Bulletin No. 2014–8 February 17, 2014 HIGHLIGHTS OF THIS …February 17, 2014. The IRS Mission...

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

REG–119305–11, Page 524.These proposed regulations under section 707 of the Coderelate to disguised sales of property to or by a partnership andunder section 752 relating to the treatment of partnershipliabilities. The proposed regulations address certain deficien-cies and technical ambiguities in the section 707 regulationsand certain issues in determining partners’ shares of liabilitiesunder section 752. Written or electronic comments and re-quests for a public hearing must be received by April 30, 2014.

Finding Lists begin on page ii.Index for July through February begins on page iv.

Bulletin No. 2014–8February 17, 2014

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly.

It is the policy of the Service to publish in the Bulletin allsubstantive rulings necessary to promote a uniform applicationof the tax laws, including all rulings that supersede, revoke,modify, or amend any of those previously published in theBulletin. All published rulings apply retroactively unless other-wise indicated. Procedures relating solely to matters of internalmanagement are not published; however, statements of inter-nal practices and procedures that affect the rights and dutiesof taxpayers are published.

Revenue rulings represent the conclusions of the Service onthe application of the law to the pivotal facts stated in therevenue ruling. In those based on positions taken in rulings totaxpayers or technical advice to Service field offices, identify-ing details and information of a confidential nature are deletedto prevent unwarranted invasions of privacy and to comply withstatutory requirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unlessthe facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based on provisions ofthe Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows: Subpart A, TaxConventions and Other Related Items, and Subpart B, Legisla-tion and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Sec-retary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index forthe matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished 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.

February 17, 2014 Bulletin No. 2014–8

Part IV. Items of General InterestNotice of ProposedRulemaking

REG–119305–11

Section 707 RegardingDisguised Sales, Generally

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document containsproposed regulations under section 707 ofthe Internal Revenue Code (Code) relatingto disguised sales of property to or by apartnership and under section 752 relatingto the treatment of partnership liabilities.The proposed regulations address certaindeficiencies and technical ambiguities inthe section 707 regulations and certainissues in determining partners’ shares ofliabilities under section 752. The proposedregulations affect partnerships and theirpartners.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by April 30, 2014.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–119305–11), room5203, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washington,DC 20044. Submissions may be hand-delivered Monday through Friday be-tween the hours of 8 a.m. and 4 p.m. to:CC:PA:LPD:PR (REG–119305–11),Courier’s Desk, Internal Revenue Service,1111 Constitution Avenue, N.W., Wash-ington, DC, or sent electronically, via theFederal eRulemaking Portal site at http://www.regulations.gov (indicate IRS andREG–119305–11).

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Deane M. Burke, (202) 317-5279; concerning submissions of com-ments and requests for a public hearing,Oluwafunmilayo (Funmi) Taylor, (202)317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information related tothese proposed regulations under section707 is reported on Form 8275, DisclosureStatement, and has been reviewed in ac-cordance with the Paperwork ReductionAct (44 U.S.C. 3507) and approved by theOffice of Management and Budget undercontrol number 1545-0889. Commentsconcerning the collection of informationand the accuracy of estimated average an-nual burden and suggestions for reducingthis burden should be sent to the Office ofManagement and Budget, Attn: Desk Of-ficer for the Department of the Treasury,Office of Information and Regulatory Af-fairs, Washington, DC 20503, with copiesto the Internal Revenue Service, IRS Re-ports Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Com-ments on the burden associated with thiscollection of information should be re-ceived by March 31, 2014.

The collection of information in theseproposed regulations is in proposed§§ 1.707–5(a)(3)(ii) and 1.707–5(b)(2)(iii)(B) (regarding the reductionof a liability presumed to be anticipated)and § 1.707–5(a)(7)(ii) (regarding a lia-bility incurred within two years prior toa transfer of property). This informationis required by the IRS to ensure thatsections 707(a)(2)(B) and 752 of theCode and applicable regulations areproperly applied respectively either totransfers between a partner and a part-nership or for allocations of partnershipliabilities. The respondents will be part-ners and partnerships.

The collection of information in theseproposed regulations under section 752has been submitted to the Office of Man-agement and Budget for review in accor-dance with the Paperwork Reduction Actof 1995 (44 U.S.C. 3507(d)). Commentson the collection of information should besent to the Office of Management andBudget, Attn: Desk Officer for the Depart-ment of the Treasury, Office of Informa-tion and Regulatory Affairs, Washington,DC 20503, with copies to the InternalRevenue Service, Attn: IRS Reports

Clearance Officer, SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Commentson the collection of information should bereceived by March 31, 2014. Commentsare specifically requested concerning:

Whether the proposed collection of in-formation is necessary for the proper per-formance of the functions of the InternalRevenue Service, including whether theinformation will have practical utility;

The accuracy of the estimated burdenassociated with the proposed collection ofinformation (see below);

How the quality, utility, and clarity ofthe information to be collected may beenhanced;

How the burden of complying with theproposed collection of information maybe minimized, including through the ap-plication of automated collection tech-niques or other forms of information tech-nology; and

Estimates of capital or start-up costsand costs of operation, maintenance, andpurchase of service to provide informa-tion.

The collection of information in thisproposed regulation is in § 1.752–2(b)(3)(iii)(C). This information is re-quired to ensure proper allocations ofpartnership liabilities. This informationwill be used to determine the extent towhich certain partners or related personsbear the economic risk of loss with respectto partnership liabilities. The collection ofinformation is mandatory. The likely re-porters are small and large businesses ororganizations and trusts.

Estimated total annual reporting bur-den: 8 million hours.

The estimated annual burden per re-spondent varies from 6 minutes to 2 hours,depending on individual circumstances,with an estimated average of 1 hour.

Estimated number of respondents: 8million.

Estimated frequency of responses: Onoccasion.

An agency may not conduct or spon-sor, and a person is not required to re-spond to, a collection of information un-less it displays a valid control numberassigned by the Office of Managementand Budget.


Books or records relating to a collec-tion of information must be retained aslong as their contents may become mate-rial in the administration of any internalrevenue law. Generally, tax returns andtax return information are confidential, asrequired by section 6103.

Background

This document contains proposedamendments to the Income Tax Regula-tions (26 CFR part 1) under section 707relating to disguised sales of property toor by a partnership and under section 752relating to the treatment of partnershipliabilities.

Section 707(a)(2)(B) of the Code gen-erally provides that, under regulations pre-scribed by the Secretary, related transfersto and by a partnership that, when viewedtogether, are more properly characterizedas a sale or exchange of property, will betreated either as a transaction between thepartnership and one who is not a partneror between two or more partners actingother than in their capacity as partners.The legislative history of section707(a)(2)(B) indicates Congress adoptedthe provision to prevent parties from char-acterizing a sale or exchange of propertyas a contribution to the partnership fol-lowed by a distribution from the partner-ship, thereby deferring or avoiding tax onthe transaction. See H.R. Rep. No. 432, pt.2, 98th Cong. 2nd Sess. 1216, 1218 (1984).

On September 30, 1992, final regula-tions under section 707(a)(2) (TD 8439,1992–2 CB 126) relating to disguisedsales of property to and by partnershipswere published in the Federal Register(57 FR 44974 as corrected on November30, 1992, by 57 FR 56443) (existing reg-ulations). Since publication of the existingregulations, the IRS and the Treasury De-partment have become aware of certainissues in interpreting or applying the reg-ulations. On November 26, 2004, a noticeof proposed rulemaking under section707(a)(2)(B) (REG–149519–03, 2004–2CB 1009) was published in the FederalRegister (69 FR 68838) to add rules fordisguised sales of partnership interestsand to amend the existing regulations byrevising, to a limited extent, the rules re-lating to disguised sales of property. TheIRS and the Treasury Department noted inthe preamble to those proposed regula-

tions an awareness of certain deficienciesand technical ambiguities in the existingregulations under §§ 1.707–3, 1.707–4,and 1.707–5, and requested comments onthe scope and content of revisions to theexisting regulations, but received none.The notice of proposed rulemaking wassubsequently withdrawn on January 21,2009, in Announcement 2009–4, 2009–1CB 597. The IRS and the Treasury De-partment have, however, continued tostudy these issues, and set forth in thefollowing section is a discussion of thoseareas in the existing regulations that theIRS and the Treasury Department haveidentified as requiring clarification or re-vision and the proposed changes to thoseareas.

In addition, regulations under section752 address the treatment of partnershiprecourse and nonrecourse liabilities. TheIRS and the Treasury Department believeit is appropriate to reconsider the rulesunder section 752 regarding the paymentobligations that are recognized under§ 1.752–2(b)(3), the satisfaction of pay-ment obligations under § 1.752–2(b)(6),and the methods available for allocatingexcess nonrecourse liabilities under§ 1.752–3(a)(3). Also discussed in the fol-lowing section is an explanation of thoseareas in the section 752 regulations thatthe IRS and the Treasury Departmenthave identified as requiring revision andthe proposed changes to those areas.

Explanation of Provisions

1. Debt-Financed Distributions

Section 1.707–3 of the existing regula-tions generally provides that a transfer ofproperty by a partner to a partnership fol-lowed by a transfer of money or otherconsideration from the partnership to thepartner will be treated as a sale of propertyby the partner to the partnership if, basedon all the facts and circumstances, thetransfer of money or other considerationwould not have been made but for thetransfer of the property and, for non-simultaneous transfers, the subsequenttransfer is not dependent on the entrepre-neurial risks of the partnership. Notwith-standing this general rule, the existing reg-ulations provide several exceptions.

One such exception in § 1.707–5(b) ofthe existing regulations generally provides

that a distribution of money to a partner isnot taken into account for purposes of§ 1.707–3 to the extent the distribution istraceable to a partnership borrowing andthe amount of the distribution does notexceed the partner’s allocable share of theliability incurred to fund the distribution(the “debt-financed distribution excep-tion”). Under a special rule in the existingregulations, if a partnership transfers tomore than one partner pursuant to a planall or a portion of the proceeds of one ormore liabilities, the debt-financed distri-bution exception is applied by treating allof the liabilities incurred pursuant to theplan as one liability. Thus, partners whoare allocated shares of multiple liabilitiesare treated as being allocated a share of asingle liability, to which any distributeepartner’s distribution of debt proceeds re-lates, rather than a share of each separateliability.

To illustrate the application of this rule,the proposed regulations add an exampleto the existing regulations to demonstratethat if more than one partner receives allor a portion of the debt proceeds of mul-tiple liabilities that are treated as a singleliability under the special rule, the debtproceeds will not be treated as consider-ation in a disguised sale to the extent ofthe partner’s allocable share of the singleliability.

In addition, the IRS and the TreasuryDepartment are aware that there is uncer-tainty as to whether, for purposes of§ 1.707–5(b)(2), the amount of moneytransferred to a partner that is traceable toa partnership liability is reduced by anyportion of such amount that is also ex-cluded from disguised sale treatment un-der one or more of the exceptions in§ 1.707–4 (for example, because thetransfer of money is also properly treatedas a reasonable guaranteed payment). TheIRS and the Treasury Department be-lieve that the treatment of a transfershould first be determined under thedebt-financed distribution exception,and any amount not excluded from§ 1.707–3 under the debt-financed dis-tribution exception should be tested tosee if such amount would be excludedfrom § 1.707–3 under a different excep-tion in § 1.707–4. This ordering rule en-sures that the application of one of theexceptions in § 1.707–4 does not mini-

Bulletin No. 2014–8 February 17, 2014525

mize the application of the debt-financeddistribution exception.

2. Preformation Expenditures

Section 1.707– 4(d) of the existingregulations provides an additional ex-ception for reimbursements of prefor-mation expenditures to the general rulein § 1.707–3. Under § 1.707– 4(d), trans-fers to reimburse a partner for certaincapital expenditures and costs incurredare not treated as part of a sale of prop-erty under § 1.707–3 (the “exception forpreformation capital expenditures”).

The proposed regulations amend the ex-ception for preformation capital expendi-tures to address three issues. First, the pro-posed regulations provide how theexception for preformation capital expendi-tures applies in the case of multiple propertytransfers. The exception for preformationcapital expenditures generally applies onlyto the extent that “the reimbursed capitalexpenditures do not exceed 20 percent ofthe fair market value of such property at thetime of the contribution.” This fair marketvalue limitation, however, does not apply ifthe fair market value of the contributedproperty does not exceed 120 percent ofthe partner’s adjusted basis in the con-tributed property at the time of the con-tribution. The references to “such prop-erty” and “contributed property” in§ 1.707– 4(d) are intended to refer to thesingle property for which the expendi-tures were made. Accordingly, in thecase of multiple property contributions,the proposed regulations provide thatthe determination of whether the fairmarket value limitation and the excep-tion to the fair market value limitationapply to reimbursements of capital ex-penditures is made separately for eachproperty that qualifies for the exception.

