Td 9207

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)

Groups

Apr 2004

Apr 2005

Percent Change
from Apr 2004
to Apr 20051

Groups 1–15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Groups 16–20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Groups 21–23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

572.0
385.6
93.6

572.4
380.8
93.0

0.1
-1.2
-0.6

Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

504.8

503.5

-0.3

1

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

DRAFTING INFORMATION
The principal author of this revenue
ruling is Michael Burkom of the Office
of Associate Chief Counsel (Income Tax
and Accounting). For further information regarding this revenue ruling, contact
Mr. Burkom at (202) 622–7924 (not a
toll-free call).

Section 752.—Treatment
of Certain Liabilities
26 CFR 1.752–1: Treatment of partnership liabilities.

T.D. 9207
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Assumption of Partner
Liabilities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regulations; and removal of temporary regulations.
SUMMARY: This document contains final regulations relating to the definition of
liabilities under section 752 of the Internal
Revenue Code (Code). These regulations
provide rules regarding a partnership’s
assumption of certain fixed and contingent
obligations in connection with the issuance

June 27, 2005

of a partnership interest and provide conforming changes to certain regulations.
These regulations also provide rules under
section 358(h) for assumptions of liabilities by corporations from partners and
partnerships. Finally, this document also
contains temporary regulations relating to
the assumption of certain liabilities under
section 358(h). The text of the temporary
regulations also serves as the text of the
proposed regulations (REG–106736–00)
set forth in the notice of proposed rulemaking on this subject in this issue of the
Bulletin.
DATES: Effective Date: These regulations
are effective May 26, 2005.
Applicability Dates:
The final
§1.752–6 regulations apply to assumptions
of liabilities by a partnership occurring after October 18, 1999, and before June 24,
2003. All of the other final regulations
in this Treasury Decision, as well as the
temporary regulations under section 358,
apply to liabilities assumed on or after
June 24, 2003, except as otherwise noted.
FOR
FURTHER
INFORMATION
CONTACT: Laura Fields at (202)
622–3050 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
reviewed and approved by the Office of
Management and Budget in accordance
with the Paperwork Reduction Act of

1344

1995 (44 U.S.C. 3507(d)) under control
number 1545–1843. Responses to these
collections of information are mandatory
and are required to obtain a benefit. The
collections of information in this final
regulation is in §1.752–7(e), (f), (g), and
(h). This information is required for a
former or current partner of a partnership
to take deductions, losses, or capital expenses attributable to the satisfaction of
the §1.752–7 liability. This information
will be used by the partner in order to
take a deduction, loss, or capital expense.
An additional collection of information in
this final regulation is in §1.752–7(k)(2).
This information is required to inform the
IRS of partnerships making the designated
election and to report income appropriately. The collection of information is
required to obtain a benefit, i.e., to elect
to apply the provisions of §1.752–7 of
the regulations in lieu of §1.752–6. The
likely respondents are business or other
for-profit institutions and small businesses
or organizations.
An agency may not conduct or sponsor,
and a person is not required to respond to, a
collection of information unless it displays
a valid control number assigned by the Office of Management and Budget.
Estimated total annual reporting burden: 125 hours.
The estimated annual burden per respondent varies from 20 to 40 minutes, depending on individual circumstances, with
an estimated average of 30 minutes.
Estimated number of respondents: 250.
Estimated annual frequency of responses: On occasion.

2005–26 I.R.B.

Comments concerning the accuracy
of this burden estimate and suggestions for reducing this burden should
be sent to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224, and to the Office of Management and Budget, Attn: Desk Officer for
the Department of the Treasury, Office
of Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to this collection of information must be retained as
long as their contents may become material in the administration of any internal
revenue law. Generally, tax returns and tax
return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to
26 CFR part 1 under sections 358, 704,
705, 737 and 752 of the Internal Revenue
Code (Code).
As part of the Community Renewal Tax
Relief Act of 2000 (the Act) (114 Stat.
2763), Congress enacted, on December 15,
2000, section 358(h), effective October 18,
1999, to address certain situations in which
property is transferred to a corporation in
exchange for both stock and the corporation’s assumption of certain obligations of
the transferor. In these situations, transferors took the position that the obligations
were not liabilities within the meaning of
section 357(c) or that they were described
in section 357(c)(3), and, therefore, the
obligations did not reduce the basis of the
transferor’s stock. These assumed obligations, however, did reduce the value of the
stock. The transferors then sold the stock
and claimed a loss. In this way, taxpayers attempted to duplicate a loss in corporate stock and to accelerate deductions that
typically are allowed only on the economic
performance of these types of obligations.
Section 358(h) addresses these transactions by requiring that, after the application of section 358(d), the basis in stock
received in an exchange to which section
351, 354, 355, 356, or 361 applies be reduced (but not below the fair market value
of the stock) by the amount of any liability
assumed in the exchange. Exceptions to
section 358(h) are provided where: (1)
the trade or business with which the liability is associated is transferred to the

