.B. 990
2005-43, 2005-26 I.R.B. 1376 2005-21, 2005-16 I.R.B. 899
Proposed Regulations:
2005-44, 2005-26 I.R.B. 1377 2005-22, 2005-15 I.R.B. 886
2005-45, 2005-26 I.R.B. 1377 REG-106736-00, 2005-26 I.R.B. 1376 2005-23, 2005-18 I.R.B. 991
Court Decisions: REG-108524-00, 2005-23 I.R.B. 1209 2005-24, 2005-16 I.R.B. 909
REG-117969-00, 2005-7 I.R.B. 533 2005-25, 2005-17 I.R.B. 962
2080, 2005-15 I.R.B. 850 REG-125443-01, 2005-16 I.R.B. 912 2005-26, 2005-17 I.R.B. 965

Notices: REG-125628-01, 2005-7 I.R.B. 536 2005-27, 2005-20 I.R.B. 1050


REG-100420-03, 2005-24 I.R.B. 1236 2005-28, 2005-21 I.R.B. 1093
2005-1, 2005-2 I.R.B. 274 REG-105346-03, 2005-24 I.R.B. 1244 2005-29, 2005-22 I.R.B. 1118

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin
2004–52, dated December 27, 2004.

June 27, 2005 ii 2005–26 I.R.B.


Revenue Procedures— Continued: Treasury Decisions— Continued:
2005-30, 2005-22 I.R.B. 1148 9169, 2005-5 I.R.B. 381
2005-31, 2005-26 I.R.B. 1374 9170, 2005-4 I.R.B. 363
2005-32, 2005-23 I.R.B. 1206 9171, 2005-6 I.R.B. 452
2005-33, 2005-24 I.R.B. 1231 9172, 2005-6 I.R.B. 468
2005-34, 2005-24 I.R.B. 1233 9173, 2005-8 I.R.B. 557
9174, 2005-9 I.R.B. 629
Revenue Rulings:
9175, 2005-10 I.R.B. 665
2005-1, 2005-2 I.R.B. 258 9176, 2005-10 I.R.B. 661
2005-2, 2005-2 I.R.B. 259 9177, 2005-10 I.R.B. 671
2005-3, 2005-3 I.R.B. 334 9178, 2005-11 I.R.B. 708
2005-4, 2005-4 I.R.B. 366 9179, 2005-11 I.R.B. 707
2005-5, 2005-5 I.R.B. 445 9180, 2005-11 I.R.B. 714
2005-6, 2005-6 I.R.B. 471 9181, 2005-11 I.R.B. 717
2005-7, 2005-6 I.R.B. 464 9182, 2005-11 I.R.B. 713
2005-8, 2005-6 I.R.B. 466 9183, 2005-12 I.R.B. 754
2005-9, 2005-6 I.R.B. 470 9184, 2005-12 I.R.B. 753
2005-10, 2005-7 I.R.B. 492 9185, 2005-12 I.R.B. 749
2005-11, 2005-14 I.R.B. 816 9186, 2005-13 I.R.B. 790
2005-12, 2005-9 I.R.B. 628 9187, 2005-13 I.R.B. 778
2005-13, 2005-10 I.R.B. 664 9188, 2005-15 I.R.B. 883
2005-14, 2005-12 I.R.B. 749 9189, 2005-13 I.R.B. 788
2005-15, 2005-11 I.R.B. 720 9190, 2005-15 I.R.B. 855
2005-16, 2005-13 I.R.B. 777 9191, 2005-15 I.R.B. 854
2005-17, 2005-14 I.R.B. 823 9192, 2005-15 I.R.B. 866
2005-18, 2005-14 I.R.B. 817 9193, 2005-15 I.R.B. 862
2005-19, 2005-14 I.R.B. 819 9194, 2005-20 I.R.B. 1016
2005-20, 2005-14 I.R.B. 821 9195, 2005-17 I.R.B. 958
2005-21, 2005-14 I.R.B. 822 9196, 2005-19 I.R.B. 1000
2005-22, 2005-13 I.R.B. 787 9197, 2005-18 I.R.B. 985
2005-23, 2005-15 I.R.B. 864 9198, 2005-18 I.R.B. 972
2005-24, 2005-16 I.R.B. 892 9199, 2005-19 I.R.B. 1003
2005-25, 2005-18 I.R.B. 971 9200, 2005-23 I.R.B. 1158
2005-26, 2005-17 I.R.B. 957 9201, 2005-23 I.R.B. 1153
2005-27, 2005-19 I.R.B. 998 9202, 2005-24 I.R.B. 1213
2005-28, 2005-19 I.R.B. 997 9203, 2005-25 I.R.B. 1285
2005-29, 2005-21 I.R.B. 1080 9204, 2005-25 I.R.B. 1279
2005-30, 2005-20 I.R.B. 1015 9205, 2005-25 I.R.B. 1267
2005-31, 2005-21 I.R.B. 1084 9206, 2005-25 I.R.B. 1283
2005-32, 2005-23 I.R.B. 1156 9207, 2005-26 I.R.B. 1344
2005-33, 2005-23 I.R.B. 1155
2005-34, 2005-22 I.R.B. 1098
2005-35, 2005-24 I.R.B. 1214
2005-36, 2005-26 I.R.B. 1368
2005-37, 2005-26 I.R.B. 1343

Tax Conventions:

2005-3, 2005-2 I.R.B. 270


2005-17, 2005-10 I.R.B. 673
2005-22, 2005-14 I.R.B. 826
2005-30, 2005-18 I.R.B. 988

Treasury Decisions:

9164, 2005-3 I.R.B. 320


9165, 2005-4 I.R.B. 357
9166, 2005-8 I.R.B. 558
9167, 2005-2 I.R.B. 261
9168, 2005-4 I.R.B. 354

2005–26 I.R.B. iii June 27, 2005


Finding List of Current Actions on Notices— Continued: Revenue Procedures— Continued:
Previously Published Items1 2005-10 2004-1
Modified by Superseded by
Bulletins 2005–1 through 2005–26
Notice 2005-38, 2005-22 I.R.B. 1100 Rev. Proc. 2005-1, 2005-1 I.R.B. 1
Announcements:
2005-17 2004-2
2001-77 Clarified and modified by Superseded by
Modified by Notice 2005-22, 2005-12 I.R.B. 756 Rev. Proc. 2005-2, 2005-1 I.R.B. 86
Rev. Proc. 2005-16, 2005-10 I.R.B. 674 Proposed Regulations: 2004-3
2005-19 Superseded by
REG-133791-02 Rev. Proc. 2005-3, 2005-1 I.R.B. 118
Supplemented by
Withdrawn by
Ann. 2005-39, 2005-22 I.R.B. 1151 2004-4
REG-134030-04, 2005-25 I.R.B. 1339
Notices: Superseded by
REG-149519-03 Rev. Proc. 2005-4, 2005-1 I.R.B. 128
88-30 Corrected by
2004-5
Obsoleted by Ann. 2005-11, 2005-5 I.R.B. 451
Superseded by
Notice 2005-4, 2005-2 I.R.B. 289 REG-163314-03 Rev. Proc. 2005-5, 2005-1 I.R.B. 170
88-132 Corrected by
2004-6
Obsoleted by Ann. 2005-32, 2005-19 I.R.B. 1012
Superseded by
Notice 2005-4, 2005-2 I.R.B. 289 REG-114726-04 Rev. Proc. 2005-6, 2005-1 I.R.B. 200
89-29 Corrected by
2004-7
Obsoleted by Ann. 2005-10, 2005-5 I.R.B. 450
Superseded by
Notice 2005-4, 2005-2 I.R.B. 289 REG-152945-04 Rev. Proc. 2005-7, 2005-1 I.R.B. 240
89-38 Corrected by
2004-8
Obsoleted by Ann. 2005-34, 2005-19 I.R.B. 1014
Superseded by
Notice 2005-4, 2005-2 I.R.B. 289 Revenue Procedures: Rev. Proc. 2005-8, 2005-1 I.R.B. 243
97-19
84-58 2004-13
Obsoleted in part by
Superseded by Superseded by
Notice 2005-36, 2005-19 I.R.B. 1007
Rev. Proc. 2005-18, 2005-13 I.R.B. 798 Rev. Proc. 2005-27, 2005-20 I.R.B. 1050
98-34
84-78 2004-16
Obsoleted in part by
Superseded by Modified and superseded by
Notice 2005-36, 2005-19 I.R.B. 1007
Rev. Proc. 2005-34, 2005-24 I.R.B. 1233 Rev. Proc. 2005-25, 2005-17 I.R.B. 962
2002-45
94-68 2004-18
Amplified by
Modified and superseded by Obsoleted in part by
Rev. Rul. 2005-24, 2005-16 I.R.B. 892
Rev. Proc. 2005-32, 2005-23 I.R.B. 1206 Rev. Proc. 2005-15, 2005-9 I.R.B. 638
2003-15
98-16 2004-24
Modified and superseded by
Modified and superseded by Obsoleted by
Rev. Proc. 2005-31, 2005-26 I.R.B. 1374
Rev. Proc. 2005-11, 2005-2 I.R.B. 307 Rev. Proc. 2005-22, 2005-15 I.R.B. 886
2004-22
2000-20 2004-35
Modified and superseded by
Modified and superseded by Corrected by
Notice 2005-30, 2005-14 I.R.B. 827
Rev. Proc. 2005-16, 2005-10 I.R.B. 674 Ann. 2005-4, 2005-2 I.R.B. 319
2004-38
2001-22 2004-60
Obsoleted by
Superseded by Superseded by
T.D. 9186, 2005-13 I.R.B. 790
Rev. Proc. 2005-12, 2005-2 I.R.B. 311 Rev. Proc. 2005-10, 2005-3 I.R.B. 341
2004-80
2002-9 2005-6
Clarified and modified by
Modified and amplified by Modified by
Notice 2005-22, 2005-12 I.R.B. 756
Rev. Proc. 2005-9, 2005-2 I.R.B. 303 Rev. Proc. 2005-16, 2005-10 I.R.B. 674
Updated by
Notice 2005-17, 2005-8 I.R.B. 606 2003-32 2005-8
Amplified and superseded by Modified by
2005-4
Rev. Proc. 2005-20, 2005-18 I.R.B. 990 Rev. Proc. 2005-16, 2005-10 I.R.B. 674
Modified by
Notice 2005-24, 2005-12 I.R.B. 757

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2004–27 through 2004–52 is in Internal Revenue Bulletin 2004–52, dated December 27,
2004.

June 27, 2005 iv 2005–26 I.R.B.


Revenue Procedures— Continued: Treasury Decisions— Continued:
2005-9 9166
Modified by Corrected by
Rev. Proc. 2005-17, 2005-13 I.R.B. 797 Ann. 2005-33, 2005-19 I.R.B. 1013

Revenue Rulings: 9170


Corrected by
69-516 Ann. 2005-13, 2005-8 I.R.B. 627
Obsoleted by Ann. 2005-35, 2005-21 I.R.B. 1095
T.D. 9182, 2005-11 I.R.B. 713
9187
76-96 Corrected by
Suspended in part by Ann. 2005-25, 2005-15 I.R.B. 891
Rev. Rul. 2005-28, 2005-19 I.R.B. 997
9196
77-415 Corrected by
Obsoleted by Ann. 2005-40, 2005-22 I.R.B. 1152
T.D. 9182, 2005-11 I.R.B. 713
9198
77-479 Corrected by
Obsoleted by Ann. 2005-41, 2005-23 I.R.B. 1212
T.D. 9182, 2005-11 I.R.B. 713

79-335
Modified and superseded by
Rev. Rul. 2005-30, 2005-20 I.R.B. 1015

82-34
Obsoleted by
T.D. 9182, 2005-11 I.R.B. 713

92-19
Supplemented in part by
Rev. Rul. 2005-29, 2005-21 I.R.B. 1080

92-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B. 334

95-63
Modified and superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B. 334

2004-43
Revoked by
Rev. Rul. 2005-10, 2005-7 I.R.B. 492

2004-103
Superseded by
Rev. Rul. 2005-3, 2005-3 I.R.B. 334

Treasury Decisions:

8408
Corrected by
Ann. 2005-28, 2005-17 I.R.B. 969

9130
Corrected by
Ann. 2005-29, 2005-17 I.R.B. 969

9165
Revised by
T.D. 9201, 2005-23 I.R.B. 1153
Corrected by
Ann. 2005-31, 2005-18 I.R.B. 996

2005–26 I.R.B. v June 27, 2005


INDEX EMPLOYEE PLANS—Cont.
Internal Revenue Bulletins 2005–1 through Proposed Regulations:
26 CFR 1.401(a)–20, amended; 1.417(a)(3)–1, amended;
2005–26
disclosure of relative values of optional forms of benefit
The abbreviation and number in parenthesis following the index entry (REG–152914–04) 9, 650
refer to the specific item; numbers in roman and italic type following 26 CFR 1.401(k)–0, –2, –6, amended; 1.401(k)–1(f), revised;
the parentheses refer to the Internal Revenue Bulletin in which the item 1.401(m)–0, –5, amended; 1.401(m)–2, revised; designated
may be found and the page number on which it appears. Roth contributions to cash or deferred arrangements under
section 401(k) (REG–152354–04) 13, 805
Key to Abbreviations: 26 CFR 1.409(p)–1, added; prohibited allocations of securi-
Ann Announcement ties in an S corporation (REG–129709–03) 3, 351
CD Court Decision 26 CFR 54.9801–1, –2, –4, –5, –6, amended; 54.9801–7,
DO Delegation Order added; 54.9831–1, amended; health coverage portability,
EO Executive Order tolling certain time periods and interaction with the Fam-
PL Public Law ily and Medical Leave Act Under HIPAA Titles I & IV
PTE Prohibited Transaction Exemption (REG–130370–04) 8, 608
RP Revenue Procedure Qualified retirement plans:
RR Revenue Ruling Automatic rollover, model language (Notice 5) 3, 337
SPR Statement of Procedural Rules Benefits during phased retirement, REG–114726–04, hearing
TC Tax Convention (Ann 10) 5, 450
TD Treasury Decision Cash or deferred arrangements under section 401(k), match-
TDO Treasury Department Order ing contributions or employee contributions under section
401(m) (TD 9169) 5, 381
EMPLOYEE PLANS Disclosure of relative values of optional forms of benefit
(REG–152914–04) 9, 650
Corporations, prohibited allocations of securities in an S corpo- Master and prototype plans and volume submitter plans, opin-
ration (TD 9164) 3, 320; (REG–129709–03) 3, 351 ion letters and advisory letters (RP 16) 10, 674
Determination letters, issuing procedures (RP 6) 1, 200 Minimum funding standards, current liability, election to de-
Full funding limitations, weighted average interest rate for: fer a net experience loss (Notice 40) 21, 1088
January 2005 (Notice 9) 4, 369 Plan amendments, Volume Submitter (VS) practitioners (Ann
February 2005 (Notice 19) 9, 634 37) 21, 1096
March 2005 (Notice 26) 12, 758 Required minimum distributions (TD 9130); correction (Ann
April 2005 (Notice 34) 17, 960 29) 17, 969
May 2005 (Notice 39) 21, 1087 Retroactive payment of benefits, remedial amendment period
June 2005 (Notice 46) 26, 1372 (RP 23) 18, 991
Health Insurance Portability and Accountability Act of 1996 Roth contributions, special rules (REG–152354–04) 13, 805
(HIPAA): Special rules regarding optional forms of benefit under de-
Interaction with FMLA (REG–130370–04) 8, 608 fined contribution plans (TD 9176) 10, 661
Portability rules (TD 9166) 8, 558; correction (Ann 33) 19, Valuation, section 412(i) plans (RP 25) 17, 962
1013 Regulations:
Individual retirement account (IRA), beneficiary’s disclaimer of 26 CFR 1.401(a)(9)–6, corrected; required distributions from
interest in decedent’s IRA after receipt of required minimum retirement plans (TD 9130); correction (Ann 29) 17, 969
distribution (RR 36) 26, 1368 26 CFR 1.401(k)–0, –1, revised; 1.401(k)–2 thru –6, added;
Letter rulings: 1.401(m)–0 thru –2, revised; 1.401(m)–3 thru –5, added;
And determination letters, areas which will not be issued 1.410(b)–3, revised; 602.101, revised; cash or deferred ar-
from: rangements under section 401(k) and matching contribu-
Associates Chief Counsel and Division Counsel (TE/GE) tions or employee contributions under section 401(m) reg-
(RP 3) 1, 118 ulations (TD 9169) 5, 381
Associate Chief Counsel (International ) (RP 7) 1, 240 26 CFR 1.409(p)–1T, revised; prohibited allocations of secu-
And information letters, procedures (RP 4) 1, 128 rities in an S corporation (TD 9164) 3, 320
User fees, request for letter rulings (RP 8) 1, 243 26 CFR 1.411(d)–4, Q&A–2(e), amended; elimination of
Nonqualified deferred compensation, new section 409A (Notice forms of distribution in defined contribution plans (TD
1) 2, 274 9176) 10, 661
Opinion and advisory letters, GUST program closing June 15, 26 CFR 54.9801–1 thru –6, added; 54.9801–1T thru –6T,
2005 (Ann 36) 21, 1095 removed; 54.9831–1, added; 54.9831–1T, removed;
Presidentially-declared disaster or combat zone, postponement 54.9833–1, added; 54.9833–1T, removed; 602.101,
of certain acts (RP 27) 20, 1050 amended; health coverage portability for group health

June 27, 2005 vi 2005–26 I.R.B.


EMPLOYEE PLANS—Cont. EMPLOYMENT TAX—Cont.
plans and group health insurance issuers under HIPAA Withholding:
Titles I & IV (TD 9166) 8, 558; correction (Ann 33) 19, Exemptions, Form W-4 (TD 9196) 19, 1000; correction (Ann
1013 40) 22, 1152; (REG–162813–04) 19, 1010
Technical advice to IRS employees (RP 5) 1, 170 Supplemental wages (REG–152945–04) 6, 484; hearing (Ann
34) 19, 1014
EMPLOYMENT TAX Workers’ compensation, treatment of sickness or accident dis-
ability payments (REG–160315–03) 14, 833
Exemption from levy for certain principal residences in absence
of judicial approval, certain business assets in absence of ad- ESTATE TAX
ministrative approval or jeopardy (TD 9189) 13, 788
Forms: Declaratory judgment pursuant to section 7479, exhausting ad-
W-2, 2005, new code Z, Box 12 (Ann 5) 3, 353 ministrative remedies prior to seeking (RP 33) 24, 1231
W-4, Employee’s Withholding Allowance Certificate Deferred annuity contracts, amounts received as income in re-
(TD 9196) 19, 1000; correction (Ann 40) 22, 1152; spect of a decedent (IRD) (RR 30) 20, 1015
(REG–162813–04) 19, 1010 Exemption from levy for certain principal residences in absence
941 and Schedule B (Form 941), general rules and specifica- of judicial approval, certain business assets in absence of ad-
tions for substitutes (RP 21) 16, 899 ministrative approval or jeopardy (TD 9189) 13, 788
Letter rulings and information letters issued by Associate Of- Form 8854, Initial and Annual Expatriation Information State-
fices, determination letters issued by Operating Divisions (RP ment, revised (Notice 36) 19, 1007
1) 1, 1 Gross estate, election to value on alternate valuation date (TD
Partnership’s contributions to partner’s Health Savings Account 9172) 6, 468
(HSA), S corporation’s contributions to HSAs of 2-percent Individual retirement account (IRA), beneficiary’s disclaimer of
shareholder-employees (Notice 8) 4, 368 interest in decedent’s IRA after receipt of required minimum
Presidentially-declared disaster or combat zone, postponement distribution (RR 36) 26, 1368
of certain acts (RP 27) 20, 1050 Letter rulings and information letters issued by Associate Of-
Proposed Regulations: fices, determination letters issued by Operating Divisions (RP
26 CFR 31.3121(a)(2)–1, amended; sickness or accident dis- 1) 1, 1
ability payments (REG–160315–03) 14, 833 Presidentially-declared disaster or combat zone, postponement
26 CFR 31.3401(a)–1, –4, amended; 31.3402(g)–1, (j)–1, of certain acts (RP 27) 20, 1050
amended; 31.3402(n)–1, revised; flat rate supplemental Regulations:
wage withholding (REG–152945–04) 6, 484; hearing (Ann 26 CFR 20.2032–1, revised; 301.9100–6T, amended; gross
34) 19, 1014 estate, election to value on alternate valuation date (TD
26 CFR 31.3402(f)(2)–1, amended; 31.3402(f)(5)–1, 9172) 6, 468
amended; withholding exemptions (REG–162813–04) 26 CFR 301.6334–1, amended; property exempt from levy
19, 1010 (TD 9189) 13, 788
Publication 4436, General Rules and Specifications for Substi- Taxpayers expatriating after June 3, 2004, transition guidance
tute Form 941 and Schedule B (Form 941) (RP 21) 16, 899 (Notice 36) 19, 1007
Regulations: Technical Advice Memoranda (TAMs) and Technical Expedited
26 CFR 20.2032–1, revised; 301.9100–6T, amended; gross Advice Memoranda (TEAMs) (RP 2) 1, 86
estate, election to value on alternate valuation date (TD Waiver of spousal right of election to insure qualification of char-
9172) 6, 468 itable remainder annuity trust (CRAT) or charitable remainder
26 CFR 31.3402(f)(2)–1, amended; 31.3402(f)(2)–1T, added; unitrust (CRUT) (RP 24) 16, 909
31.3402(f)(5)–1, amended; 31.3402(f)(5)–1T, added; with-
holding exemptions (TD 9196) 19, 1000; correction (Ann
40) 22, 1152
EXCISE TAX
26 CFR 301.6334–1, amended; property exempt from levy
Alcohol and biodiesel fuels, aviation grade kerosene, sales of
(TD 9189) 13, 788
gasoline to state and local governments and nonprofit organi-
Student FICA exception:
zations (Notice 4) 2, 289; modification (Notice 24) 12, 757
Application under sections 3121(b)(10) and 3306(c)(10)(B)
Diesel fuel and kerosene, nontaxable use, mandatory dye injec-
(TD 9167) 2, 261
tion systems (TD 9199) 19, 1003; (REG–154000–04) 19, 1009
Treatment of amounts paid by certain institutions of higher
Exemption from levy for certain principal residences in absence
education (RP 11) 2, 307
of judicial approval, certain business assets in absence of ad-
Technical Advice Memoranda (TAMs) and Technical Expedited
ministrative approval or jeopardy (TD 9189) 13, 788
Advice Memoranda (TEAMs) (RP 2) 1, 86
Imposition of tax on heavy trucks and trailers sold at retail, body
Trust fund recovery penalty assessments (RP 34) 24, 1233
type classifications (RP 19) 14, 832