Second, the proposed regulations clar-ify the scope of the term “capital expen-ditures” for purposes of §§ 1.707–4 and1.707–5. For purposes of §§ 1.707–4 and1.707–5, the term “capital expenditures”has the same meaning as the term “capitalexpenditures” has under the Code and ap-plicable regulations, except that it in-cludes capital expenditures taxpayerselect to deduct, and does not include de-ductible expenses taxpayers elect to treatas capital expenditures. The IRS and the

Treasury Department are aware that tax-payers are uncertain whether the term cap-ital expenditures includes only expendi-tures that are required to be capitalizedunder the Code. The purpose of the excep-tion for preformation capital expenditures isto permit a partnership to reimburse a con-tributing partner for expenditures incurredwith respect to contributed property. TheIRS and the Treasury Department consid-ered whether a contributing partner’s cap-ital expenditures for this purpose shouldbe reduced by the benefit of the tax de-duction the contributing partner receivedprior to contribution of the property ei-ther because the capital expenditure wascurrently deductible by the contributingpartner or recovered through amortiza-tion or depreciation deductions. Theproposed regulations, however, do notadopt such an approach because theapproach would be too burdensome toadminister.

Finally, the proposed regulations pro-vide a rule coordinating the exception forpreformation capital expenditures and therules regarding liabilities traceable to cap-ital expenditures. Section 1.707–5 pro-vides special rules for disguised sales re-lating to liabilities assumed or takensubject to by a partnership. Under§ 1.707–5(a)(1) of the existing regula-tions, a partnership’s assumption of ortaking property subject to a qualified lia-bility in connection with a partner’s trans-fer of property to the partnership is treatedas a transfer of consideration to the part-ner only if the property transfer is other-wise treated as part of a sale. A liabilityconstitutes a qualified liability of the part-ner to the extent the liability meets one ofthe four definitions of qualified liabilitiesunder § 1.707–5(a)(6). One of the enu-merated qualified liabilities is a liabilitythat is allocable under the rules of§ 1.163–8T to capital expenditures withrespect to the property transferred to thepartnership (the “capital expenditure qual-ified liability”).

The IRS and the Treasury Departmentare aware that taxpayers are uncertainabout whether a partner may qualify underthe exception for preformation capital ex-penditures if those expenditures werefunded with a capital expenditure quali-fied liability. For example, taxpayers areuncertain about whether a partner can fi-

nance its capital expenditures through aborrowing that is exempted as a qualifiedliability and can also be reimbursed forthose expenditures without triggering saletreatment. The IRS and the Treasury De-partment believe that the exception forpreformation capital expenditures appliesonly to the extent the distribution is inreimbursement of such expenditures.Thus, the proposed regulations providethat to the extent a partner funded a capitalexpenditure through a borrowing and eco-nomic responsibility for that borrowinghas shifted to another partner, the excep-tion for preformation capital expendituresshould not apply because there is no out-lay by the partner to reimburse.

3. Qualified Liabilities in a Trade orBusiness

As previously mentioned, the exist-ing regulations generally exclude quali-fied liabilities from disguised sale treat-ment. The legislative history of section707(a)(2)(B) with respect to liabilitiesprovides that Congress was “concernedwith transactions that attempt to disguise asale of property and not with non-abusivetransactions that reflect the various eco-nomic contributions of the partners. . . . Forexample . . . the transaction will be treatedas a sale or exchange of property . . . to theextent the partner has received a loanrelated to the property in anticipation ofthe transaction and responsibility for re-payment of the loan is transferred to theother partners.” See H.R. Rep. No. 432,pt. 2, 98th Cong. 2nd Sess. 1216, 1220 –1221 (1984).

The existing regulations under§ 1.707–5(a)(6) provide four types of lia-bilities that are qualified liabilities. In ad-dition to the capital expenditure qualifiedliabilities discussed previously, the exist-ing regulations include as a qualified lia-bility a liability incurred in the ordinarycourse of the trade or business in whichproperty transferred to the partnership wasused or held, but only if all of the assetsthat are material to that trade or businessare transferred to the partnership (“ordi-nary course qualified liability”). There isno requirement that these two types ofliabilities encumber the transferred prop-erty to be treated as qualified liabilities.


The remaining two types of qualifiedliabilities are liabilities incurred more thantwo years before the transfer (or writtenagreement to transfer), and liabilities in-curred within two years of the transfer (orwritten agreement to transfer) but not inanticipation of the transfer. Liabilities in-curred by a partner within two years of thetransfer, other than capital expenditureand ordinary course qualified liabilities,are presumed to be incurred in anticipa-tion of the transfer unless the facts andcircumstances clearly establish otherwise.With respect to both of these types ofqualified liabilities, there is a requirementthat the liability encumber the transferredproperty.

The IRS and the Treasury Departmentbelieve the requirement that the liabilityencumber the transferred property is notnecessary to carry out the purposes ofsection 707(a)(2)(B) when a liability wasincurred in connection with the conduct ofa trade or business, provided the liabilitywas not incurred in anticipation of thetransfer and all of the assets material tothat trade or business are transferred to thepartnership. Accordingly, the proposedregulations add an additional definition ofqualified liability to account for this typeof liability. As under the existing regula-tions regarding liabilities other than capi-tal expenditure and ordinary course qual-ified liabilities, if the partner incurred theliability within two years of the transfer ofassets to the partnership, (i) the liability ispresumed under § 1.707–5(a)(7)(i) to havebeen incurred in anticipation of the trans-fer unless the facts and circumstancesclearly establish that the liability was notincurred in anticipation of the transfer,and (ii) the treatment of the liability as aqualified liability under the new definitionmust be disclosed to the IRS under§ 1.707–8.

4. Anticipated Reduction

Under the existing regulations, for pur-poses of the rules under section 707, apartner’s share of a liability assumed ortaken subject to by a partnership is deter-mined by taking into account certain sub-sequent reductions in the partner’s shareof the liability. Specifically, a subsequentreduction in a partner’s share of a liabilityis taken into account if (i) at the time that

the partnership incurs, assumes, or takesproperty subject to the liability, it is an-ticipated that the partner’s share of theliability will be subsequently reduced; and(ii) the reduction is part of a plan that hasas one of its principal purposes minimiz-ing the extent to which the distribution orassumption of, or taking property subjectto, the liability is treated as part of a sale(the “anticipated reduction rule”). TheIRS and the Treasury Department areaware that there is uncertainty as to whena reduction is anticipatory because it isgenerally anticipated that all liabilitieswill be repaid. Consistent with the overallapproach of the existing regulations undersection 707, the IRS and the TreasuryDepartment believe that a reduction that issubject to the entrepreneurial risks of part-nership operations is not an anticipatedreduction, and the proposed regulationsadopt this approach.

In addition, the proposed regulationsprovide that if within two years of thepartnership incurring, assuming, or takingproperty subject to the liability, a partner’sshare of the liability is reduced due to adecrease in the partner’s or a related per-son’s net value (as described in Part 8.a ofthe Explanation of Provisions section ofthis preamble), then the reduction will bepresumed to be anticipated, unless thefacts and circumstances clearly establishthat the decrease in the net value was notanticipated. Any such reduction must bedisclosed in accordance with § 1.707–8.

5. Tiered Partnerships

The existing regulations in § 1.707–5(e), and § 1.707–6(b) by applying rulessimilar to § 1.707–5(e), currently provideonly a limited tiered-partnership rule forcases in which a partnership succeeds to aliability of another partnership. Underthose rules, if a lower-tier partnership suc-ceeds to a liability of an upper-tier part-nership, the liability in the lower-tier part-nership retains the same characterizationas either a qualified or a nonqualified lia-bility that it had as a liability of the upper-tier partnership. Similarly, if an upper-tierpartnership succeeds to a liability of alower-tier partnership, the liability in theupper-tier partnership retains the samecharacterization as either a qualified or anonqualified liability that it had as a lia-

bility of the lower-tier partnership thatincurred the liability. Moreover, the exist-ing regulations provide that a similar ruleapplies to other related party transactionsinvolving liabilities to the extent providedby guidance in the Internal Revenue Bul-letin. See, for example, Rev. Rul. 2000–44, 2000–2 CB 336.

The proposed regulations add addi-tional rules regarding tiered partnerships.First, the proposed regulations clarify thatthe debt-financed distribution exceptionapplies in a tiered partnership setting. Sec-ond, the proposed regulations providerules regarding the characterization of li-abilities attributable to a contributed part-nership interest. Section 752(d) providesthat in the case of a sale or exchange of aninterest in a partnership, liabilities shall betreated in the same manner as liabilities inconnection with the sale or exchange ofproperty not associated with partnerships.Accordingly, a partner that contributes aninterest in a partnership (lower-tier part-nership) to another partnership (upper-tierpartnership) must take into account itsshare of liabilities from the lower-tierpartnership in applying the rules under§ 1.707–5. The IRS and the Treasury De-partment believe it is appropriate to treatthe lower-tier partnership as an aggregatefor purposes of determining whether theupper-tier partnership’s share of the liabil-ities of the lower-tier partnership are qual-ified liabilities. Thus, these proposed reg-ulations provide that a contributingpartner’s share of liabilities from a lower-tier partnership are treated as qualifiedliabilities to the extent the liability wouldbe a qualified liability had the liabilitybeen assumed or taken subject to by theupper-tier partnership in connection witha transfer of all of the lower-tier partner-ship’s property to the upper-tier partner-ship by the lower-tier partnership.

6. Treatment of Liabilities in Assets-Over Merger

Section 1.752–1(f) provides for nettingof increases and decreases in a partner’sshare of liabilities resulting from a singletransaction. Under that rule, increases anddecreases in partnership liabilities associ-ated with a merger or consolidation arenetted by the partners in the terminatingpartnership and the resulting partnership


to determine the effect of a merger undersection 752. The IRS and the TreasuryDepartment believe that similar nettingrules should apply with respect to the dis-guised sale rules and, accordingly, theproposed regulations extend the principlesof § 1.752–1(f) to determine the effect ofthe merger under the disguised sale rules.

7. Disguised Sales of Property by aPartnership to a Partner

For disguised sales of property by apartnership to a partner, the existing reg-ulations under § 1.707–6 provide thatrules similar to those in § 1.707–5 (fordisguised sales of property by a partner toa partnership) apply to determine the ex-tent to which an assumption of or takingproperty subject to a liability by a partner,in connection with a transfer of propertyby a partnership, is considered part of asale. More specifically, the existing regu-lations provide that if the partner assumesor takes property subject to a liability thatis not a qualified liability, the amounttreated as consideration transferred to thepartnership is the amount that the liabilityassumed or taken subject to by the partnerexceeds the partner’s share of that liabilityimmediately before the transfer. Thus, if atransferee partner had a 100 percent shareof a liability immediately before a transferin which the transferee partner assumedthe liability, then no sale is treated asoccurring between the partnership and thepartner with respect to the liability as-sumption, irrespective of the period oftime during which the partnership liabilityis outstanding and the period of time inwhich the partnership liability is allocatedto the partner.

The IRS and the Treasury Departmentare studying these rules and believe it maybe inappropriate to take into account atransferee partner’s share of a partnershipliability immediately prior to a distribu-tion if the transferee partner did not haveeconomic exposure with respect to thepartnership liability for a meaningful pe-riod of time before appreciated property isdistributed to that partner subject to theliability. Thus, the IRS and the TreasuryDepartment are considering, and requestcomments on, whether the rules under§ 1.707–6 should be amended to providethat a transferee partner’s share of an as-

sumed liability immediately before a dis-tribution is taken into account for pur-poses of determining the considerationtransferred to the partnership only to theextent of the partner’s lowest share of theliability within some meaningful period oftime, for example, 12 months.

8. Partner’s Share of PartnershipLiabilities

A. Recourse Liabilities

The existing regulations under section1.752–2 provide that a partner’s share of arecourse partnership liability equals theportion of the liability, if any, for whichthe partner or related person bears theeconomic risk of loss. A partner generallybears the economic risk of loss for a part-nership liability to the extent the partner,or a related person, would be obligated tomake a payment if the partnership’s assetswere worthless and the liability becamedue and payable. Subject to an anti-abuserule and the disregarded entity net valuerequirement of § 1.752–2(k), § 1.752–2(b)(6) assumes that all partners and re-lated persons will actually satisfy theirpayment obligations, irrespective of theiractual net worth, unless the facts and cir-cumstances indicate a plan to circumventor avoid the obligation (the “satisfactionpresumption”). Thus, for purposes of al-locating partnership liabilities, § 1.752–2adopts an ultimate liability test under aworst-case scenario. Under this test, theregulations would generally allocate anotherwise nonrecourse liability of thepartnership to a partner that guarantees theliability even if the lender and the partner-ship reasonably anticipate that the partner-ship will be able to satisfy the liabilitywith either partnership profits or capital.