2005–26 I.R.B.

person assuming the liability as part of the
exchange; or (2) substantially all of the
assets with which the liability is associated are transferred to the person assuming
the liability as part of the exchange. The
Secretary, however, has the authority to
limit these exceptions. The term liability
for purposes of section 358(h) includes
any fixed or contingent obligation to make
payment without regard to whether the
obligation is otherwise taken into account
for purposes of the Code.
Congress recognized that taxpayers
were attempting to use partnerships and S
corporations to carry out the same types of
abuses that section 358(h) was designed
to deter. Therefore, in sections 309(c)
and (d)(2) of the Act, Congress directed
the Secretary to prescribe rules to provide
“appropriate adjustments under subchapter K of chapter 1 of the Code to prevent
the acceleration or duplication of losses
through the assumption of (or transfer of
assets subject to) liabilities described in
section 358(h)(3) . . . in transactions
involving partnerships.” Under the statute,
these rules are to “apply to assumptions of
liability after October 18, 1999, or such
later date as may be prescribed in such
rules.”
In response to this directive, a notice of
proposed rulemaking (REG–106736–00,
2003–2 C.B. 60) under sections 358, 704,
705, and 752 was published in the Federal
Register (68 FR 37434) on June 24, 2003.
In addition, temporary regulations (T.D.
9062, 2003–2 C.B. 46) were published
on that same day (68 FR 37414). The
proposed and temporary regulations provide rules to prevent the duplication and
acceleration of loss through the assumption by a partnership of certain liabilities
from a partner. Section 1.752–6T of the
temporary regulations (the temporary regulations) applies to liabilities assumed by
a partnership after October 18, 1999, and
before June 24, 2003. Section 1.752–7
of the proposed regulations (the proposed
regulations) applies to liabilities assumed
by a partnership on or after June 24, 2003.
However, taxpayers may elect to apply the
proposed regulations, instead of the temporary regulations, to liabilities assumed
by a partnership after October 18, 1999,
and before June 24, 2003.
The temporary regulations adopt the approach of section 358(h), with some modifications. For example, the exception for

1345

contributions of “substantially all of the assets with which the liability is associated”
does not apply to certain abusive transactions described in Notice 2000–44, 2000–2
C.B. 255, released to the public on August
11, 2000, and published on September 5,
2000.
The proposed regulations deviate somewhat from the rules of section 358(h). In
particular, the proposed regulations do not
reduce the partner’s basis in the partnership at the time of the assumption of a
§1.752–7 liability by the partnership, but
delay that reduction until an event occurs
that separates the partner from the liability
(triggering event). The triggering events
are: (1) a disposition (or partial disposition) of the partnership interest by the partner; (2) a liquidation of the partner’s interest in the partnership; and (3) the assumption of the liability by another partner. After a triggering event, the partnership’s (or
the assuming partner’s) deduction on the
economic performance of the §1.752–7 liability is limited. However, if the partnership (or the assuming partner) notifies
the partner of the economic performance
of the §1.752–7 liability, then the partner
may take a loss or deduction in the amount
of the prior basis reduction.
The proposed regulations include an exception, similar to the exception in section
358(h)(2)(A), for transactions in which the
partner contributes to the partnership the
trade or business with which the liability
is associated as part of the exchange (the
trade or business exception), but do not include an exception, similar to the exception in section 358(h)(2)(B), for transactions in which the partner contributes to
the partnership substantially all of the assets associated with the liability as part
of the exchange. The proposed regulations also include an additional exception
for situations in which, immediately before the triggering event, the amount of the
remaining built-in loss with respect to all
§1.752–7 liabilities assumed by the partnership (other than §1.752–7 liabilities assumed by the partnership with an associated trade or business) in one or more
§1.752–7 liability transfers is less than the
lesser of 10% of the gross value of partnership assets or $1,000,000 (the de minimis
exception).
In addition, the proposed regulations
provide detailed rules to address the treatment of the liability between the date of the