2005–26 I.R.B. vii June 27, 2005


EXCISE TAX—Cont. EXEMPT ORGANIZATIONS—Cont.
Letter rulings and information letters issued by Associate Of- Revocations (Ann 8) 4, 380; (Ann 18) 9, 660; (Ann 21) 12, 776;
fices, determination letters issued by Operating Divisions (RP (Ann 38) 21, 1097; (Ann 44) 26, 1377
1) 1, 1 Technical advice to IRS employees (RP 5) 1, 170
Presidentially-declared disaster or combat zone, postponement
of certain acts (RP 27) 20, 1050
Proposed Regulations:
GIFT TAX
26 CFR 48.4082–1, amended; 48.4101–1, amended;
Exemption from levy for certain principal residences in absence
diesel fuel and kerosene excise tax; dye injection
of judicial approval, certain business assets in absence of ad-
(REG–154000–04) 19, 1009
ministrative approval or jeopardy (TD 9189) 13, 788
Regulations:
Form 8854, Initial and Annual Expatriation Information State-
26 CFR 48.4082–1, amended; 48.4082–1T, added;
ment, revised (Notice 36) 19, 1007
48.4101–1, amended; 48.4101–1T, added; 602.101,
Individual retirement account (IRA), beneficiary’s disclaimer of
amended; diesel fuel and kerosene excise tax; dye injection
interest in decedent’s IRA after receipt of required minimum
(TD 9199) 19, 1003
distribution (RR 36) 26, 1368
26 CFR 301.6334–1, amended; property exempt from levy
Interest, determination of qualified interests (TD 9181) 11, 717
(TD 9189) 13, 788
Letter rulings and information letters issued by Associate Of-
Technical Advice Memoranda (TAMs) and Technical Expedited
fices, determination letters issued by Operating Divisions (RP
Advice Memoranda (TEAMs) (RP 2) 1, 86
1) 1, 1
Trust fund recovery penalty assessments (RP 34) 24, 1233
Presidentially-declared disaster or combat zone, postponement
of certain acts (RP 27) 20, 1050
EXEMPT ORGANIZATIONS Regulations:
26 CFR 25.2702–0, –2, –3, –7, amended; qualified interests
Annual notice to donors regarding pending and settled declara- (TD 9181) 11, 717
tory judgment suits (Ann 1) 1, 257 26 CFR 301.6334–1, amended; property exempt from levy
Declaratory judgment suits (Ann 9) 4, 380 (TD 9189) 13, 788
Electronic filing of Forms 1120, 1120S, 990, and 990-PF, manda- Taxpayers expatriating after June 3, 2004, transition guidance
tory (TD 9175) 10, 665; (REG–130671–04) 10, 694 (Notice 36) 19, 1007
Fees for copies of publicly available exempt organization mate- Technical Advice Memoranda (TAMs) and Technical Expedited
rial (TD 9173) 8, 557 Advice Memoranda (TEAMs) (RP 2) 1, 86
Forms 1120, 1120S, 990, and 990-PF, mandatory electronic filing Waiver of spousal right of election to insure qualification of char-
(TD 9175) 10, 665; (REG–130671–04) 10, 694 itable remainder annuity trust (CRAT) or charitable remainder
Letter rulings: unitrust (CRUT) (RP 24) 16, 909
And determination letters, areas which will not be issued
from, Associates Chief Counsel and Division Counsel
(TE/GE) (RP 3) 1, 118
INCOME TAX
And information letters, procedures (RP 4) 1, 128
Accident and health reimbursement plans, amounts received (RR
User fees, request for letter rulings (RP 8) 1, 243
24) 16, 892
List of organizations classified as private foundations (Ann 7) 4,
Accounting methods:
377; (Ann 16) 10, 702; (Ann 20) 12, 772; (Ann 23) 14, 845;
Change to a method provided in sections 1.263(a)–4,
(Ann 24) 15, 889
1.263(a)–5, and 1.167(a)–3(b) (RP 9) 2, 303; modification
Presidentially-declared disaster or combat zone, postponement
(RP 17) 13, 797
of certain acts (RP 27) 20, 1050
Economic performance requirement (TD 8408); correction
Proposed Regulations:
(Ann 28) 17, 969
26 CFR 1.6011–5, added; 1.6033–4, added; 1.6037–2,
Adjustments to gross income, Medicaid rebates (RR 28) 19, 997
added; 301.6011–5, added; 301.6033–4, added;
Advance Pricing Agreement (APA) Program for 2004 (Ann 27)
301.6037–2, added; returns required on magnetic me-
16, 918
dia (REG–130671–04) 10, 694
Alternative minimum tax (AMT), refinanced mortgage interest
Regulations:
(RR 11) 14, 816
26 CFR 1.6011–5T, added; 1.6033–4T, added; 1.6037–2T,
Amended returns, qualified, John Doe summons (TD 9186) 13,
added; 301.6011–5T, added; 301.6033–4T, added;
790; (REG–122847–04) 13, 804
301.6037–2T, added; returns required on magnetic media
Annual notice to donors regarding pending and settled declara-
(TD 9175) 10, 665
tory judgment suits (Ann 1) 1, 257
26 CFR 301.6104(a), (b), (d), amended; authority to charge
Application of section 108 to members of a consolidated group
fees for furnishing copies of exempt organizations’ material
(TD 9192) 15, 866
open to public inspection (TD 9173) 8, 557
Archer MSAs, 2004 not a cut-off year (Ann 12) 7, 555

June 27, 2005 viii 2005–26 I.R.B.