The IRS and the Treasury Departmenthave considered whether the approach ofthe existing regulations under § 1.752–2 isappropriate given that, in most cases, apartnership will satisfy its liabilities withpartnership profits, the partnership’s as-sets do not become worthless, and thepayment obligations of partners or relatedpersons are not called upon. The IRS andthe Treasury Department are concernedthat some partners or related persons haveentered into payment obligations that arenot commercial solely to achieve an allo-

cation of a partnership liability to suchpartner. The IRS and the Treasury Depart-ment believe that section 79 of the TaxReform Act of 1984 (Public Law 98–369),which overruled the decision in Raphan v.United States, 3 Cl. Ct. 457 (1983) (hold-ing that a guarantee by a general partnerof an otherwise nonrecourse liability ofthe partnership did not require the partnerto be treated as personally liable for thatdebt), and directed the Treasury Depart-ment to prescribe regulations under sec-tion 752 relating to the treatment of guar-antees and other payment obligations, wasintended to ensure that bona fide, com-mercial payment obligations would begiven effect under section 752.

Accordingly, the proposed regulationsprovide a rule that obligations to make apayment with respect to a partnership lia-bility (excluding those imposed by statelaw) will not be recognized for purposesof section 752 unless certain factors arepresent. These factors, if satisfied, are in-tended to establish that the terms of thepayment obligation are commercially rea-sonable and are not designed solely toobtain tax benefits. Specifically, the rulerequires a partner or related person tomaintain a commercially reasonable networth during the term of the payment ob-ligation or be subject to commercially rea-sonable restrictions on asset transfers forinadequate consideration. In addition, thepartner or related person must providecommercially reasonable documentationregarding its financial condition and re-ceive arm’s length consideration for as-suming the payment obligation. The rulealso requires that the payment obligation’sterm must not end prior to the term of thepartnership liability and that the primaryobligor or any other obligor must not berequired to hold money or other liquidassets in an amount that exceeds the rea-sonable needs of such obligor. The rulewould also prevent certain so-called“bottom-dollar” guarantees from beingrecognized for purposes of section 752.

Moreover, the IRS and the TreasuryDepartment are concerned that some part-ners or related persons might attempt touse certain structures or arrangements tocircumvent the rules included in theseproposed regulations with respect tobottom-dollar guarantees. For example, afinancial intermediary might artificially


convert a single mortgage loan into seniorand junior tranches using a wrap-aroundmortgage or other device with a principalpurpose of creating tranches for partnersto guarantee that result in exposure tanta-mount to a bottom-dollar guarantee. Ac-cordingly, the proposed regulations revisethe anti-abuse rule under § 1.752–2(j) toaddress the use of intermediaries, tieredpartnerships, or similar arrangements toavoid the bottom-dollar guarantee rules.The IRS and the Treasury Department re-quest comments on whether other struc-tures or arrangements might be used tocircumvent the rules regarding bottom-dollar guarantees, and whether the finalregulations should broaden the anti-abuserule further to address any such structuresor arrangements.

The IRS and the Treasury Departmentalso acknowledge that the proposed regu-lations relating to guarantees and indem-nities draw lines that, among other things,preclude recognition of a payment obliga-tion for a portion, rather than 100 percent,of each dollar of a partnership liability towhich the payment obligation relates (aso-called vertical slice of the partnershipliability) (see § 1.752–2(f) Example 12 inthe proposed regulations). The IRS andthe Treasury Department request com-ments on whether, and under what cir-cumstances, the final regulations shouldpermit recognition of such a paymentobligation. In addition, the IRS and theTreasury Department request commentson whether the special rule under§ 1.752–2(e) (and related § 1.752–2(f)Example 7) should be removed from thefinal regulations or revised to requirethat 100 percent of the total interest thatwill accrue on a partnership nonrecourseliability be guaranteed.

As was previously noted, the satisfac-tion presumption assumes that all partnersand related persons will actually satisfytheir payment obligations, unless the factsand circumstances indicate a plan to cir-cumvent or avoid the obligation. The sat-isfaction presumption does not apply,however, to the payment obligations ofdisregarded entities. Instead, the paymentobligation of a disregarded entity forwhich a partner is treated as bearing theeconomic risk of loss is taken into accountonly to the extent of the net value of thedisregarded entity, as determined under

§ 1.752–2(k). The preamble to the pro-posed regulations under § 1.752–2(k) re-quested comments regarding whether therules for disregarded entities should beextended to the payment obligations ofother entities. Some commenters opposedextending the rules to other entities, whileother commenters suggested that the anti-abuse rule in § 1.752–2(j) could be ex-panded to cover certain situations involv-ing thinly capitalized entities. Onecommenter suggested that the anti-abuserule should apply if a substantially under-capitalized subsidiary of a consolidatedgroup of corporations or a substantiallyundercapitalized passthrough entity (otherthan a disregarded entity) is utilized as thepartner (or related obligor) for a principalpurpose of limiting its owner’s risk of lossin respect of existing partnership liabili-ties, and obtaining tax benefits for its own-ers (or other members of the consolidatedgroup) that would not be available but forthe additional tax basis in the partnershipinterest that results from the satisfactionpresumption. Although the final regula-tions under § 1.752–2(k) did not extendthe rules for disregarded entities to otherentities, the IRS and the Treasury Depart-ment indicated that they would continueto study the issue of extending the netvalue approach for disregarded entities toother entities.

After further consideration, the IRSand the Treasury Department believe thatthere are circumstances in addition tothose involving disregarded entities underwhich the satisfaction presumption is notappropriate. Thus, the proposed regula-tions turn off the satisfaction presumptionby extending the net value requirement of§ 1.752–2(k) to all partners or related per-sons, including grantor trusts, other thanindividuals and decedent’s estates forpayment obligations associated with li-abilities that are not trade payables. Insituations in which the satisfaction pre-sumption is turned off, the proposedregulations provide that the partner’s orrelated person’s payment obligation isrecognized only to the extent of the part-ner’s or related person’s net value as ofthe allocation date. A partner or relatedperson that is not a disregarded entity istreated as a disregarded entity for pur-poses of determining net value under§ 1.752–2(k). The IRS and the Treasury

Department request comments on whetherit would be clearer if all the net valuerequirement rules were consolidated in§ 1.752–2(k).

The IRS and the Treasury Departmentconsidered further extending the net valuerequirement of § 1.752–2(k) to partnersand related persons that are individualsand decedent’s estates, but decided not torequire such persons to comply with thenet value requirement of § 1.752–2(k) be-cause of the nature of personal guarantees.However, applying this less restrictivestandard to individuals and decedent’sestates may disadvantage other entitiesthat enter into partnerships with individ-uals or decedent’s estates. Thus, the IRSand the Treasury Department requestcomments on whether the final regula-tions should extend the net value re-quirement of § 1.752–2(k) to all partnersand related persons. The IRS and theTreasury Department also request com-ments on the application of the net valuerequirement of § 1.752–2(k) to tieredpartnerships.

Finally, in determining the amount ofany obligation of a partner to make apayment to a creditor or a contribution tothe partnership with respect to a partner-ship liability, § 1.752–2(b)(1) reduces thepartner’s payment obligation by theamount of any reimbursement that thepartner would be entitled to receive fromanother partner, a person related to an-other partner, or the partnership. The IRSand the Treasury Department have consid-ered whether a right to be reimbursed fora payment or contribution by an unrelatedperson (for example, pursuant to an in-demnification agreement from a thirdparty) should be taken into account in thesame manner and have concluded that anysource of reimbursement that effectivelyeliminates the partner’s payment riskshould cause a payment obligation to bedisregarded. Therefore, the proposed reg-ulations change the rule in § 1.752–2(b)(1) to reduce the partner’s paymentobligation by the amount of any right toreimbursement from any person.

B. Nonrecourse Liabilities

The existing regulations under§ 1.752–3 contain rules for determining apartner’s share of a nonrecourse liability


of a partnership, including the partner’sshare of excess nonrecourse liabilities un-der § 1.752–3(a)(3). Section 1.752–3(a)(3) provides various methods to deter-mine a partner’s share of the excessnonrecourse liabilities. Under onemethod, a partner’s share of excess non-recourse liabilities is determined in accor-dance with the partner’s share of partner-ship profits. For this purpose, thepartnership agreement may specify thepartners’ interests in partnership profits solong as the interests so specified are rea-sonably consistent with allocations (thathave substantial economic effect underthe section 704(b) regulations) of someother significant item of partnership in-come or gain (the “significant itemmethod”). Alternatively, excess nonre-course liabilities may be allocated amongthe partners in the manner that deductionsattributable to those liabilities are reason-ably expected to be allocated (the “alter-native method”). Similar to the significantitem method, under § 1.704–2(e)(2), thepartnership agreement may allocate non-recourse deductions in a manner that isreasonably consistent with allocations thathave substantial economic effect of someother significant partnership item attribut-able to the property securing the nonre-course liability.

The IRS and the Treasury Departmentbelieve that the allocation of excess non-recourse liabilities in accordance with thesignificant item method and the alterna-tive method may not properly reflect apartner’s share of partnership profits thatare generally used to repay such liabilitiesbecause the allocation of the significantitem may not necessarily reflect the over-all economic arrangement of the partners.Therefore, the proposed regulations re-move the significant item method and thealternative method from § 1.752–3(a)(3).

The IRS and the Treasury Department,however, are aware of the difficulty indetermining a partner’s interest in partner-ship profits in other than very simple part-nerships and, therefore, recognize theneed to have a bright-line measure of apartner’s interest in partnership profits.The IRS and the Treasury Departmentconsidered several alternatives and be-lieve that, for this purpose, an appropriateproxy of a partner’s interest in partnershipprofits, and one that can provide the

needed certainty, is a partner’s liquidationvalue percentage, determined upon forma-tion of the partnership and redeterminedupon the most recent occurrenceof an event described in § 1.704–1(b)(2)(iv)(f)(5), whether or not the capi-tal accounts of the partners are adjustedunder § 1.704–1(b)(2)(iv)(f) in connec-tion with such event. A partner’s liquida-tion value percentage is the ratio (ex-pressed as a percentage) of the liquidationvalue of the partner’s interest in the part-nership to the liquidation value of all ofthe partners’ interests in the partnership.The proposed regulations adopt the liqui-dation value percentage approach.

For purposes of the proposed rule, theliquidation value of a partner’s interest ina partnership is the amount of cash thepartner would receive with respect tothe interest if, immediately after formationof the partnership or the occurrenceof the event described in § 1.704–1(b)(2)(iv)(f)(5), as the case may be, thepartnership sold all of its assets for cashequal to the fair market value of suchproperty (taking into account section7701(g)), satisfied all of its liabilities(other than those described in § 1.752–7),paid an unrelated third party to assume allof its § 1.752–7 liabilities in a fully tax-able transaction, and then liquidated. Theproposed regulations also provide an ex-ample illustrating the new liquidation valueapproach in place of Example 2 in § 1.752–3(c) illustrating the alternative method. Asthe proposed example illustrates, a changein the partners’ shares of partnership liabil-ities as a result of an event described in§ 1.704–1(b)(2)(iv)(f)(5) is taken into ac-count in determining the tax conse-quences of the event that gave rise tosuch change.

The IRS and the Treasury Departmentare aware that the liquidation value ap-proach may not precisely measure a part-ner’s interest in partnership profits but be-lieve that the approach is a better proxythan the significant item and alternativemethods and is still administrable. TheIRS and the Treasury Department requestcomments on other methods that reason-ably measure a partner’s interest in part-nership profits that are not overly burden-some. In addition, the IRS and theTreasury Department request commentson whether exceptions should be provided

to exclude certain events from triggering aredetermination of the partners’ liquida-tion values.

Proposed Applicability Dates

The regulations under section 707 areproposed to apply to transactions with re-spect to which all transfers occur on orafter the date these regulations arepublished as final regulations in the Fed-eral Register. The regulations under§ 1.752–2 are proposed to apply to liabil-ities incurred or assumed by a partnershipand to payment obligations imposed orundertaken with respect to a partnershipliability on or after the date these regula-tions are published as final regulations inthe Federal Register. The regulations un-der § 1.752–3 are proposed to apply toliabilities incurred or assumed by a part-nership on or after the date these regula-tions are published as final regulations inthe Federal Register. The IRS and theTreasury Department anticipate that thefinal regulations under section 752 willpermit a partnership to apply the provi-sions contained in the final regulations toall of its liabilities as of the beginning ofthe first taxable year of the partnershipending on or after the date these regula-tions are published as final regulations inthe Federal Register.