June 27, 2005

assumption of that liability by the partnership and the date of a triggering event and
to address tiered entity situations.
The proposed regulations distinguish
between a §1.752–1 liability, for which a
basis reduction is required when the liability is assumed by the partnership from a
partner, and a §1.752–7 liability, for which
a basis reduction is not required until the
occurrence of a triggering event. Under
the proposed regulations, an obligation is
a §1.752–1 liability to the extent the obligation creates or increases the basis of any
of the obligor’s assets (including cash),
gives rise to an immediate deduction to the
obligor, or gives rise to an expense that is
not deductible in computing the obligor’s
taxable income and is not properly chargeable to capital. All remaining obligations
are §1.752–7 liabilities. Under the proposed regulations, §1.752–7 liabilities are
subject to the rules of section 704(c) and
the regulations thereunder.
The American Jobs Creation Act of
2004, Public Law 108–357 (118 Stat.
1418) (the Act), was enacted on October 22, 2004. Section 833(a) of the Act
amended section 704(c) of the Code by
adding section 704(c)(1)(C), effective for
contributions of property to a partnership
after October 22, 2004. Under new section
704(c)(1)(C), if “built-in loss” property is
contributed to a partnership, the built-in
loss shall be taken into account only in
determining the items allocated to the contributing partner, and, except as provided
in regulations, in determining the amount
of items allocated to the other partners,
the basis of the contributed property shall
be treated as being equal to its fair market
value at the time of contribution. For this
purpose, a “built-in loss” is defined to
mean the excess of the adjusted basis of
the property in the hands of the contributing partner over its fair market value at the
time of its contribution to the partnership.
Section 833(b) of the Act requires basis
adjustments to be made following certain
transfers of interests in partnerships for
which no section 754 election is in effect.
As amended by the Act, section 743(a) and
(b) of the Code requires a partnership to reduce the basis of partnership property upon
the transfer of an interest in the partnership by sale or exchange or upon the death
of a partner, if, at the time of the relevant
transfer, the partnership has a “substantial built-in loss.” Section 743(d)(1) pro-

June 27, 2005

vides that, for purposes of section 743, a
partnership has a substantial built-in loss
with respect to a transfer of a partnership
interest if the partnership’s adjusted basis
in the partnership’s property exceeds by
more than $250,000 the fair market value
of such property. Exceptions are provided
for electing investment partnerships and
for securitization partnerships, as defined
in the Act. See also sections 734(b) and
(d), as amended by section 833(c) of the
Act (requiring a basis adjustment to be
made following a distribution from a partnership for which no section 754 election
is in effect in the case of a “substantial basis reduction”).
The IRS and the Treasury Department
are aware of certain similarities between
the treatment of §1.752–7 liabilities in
these regulations and the treatment of
built-in losses under sections 704(c)(1)(C),
734, and 743 of the Code, as added by the
Act. For example, it is possible to view the
contribution of property with an adjusted
tax basis equal to the fair market value of
the property, determined without regard
to any §1.752–7 liabilities, as “built-in
loss” property after the §1.752–7 liability
is taken into account in those cases where
the §1.752–7 liability is related to the
contributed property. Although a partnership’s assumption of a §1.752–7 liability
as part of the contribution of property to
the partnership can be analogized to a
property with an adjusted tax basis greater
than fair market value, the purposes of
section 704(c)(1)(C) and §1.752–7 are
different in certain respects.
Section
704(c)(1)(C) and the other changes in section 833 of the Act are directed toward
loss duplication whereas §1.752–7 is directed at both loss duplication and loss
acceleration. Therefore, to the extent of
any built-in loss attributable to a §1.752–7
liability, §1.752–7 shall be applied without regard to the amendments made by the
Act, unless future guidance provides to
the contrary. Any such guidance would be
prospective in application.
Written comments were received in response to the notice of proposed rulemaking, and a public hearing was held on October 14, 2003. Two commentators requested to speak at that hearing. After consideration of the comments, the proposed
and temporary regulations are adopted as
modified by this Treasury decision.

1346

Explanation of Provisions
These final regulations generally follow the proposed and temporary regulations with the changes described below.
1. Comments on §1.752–6T
Several commentators suggested that
the issuance of §1.752–6T exceeded the
authority granted to the Secretary in
section 309 of the Act. More specifically, some commentators suggested that
§1.752–6T results in the inappropriate
denial of a bona fide loss, that §1.752–6T
was issued to bootstrap the IRS’s litigating
position regarding transactions described
in Notice 2000–44, 2000–2 C.B. 255, and
that section 309 of the Act only granted the
Secretary the authority to prescribe rules
to address situations in which a partnership liability is assumed by a corporation.
In addition, several commentators argued
that the Treasury Department and the
IRS exceeded their authority in providing
that §1.752–6T applies retroactively to
assumptions of liabilities occurring after
October 18, 1999, and before June 24,
2003, the date the regulations were issued.
The Treasury Department and the IRS
believe that §1.752–6T does not result in
the inappropriate denial of a bona fide
loss. The exceptions in §1.752–6T generally limit the application of the regulations
to transactions that are abusive in nature
and that lack a business purpose. In addition, the regulations allow taxpayers to
elect into §1.752–7 so as to avoid the immediate basis reduction under §1.752–6T.
Recognizing, however, that some taxpayers may not have expected the approach
taken in §1.752–7 when engaging in transactions in prior years, §1.752–6T employs
rules similar to section 358(h) for partnership transactions.
Those commentators who suggested
that the IRS issued §1.752–6T to “bootstrap” its litigating position in Notice
2000–44 pointed to the fact that Notice
2000–44 did not mention that regulations
would be issued in the future to challenge
the transactions described in that notice.
As discussed earlier, the Act was enacted with a retroactive effective date and
granted the Treasury Department and the
IRS the authority to issue retroactive regulations. The Treasury Department and the
IRS believe that they have appropriately