INCOME TAX—Cont. INCOME TAX—Cont.
Attorney contingent fee, included in litigant’s income (CD 2080) Satisfactory bond, “bond factor” amounts for the period:
15, 850 January through March 2005 (RR 1) 2, 258
Automatic consent to change to the alternative tax book value January through June 2005 (RR 16) 13, 777
method of valuing assets for expense apportionment purposes New markets tax credit (TD 9171) 6, 452
(RP 28) 21, 1093 Nonconventional source fuel credit, inflation adjustment fac-
Automobile owners and lessees, inflation adjustment for 2005 tor, reference price for CY 2004 (Notice 33) 17, 960
(RP 13) 12, 759 Renewable electricity production credit and refined coal pro-
Bankruptcy, definition of “pending” (RR 9) 6, 470 duction credit, 2005 inflation adjustment (Notice 37) 20,
Cafeteria plans, deferred compensation (Notice 42) 23, 1204 1049
Charitable contributions: Declaratory judgment suits (Ann 9) 4, 380
Qualified intellectual property (Notice 41) 23, 1203 Deferred annuity contracts, amounts received as income in re-
Qualified vehicles (Notice 44) 25, 1287 spect of a decedent (IRD) (RR 30) 20, 1015
Charitable remainder trusts (CRTs), application of ordering rule Deposits made to suspend the running of interest on potential
(TD 9190) 15, 855 underpayments (RP 18) 13, 798
Collection, extension of statute of limitations (REG–148701–03) Designation to take summoned testimony and receive summoned
13, 802 records (TD 9195) 17, 958
Corporations: Determination of bona fide resident of a U.S. possession, income
Adjustment to net unrealized built-in gain (TD 9180) 11, 714 derived from sources or effectively connected with the conduct
Application of section 367 in cross border section 304 trans- of a trade or business within a U.S. possession (TD 9194) 20,
actions (REG–127740–04) 24, 1254 1016; (REG–159243–03) 20, 1075
Clarification of section 1374 effective dates, S corporations Disaster relief, qualified disaster, Indian Ocean tsunamis (Notice
(TD 9170) 4, 363; correction (Ann 13) 8, 627; correction 23) 11, 732
(Ann 35) 21, 1095; (REG–139683–04) 4, 371 Disciplinary actions involving attorneys, certified public accoun-
Controlled foreign corporations, dividends received deduc- tants, enrolled agents and enrolled actuaries (Ann 2) 2, 319;
tion under section 965 (Notice 10) 6, 474 (Ann 15) 9, 654
Deemed election to be an association taxable as a corporation Disclosure of return information:
for a qualified electing S corporation (TD 9203) 25, 1285 To the Bureau of the Census (TD 9188) 15, 883;
Entity classification, classification of foreign entities, per se (REG–147195–04) 15, 888
corporations (TD 9197) 18, 985; (REG–148521–04) 18, Written contracts or agreements, acquisition of property and
995 services for tax administration (REG–148867–03) 9, 646
Formations, reorganizations, liquidations, transfer of no net Disguised sales, section 707, REG–149519–03, correction (Ann
value (REG–163314–03) 14, 835; correction (Ann 32) 19, 11) 5, 451
1012 Disregarded entities, treatment as separate entities in certain cir-
Guidance related to section 936 termination (Notice 21) 11, cumstances (TD 9183) 12, 754
727 Dollar approximate separate transactions method (DASTM),
Limitation on dividends received deduction (DRD) and other translation rate to be used for transfers in determination of
guidance, domestic reinvestment plan (Notice 38) 22, 1100 DASTM gain or loss (Notice 27) 13, 795
Miscellaneous operating rules for successor persons, Domestic production activities, income attributable to (Notice
succession to items of the liquidating corporation 14) 7, 498
(REG–131128–04) 11, 733 Dual consolidated loss (REG–102144–04) 25, 1297
Reorganizations under section 368(a)(1)(E) and section Electronic filing of Forms 1120, 1120S, 990, and 990-PF, manda-
368(a)(1)(F) (TD 9182) 11, 713 tory (TD 9175) 10, 665; (REG–130671–04) 10, 694
S corporation, relief for late shareholders, Rev. Proc. Entertainment expense deduction, business aircraft (Notice 45)
2004–35, correction (Ann 4) 2, 319 24, 1228
Statutory mergers and consolidations pursuant to for- Examinations, inspections, and reopenings (RP 32) 23, 1206
eign law involving one or more foreign corporations Exemption from levy for certain principal residences in absence
(REG–125628–01) 7, 536 of judicial approval, certain business assets in absence of ad-
Transfers of assets or stock following a reorganization ministrative approval or jeopardy (TD 9189) 13, 788
(REG–117969–00) 7, 533 Forms:
Credits: 656, Offer in Compromise, revision, check-the-box (Ann 6)
Adoption credit (RP 31) 26, 1374; (Ann 45) 26, 1377 4, 377
Increasing research activities (TD 9205) 25, 1267; 941 and Schedule B (Form 941), general rules and specifica-
(REG–134030–04) 25, 1339 tions for substitutes (RP 21) 16, 899
Low-income housing credit: 1120, 1120S, 990, and 990-PF, mandatory electronic filing
2005 population figures used for calculation (Notice 16) 8, (TD 9175) 10, 665; (REG–130671–04) 10, 694
605