The proposed regulations also providetransitional relief for any partner whoseallocable share of partnership liabilitiesunder § 1.752–2 exceeds its adjusted basisin its partnership interest on the date theproposed regulations are finalized. Underthis transitional relief, the partner can con-tinue to apply the existing regulations un-der § 1.752–2 for a seven-year period tothe extent that the partner’s allocableshare of partnership liabilities exceeds thepartner’s adjusted basis in its partnershipinterest on the date the proposed regula-tions are finalized. The amount of partner-ship liabilities subject to transitional reliefwill be reduced for certain reductions inthe amount of liabilities allocated to thatpartner under the transition rules and,upon the sale of any partnership prop-erty, for any excess of tax gain (includ-ing section 704(c) gain) allocated to thepartner less the partner’s share ofamount realized.


Special Analyses

It has been determined that this noticeof proposed rulemaking is not a signifi-cant regulatory action as defined in Exec-utive Order 12866, as supplemented byExecutive Order 13563. Therefore, a reg-ulatory assessment is not required. It alsohas been determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) does not apply to theseregulations. It is hereby certified that thecollection of information in these regula-tions will not have a significant economicimpact on a substantial number of smallentities. This certification is based on thefact that the amount of time necessary toreport the required information will beminimal in that it requires partners that arebusiness entities and trusts to provide in-formation they already maintain or caneasily obtain to their respective partner-ship. Moreover, it should take a partner nomore than 2 hours to satisfy the informa-tion requirement in these regulations. Ac-cordingly, a Regulatory Flexibility Anal-ysis under the Regulatory Flexibility Act(5 U.S.C. chapter 6) does not apply. Pur-suant to section 7805(f) of the Code, thisnotice of proposed rulemaking has beensubmitted to the Chief Counsel for Advo-cacy of the Small Business Administra-tion for comment on its impact on smallbusiness.

Comments and Requests for a PublicHearing

Before these proposed regulations areadopted as final regulations, considerationwill be given to any written comments (asigned original and eight (8) copies) orelectronic comments that are submittedtimely to the IRS. The IRS and the Trea-sury Department request comments on allaspects of the proposed regulations. Allcomments will be available for public in-spection and copying at www.regulations.gov or upon request. A public hearing willbe scheduled if requested in writing by aperson who timely submits written com-ments. If a public hearing is scheduled,notice of the date, time, and place of thehearing will be published in the FederalRegister.

Drafting Information

The principal author of these regula-tions is Deane M. Burke of the Office ofthe Associate Chief Counsel (Pass-throughs & Special Industries), IRS.However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 1 is pro-posed to be amended as follows:

PART 1—INCOME TAXES

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

Authority: 26 U.S.C. 7805 * * *Sections 1.707–2 through 1.707–9 also

issued under 26 U.S.C. 707(a)(2)(B).

§ 1.704–2 [Amended]

Par. 2. Section 1.704–2 is amended by:a. Removing the language “and (vii)”

in paragraph (d)(2)(ii).b. Removing the language “Example

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

c. Removing the language “Example(1)(viii)” in paragraph (i)(5) and addingthe language “Example (1)(vii)” in itsplace.

d. Removing Example 1(vii) in para-graph (m) and redesignating Examples1(viii) and (ix) as Examples 1(vii) and(viii) respectively.

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

Par. 3. Section 1.707–0 is amended by:a. Adding entries for §§ 1.707–4(d)(1),

(d)(2), (d)(3), and (f).b. Adding an entry for § 1.707–5(b)(3).c. Redesignating the entry for § 1.707–

5(f) as § 1.707–5(g) and adding a newentry for § 1.707–5(f).

The additions read as follows:

§ 1.707–0 Table of contents.

* * * * *

§ 1.707–4 Disguised sales of property topartnership; special rules applicable toguaranteed payments, preferred returns,operating cash flow distributions, andreimbursements of preformationexpenditures.

* * * * *(d) * * *(1) In general.(2) Special rule for certain qualified

liabilities.(3) Scope of capital expenditures.* * * * *(f) Ordering rule cross reference.* * * * *

§ 1.707–5 Disguised sales of property topartnership; special rules relating toliabilities.

* * * * *(b) * * *(3) Ordering rule.* * * * *(f) Netting liabilities in assets-over

merger or consolidation.* * * * *Par. 4. Section 1.707–4 is amended by:a. Adding the language “(1) In gen-

eral.” after the heading for paragraph (d).b. Redesignating paragraph (d)(1) as

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

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

paragraph (d)(1)(ii)(A).e. Redesignating paragraph (d)(2)(ii) as

paragraph (d)(1)(ii)(B).f. Revising the second sentence in newly

redesignated paragraph (d)(1)(ii)(B) andadding a new sentence at the end of newlyredesignated paragraph (d)(1)(ii)(B).

g. Adding new paragraphs (d)(2),(d)(3), and (f).

The additions and revisions read as fol-lows:

§ 1.707–4 Disguised sales of property topartnership; special rules applicable toguaranteed payments, preferred returns,operating cash flow distributions, andreimbursements of preformationexpenditures.

* * * * *(d) * * *


(1) In general. * * *(ii) * * *(B) * * * However, the 20 percent of

fair market value limitation of this para-graph (d)(1)(ii)(B) does not apply if thefair market value of the contributed prop-erty does not exceed 120 percent of thepartner’s adjusted basis in the contributedproperty at the time of the contribution.This paragraph (d)(1)(ii)(B) shall be ap-plied on a property-by-property basis.

(2) Special rule for certain qualifiedliabilities. For purposes of paragraph(d)(1) of this section, if the capital expen-ditures were funded by a liability definedin § 1.707–5(a)(6)(i)(C) that is assumed ortaken subject to by the partnership in con-nection with a transfer of property to thepartnership by a partner, a transfer ofmoney or other consideration by the part-nership to the partner is not treated asmade to reimburse the partner for suchcapital expenditures to the extent thetransfer of money or other considerationby the partnership to the partner exceedsthe partner’s share of the liability (as de-termined under § 1.707–5(a)(2)).

(3) Scope of capital expenditures. Forpurposes of this section and § 1.707–5, theterm capital expenditures has the samemeaning as the term capital expenditureshas under the Code and applicable regu-lations, except that it includes capital ex-penditures taxpayers elect to deduct, anddoes not include deductible expenses tax-payers elect to treat as capital expendi-tures.

* * * * *(f) Ordering rule cross reference. For

payments or transfers by a partnership to apartner to which the rules under this sec-tion and § 1.707–5(b) apply, see the or-dering rule under § 1.707–5(b)(3).

Par. 5. Section 1.707–5 is amended by:a. Removing the language “or would

be treated as a recourse liability under thatsection if it were treated as a partnershipliability for purposes of that section” atthe end of paragraph (a)(2)(i).

b. Removing the language “or wouldbe a nonrecourse liability of the partner-ship under § 1.752–1(a)(2) if it weretreated as a partnership liability for pur-poses of that section” at the end of para-graph (a)(2)(ii).

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

e. Removing the language “and” at theend of paragraph (a)(6)(i)(D) and addingthe language “or” in its place.

f. Adding paragraph (a)(6)(i)(E).g. Revising paragraph (a)(7)(ii).h. Adding a sentence at the end of

paragraph (b)(1).i. Removing the language “property” in

paragraph (b)(2)(i)(A) and adding the lan-guage “consideration” in its place.

j. Revising paragraph (b)(2)(iii).k. Adding paragraph (b)(3).l. Designating the text of paragraph (e)

after its subject heading as paragraph(e)(1).

m. Adding paragraph (e)(2).n. Redesignating paragraph (f) as para-

graph (g) and adding new paragraph (f).o. Revising Example 10 in newly re-

designated paragraph (g).p. Redesignating Example 11 in newly

redesignated paragraph (g) as Example 14and adding new Examples 11, 12, and 13.

The additions and revisions read as fol-lows:

§ 1.707–5 Disguised sales of property topartnership; special rules relating toliabilities.

(a) * * *(3) Reduction of partner’s share of li-

ability—(i) For purposes of this section, apartner’s share of a liability, immediatelyafter a partnership assumes or takes prop-erty subject to the liability, is determinedby taking into account a subsequent re-duction in the partner’s share if—

(A) At the time that the partnershipassumes or takes property subject to theliability, it is anticipated that the transfer-ring partner’s share of the liability will besubsequently reduced;

(B) The anticipated reduction is notsubject to the entrepreneurial risks of part-nership operations; and

(C) The reduction of the partner’s shareof the liability is part of a plan that has asone of its principal purposes minimizingthe extent to which the assumption of ortaking property subject to the liability istreated as part of a sale under § 1.707–3.

(ii) If within two years of the partner-ship assuming or taking property subjectto the liability, a partner’s share of theliability is reduced due to a decrease in thenet value of the partner or related person

for purposes of § 1.752–2(k), the reduc-tion will be presumed to be anticipated,unless the facts and circumstances clearlyestablish that the decrease in the net valuewas not anticipated. Any such reductionmust be disclosed in accordance with§ 1.707–8.

* * * * *(6) * * *(i) * * *(C) A liability that is allocable under

the rules of § 1.163–8T to capital expen-ditures (as described under § 1.707–4(d)(3)) with respect to the property;

* * * * *(E) A liability that was not incurred in

anticipation of the transfer of the propertyto a partnership, but that was incurred inconnection with a trade or business inwhich property transferred to the partner-ship was used or held but only if all theassets related to that trade or business aretransferred other than assets that are notmaterial to a continuation of the trade orbusiness (see paragraph (a)(7) of this sec-tion for further rules regarding a liabilityincurred within two years of a transferpresumed to be in anticipation of thetransfer); and

* * * * *(7) * * *(ii) Disclosure of transfers of property

subject to liabilities incurred within twoyears of the transfer. A partner that treatsa liability assumed or taken subject to bya partnership in connection with a transferof property as a qualified liability underparagraph (a)(6)(i)(B) of this section orunder paragraph (a)(6)(i)(E) of this sec-tion (if the liability was incurred by thepartner within the two-year period prior tothe earlier of the date the partner agrees inwriting to transfer the property or the datethe partner transfers the property to thepartnership) must disclose such treatmentto the Internal Revenue Service in accor-dance with § 1.707–8.

(b) * * *(1) * * * For purposes of paragraph (b)

of this section, an upper-tier partnership’sshare of the liabilities of a lower-tier part-nership that are treated as a liability of theupper-tier partnership under § 1.752–4(a)shall be treated as a liability of the upper-tier partnership incurred on the same daythe liability was incurred by the lower-tierpartnership.


(2) * * *(iii) Reduction of partner’s share of

liability—(A) For purposes of paragraph(b)(2) of this section, a partner’s share ofa liability immediately after a partnershipincurs the liability is determined by takinginto account a subsequent reduction in thepartner’s share if—

(1) At the time that the partnershipincurs the liability, it is anticipated that thepartner’s share of the liability that is allo-cable to a transfer of money or other con-sideration to the partner will be reducedsubsequent to the transfer;

(2) The anticipated reduction is notsubject to the entrepreneurial risks of part-nership operations; and

(3) The reduction of the partner’s shareof the liability is part of a plan that has asone of its principal purposes minimizingthe extent to which the partnership’s dis-tribution of the proceeds of the borrowingis treated as part of a sale.

(B) If within two years of the partner-ship incurring the liability, a partner’sshare of the liability is reduced due to adecrease in the net value of the partner ora related person for purposes of § 1.752–2(k), the reduction will be presumed to beanticipated, unless the facts and circum-stances clearly establish that the decreasein the net value was not anticipated. Anysuch reduction must be disclosed in accor-dance with § 1.707–8.

(3) Ordering rule. The treatment of atransfer of money or other considerationunder paragraph (b) of this section is de-termined before applying the rules under§ 1.707–4.

* * * * *(e) * * *(2) If an interest in a partnership that

has one or more liabilities (the lower-tierpartnership) is transferred to another part-nership (the upper-tier partnership), theupper-tier partnership’s share of any lia-bility of the lower-tier partnership that istreated as a liability of the upper-tier part-nership under § 1.752–4(a) is treated as aqualified liability under § 1.707–5(a)(6)(i)to the extent the liability would be a qual-ified liability under § 1.707–5(a)(6)(i) hadthe liability been assumed or taken subjectto by the upper-tier partnership in connec-tion with a transfer of all of the lower-tierpartnership’s property to the upper-tierpartnership by the lower-tier partnership.