2005–26 I.R.B.

exercised this grant of authority. Also,
Notice 2000–44 was released on August
11, 2000. The Act was not enacted into
law until December 15, 2000, after the
release of Notice 2000–44. Therefore, the
Treasury Department and the IRS could
not reference regulations promulgated under the Act in Notice 2000–44.
The Treasury Department and the IRS
have concluded that the Secretary’s authority under section 309(c) is not limited
to addressing assumptions of liabilities by
corporations from partnerships. The plain
language of the legislative directive is not
so limited and the legislative history does
not support such a limitation.
To the contrary, the Treasury Department and the IRS believe that the rules
of §1.752–6T carry out the explicit directive of section 309(c) of the Act by
applying to partnership transactions rules
that are analogous to the rules that apply to corporate transactions under section 358(h). For example, if the transactions described in Notice 2000–44 were effected through a contribution to a corporation, rather than a contribution to a partnership, section 358(h) would generally apply to such a transaction, causing a basis reduction identical to that provided by
§1.752–6T.
Section 7805(b) addresses when a regulation (temporary, proposed, or final)
may be effective retroactively. Section
7805(b)(1) generally provides that no
temporary, proposed, or final regulations
relating to the internal revenue laws shall
apply to any taxable period ending before
the earliest of the following dates: (A)
the date on which such regulation is filed
with the Federal Register; (B) in the case
of any final regulation, the date on which
any proposed or temporary regulation to
which such final regulation relates was
filed with the Federal Register; or (C) the
date on which any notice substantially
describing the expected contents of any
temporary, proposed, or final regulation
is issued to the public. However, section
7805(b) provides a list of exceptions to the
general rule stated above. Included in that
list, and relevant in this context, is section
7805(b)(6). Section 7805(b)(6) provides
that the limitation may be superseded
“by a legislative grant from Congress authorizing the Secretary to prescribe the
effective date with respect to any regulation.” Also included among the exceptions

2005–26 I.R.B.

to the general rule in section 7805(b)(1)
is section 7805(b)(3). Section 7805(b)(3)
states that the “Secretary may provide that
any regulation may take effect or apply
retroactively to prevent abuse.”
The retroactive effective date of
§1.752–6T is in accordance with the directive in section 309(c) and (d)(2) of the Act
and section 7805(b)(6). Furthermore, pursuant to section 7805(b)(3), the Secretary
has determined that a retroactive effective
date is appropriate to prevent abuse.
For these reasons, the Treasury Department and the IRS have concluded that
§1.752–6T is a valid exercise of the Secretary’s regulatory authority under the Code
and section 309 of the Act.
2. Extension of Time to Adopt the
Provisions of §1.752–7 in lieu of
§1.752–6T
Section 1.752–6T(d)(2) provides that
partnerships may elect to apply the provisions of §1.752–7 of the proposed regulations to all assumptions of liabilities by
the partnership occurring after October 18,
1999, and before June 24, 2003, in lieu of
applying §1.752–6T of the temporary regulations. The election must be filed with
the first Federal income tax return filed by
the partnership on or after September 24,
2003.
Several commentators expressed a need
for additional time to make this election.
In response to these comments, the election period described in §1.752–6T(d)(2)
has been extended. Under the extension,
an election to apply the regulations under
§1.752–7, rather than the regulations under §1.752–6, to all liabilities assumed by
a partnership after October 18, 1999, and
before June 24, 2003, must be filed with a
Federal income tax return filed by the partnership on or after September 24, 2003,
and on or before December 31, 2005.
3. Section 1.358–5T, Special Rules For
Assumption of Liabilities
The preamble to the proposed regulations advised taxpayers that, with respect
to an exchange to which §358(a)(1) applies, the Treasury Department and the
IRS were considering exercising their authority under §358(h)(2) to issue regulations that would limit the exceptions to
§358(h)(1) to follow the exceptions set
forth in the proposed regulations under