2005–26 I.R.B. ix June 27, 2005


INCOME TAX—Cont. INCOME TAX—Cont.
8596, specifications for filing electronically or magnetically, Interpretation of the phrase “plan (or series of related transac-
Publication 1516 (RP 29) 22, 1118 tions)” under section 355(e) (TD 9198) 18, 972; correction
8693, Low-Income Housing Credit Disposition Bond, new (Ann 41) 23, 1212
procedure for filing (Ann 43) 26, 1376 Inventory:
8854, Initial and Annual Expatriation Information Statement, LIFO, price indexes used by department stores for:
revised (Notice 36) 19, 1007 November 2004 (RR 5) 5, 445
Frivolous tax returns, tax avoidance: December 2004 (RR 12) 9, 628
Altering the jurat (RR 18) 14, 817 January 2005 (RR 22) 13, 787
Argument regarding waiver of social security benefits (RR February 2005 (RR 26) 17, 957
17) 14, 823 March 2005 (RR 34) 22, 1098
Common frivolous arguments and schemes (Notice 30) 14, April 2005 (RR 37) 26, 1343
827 Leases, tax-exempt use property (Notice 29) 13, 796
Constitutionally based arguments (RR 19) 14, 819 Letter rulings:
Protesting government policies and programs (RR 20) 14, 821 And determination letters, areas which will not be issued
Use of “straw man” claim (RR 21) 14, 822 from:
Guidance Priority List, recommendations for 2005-2006 (Notice Associates Chief Counsel and Division Counsel (TE/GE)
25) 14, 827 (RP 3) 1, 118
Health Savings Account (HSA), high deductible health plan Associate Chief Counsel (International) (RP 7) 1, 240
(HDHP) family coverage (RR 25) 18, 971 And information letters issued by Associate Offices, determi-
Income tax liability, substantial understatement, addition to tax nation letters issued by Operating Divisions (RP 1) 1, 1
(TD 9174) 9, 629 Like-kind exchange of a principal residence (RP 14) 7, 528
Information reporting: Listed transaction situations, extended period of limitations on
For acquisitions (Notice 7) 3, 340 assessment (RP 26) 17, 965
Relating to qualified intellectual property contributions (TD Mortgage revenue bonds:
9206) 25, 1283; (REG–158138–04) 25, 1341 And credit certificates, median income figures– 2005 (RP 22)
Insurance companies: 15, 886
Electronic submission under Rev. Rul. 2005–6 (Notice 35) Obligations of state and local governments (TD 9204) 25,
21, 1087 1279
Insurance contract defined (RR 6) 6, 471 Net operating losses (Notice 20) 9, 635
Life insurance contract, attained age of insured under section New procedure for filing Form 8693, Low-Income Housing
7702 (REG–168892–03) 25, 1293 Credit Disposition Bond (Ann 43) 26, 1376
Premium stabilization reserves (RR 33) 23, 1155 Nonqualified deferred compensation, new section 409A (Notice
Prevailing state assumed interest rates, 2005 (RR 29) 21, 1080 1) 2, 274
Tentative differential earnings rate (Notice 18) 9, 634 Optional 10-year writeoff, rules governing the time and manner
Interest: for making and revoking an election under section 59(e) (TD
Election to treat qualified dividend income as investment in- 9168) 4, 354
come (TD 9191) 15, 854 Partnerships:
Investment: Application of section 83 to transfer of partnership interest in
Federal short-term, mid-term, and long-term rates for: connection with the performance of services (Notice 43) 24,
January 2005 (RR 2) 2, 259 1221
February 2005 (RR 8) 6, 466 Assets-over partnership merger, gain or loss (RR 10) 7, 492
March 2005 (RR 13) 10, 664 Assumption of partner liabilities (TD 9207) 26, 1344;
April 2005 (RR 23) 15, 864 (REG–106736–00) 26, 1376
May 2005 (RR 27) 19, 998 Diversification requirements for variable annuity, endow-
June 2005 (RR 32) 23, 1156 ment, and life insurance contracts (TD 9185) 12, 749
Rates: Equity for services (REG–105346–03) 24, 1244
Underpayments and overpayments, quarter beginning: Installment obligations, treatment of property sold (TD 9193)
April 1, 2005 (RR 15) 11, 720 15, 862
July 1, 2005 (RR 35) 24, 1214 Mandatory basis adjustment under sections 734 and 743,
Refinanced mortgage interest, alternative minimum tax electing investment partnership (Notice 32) 16, 895
(AMT) (RR 11) 14, 816 Partner’s distributive share, mergers (Notice 15) 7, 527
Suspension applicability to amended returns (RR 4) 4, 366 Partnership’s contributions to partner’s Health Savings Ac-
Interim guidance under new amendments to sections 6111, 6112, count (HSA), S corporation’s contributions to HSAs of
and 6708, extension of time in Notice 2004–80 (Notice 17) 2-percent shareholder-employees (Notice 8) 4, 368
8, 606; extension of time in Notices 2004–80 and 2005–17 Regulated investment companies (RICs), tax-exempt bond
(Notice 22) 12, 756 partnership look-through II (RP 20) 18, 990

June 27, 2005 x 2005–26 I.R.B.


INCOME TAX—Cont. INCOME TAX—Cont.
Requirement to pay withholding tax on effectively connected 26 CFR 1.358–5, added; assumption of liabilities
U.S. trade or business income allocable to foreign partners (REG–106736–00) 26, 1376
(TD 9200) 23, 1158; (REG–108524–00) 23, 1209 26 CFR 1.367(a)–3, amended; 1.367(b)–4, –6, amended; ap-
Return of partnership income (TD 9177) 10, 671 plication of section 367 in cross border section 304 trans-
Unified partnership audit procedures, applicability to disputes actions; certain transfers of stock involving foreign corpo-
regarding ownership of residual interests in a Real Estate rations (REG–127740–04) 24, 1254
Mortgage Investment Conduit (REMIC) (TD 9184) 12, 753 26 CFR 1.368–2(b), amended; statutory mergers and consol-
Per diem allowances updated, 2005 (RP 10) 3, 341 idations (REG–117969–00) 7, 533
Practice before the Internal Revenue Service: 26 CFR 1.475–0, amended; 1.475(a)–4, added; safe harbor for
Best practices (TD 9165) 4, 357; correction (Ann 31) 18, 996 valuation under section 475 (REG–100420–03) 24, 1236
Clarification (TD 9201) 23, 1153 26 CFR 1.1374–8, –10, amended; section 1374 effective dates
Interim guidance concerning state or local bond opinions (No- (REG–139683–04) 4, 371
tice 47) 26, 1373 26 CFR 1.1441–1, –3, –6, amended; 1.6049–5, amended;
State or local bond opinions (REG–159824–04) 4, 372 301.6114–1, amended; revision to regulations relating to
Pre-Filing Agreement (PFA) program: withholding of tax on certain U.S. source income paid to
Annual report for CY 2004, Large and Mid-Size Business foreign persons and revisions to information reporting reg-
Division (LMSB) (Ann 42) 24, 1257 ulations (REG–125443–01) 16, 912
Procedures for resolving issues through pre-filing examina- 26 CFR 1.1446–6, added; 1.1464–1, amended; 1.6071–1, re-
tions (RP 12) 2, 311 vised; 1.6091–1, amended; 1.6151–1, amended; 1.6302–2,
Presidentially-declared disaster or combat zone, postponement revised; 1.6414–1, amended; 301.6302–1, revised;
of certain acts (RP 27) 20, 1050 301.6402–3, amended; 301.6722–1, revised; section 1446
Presidentially declared disasters, like-kind exchanges affected by regulations, withholding on effectively connected taxable
(Notice 3) 5, 447 income allocable to foreign partners (REG–108524–00)
Private activity bond volume cap, unused, extension of time to 23, 1209
make carryforward election (RP 30) 22, 1148 26 CFR 1.1502–13, –80, amended; miscellaneous operating
Private foundations, organizations now classified as (Ann 7) 4, rules for successor persons, succession to items of the liq-
377; (Ann 16) 10, 702; (Ann 20) 12, 772; (Ann 23) 14, 845; uidating corporation (REG–131128–04) 11, 733
(Ann 24) 15, 889 25 CFR 1.1502–21, amended; 1.1503(d)–0 thru –6,
Proposed Regulations: added; 1.6043–4T, amended; dual consolidated loss
26 CFR 1.1–1, revised; 1.170A–1, revised; 1.861–3, –8, (REG–102144–04) 25, 1297
revised; 1.871–1, amended; 1.876–1, revised; 1.881–5, 26 CFR 1.6011–5, added; 1.6033–4, added; 1.6037–2,
added; 1.884–0, amended; 1.901–1, revised; 1.931–1, added; 301.6011–5, added; 301.6033–4, added;
revised; 1.932–1, revised; 1.933–1, amended; 1.934–1, re- 301.6037–2, added; returns required on magnetic me-
vised; 1.935–1, amended; 1.937–1 thru –3, added; 1.957–3, dia (REG–130671–04) 10, 694
revised; 1.1402(a)–12, revised; 1.6038–2, revised; 26 CFR 1.6050L–2, added; information returns by donees
1.6046–1, revised; 301.6688–1, revised; 301.7701–3, relating to qualified intellectual property contributions
amended; 301.7701(b)–1, revised; residence and source (REG–158138–04) 25, 1341
rules involving U.S. possessions and other conforming 26 CFR 1.6664–1, –2, amended; qualified amended returns
changes (REG–159243–03) 20, 1075 (REG–122847–04) 13, 804
26 CFR 1.41–0, amended; 1.41–6, –8, revised; credit for in- 26 CFR 1.7702–0, –3, added; attained age of insured under
creasing research activities (REG–134030–04) 25, 1339 section 7702 (REG–168892–03) 25, 1293
26 CFR 1.83–3, –6, amended; 1.704–1, amended; 26 CFR 301.6103(j)(1)–1, revised; disclosure of return infor-
1.706–3, added; 1.707–1, amended; 1.721–1, revised; mation to the Bureau of the Census (REG–147195–04) 15,
1.761–1, amended; partnership equity for services 888
(REG–105346–03) 24, 1244 26 CFR 301.6103(n)–1, revised; disclosure of returns and
26 CFR 1.332–2, amended; 1.351–1, amended; 1.368–1, –2, return information in connection with written contracts or
amended; transactions involving the transfer of no net value agreements for the acquisition of property and services for
(REG–163314–03) 14, 835; correction (Ann 32) 19, 1012 tax administration purposes (REG–148867–03) 9, 646
26 CFR 1.358–1, –6, amended; 1.367(a)–3, –8, amended; 26 CFR 301.6502–1, revised; collection after assessment
1.367(b)–1, –3, –4, –6, revised; 1.367(b)–13, added; (REG–148701–03) 13, 802
1.884–2, amended; 1.884–2T, revised; revision of income 26 CFR 301.7701–2, amended; classification of certain for-
tax regulations under sections 358, 367, and 884 dealing eign entities (REG–148521–04) 18, 995
with statutory mergers or consolidations under section 31 CFR 10.35, amended; 10.36, 10.38, revised; 10.39, added;
368(a)(1)(A) involving one or more foreign corporations 10.52, revised; regulations governing practice before the
(REG–125628–01) 7, 536 Internal Revenue Service (REG–159824–04) 4, 372