(f) Netting liabilities in assets-overmerger or consolidation. When two ormore partnerships merge or consolidateunder section 708(b)(2)(A), as describedin § 1.708–1(c)(3)(i), any increases or de-creases in partnership liabilities associatedwith the merger or consolidation are net-ted by a partner in the terminating part-nership and the resulting partnership forpurposes of applying §§ 1.707–3 through1.707–5 to transfers of money or otherconsideration by the terminating partner-ship to the partner.

(g) * * *Example 10. Treatment of debt-financed trans-

fers of consideration by partnership. (i) K transfersproperty Z to partnership KL in exchange for aninterest in KL on April 9, 2014. On September 13,2014, KL incurs a liability of $20,000. On November17, 2014, KL transfers $20,000 to K, and $10,000 ofthis transfer is allocable under the rules of§ 1.163–8T to proceeds of the partnership liabilityincurred on September 13, 2014. The remaining$10,000 is paid from other partnership funds. As-sume that, under section 752 and the correspondingregulations, the $20,000 liability incurred on Sep-tember 13, 2014, is a recourse liability of KL andK’s share of that liability is $10,000 on November17, 2014.

(ii) Because a portion of the transfer made to Kon November 17, 2014, is allocable under§ 1.163–8T to proceeds of a partnership liability thatwas incurred by the partnership within 90 days ofthat transfer, K is required to take the transfer intoaccount in applying the rules of this section and§ 1.707–3 only to the extent that the amount of thetransfer exceeds K’s allocable share of the liabilityused to fund the transfer. K’s allocable share ofthe $20,000 liability used to fund $10,000 of thetransfer to K is $5,000 (K’s share of the liability($10,000) multiplied by the fraction obtained bydividing—

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

(B) The total amount of such liability ($20,000)).(iii) Therefore, K is required to take into account

only $15,000 of the $20,000 partnership transfer toK for purposes of this section and § 1.707–3. Underthese facts, assuming the within-two-year presump-tion is not rebutted, this $15,000 transfer will betreated under the rule in § 1.707–3 as part of a saleby K of property Z to KL.

Example 11. Treatment of debt-financed trans-fers of consideration and transfers characterized asguaranteed payments by a partnership. (i) Thefacts are the same as in Example 10, except thatthe entire $20,000 transfer to K is allocable underthe rules of § 1.163– 8T to proceeds of the part-nership liability incurred on September 13, 2014.In addition, the partnership agreement providesthat K is to receive a guaranteed payment for theuse of K’s capital in the amount of $10,000 in eachof the three years following the transfer of prop-erty Z. Ten thousand dollars of the transfer madeto K on November 17, 2014, is pursuant to thisprovision of the partnership agreement. Assume

that the guaranteed payment to K constitutes areasonable guaranteed payment within the mean-ing of § 1.707– 4(a)(3).

(ii) Under these facts, the rules under both§ 1.707–4(a) and § 1.707–5(b) apply to the Novem-ber 17, 2014 transfer to K by the partnership.Thus, the ordering rule in § 1.707–5(b)(3) requiresthat the § 1.707–5(b) debt-financed distributionrules apply first to determine the treatment of the$20,000 transfer. Because the entire transfer madeto K on November 17, 2014, is allocable under§ 1.163– 8T to proceeds of a partnership liabilitythat was incurred by the partnership within 90days of that transfer, K is required to take thetransfer into account in applying the rules of thissection and § 1.707–3 only to the extent that theamount of the transfer exceeds K’s allocable shareof the liability used to fund the transfer. K’sallocable share of the $20,000 liability used tofund the transfer to K is $10,000 (K’s share of theliability ($10,000) multiplied by the fraction ob-tained by dividing—

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

(B) The total amount of such liability ($20,000)).(iii) The remaining $10,000 amount of the trans-

fer to K that exceeds K’s allocable share of theliability is tested to determine whether an exceptionunder § 1.707–4 applies. Because $10,000 of thepayment to K is a reasonable guaranteed payment forcapital under § 1.707–4(a)(1)(ii), the $10,000 trans-fer will not be treated as part of a sale by K ofproperty Z to the partnership under § 1.707–3, unlessthe facts and circumstances establish that the transferis not a guaranteed payment for capital but is part ofa sale.

Example 12. Treatment of debt-financed trans-fers of consideration by partnership made pursuantto plan. (i) O transfers property X, and P transfersproperty Y, to partnership OP in exchange for equalinterests therein on June 1, 2014. On October 1,2014, the partnership incurs two liabilities: Liabil-ity 1 of $8,000 and Liability 2 of $4,000. OnDecember 15, 2014, the partnership transfers$2,000 to each of O and P pursuant to a plan. Thetransfers made to O and P on December 15, 2014are allocable under § 1.163– 8T to the proceeds ofeither Liability 1 or Liability 2. Assume that theliabilities incurred on October 1, 2014 are each arecourse liability of the partnership under§ 1.752–2 and that O’s and P’s share of Liability1 is $4,000 each and Liability 2 is $2,000 each onDecember 15, 2014.

(ii) Because the partnership transferred pursu-ant to a plan a portion of the proceeds of the twoliabilities to O and P, paragraph (b)(1) of thissection is applied by treating Liability 1 and Lia-bility 2 as a single $12,000 liability. Pursuant toparagraph (b)(2)(ii)(A) of this section, each part-ner’s allocable share of the $12,000 liabilityequals the amount obtained by multiplying thesum of the partner’s share of Liability 1 and Lia-bility 2 ($6,000) ($4,000 for Liability 1 plus$2,000 for Liability 2) by the fraction obtained bydividing—

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


(B) The total amount of such liability ($12,000).(iii) Therefore, O’s and P’s allocable share of the

$12,000 liability is $2,000 each. Accordingly, be-cause a portion of the proceeds of the $12,000 lia-bility are allocable under § 1.163–8T to the $2,000transfer made to each of O and P within 90 days ofincurring the liability, and the $2,000 transfer doesnot exceed O or P’s $2,000 allocable share of thatliability, each is required to take into account $0 ofthe $2,000 transfer for purposes of this section and§ 1.707–3. Under these facts, no part of the transfersto O and P will be treated as part of a sale of propertyX by O or property Y by P.

Example 13. Treatment of debt-financed trans-fers of consideration by partnership with liabilityallocated according to partners’ liquidation valuepercentages. (i) X transfers property A, which has afair market value of $90,000 and an adjusted taxbasis of $5,000, to partnership XY in exchange foran interest therein on March 29, 2014. At the time ofthe contribution, partnership XY’s only asset is prop-erty B with a fair market value of $120,000 andadjusted tax basis of $70,000. On March 30, 2014,the partnership incurs a liability of $30,000. OnMarch 31, 2014, the partnership transfers $30,000 toX, and $30,000 of this transfer is allocable under therules of § 1.163–8T to proceeds of the partnershipliability incurred on March 30, 2014. Assume that,under section 752 and the corresponding regulations,the $30,000 liability incurred on March 30, 2014 is anonrecourse liability of the partnership and that part-nership XY allocates its excess nonrecourse liabili-ties under § 1.752–3(a)(3) in accordance with thepartners’ liquidation value percentages as defined in§ 1.752–3(a)(3).

(ii) Under paragraph (a)(2)(ii) of this section, X’sshare of partnership XY’s $30,000 nonrecourse lia-bility is determined by applying the same percent-ages used to determine X’s share of XY’s excessnonrecourse liabilities under § 1.752–3(a)(3). Be-cause the distribution to X is an event described in§ 1.704–1(b)(2)(iv)(f)(5), X’s liquidation value per-centage must be redetermined under § 1.752–3(a)(3)as of March 31, 2014, irrespective of whether thecapital accounts of the partners of partnership XYare adjusted under § 1.704–1(b)(2)(iv)(f). X’s liqui-dation value percentage is 33.3% ((X’s liquidationvalue of $60,000 immediately after the distribution)divided by (partnership XY’s aggregate liquidationvalue of $180,000 immediately after the distribu-tion)). Accordingly, under paragraph (a)(2)(ii) of thissection, X’s share of the $30,000 liability is $10,000on March 31, 2014.

(iii) Because the transfer made to X on March 31,2014 is allocable under § 1.163–8T to proceeds of apartnership liability that was incurred by the partner-ship within 90 days of that transfer, X is required totake the transfer into account in applying the rules ofthis section and § 1.707–3 only to the extent that theamount of the transfer exceeds X’s allocable share ofthe liability used to fund the transfer. X’s allocableshare of the $30,000 liability used to fund the$30,000 transfer to X is $10,000 (X’s share of theliability ($10,000) multiplied by the fraction ob-tained by dividing—

(A) The amount of the liability that is allocableto the distribution to X ($30,000); by

(B) The total amount of such liability ($30,000)).

(iv) Therefore, X is required to take into account$20,000 of the $30,000 partnership transfer to X forpurposes of this section and § 1.707–3.

* * * * *Par. 6. Section 1.707–8 is amended by

revising paragraph (a) to read as follows:

§ 1.707–8 Disclosure of certaininformation.

(a) In general. The disclosure referredto in § 1.707–3(c)(2) (regarding certaintransfers made within two years of eachother), §§ 1.707–5(a)(3)(ii) and 1.707–5(b)(2)(iii)(B) (regarding the reduction ofa liability presumed to be anticipated),§ 1.707–5(a)(7)(ii) (regarding a liabilityincurred within two years prior to a trans-fer of property), and § 1.707–6(c) (relat-ing to transfers of property from a part-nership to a partner in situationsanalogous to those listed above) is to bemade in accordance with paragraph (b) ofthis section.

* * * * *Par. 7. Section 1.707–9 is amended by

revising paragraphs (a)(1) and (b) to readas follows:

§ 1.707–9 Effective dates andtransitional rules.

(a) * * *(1) In general. Except as provided in

paragraph (a)(3) of this section,§§ 1.707–3 through 1.707–5 apply to anytransaction with respect to which all trans-fers occur on or after [effective date offinal rule] and § 1.707–6 applies to anytransaction with respect to which all trans-fers that are part of a sale of an item ofproperty occur after April 24, 1991. Forany transaction with respect to which alltransfers that are part of a sale of an itemof property occur after April 24, 1991, butbefore [effective date of final rule],§§ 1.707–3 through 1.707–5 as containedin 26 CFR edition revised April 1, 2013(TD 8439) apply.

* * * * *(b) Section 1.707–8 disclosure of cer-

tain information. The disclosure provi-sions described in § 1.707–8 apply to anytransaction with respect to which all trans-fers occur on or after [effective date offinal rule]. Otherwise, for any transactionwith respect to which all transfers that arepart of a sale of property occur after Sep-

tember 30, 1992, but before [effectivedate of final rule], § 1.707–8 as containedin 26 CFR edition revised April 1, 2013(TD 8439) applies.

* * * * *Par. 8. Section 1.752–0 is amended by:a. Removing the entries for §§ 1.752–

2(b)(5) and (b)(6).b. Revising the entries for § 1.752–

2(j)(3) and (j)(4).c. Adding entries for § 1.752–2(k),

(k)(1), (2), (3), (4), (5), and (6).d. Adding an entry for § 1.752–2(l).e. Redesignating the entry for § 1.752–3(b)

as § 1.752–3(c) and adding a new entryfor § 1.752–3(b).

f. Adding an entry for § 1.752–3(d).The revisions and additions read as fol-

lows:

§ 1.752–0 Table of contents.

* * * * *

§ 1.752–2 Partner’s share of recourseliabilities.

* * * * *(j) * * *(3) Plan to circumvent or avoid the

obligation.(4) Arrangements intended to avoid

certain requirements of paragraph (b).* * * * *(k) Effect of a disregarded entity.(1) In general.(2) Net value of a disregarded entity.(3) Multiple liabilities.(4) Reduction in net value of a disre-

garded entity.(5) Information to be provided by the

owner of a disregarded entity.(6) Examples.(l) Effective/applicability dates.(1) In general.(2) Transitional rules.

§ 1.752–3 Partner’s share ofnonrecourse liabilities.

* * * * *(b) Allocation of a single nonrecourse

liability among multiple properties.(c) Examples.(d) Effective/applicability dates.* * * * *Par. 9. Section 1.752–2 is amended by:


a. Revising the first sentence in para-graph (b)(1).

b. Revising paragraph (b)(3).c. Removing paragraphs (b)(5) and

(b)(6).d. Adding a sentence at the end of

paragraph (f), revising Example 3, reserv-ing Example 9, and adding new Examples10, 11, and 12.

e. Revising paragraph (j)(4).f. Revising the first sentence of para-

graph (k)(1).g. Revising paragraphs (k)(2)(i)(A) and

(l).The revisions and additions read as fol-

lows:

§ 1.752–2 Partner’s share of recourseliabilities.