1347

§1.752–7 (other than the de minimis exception). The preamble indicated that such
regulations would be retroactive to the extent necessary to prevent abuse. No comments were received regarding the appropriate scope or substance of such regulations. The Treasury Department and the
IRS have determined that removing the exception of §358(h)(2)(B) (which applies
where substantially all of the assets with
which the liability is associated are transferred to the person assuming the liability
as part of the exchange) is necessary to prevent the abuse that §358(h) was designed
to prevent. Therefore, with respect to an
exchange to which §358(a)(1) applies, this
document contains temporary regulations
providing that the exception contained in
§358(h)(2)(B) does not apply to exchanges
under §358(a)(1) in which liabilities are
assumed on or after June 24, 2003.
4. Section 1.752–7 Liability
Commentators have asked for clarification on whether an obligation could be a
§1.752–1 liability in part and a §1.752–7
liability in part. Certain obligations that
create liabilities under §1.752–1 may also
create §1.752–7 liabilities. For example,
a fixed obligation that gives rise to basis
can have a component portion that changes
in value between the time the obligation is
first incurred by the partner and the time
that the partnership assumes the obligation
due to changes in interest rates, stock price,
or other similar factors. In these and other
cases, the value of the obligation to the
holder has increased and, as a result, the
cost to the obligor has increased by a like
amount. The final regulations clarify that
an obligation can be treated in part as a
§1.752–7 liability and in part as a §1.752–1
liability.
5. Satisfaction Other than by Economic
Performance
The proposed regulations allow the
§1.752–7 liability partner to claim a
loss or deduction upon “economic performance” of the obligation. Certain
§1.752–7 liabilities may be settled in
cash or in kind, extinguished, satisfied or
otherwise resolved under circumstances
where there may not be an “economic
performance” of the obligation within the
meaning of that term. See section 461(h)

June 27, 2005

and §1.461–4. In addition, economic performance only applies to “liabilities” as
defined in §1.446–1(c)(1)(ii)(B), and it
is possible that some §1.752–7 liabilities
may not come within the meaning of that
term. As a result, the final regulations
allow the §1.752–7 liability partner to
claim a loss or deduction under §1.752–7
upon the “satisfaction of the §1.752–7 liability”. A §1.752–7 liability is treated as
satisfied on the date upon which, but for
§1.752–7, the partnership, or the assuming partner, would have been allowed to
take the §1.752–7 liability into account for
federal tax purposes. The final regulations
provide a nonexclusive list of examples
of when the §1.752–7 liability would be
taken into account for these purposes.
6. Application of Section 704(c)
Under §1.752–7(c), any §1.752–7 liability assumed by a partnership in a
§1.752–7 liability transfer is treated under section 704(c) principles as having a
built-in loss equal to the amount of the
§1.752–7 liability as of the date of the
partnership’s assumption of the §1.752–7
liability. The proposed regulations provide that, if a §1.752–7 liability is assumed
from the partnership by a partner other
than the §1.752–7 liability partner, and the
trade or business or de minimis exceptions
do not apply, then section 704(c)(1)(B)
does not apply to the assumption and
instead the rules of §1.752–7(g) apply.
Commentators asked whether section
704(c)(1)(B) applies to the assumption of
a §1.752–7 liability by another partner if
the trade or business or de minimis exceptions apply to that assumption. In addition,
commentators questioned whether the
successor partner rule of §1.704–3(a)(7)
applies to the built-in loss amount of the
§1.752–7 liability. The successor partner rule provides that, if a contributing
partner transfers a partnership interest,
built-in gain or loss must be allocated to
the transferee partner as it would have
been allocated to the transferor partner.
The intent of the Treasury Department
and the IRS was that all of the rules of
section 704(c), §1.704–3, and §1.704–4,
including section 704(c)(1)(B), apply
to §1.752–7 liabilities unless otherwise
specifically stated. The §1.752–7 regulations have been modified to make this
clear. In addition, §1.704–3 has been

June 27, 2005

amended to provide that §1.752–7 liabilities are section 704(c) property and
to provide that in general, the successor
partner rule does not apply to §1.752–7
liabilities.
Comments were also received regarding the application of section 704(c) principles to the extent that a §1.752–7 liability has decreased after the partnership’s
assumption of the liability. Consistent
with the principles of §1.704–3, the final regulations provide that, if there is a
post-assumption change in the value of the
§1.752–7 liability, resulting in an obligation amount that is either greater or less
than the initial amount of the obligation,
the change in the amount will be treated as
a section 704(b) and not a section 704(c)
item, thereby creating book income or
loss to be allocated to the partners. The
final regulations also provide that, if the
value of the §1.752–7 liability decreases
after the assumption of the obligation by
the partnership, the “ceiling rule” applies,
and the partnership and the partners are
entitled to adopt one of the reasonable
methods specified in §1.704–3 to correct
any ceiling rule disparities.
7. Section 1.752–7 Liabilities that are
Capitalized and Not Deducted
The proposed regulations make reference in several places to a “deduction or
capital expense”, but no rules are provided
as to how the capital expense is taken into
account. For example, no rules are provided in the proposed regulations for situations where the contributing partner is still
a partner in the partnership at the time that
the obligation is recognized for federal tax
purposes and capitalized into the tax basis
of one or more assets of the partnership.
The final regulations add a rule to
§1.704–3 providing that, to the extent a
partnership properly capitalizes all or a
portion of an item as described in paragraph §1.704–3(a)(12), then the item
or items to which such cost is properly
capitalized is treated as section 704(c)
property with the same amount of built-in
loss as corresponds to the amount capitalized. Similar rules are provided under
§§1.704–4 and 1.737–2.
In addition, the proposed regulations do
not provide any guidance as to the appropriate tax treatment if a triggering event
occurs after a §1.752–7 liability has been