2005–26 I.R.B. xi June 27, 2005


INCOME TAX—Cont. INCOME TAX—Cont.
Publications: 26 CFR 1.355–0, amended; 1.355–7, added; 1.355–7T, re-
1220, changes affecting tax year 2004 filing of information moved; guidance under section 355(e), recognition of gain
returns (Ann 14) 9, 653 on certain distributions of stock or securities in connection
1516, Specifications for Filing Form 8596, Electronically or with an acquisition (TD 9198) 18, 972; correction (Ann 41)
Magnetically, for information returns for federal contracts 23, 1212
(RP 29) 22, 1118 26 CFR 1.358–5T, –7, added; 1.704–1 thru –4, amended;
4436, General Rules and Specifications for Substitute Form 1.705–1, amended; 1.737–2, amended; 1.737–5, revised;
941 and Schedule B (Form 941) (RP 21) 16, 899 1.752–0, –1, –5, amended; 1.752–6, –7, added; 1.752–6T,
Qualified green building and sustainable design projects (Notice removed; 602.101, amended; assumption of partner liabili-
28) 13, 796 ties (TD 9207) 26, 1344
Qualified mortgage bonds and mortgage credit certificates, aver- 26 CFR 1.368–1(b), amended; reorganizations under section
age area and nationwide housing purchase prices for 2005 (RP 368(a)(1)(E) and section 368(a)(1)(F) (TD 9182) 11, 713
15) 9, 638 26 CFR 1.461–4, amended; economic performance require-
Regulated investment company (RIC): ment (TD 8408); correction (Ann 28) 17, 969
Application of look-through rule to ownership of shares by 26 CFR 1.488–1T, revised; 1.6661–1 thru –6, removed;
segregated asset accounts (RR 7) 6, 464 602.101, amended; substantial understatement of income
Designation of dividends (RR 31) 21, 1084 tax liability (TD 9174) 9, 629
Regulations: 26 CFR 1.664–1, amended; charitable remainder trusts
26 CFR 1.41–0, amended; 1.41–6, –8, removed; 1.41–6T, (CRTs), application of ordering rule (TD 9190) 15, 855
–8T, added; credit for increasing research activities (TD 26 CFR 1.704–3, –4, amended; 1.737–2, amended; 1.737–5,
9205) 25, 1267 revised; installment obligations and contributed contracts
26 CFR 1.45D–1, added; 1.45D–1T, removed; 602.101, re- (TD 9193) 15, 862
vised; new markets tax credit (TD 9171) 6, 452 26 CFR 1.817–5, amended; diversification requirements for
26 CFR 1.59–1, added; 602.101, amended; optional 10-year variable annuity, endowment, and life insurance contracts
writeoff of certain tax preferences (TD 9168) 4, 354 (TD 9185) 12, 749
26 CFR 1.143(g)–1, added; mortgage revenue bonds (TD 26 CFR 1.856–9, added; 1.1361–4, amended; 301.7701–2,
9204) 25, 1279 amended; modification of check the box (TD 9183) 12, 754
26 CFR 1.163(d)–1, revised; 1.163–1T, removed; time and 26 CFR 1.860F–4, amended; Real Estate Mortgage Invest-
manner of making section 163(d)(4)(B) election to treat ment Conduits (REMICs) (TD 9184) 12, 753
qualified dividend income as investment income (TD 9191) 26 CFR 1.871–10, amended; 1.1443–1, amended; 1.1446–0
15, 854 thru –5, –6T, –7, added; 1.1461–1, –2, amended;
26 CFR 1.170A–1, revised; 1.170A–1T, added; 1.243–3, 1.1461–3, added; 1.1462–1, amended; 1.1463–1, amended;
revised; 1.702–1, revised; 1.861–3, –8, revised; 1.861–3T, 301.6109–1, amended; 301.6721–1, amended; 602.101,
added; 1.863–6, revised; 1.871–1, amended; 1.876–1, amended; section 1446 regulations, withholding on ef-
revised; 1.876–1T, added; 1.881–1, revised; 1.881–5T, fectively connected taxable income allocable to foreign
added; 1.884–0, amended; 1.884–0T, added; 1.901–1, partners (TD 9200) 23, 1158
revised; 1.901–1T, added; 1.931–1, revised; 1.931–1T, 26 CFR 1.1031(a)–2, amended; 1.1031(a)–2T, removed;
added; 1.932–1, revised; 1.932–1T, added; 1.933–1, 1.1031(j)–1(d), amended; additional rules for exchanges
amended; 1.933–1T, added; 1.934–1, revised; 1.934–1T, of personal property under section 1031(a) (TD 9202) 24,
added; 1.935–1, amended; 1.935–1T, added; 1.937–1T thru 1213
3T, added; 1.957–3, revised; 1.957–3T, added; 1.957–4, re- 26 CFR 1.1374–3, amended; 1.1374–10, revised; adjustment
moved; 1.1402(a)–11, –12, revised; 1.1402(a)–12T, added; to net unrealized built-in gain (TD 9180) 11, 714
1.6038–2, revised; 1.6038–2T, added; 1.6046–1, amended; 26 CFR 1.1374–8, –10, amended; 1.1374–8T, –10T, added;
1.6046–1T, added; 301.6688–1, revised; 301.6688–1T, section 1374 effective dates (TD 9170) 4, 363; correction
added; 301.7701(b)–1, revised; 301.7701(b)–1T, added; (Ann 13) 8, 627; correction (Ann 35) 21, 1095
602.101(b), amended; residence and source rules involving 26 CFR 1.1502–11, –13, –19, –21, –21T, –32, –32T, –76,
U.S. possessions and other conforming changes (TD 9194) –80, –80T, amended; 1.1502–28, added; 1.1502–13T, –19T,
20, 1016 –28T, removed; application of section 108 to members of a
26 CFR 1.263A–9, –15, amended; 1.263A–9T, –15T, re- consolidated group (TD 9192) 15, 866
moved; uniform capitalization of interest expense in safe 26 CFR 1.6011–5T, added; 1.6033–4T, added; 1.6037–2T,
harbor sale and leaseback transactions (TD 9179) 11, 707 added; 301.6011–5T, added; 301.6033–4T, added;
26 CFR 1.337(d)–2, revised; 1.337(d)–2T, removed; 301.6037–2T, added; returns required on magnetic media
1.1502–20, –32, –32T, revised; 1.1502–20T(i), removed; (TD 9175) 10, 665
602.101, amended; loss limitation rules (TD 9187) 13, 778; 26 CFR 1.6031(a)–1, amended; 1.6031(a)–1T, removed; re-
correction (Ann 25) 15, 891 turn of partnership income (TD 9177) 10, 671