* * * * *(b) * * *(1) * * * Except as otherwise provided

in this section, a partner bears the eco-nomic risk of loss for a partnership liabil-ity to the extent that, if the partnershipconstructively liquidated, the partner orrelated person would be obligated to makea payment to any person (or a contributionto the partnership) because that liabilitybecomes due and payable and the partneror related person would not be entitled toreimbursement from another person. * * *

* * * * *(3) Obligations recognized—(i) In

general. The determination of the extentto which a partner or related person has anobligation to make a payment under para-graph (b)(1) of this section is based on thefacts and circumstances at the time of thedetermination. Notwithstanding the priorsentence, a payment obligation will not berecognized if it fails to satisfy paragraphs(b)(3)(ii) and (iii) of this section. All stat-utory and contractual obligations relatingto the partnership liability are taken intoaccount for purposes of applying this sec-tion, including:

(A) Contractual obligations outside thepartnership agreement such as guarantees,indemnifications, reimbursement agree-ments, and other obligations running di-rectly to creditors, to other partners, or tothe partnership;

(B) Obligations to the partnership thatare imposed by the partnership agreement,including the obligation to make a capital

contribution and to restore a deficit capitalaccount upon liquidation of the partner-ship; and

(C) Payment obligations (whether inthe form of direct remittances to anotherpartner or a contribution to the partner-ship) imposed by state law, including thegoverning state partnership statute.

(ii) Recognition requirements. An ob-ligation of a partner or related person tomake a payment with respect to a partner-ship liability described under paragraph(b)(3)(i)(A) or (B) of this section is notrecognized under paragraph (b)(3) of thissection unless all of the requirements ofthis paragraph (b)(3)(ii)(A) through (G)are satisfied. To the extent that an obliga-tion of a partner or related person to makea payment with respect to a partnershipliability is not recognized under paragraph(b)(3) of this section, paragraph (b) of thissection is applied as if the obligation didnot exist.

(A) The partner or related person is—(1) Required to maintain a commer-

cially reasonable net worth throughout theterm of the payment obligation; or

(2) Subject to commercially reasonablecontractual restrictions on transfers of as-sets for inadequate consideration.

(B) The partner or related person isrequired periodically to provide commer-cially reasonable documentation regard-ing the partner’s or related person’s finan-cial condition.

(C) The term of the payment obligationdoes not end prior to the term of thepartnership liability.

(D) The payment obligation does notrequire that the primary obligor or anyother obligor with respect to the partner-ship liability directly or indirectly holdmoney or other liquid assets in an amountthat exceeds the reasonable needs of suchobligor.

(E) The partner or related person re-ceived arm’s length consideration for as-suming the payment obligation.

(F) In the case of a guarantee or similararrangement, the partner or related personis or would be liable up to the full amountof such partner’s or related person’s pay-ment obligation if, and to the extent that,any amount of the partnership liability isnot otherwise satisfied. For purposes ofthis paragraph (b)(3)(ii)(F), the terms of aguarantee or similar arrangement will be

treated as modified by any right of indem-nity, reimbursement, or similar arrangementregardless of whether that arrangementwould be recognized under paragraph (b)(3)of this section. However, the precedingsentence does not apply to a right of pro-portionate contribution running betweenpartners or related persons who are co-obligors with respect to a payment obli-gation for which each of them is jointlyand severally liable.

(G) In the case of an indemnity, reim-bursement agreement, or similar arrange-ment, the partner or related person is orwould be liable up to the full amount ofsuch partner’s or related person’s paymentobligation if, and to the extent that, anyamount of the indemnitee’s or other ben-efitted party’s payment obligation is satis-fied. The indemnity, reimbursementagreement, or similar arrangement onlysatisfies this paragraph (b)(3)(ii)(G) if, be-fore taking into account the indemnity,reimbursement agreement, or similar ar-rangement, the indemnitee’s or otherbenefitted party’s payment obligation isrecognized under paragraph (b)(3) of thissection or would be recognized under para-graph (b)(3) of this section if such personwere a partner or related person. For pur-poses of this paragraph (b)(3)(ii)(G), theterms of an indemnity, reimbursementagreement, or similar arrangement will betreated as modified by any further right ofindemnity, reimbursement, or similar ar-rangement regardless of whether thatfurther arrangement would be recognizedunder paragraph (b)(3) of this section.However, the preceding sentence doesnot apply to a right of proportionatecontribution running between partnersor related persons who are co-obligorswith respect to a payment obligation forwhich each of them is jointly and sev-erally liable.

(iii) Satisfaction of obligation—(A) Ingeneral. Except as provided in paragraph(b)(3)(iii)(B) of this section, for purposesof determining the extent to which a part-ner or related person has a payment obli-gation or bears the economic risk of lossfor a partnership liability under paragraph(b)(1) of this section, it is assumed thatsuch partner or related person who has anobligation to make a payment actuallyperforms its obligation, irrespective ofits actual net value, unless the facts and


circumstances indicate a plan to circum-vent or avoid the obligation. See para-graph (j) of this section.

(B) Net value requirement. In deter-mining the extent to which a partner orrelated person other than an individual ora decedent’s estate bears the economicrisk of loss under paragraph (b)(1) of thissection for a partnership liability otherthan a trade payable, a payment obligationis recognized only to the extent of the netvalue of the partner or related person as ofthe allocation date (as defined in para-graph (k)(2)(iv) of this section) that isallocated to the partnership liability. Apartner or related person’s net value isdetermined under the rules of paragraph(k) of this section. This paragraph(b)(3)(iii)(B) applies to a payment obliga-tion of a partner or related person that isdisregarded as an entity separate from itsowner under sections 856(i) or 1361(b)(3)or §§ 301.7701–1 through 301.7701–3 ofthis chapter or is a trust to which subpartE, part I, subchapter J, chapter 1 of theCode applies (a disregarded entity),even if the owner of the disregardedentity is an individual or a decedent’sestate. A partner or related person that isnot a disregarded entity is treated as adisregarded entity for purposes of deter-mining net value of the partner or re-lated person under paragraph (k) of thissection.

(C) Information to be provided regard-ing net value. A partner that may betreated as bearing the economic risk ofloss for a partnership liability based uponan obligation under paragraph (b)(1) ofthis section (a § 1.752–2(b)(1) paymentobligation) of a person, including the part-ner, other than an individual or a dece-dent’s estate, must provide information tothe partnership as to that person’s netvalue that is appropriately allocable to thepartnership’s liabilities on a timely basis.

* * * * *(f) Examples. * * * For purposes of

Examples 1 through 7, unless otherwiseprovided, assume that any obligation of apartner or related person to make a pay-ment with respect to the partnership lia-bility satisfies the requirements underparagraphs (b)(3)(ii), (b)(3)(iii), and (k) ofthis section where applicable.

* * * * *

Example 3. Guarantee by limited partner; part-ner satisfaction of obligation. E and F form a limitedpartnership. E, the general partner, contributes$2,000 and F, the limited partner, contributes $8,000in cash to the partnership. E and F are both businessentities (as defined in § 301.7701–2(a) of this chap-ter). The partnership agreement allocates losses 20%to E and 80% to F until F’s capital account isreduced to zero, after which all losses are allocatedto E. The partnership purchases depreciable propertyfor $25,000 using its $10,000 cash and a $15,000recourse loan from a bank. E’s net value, determinedunder paragraphs (k)(2) through (k)(4) of this sec-tion, at all times exceeds the $15,000 loan amount,but F guarantees payment of the $15,000 loan to theextent the loan remains unpaid after the bank hasexhausted its remedies against the partnership (in-cluding causing E to make any contributions re-quired of a general partner under state law). In aconstructive liquidation, the $15,000 liability be-comes due and payable. All of the partnership’sassets, including the depreciable property, aredeemed to be worthless. The depreciable property isdeemed sold for a value of zero. Capital accounts areadjusted to reflect the loss on the hypothetical dis-position, as follows:

E F

Initialcontribution

$2,000 $8,000

Loss onhypothetical sale

(17,000) (8,000)

($15,000) -0-

E, as a general partner, would be obligated byoperation of law to make a net contribution tothe partnership of $15,000. Under paragraph(b)(3)(iii)(B) of this section, E has net value tosatisfy its payment obligation as of the allocationdate. Because E has net value to the extent of itsobligation, it is assumed that F would not have tosatisfy F’s guarantee. The $15,000 mortgage istreated as a recourse liability because one or morepartners bear the economic risk of loss. E’s shareof the liability is $15,000, and F’s share is zero.

* * * * *Example 9. [Reserved]* * * * *Example 10. Guarantee of first and last dollars.

(i) A, B, and C are equal members of limited liabilitycompany, ABC, that is treated as a partnership forfederal tax purposes. ABC borrows $1,000 fromBank. A guarantees payment of up to $300 of theABC liability if any amount of the full $1,000 lia-bility is not recovered by Bank. B guarantees pay-ment of up to $200, but only if the Bank otherwiserecovers less than $200. Both A and B waive theirrights of contribution against each other. A’s and B’sguarantees satisfy the requirements set forth in para-graphs (b)(3)(ii)(A) through (E) and paragraph(b)(3)(iii) of this section.

(ii) Because A is obligated to pay up to $300 if,and to the extent that, any amount of the $1,000partnership liability is not recovered by Bank, A’sguarantee satisfies the requirement under paragraph(b)(3)(ii)(F) of this section. Therefore, A’s paymentobligation is recognized under paragraph (b)(3) ofthis section. The amount of A’s economic risk of loss

under paragraph (a)(1) of this section is $300. How-ever, because B is obligated to pay up to $200 onlyif and to the extent that the Bank otherwise recoversless than $200 of the $1,000 partnership liability, B’sguarantee does not satisfy the requirement underparagraph (b)(3)(ii)(F) of this section and B’s pay-ment obligation is not recognized. Therefore, Bbears no economic risk of loss under paragraph(a)(1) of this section for ABC’s liability. As aresult, $300 of the liability is allocated to A underparagraph (a)(1) of this section and the remaining$700 liability is allocated to A, B, and C under§ 1.752–3.

Example 11. Indemnification of guarantees. (i)The facts are the same as in Example 10, except that,in addition, C agrees to indemnify A up to $50 thatA pays with respect to its guarantee, and agrees toindemnify B fully with respect to its guarantee. C’sindemnity satisfies the requirements set forth in para-graphs (b)(3)(ii)(A) through (E) and paragraph(b)(3)(iii) of this section.

(ii) The determination of whether C’s indemnitysatisfies the requirement under paragraph (b)(3)(ii)(G) ofthis section is made without regard to whether C’s indem-nity itself causes A’s guarantee not to be recognized.Because A’s obligation would be recognized but for theeffect of C’s indemnity and C is obligated to payA up to the full amount of C’s indemnity if A paysany amount on its guarantee of ABC’s liability,C’s indemnity of A’s guarantee satisfies the re-quirement under paragraph (b)(3)(ii)(G) of thissection. The amount of C’s economic risk of lossunder paragraph (a)(1) of this section for its in-demnity of A’s guarantee is $50.

(iii) Because C’s indemnity of A’s guarantee sat-isfies the requirement under paragraph (b)(3)(ii)(G) ofthis section, it is treated as modifying A’s guaranteesuch that A is treated as liable for $250 only to theextent any amount beyond $50 of the partnershipliability is not satisfied. Thus, A is not liable if, andto the extent, any amount of the partnership liabilityis not otherwise satisfied, and, as a result, A’s guar-antee is not recognized under paragraph (b)(3)(ii)(F)of this section. Therefore, A bears no economic riskof loss under paragraph (a)(1) of this section forABC’s liability.

(iv) Because B’s obligation is not recognizedunder paragraph (b)(3) of this section, C’s indemnityof B’s guarantee does not satisfy the requirementunder paragraph (b)(3)(ii)(G) of this section, and C’spayment obligation to B is not recognized. There-fore, C bears no economic risk of loss under para-graph (a)(1) of this section for its indemnity of B’sguarantee. As a result, $50 of the liability is allocatedto C under paragraph (a)(1) of this section and theremaining $950 liability is allocated to A, B, and Cunder § 1.752–3.