1348

capitalized into the basis of one or more
assets of the partnership. Under the final
regulations, no reduction in the partner’s
basis in the partnership interest is required
with respect to such a capitalized amount
as a result of the triggering event, but, after the triggering event, neither the partnership nor the remaining partners may use
the capitalized basis.
8. Exception for Trading and Investment
Partnerships.
The proposed regulations contain an
exception to §1.752–7(e), (f), and (g) for
assumptions of liabilities in connection
with the contribution of an associated
trade or business, provided that the partnership continues to carry on that trade
or business after the contribution. The
proposed regulations provide that, for this
purpose, a trade or business generally does
not include the activity of acquiring, holding, or disposing of financial instruments,
unless such activity is carried on by an
entity registered with the Securities and
Exchange Commission as a management
company under the Investment Company
Act of 1940, as amended (15 U.S.C. 80a).
The exception for entities registered as
management companies was intended to
apply narrowly to master-feeder partnerships; however, it appears that the exception could apply to a broader range of entities, some of which could be carrying
on the types of transactions that section
309 of the Act and these regulations were
intended to address. Consequently, the
Treasury Department and the IRS have removed the exception for entities registered
as management companies.
The Treasury Department and the IRS
do not believe that eliminating the exception will create a substantial burden
for master-feeder partnerships, because
interests in these partnerships are not regularly sold, and because distributions by
these partnerships typically take the form
of nonliquidating distributions of cash.
Accordingly, master-feeder partnerships
are unlikely to engage in triggering events
that would implicate this regulation.
Therefore, under the final regulations,
the activity of acquiring, holding, dealing
in, or disposing of financial instruments is
not treated as a trade or business even if engaged in by an entity registered as a management company. For assumptions of li-

2005–26 I.R.B.

abilities on or after June 24, 2003, and before May 26, 2005, however, entities registered as management companies may rely
on the exception to the trade or business
definition in the proposed regulations.
9. Technical Terminations, Mergers, and
Divisions
Section 1.708–1(b)(4) provides that if
a partnership is terminated under section
708(b)(1)(B) by a sale or exchange of an
interest, the partnership is deemed to contribute all of its assets and liabilities to a
new partnership in exchange for an interest in the new partnership; and, immediately thereafter, the terminated partnership
is deemed to distribute interests in the new
partnership to the purchasing partner and
the other remaining partners.
A commentator asked whether the
rules provided in §1.752–7 apply to the
contribution and distribution of partnership interests deemed to occur under
§1.708–1(b)(4). Rules have been added
to the final regulations to clarify how the
regulations apply to technical terminations
and partnership mergers and divisions.
These rules are designed to ensure that,
after a technical termination, merger, or
division, the partners that were §1.752–7
liability partners of the prior partnership
continue to be §1.752–7 liability partners
of the new partnership, and that built-in
loss associated with the §1.752–7 liability
does not shift from one partner to another
partner. In addition, these rules are designed to ensure that a deemed assumption
of a liability as a result of a technical termination of a partnership does not create
any new §1.752–7 liabilities that did not
exist prior to the technical termination.
Accordingly, §1.752–7(b)(6)(ii) of the
final regulations provides that, in determining if a deemed contribution of assets and assumption of liability as a result
of a technical termination is treated as a
§1.752–7 liability transfer, only liabilities
that were §1.752–7 liabilities of the terminating partnership are taken into account
and, then, only to the extent of the amount
of the liability that was subject to §1.752–7
prior to the technical termination.
In addition, the definition of a §1.752–7
liability partner has been amended to clarify that, if, in a transaction described in
§1.752–7(e)(3), a partnership (lower-tier
partnership) assumes a §1.752–7 lia-

2005–26 I.R.B.

bility from another partnership (upper-tier partnership), then any partners
that were §1.752–7 liability partners
of the upper-tier partnership continue
to be §1.752–7 liability partners of the
lower-tier partnership with respect to the
remaining built-in loss associated with the
§1.752–7 liability at the time of the assumption of the §1.752–7 liability by the
lower-tier partnership from the upper-tier
partnership. Any new built-in loss associated with the §1.752–7 liability that is
created on the assumption of the §1.752–7
liability from the upper-tier partnership by
the lower-tier partnership is shared by all
the partners of the upper-tier partnership
in accordance with their interests in the
upper-tier partnership, and each partner of
the upper-tier partnership is treated as a
§1.752–7 liability partner with respect to
that new built-in loss.
The definition of §1.752–7 liability
partner has also been amended to provide that, if, in a transaction described in
§1.752–7(e)(3), an interest in a partnership
(lower-tier partnership) that has assumed
a §1.752–7 liability is distributed by a
partnership (upper-tier partnership) that is
the §1.752–7 liability partner with respect
to that liability, then the persons receiving
interests in the lower-tier partnership are
§1.752–7 liability partners with respect
to the lower-tier partnership to the same
extent that they were prior to the distribution. In addition, §1.752–7(e)(3) has
been amended to provide that a distribution of an interest in a lower-tier partnership is exempt from the application of
§1.752–7(e) only if the partners that were
§1.752–7 liability partners with respect
to the lower-tier partnership prior to the
distribution continue to be §1.752–7 liability partners with respect to the lower-tier
partnership after the distribution.
10. Disguised Sale Rules
Section 707(a)(2)(B) provides that
where there is a direct or indirect transfer
of money or other property by a partner
to a partnership and a related direct or
indirect transfer of money or property by
the partnership to such partner and the
transfers, when viewed together, are properly characterized as a sale or exchange,
such transfers shall be treated either as a
transaction between the partnership and
one who is not a partner, or as a transac-