June 27, 2005 xii 2005–26 I.R.B.


INCOME TAX—Cont. INCOME TAX—Cont.
26 CFR 1.6050L–2T, added; 602.101, amended; information U.S. and Swiss pension plans for tax treaty benefits, agree-
returns by donees relating to qualified intellectual property ment (Ann 3) 2, 270
contributions (TD 9206) 25, 1283 U.S.-Austria income tax treaty, taxation of certain scholar-
26 CFR 1.6664–1T, –2T, added; 1.6664–2, amended; quali- ships (Ann 22) 14, 826
fied amended returns (TD 9186) 13, 790 U.S.-New Zealand MAP Agreement regarding treatment of
26 CFR 301.6103(j)(1)–1, amended; 301.6103(j)(1)–1T, income derived through certain fiscally transparent entities
added; disclosure of return information to the Bureau of (Ann 17) 10, 673
the Census (TD 9188) 15, 883 Tax-exempt leasing involving defeasance (Notice 13) 9, 630
26 CFR 301.6334–1, amended; property exempt from levy Taxpayers expatriating after June 3, 2004, transition guidance
(TD 9189) 13, 788 (Notice 36) 19, 1007
26 CFR 301.7602–1, revised; 301.7602–1T, removed; desig- Technical Advice Memoranda (TAMs) and Technical Expedited
nated IRS officer or employee under section 7602(a)(2) of Advice Memoranda (TEAMs) (RP 2) 1, 86
the Internal Revenue Code (TD 9195) 17, 958 TeleFile program, termination (Ann 26) 17, 969
26 CFR 301.7701–2(b)(8)(vi), added; 301.7701–2T, Testimony or production of records in a court or other proceeding
amended; classification of certain foreign entities (TD (TD 9178) 11, 708
9197) 18, 985 Tonnage tax regime, election (Notice 2) 3, 337
26 CFR 301.7701–3, amended; 301.7701–3T, removed; Undisclosed reportable transactions, assertion of penalty (Notice
deemed election to be an association taxable as a corpora- 11) 7, 493
tion for a qualified electing S corporation (TD 9203) 25, Waiver of spousal right of election to insure qualification of char-
1285 itable remainder annuity trust (CRAT) or charitable remainder
26 CFR 301.9100–1, revised; 301.9100–2 thru –7, added; unitrust (CRUT) (RP 24) 16, 909
602.101, amended; testimony or production of records in Withholding of tax on certain U.S. source income paid to for-
a court or other proceeding (TD 9178) 11, 708 eign persons and information reporting regulations, revisions
31 CFR 10.33, amended; 10.35 thru 10.38, added; 10.52, (REG–125443–01) 16, 912
amended; regulations governing practice before the Inter-
nal Revenue Service (TD 9165) 4, 357; correction (Ann 31)
18, 996
SELF-EMPLOYMENT TAX
31 CFR 10.35, amended; regulations governing practice be-
Exemption from levy for certain principal residences in absence
fore the Internal Revenue Service (TD 9201) 23, 1153
of judicial approval, certain business assets in absence of ad-
Reportable transaction understatement, penalty, special rule for
ministrative approval or jeopardy (TD 9189) 13, 788
amended returns, disqualified tax advisor (Notice 12) 7, 494
Letter rulings and information letters issued by Associate Of-
Revocations, exempt organizations (Ann 8) 4, 380; (Ann 18) 9,
fices, determination letters issued by Operating Divisions (RP
660; (Ann 21) 12, 776; (Ann 38) 21, 1097; (Ann 44) 26, 1377
1) 1, 1
Safe harbor:
Partnership’s contributions to partner’s Health Savings Account
Elective safe harbor for valuation under section 475 for mark-
(HSA), S corporation’s contributions to HSAs of 2-percent
ing to market (REG–100420–03) 24, 1236
shareholder-employees (Notice 8) 4, 368
Sale and leaseback transactions, uniform capitalization of in-
Presidentially-declared disaster or combat zone, postponement
terest expense (TD 9179) 11, 707
of certain acts (RP 27) 20, 1050
Section 901(j)(5) Presidential waiver, section 901(j)(1) no longer
Regulations:
applies to Libya (RR 3) 3, 334
26 CFR 301.6334–1, amended; property exempt from levy
Standard Industrial Classification (SIC) system replaced by the
(TD 9189) 13, 788
North American Industry Classification System (NAICS) (TD
Technical Advice Memoranda (TAMs) and Technical Expedited
9202) 24, 1213
Advice Memoranda (TEAMs) (RP 2) 1, 86
Standard Industry Fare Level (SIFL) formula (RR 14) 12, 749
State and local general sales tax deduction (Notice 31) 14, 830
Stocks:
Exchange of securities of foreign corporation, domestic cor-
poration (Notice 6) 5, 448
Loss disallowance on disposition of subsidiary stock by con-
solidated group (TD 9187) 13, 778; correction (Ann 25) 15,
891
Transfers of non-statutory stock options, executives (Ann 19)
11, 744; supplemental information (Ann 39) 22, 1151
Tax conventions:
Mutual Agreement on U.K. pension arrangements (Ann 30)
18, 988

2005–26 I.R.B. xiii *U.S. Government Printing Office: 2005—314–048/20011 June 27, 2005