Example 12. Partial guarantee of partnershipliability. (i) A, B, and C are equal members oflimited liability company, ABC, that is treated asa partnership for federal tax purposes. ABC bor-rows $1,000 from Bank. A guarantees payment of25 percent of each dollar of the $1,000 liabilitythat is not recovered by Bank. A’s guarantee sat-isfies the requirements set forth in paragraphs(b)(3)(ii)(A) through (E) and paragraph (b)(3)(iii)of this section.


(ii) If $250 of the $1,000 partnership liability isnot recovered by Bank, A is only obligated to pay$62.50 ($250 x .25) pursuant to the terms of theguarantee. Because A is not obligated to pay up tothe full amount of its payment obligation ($250) tothe extent that $250 is not recovered by Bank, A’sguarantee does not satisfy the requirement underparagraph (b)(3)(ii)(F) of this section, and A’s pay-ment obligation is not recognized. As a result, theABC liability is allocated to A, B, and C under§ 1.752–3.

* * * * *(j) * * *(4) Arrangements intended to avoid

certain requirements of paragraph (b). Anobligation of a partner or related person tomake a payment with respect to a partner-ship liability is not recognized underparagraph (b) of this section if the factsand circumstances indicate that the part-nership liability is part of a plan or ar-rangement involving the use of tieredpartnerships, intermediaries, or similar ar-rangements to convert a single liabilityinto more than one liability with a princi-pal purpose of circumventing the rules ofparagraphs (b)(3)(ii)(F) and (G) of thissection.

* * * * *(k) * * *(1) * * * In determining the extent to

which a partner bears the economic risk ofloss for a partnership liability other than atrade payable, an obligation under para-graph (b)(1) of this section (§ 1.752–2(b)(1) payment obligation) of a businessentity that is disregarded as an entity sep-arate from its owner under sections 856(i)or 1361(b)(3) or §§ 301.7701–1 through§§ 301.7701–3 of this chapter or a trust towhich subpart E, part I, subchapter J,chapter 1 of the Code applies (disregardedentity) is taken into account only to theextent of the net value of the disregardedentity as of the allocation date (as definedin paragraph (k)(2)(iv) of this section) thatis allocated to the partnership liability asdetermined under the rules of this para-graph (k). * * *

(2) * * *(i) * * *(A) The fair market value of all assets

owned by the disregarded entity that maybe subject to creditors’ claims under locallaw (including the disregarded entity’s en-forceable rights to contributions from itsowner, and the fair market value of aninterest in any partnership, but excludingthe disregarded entity’s direct or indirect

interest in the partnership for which thenet value is being determined and the netfair market value of property pledged tosecure a liability of the partnership underparagraph (h)(1) of this section); less

* * * * *(l) Effective/applicability dates—(1) In

general. Paragraph (a) and paragraphs(h)(3) and (k) of this section apply toliabilities incurred or assumed by a part-nership on or after October 11, 2006,other than liabilities incurred or assumedby a partnership pursuant to a writtenbinding contract in effect prior to thatdate. The rules applicable to liabilities in-curred or assumed (or pursuant to a writ-ten binding contract in effect) prior toOctober 11, 2006, are contained in§ 1.752–2 in effect prior to October 11,2006, (see 26 CFR part 1 revised as ofApril 1, 2006). Paragraphs (b)(1) first sen-tence, (b)(3), (f), (f) Examples 3, 10, 11,and 12, (j)(4), (k)(1) first sentence, and(k)(2)(i)(A) of this section apply to liabil-ities incurred or assumed by a partnershipand to payment obligations imposed orundertaken with respect to a partnershipliability on or after [effective date of finalrule], other than liabilities incurred or as-sumed by a partnership and payment ob-ligations imposed or undertaken pursuantto a written binding contract in effect priorto that date.

(2) Transitional rules—(i) In general.If a partner has a share of a recoursepartnership liability under paragraph (b)of this section immediately prior to [effec-tive date of final rule] (Transition Partner),the partnership (Transition Partnership)may choose not to apply paragraphs (b)(1)first sentence, (b)(3), (f), (f) Examples 3,10, 11, and 12, (j)(4), (k)(1) first sentence,and (k)(2)(i)(A) of this section to the ex-tent the amount of the Transition Partner’sshare of liabilities under paragraph (b) ofthis section immediately prior to the ef-fective date exceeds the amount of theTransition Partner’s adjusted basis in itspartnership interest as determined under§ 1.705–1 at such time (GrandfatheredAmount). The Transition Partnership maycontinue to apply the rules under§ 1.752–2 in effect prior to [effective dateof final rule], with respect to a TransitionPartner for liabilities described in para-graph (b) of this section to the extent ofthe Transition Partner’s adjusted Grandfa-

thered Amount for the seven-year periodbeginning [effective date of final rule].A Transition Partner’s GrandfatheredAmount is reduced (not below zero), butnever increased, by—

(A) Upon the sale of any property bythe Transition Partnership, an amountequal to the excess of any tax gain allo-cated to the Transition Partner by theTransition Partnership (including amountsallocated under section 704(c) and appli-cable regulations) over the product of thetotal amount realized by the TransitionPartnership from the property sale multi-plied by the Transition Partner’s liquida-tion value percentage as determined under§ 1.752–3(a)(3), and

(B) An amount equal to any decrease inthe Transition Partner’s share of liabilitiesto which the rules of this paragraph(l)(2)(i) apply, other than by operation ofparagraph (l)(2)(i)(A) of this section.

(ii) Special rules—(A) Ownershipchanges in Transition Partner. A Transi-tion Partner that is a partnership, S corpo-ration, or disregarded entity ceases toqualify as a Transition Partner if the director indirect ownership of that TransitionPartner changes by 50 percent or more.

(B) Section 708(b)(1)(B) terminations.The termination of a Transition Partner-ship under section 708(b)(1)(B) and appli-cable regulations does not affect theGrandfathered Amount of a TransitionPartner that remains a partner in the newpartnership (as described in § 1.708–1(b)(4)), and the new partnership istreated as a continuation of the TransitionPartnership for purposes of this paragraph(l)(2).

Par. 10. Section 1.752–3 is amendedby:

a. Removing the third and fourth sen-tences in paragraph (a)(3) and adding fournew sentences in their place.

b. Revising Example 2 in paragraph(c).

c. Adding paragraph (d).The revisions and additions read as fol-

lows:

§ 1.752–3 Partner’s share ofnonrecourse liabilities.

(a) * * *(3) * * * The partnership agreement

may specify the partners’ interests in part-


nership profits for purposes of allocatingexcess nonrecourse liabilities provided theinterests so specified are in accordancewith the partners’ liquidation value per-centages. A partner’s liquidation valuepercentage, which is determined upon theformation of a partnership and redeter-mined upon any event described in§ 1.704–1(b)(2)(iv)(f)(5), irrespective ofwhether the capital accounts of the part-ners are adjusted under § 1.704–1(b)(2)(iv)(f), is the ratio (expressed as apercentage) of the liquidation value of thepartner’s interest in the partnership di-vided by the aggregate liquidation valueof all of the partners’ interests in the part-nership. Any change in the partners’shares of partnership liabilities as a resultof an event described in § 1.704–1(b)(2)(iv)(f)(5) is taken into account indetermining the tax consequences of theevent that gave rise to such change. Forpurposes of this paragraph (a)(3), the liq-uidation value of a partner’s interest in apartnership is the amount of cash thepartner would receive with respect to theinterest if, immediately after the forma-tion of the partnership or the occurrenceof an event described in § 1.704 –1(b)(2)(iv)(f)(5), as the case may be, thepartnership sold all of its assets for cashequal to the fair market value of suchassets (taking into account section7701(g)), satisfied all of its liabilities(other than those described in § 1.752–7), paid an unrelated third party toassume all of its § 1.752–7 liabilities ina fully taxable transaction, and thenliquidated. * * *

(c) * * *Example 2. Excess nonrecourse liabilities allo-

cated according to partners’ liquidation value per-centages. (i) On January 1, 2012, X and Y eachcontribute $100 to a limited liability company clas-sified as a partnership for U.S. tax purposes (XY) in

exchange for equal interests in XY. XY’s organizingagreement provides that it will maintain members’capital accounts in accordance with section 704 andthe regulations thereunder, and will make liquidatingdistributions in accordance with positive capital ac-count balances. XY has a calendar year taxable year.On the same day, XY borrows $50 from a personunrelated to either X or Y. Under the rules of thissection, the liability is a nonrecourse liability. XYpurchases Land A for $50 and Land B for $200. Thepartners agree to allocate excess nonrecourse liabil-ities in accordance with the partners’ liquidationvalue percentages as defined in paragraph (a)(3) ofthis section.

(ii) Under paragraph (a)(3) of this section, theliquidation value percentage for each of partners Xand Y is 50% ((each partner’s liquidation valueimmediately after the formation of $100) divided by(XY’s aggregate liquidation value immediately afterthe formation of $200)). Therefore, X and Y eachhas a $25 share of the $50 liability and each istreated as contributing $25 to XY under section752(a).

(iii) On September 1, 2015, XY owns the fol-lowing assets: (1) Land A with a fair market value of$40 and an adjusted tax basis of $50; (2) Land Bwith a fair market value of $800 and an adjusted taxbasis of $200; and (3) Land C with a fair marketvalue of $400 and an adjusted tax basis of $390. Theoutstanding principal on the partnership liability is$40. Thus, X and Y each own an interest in XY witha fair market value of $600 and an adjusted tax basisof $320. The partners continue to agree to allocateexcess nonrecourse liabilities in accordance with thepartners’ liquidation value percentages as defined inparagraph (a)(3) of this section. On September 1,2015, XY distributes Land C to X. Assume XY hasno items of income, gain, loss, deduction, or credit inits taxable year ending December 31, 2015.

(iv) The distribution of Land C to X is an eventdescribed in § 1.704–1(b)(2)(iv)(f)(5) and, thus, un-der paragraph (a)(3) of this section, X’s liquidationvalue percentage must be redetermined under para-graph (a)(3) of this section as of September 1, 2015,irrespective of whether the capital accounts of thepartners of XY are adjusted under § 1.704–1(b)(2)(iv)(f). X’s liquidation value percentage is25% ((X’s liquidation value immediately after thedistribution of $200) divided by (XY’s aggregateliquidation value immediately after the distributionof $800)). Accordingly, X’s share of the $40 liabilityis reduced from $20 to $10 on September 1, 2015,while Y’s share of the liability is increased from $20

to $30. Thus, X is treated as receiving a distributionof $10 from XY under section 752(b), and Y istreated as contributing $10 to XY under section752(a). Because the distribution of $10 to X does notexceed X’s $320 adjusted basis in its interest in XY,X recognizes no gain. Pursuant to section 732(a)(2),X’s basis in Land C is $310.

* * * * *(d) Effective/applicability dates. The

third, fourth, fifth, and sixth sentences ofparagraph (a)(3) of this section and para-graph (c) Example 2 of this section applyto liabilities that are incurred or assumedby a partnership on or after [effective dateof final rule], other than liabilities incurredor assumed by a partnership pursuant to awritten binding contract in effect prior tothat date.

Par. 11. Section 1.752–5 is amended byrevising the second and third sentences ofparagraph (a) to read as follows:

§ 1.752–5 Effective dates andtransitional rules.

(a) * * * However, § 1.752–3(a)(3)seventh, eighth, and ninth sentences, (b),and (c) Example 3, do not apply to anyliability incurred or assumed by a partner-ship prior to October 31, 2000. Neverthe-less, § 1.752–3(a)(3) seventh, eighth, andninth sentences, (b), and (c) Example 3,may be relied upon for any liability in-curred or assumed by a partnership priorto October 31, 2000 for federal taxableyears ending on or after October 31, 2000.* * *

John DalrympleDeputy Commissioner for

Services and Enforcement.

(Filed by the Office of the Federal Register on January 29,2014, 8:45 a.m., and published in the issue of the FederalRegister for January 30, 2014, 79 F.R. 4826)


Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe theeffect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position isbeing extended to apply to a variation ofthe fact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds thatthe same principle also applies to B, theearlier ruling is amplified. (Compare withmodified, below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position in aprior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modifiedis used where the substance ofa previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleteddescribes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revokeddescribes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Supersededdescribes a situation wherethe new ruling does nothing more thanrestate the substance and situation of apreviously published ruling (or rulings).Thus, the term is used to republish underthe 1986 Code and regulations the sameposition published under the 1939 Codeand regulations. The term is also usedwhen it is desired to republish in a singleruling a series of situations, names, etc.,that were previously published over a pe-riod of time in separate rulings. If the newruling does more than restate the sub-

stance of a prior ruling, a combination ofterms is used. For example, modified andsuperseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that isself contained. In this case, the previouslypublished ruling is first modified and then,as modified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further namesin subsequent rulings. After the originalruling has been supplemented severaltimes, a new ruling may be published thatincludes the list in the original ruling andthe additions, and supersedes all prior rul-ings in the series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome ofcases in litigation, or the outcome of aService study.