1349

tion between two or more partners acting
other than in their capacity as members
of the partnership. Section 1.752–7(a)(2)
of the proposed regulations provides that
the assumption of a §1.752–7 liability is
not treated as an assumption of a liability
or as a transfer of cash for purposes of
section 707(a)(2)(B). One commentator
noted that the language contained in the
proposed regulations was not consistent
with §1.707–5(a), which takes into account all liabilities, regardless of whether
those liabilities are taken into account under section 752.
The intent of the proposed regulations
under section 752 was not to override the
disguised sale rules under section 707,
which may include §1.752–7 liabilities as
consideration. Therefore, §1.752–7(a)(2)
has been removed.
11. Revisions to §1.704–1(b)(2)(iv)
Under section 704(b), a partner’s distributive share of income, gain, loss, deduction, or credit (or item thereof) is determined in accordance with the partnership
agreement provided that those allocations
have substantial economic effect. If the allocations under the partnership agreement
do not have substantial economic effect or
the partnership agreement does not provide as to a partner’s distributive share of
partnership items, then the partner’s distributive share of such items is determined
in accordance with the partner’s interest in
the partnership (determined by taking into
account all facts and circumstances).
Section 1.704–1(b) describes various
requirements that must be met for partnership allocations to have substantial
economic effect. Among these requirements is that (except as otherwise provided
in §1.704–1(b)) the partnership agreement
must provide for the determination and
maintenance of capital accounts in accordance with the rules of §1.704–1(b)(2)(iv).
Section 1.704–1(b)(2)(iv)(b) generally
requires that a partner’s capital account
be increased by the value of property contributed by the partner to the partnership
net of liabilities secured by such contributed property that the partnership is
considered to assume or take subject to
under section 752, and be decreased by
the value of property distributed by the
partnership to the partner net of liabilities
secured by such distributed property that

June 27, 2005

the partner is considered to assume or
take subject to under section 752. Section
1.704–1(b)(2)(iv)(c) requires that a partner’s capital account be increased by liabilities of the partnership that are assumed
by such partner (other than liabilities
described in §1.704–1(b)(2)(iv)(b)(5)),
and be decreased by liabilities of the
partner that are assumed by the partnership (other than liabilities described in
§1.704–1(b)(2)(iv)(b)(2)). The proposed
regulations revised §1.704–1(b)(2)(iv)(b)
to take into account all liabilities to which
the contributed or distributed property is
subject, not just liabilities described in
section 752. The proposed regulations did
not revise §1.704–1(b)(2)(iv)(c), because
that section is not limited to assumptions
of liabilities described in section 752.
A
commentator
suggested
that, if all liabilities are covered
by
§1.704–1(b)(2)(iv)(b),
then
§1.704–1(b)(2)(iv)(c) did not have
any effect and should be removed.
The final regulations do not adopt
this comment, because the Treasury
Department and the IRS believe that
§1.704–1(b)(2)(iv)(c) has significance
even though §1.704–1(b)(2)(iv)(b) is no
longer limited to liabilities described in
section 752. Section 1.704–1(b)(2)(iv)(b)
applies only to situations in which liabilities are assumed by the partnership or the
partner in connection with the contribution
or distribution of property, or contributed
or distributed property is taken subject to
liabilities. Section 1.704–1(b)(2)(iv)(b)
does not apply if liabilities are assumed
by the partnership or a partner other
than in connection with a contribution
or distribution; these assumptions are
covered by §1.704–1(b)(2)(iv)(c).
12. Notification upon Satisfaction of the
§1.752–7 Liability
One commentator suggested that, to
prevent the loss of a deduction to the
§1.752–7 partner, the regulations should
require the assuming partnership or partner to notify the §1.752–7 liability partner
of the satisfaction of the §1.752–7 liability. The proposed regulations impose
no penalty on the partnership for failure
to notify the §1.752–7 liability partner.
The commentator also suggested that the
§1.752–7 liability partner be required to