AbbreviationsThe following abbreviations in currentuse and formerly used will appear in ma-terial published in the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.E.O.—Executive Order.ER—Employer.

ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contributions Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—Grantor.IC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.

PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statement of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

Bulletin No. 2014–8 February 17, 2014i

Numerical Finding List1

Bulletins 2014–1 through 2014–8

Announcements

2014-1, 2014-2 I.R.B. 3932014-2, 2014-4 I.R.B. 4482014-4, 2014-7 I.R.B. 5232014-05, 2014-6 I.R.B. 5072014-06, 2014-6 I.R.B. 5082014-07, 2014-6 I.R.B. 5082014-08, 2014-6 I.R.B. 5082014-09, 2014-6 I.R.B. 5082014-10, 2014-6 I.R.B. 5082014-11, 2014-6 I.R.B. 5082014-12, 2014-6 I.R.B. 509

Notices

2014-1, 2014-2 I.R.B. 2702014-2, 2014-3 I.R.B. 4072014-3, 2014-3 I.R.B. 4082014-4, 2014-2 I.R.B. 2742014-5, 2014-2 I.R.B. 2762014-6, 2014-2 I.R.B. 2792014-7, 2014-4 I.R.B. 4452014-8, 2014-5 I.R.B. 4522014-9, 2014-5 I.R.B. 455

Proposed Regulations

REG-154890-03, 2014-6 I.R.B. 504REG-159420-04, 2014-2 I.R.B. 374REG-144468-05, 2014-6 I.R.B. 474REG-119305-11, 2014-8 I.R.B. 524REG-140974-11, 2014-3 I.R.B. 438REG-121534-12, 2014-6 I.R.B. 473REG-136984-12, 2014-2 I.R.B. 378REG-113350-13, 2014-3 I.R.B. 440REG-141036-13, 2014-7 I.R.B. 516REG-143172-13, 2014-2 I.R.B. 383

Revenue Procedures

2014-1, 2014-1 I.R.B. 12014-2, 2014-1 I.R.B. 902014-3, 2014-1 I.R.B. 1112014-4, 2014-1 I.R.B. 1252014-5, 2014-1 I.R.B. 1692014-6, 2014-1 I.R.B. 1982014-7, 2014-1 I.R.B. 2382014-8, 2014-1 I.R.B. 2422014-9, 2014-2 I.R.B. 2812014-10, 2014-2 I.R.B. 2932014-11, 2014-3 I.R.B. 4112014-12, 2014-3 I.R.B. 4152014-13, 2014-3 I.R.B. 4192014-14, 2014-2 I.R.B. 2952014-15, 2014-5 I.R.B. 4562014-18, 2014-7 I.R.B. 513

Revenue Rulings

2014-1, 2014-2 I.R.B. 2632014-2, 2014-2 I.R.B. 2552014-3, 2014-2 I.R.B. 2592014-4, 2014-5 I.R.B. 4492014-6, 2014-7 I.R.B. 510

Treasury Decisions

9649, 2014-2 I.R.B. 2659650, 2014-3 I.R.B. 3949651, 2014-4 I.R.B. 4419653, 2014-6 I.R.B. 4609654, 2014-6 I.R.B. 461

1A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2013–27 through 2013–52 is in Internal Revenue Bulletin2013–52, dated December 23, 2013.

February 17, 2014 Bulletin No. 2014–8ii

Finding List of Current Actions onPreviously Published Items1

Bulletins 2014–1 through 2014–8

Announcements:

2007-44Modified byAnn. 2014-4, 2014-7 I.R.B. 523

2011-49Modified byAnn. 2014-4, 2014-7 I.R.B. 523

Notices:

2006-109Modified byNotice 2014-4, 2014-2 I.R.B. 274

2009-78Superseded byT.D. 9654 2014-6 I.R.B. 461

2013-17Amplified byNotice 2014-1, 2014-2 I.R.B. 270

Revenue Procedures:

2003-49Modified and superseded byRev. Proc. 2014-14, 2014-2 I.R.B. 295

2011-44Modified and Superseded byRev. Proc. 2014-11, 2014-3 I.R.B. 411

2011-49Modified byRev. Proc. 2014-6, 2014-1 I.R.B. 198

2013-1Superseded byRev. Proc. 2014-1, 2014-1 I.R.B. 1





Revenue Procedures—Continued:






2013-32Superseded in part byRev. Proc. 2014-1, 2014-1 I.R.B. 1, andRev. Proc. 2014-3, 2014-1 I.R.B. 111

2014-1Amplified byRev. Proc. 2014-18, 2014-7 I.R.B. 513

2014-3Amplified byRev. Proc. 2014-18, 2014-7 I.R.B. 513

Proposed Regulations:

209054-87A portion withdrawn byREG-113350-13 2014-3 I.R.B. 440

1A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2013–27 through 2013–52 is in Internal Revenue Bulletin 2013–52, dated December 23,2013.

Bulletin No. 2014–8 February 17, 2014iii

INDEXInternal Revenue Bulletins 2014–1 through2014–8

The abbreviation and number in parenthesis following the indexentry refer to the specific item; numbers in roman and italic typefollowing the parentheses refer to the Internal Revenue Bulletin inwhich the item may be found and the page number on which itappears.

Key to Abbreviations:Ann AnnouncementCD Court DecisionDO Delegation OrderEO Executive OrderPL Public LawPTE Prohibited Transaction ExemptionRP Revenue ProcedureRR Revenue RulingSPR Statement of Procedural RulesTC Tax ConventionTD Treasury DecisionTDO Treasury Department Order

ADMINISTRATIVEExtension of time to file estate tax return to elect portability of a

deceased spousal unused exclusion amount under section2010(c)(5)(A). (RP 18) 7, 513

EMPLOYEE PLANSDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Excepted benefits (REG–143172–13) 2, 383Letter rulings:

And determination letters:Areas which will not be issued from Associate Chief

Counsel and Division counsel (TE/GE) (RP 3) 1, 111Exemption application determination letter rulings under

sections 501 and 521 (RP 9) 2, 281And general information letters; procedures (RP 4) 1, 125User fees, request for letter rulings (RP 8) 1, 242

Letter rulings and general information letters (RP 4) 1, 125Letter rulings or determination letters (RP 1) 1, 1Qualification, determination letters (RP 6) 1, 198Qualified plans:

Discrimination (Notice 5) 2, 276Opinion letters (Ann 4) 7, 523

Qualified retirement plans covered compensation, permitted dis-parity (RR 3) 2, 259

Rulings and determination letters, user fees (RP 8) 1, 242Technical advice memorandum or TAM (RP 2) 1, 90Technical advice procedures (RP 5) 1, 169Full funding limitations, weighted average interest rates, segment

rates for:January 2014 (Notice 8) 5, 452

EMPLOYMENT TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Employment tax liability of agents authorized under section 3504

(TD 9649) 2, 265Letter rulings or determination letters (RP 1) 1, 1Technical Advice Memorandum (TAM) (RP 2) 1, 90

ESTATE TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Extension of time to file estate tax return to elect portability of a

deceased spousal unused exclusion amount under section2010(c)(5)(A) (RP 18) 7, 513

Letter rulings or determination letters (RP 1) 1, 1Technical Advice Memorandum (TAM) (RP 2) 1, 90

EXCISE TAXDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Interim guidance regarding supporting organizations (Notice 4)

2, 274Letter rulings or determination letters (RP 1) 1, 1Technical Advice Memorandum (TAM) (RP 2) 1, 90

EXEMPT ORGANIZATIONSDomestic areas in which the Service will not issue letter rulings

or determination letters (RP 3) 1, 111Interim guidance regarding supporting organizations (Notice 4)

2, 274Letter rulings:

And determination letters:Areas which will not be issued from Associate Chief

Counsel and Division counsel (TE/GE) (RP 3) 1, 111Exemption application determination letter rulings under

sections 501 and 521 (RP 9) 2, 281And general information letters; procedures (RP 4) 1, 125User fees, request for letter rulings (RP 8) 1, 242

Letter rulings (RP 10) 2, 293; (RP 9) 2, 281Letter rulings or determination letters (RP 1) 1, 1Proposed procedures for charitable hospitals to correct and dis-

close failures to meet section 501(r) (Notice 3) 3, 408Reliance on proposed regulations for tax-exempt hospitals (No-

tice 2) 3, 407Rulings and determination letters, user fees (RP 8) 1, 242Technical Advice Memorandum (TAM) (RP 2) 1, 90Technical advice procedures (RP 5) 1, 169

INCOME TAXAdequate disclosure revenue procedure (RP 15) 5, 456Allocation of section 47 credits by a partnership to its partners

(RP 12) 3, 415Allocation of section 752 recourse liabilities among related par-

ties (REG–136984–12) 2, 378

February 17, 2014 Bulletin No. 2014–8iv

INCOME TAX—Cont.Areas in which rulings will not be issued; Associate Chief

Counsel (International) (RP 7) 1, 238Basis in assets of tax exempt trusts (REG–154890–03) 6, 504Bond premium carryforward (TD 9653) 6, 460Cafeteria plans, FSA reimbursements, and HSA contribution

limits for same-sex spouses (Notice 1) 2, 270Current refunding of Recovery Zone facility bonds (Notice 9) 5,

455Declaratory judgement suits (Ann 5) 6, 507; (Ann 6) 6, 508;

(Ann 7) 6, 508; (Ann 8) 6, 508; (Ann 9) 6, 508; (Ann 10) 6,508; (Ann 12) 6, 509

Definitions applicable to U.S. persons owning interests in passiveforeign investment companies (REG–113350–13) 3, 440

Determination of ownership in a passive foreign investmentcompany; annual filing requirements for shareholders of pas-sive foreign investment companies; filing requirements forconstructive owners in certain foreign corporations (REG–140974–11) 3, 438; (TD 9650) 3, 394

Determining stock ownership for purposes of whether an entity isa surrogate foreign corporation (TD 9654) 6, 461; (REG–121534–12) 6, 473

Contribution of built-in lost property to a partnership; mandatorybasis adjustments in the event of a substantial built-in loss orsubstantial basis reduction; modification of basis allocationrules (REG–144468–05) 6, 474

Domestic areas in which the Service will not issue letter rulingsor determination letters (RP 3) 1, 111

FATCA financial institution registration update (Ann 1) 2, 393Interest:

Investment:Federal short-term, mid-term, and long-term rates for:

January 2014 (RR 1) 2, 263February 2014 (RR 6) 7, 510

Final FFI agreement for participating FFI and reporting Model 2FFI (RP 13) 3, 419

Guidance regarding resinstatement following auto revocation oftax-exempt status under section 6033(j) (RP 11) 3, 411

Intra-group gross receipts (REG–159420–04) 2, 374Insurance tax, insurance companies, interest rate tables (RR 4) 5,

449Letter rulings or determination letters (RP 1) 1, 1Principal residence, treatment of National Mortgage Settlement

payments (RR 2) 2, 255Qualified census tracts (RP 14) 2, 295Regarding disguised sales, generally (REG–119305–11) 8, 523Revocations, exempt organization (Ann 11) 6, 508Shared responsibility payment for not maintaining minimum

essential coverage (REG–141036–13) 7, 516Technical Advice Memorandum (TAM) (RP 2) 1, 90Transition relief for the tax credit for employee health insurance

expenses of certain small employers (Notice 6) 2, 279

Bulletin No. 2014–8 February 17, 2014v

INTERNAL REVENUE BULLETINThe Introduction at the beginning of this issue describes the purpose and content of this publication. The weekly Internal Revenue

Bulletins are available at www.irs.gov/irb/.

CUMULATIVE BULLETINSThe contents of the weekly Bulletins were consolidated semiannually into permanent, indexed, Cumulative Bulletins through the

2008–2 edition.

INTERNAL REVENUE BULLETINS ON CD-ROMInternal Revenue Bulletins are available annually as part of Publication 1796 (Tax Products CD-ROM). The CD-ROM can be

purchased from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders (discount for online orders)or by calling 1-877-233-6767. The first release is available in mid-December and the final release is available in late January.

We Welcome Comments About the Internal Revenue BulletinIf you have comments concerning the format or production of the Internal Revenue Bulletin or suggestions for improving it, we

would be pleased to hear from you. You can email us your suggestions or comments through the IRS Internet Home Page(www.irs.gov) or write to the IRS Bulletin Unit, SE:W:CAR:MP:P:SPA, Washington, DC 20224.

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