June 27, 2005

keep contact information current with the
assuming partnership or partner.
The Treasury Department and the IRS
do not believe that imposing additional requirements is necessary in these circumstances. It is anticipated that the §1.752–7
liability partner, upon entering the partnership, will negotiate with the partnership for
the necessary notification. Therefore, this
comment was not adopted.
13. Treatment of §1.752–7 Liabilities
Commentators have requested that
the final regulations include guidance on
the recourse or nonrecourse treatment of
§1.752–7 liabilities for all purposes of
subchapter K. Under the proposed regulations, a §1.752–7 liability is treated as a
nonrecourse liability solely for purposes
of §1.704–2, dealing with the allocation
of nonrecourse deductions among the
partners. The only other provision that
the Treasury Department and the IRS are
aware of for which the characterization of
a §1.752–7 liability as recourse or nonrecourse is §1.707–5 (addressing the treatment of liabilities for purposes of the disguised sale rules of section 707(a)(2)(B)),
and §1.707–5 already provides adequate
rules for determining if a §1.752–7 liability is recourse or nonrecourse. Because
a §1.752–7 liability is not, by definition,
a §1.752–1 liability, the recourse or nonrecourse nature of a §1.752–7 liability is
not relevant for purposes of §§1.752–1
through 1.752–5. For this reason, this
comment was not adopted.
14. Valuation of §1.752–7 Liabilities
Comments were received requesting
that the final regulations include guidance
on acceptable methods for identifying
and valuing §1.752–7 liabilities, as well
as identifying the appropriate discount
rate for determining the liability’s present
value.
The Treasury Department and the IRS
believe that such matters are best left to
the negotiation of the financial arrangement among the parties and are beyond
the scope of this regulation. In an arm’s
length transaction, the parties will take the
potential occurrence of these obligations
into account in arriving at the agreement
among the parties that will govern their affairs, including the appropriate valuation

1350

methodology to apply to these obligations.
Accordingly, the final regulations do not
adopt this comment.
However, the final regulations clarify that, if the obligation arose under a
contract in exchange for rights granted
to the obligor under that contract, and
those contractual rights are contributed
to the partnership in connection with the
partnership’s assumption of the contractual obligation, then the amount of the
§1.752–7 liability is the amount of cash,
if any, that a willing assignor would pay
to a willing assignee to assume the entire
contract.
Effective Date
The final §1.752–6 regulations apply to
assumptions of liabilities by a partnership
occurring after October 18, 1999, and before June 24, 2003. All of the other final
regulations in this Treasury decision apply
to liabilities assumed on or after June 24,
2003, except as otherwise noted.
Special Analyses
These final and temporary regulations
are necessary to prevent abusive transactions involving transfers to partnerships
and corporations of the type section 358(h)
was enacted to prevent. Accordingly, good
cause is found for dispensing with notice
and public procedure pursuant to 5 U.S.C.
553(b)(B) with respect to the temporary
regulations, and for dispensing with a delayed effective date pursuant to 5 U.S.C.
553(d)(1) and (3) with respect to the final
and temporary regulations.
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It is hereby certified that
the final regulations in this document will
not have a significant economic impact
on a substantial number of small entities.
This certification is based upon the fact
that few partnerships engage in the type of
transactions that are subject to these regulations (assumptions of liabilities not described in section 752(a) and (b) from a
partner). In addition, available data indicates that most partnerships that engage
in the type of transactions that are subject
to these regulations are large partnerships.
Certain broad exceptions to the application

2005–26 I.R.B.

of these regulations (including a de minimis exception) further limit the economic
impact of these regulations on small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. For the applicability of the Regulatory Flexibility Act to the temporary regulations in this document (§1.358–5T), refer
to the cross-reference notice of proposed
rulemaking published in this issue of the
Bulletin. Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
that preceded these regulations was submitted to the Chief Counsel for Advocacy
of the Small Business Administration for
comment on its impact on small business.
Drafting Information
The principal author of these regulations is Laura Nash, Office of Associate
Chief Counsel (Passthroughs and Special
Industries), IRS. However, other personnel from the IRS and Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding entries in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.358–5T also issued under 26
U.S.C. 358(h)(2). * * *
Section 1.358–7 also issued under
Public Law 106–554, 114 Stat. 2763,
2763A–638 (2001) * * *
Section 1.752–1(a) also issued under
Public Law 106–554, 114 Stat. 2763,
2763A–638 (2001).
Section 1.752–6 also issued under
Public Law 106–554, 114 Stat. 2763,
2763A–638 (2001).
Section 1.752–7 also issued under
Public Law 106–554, 114 Stat. 2763,
2763A–638 (2001). * * *
Par. 2. Section 1.358–5T is added to
read as follows:

2005–26 I.R.B.

§1.358–5T Special rules for assumption
of liabilities (temporary).
(a) In general. Section 358(h)(2)(B)
does not apply to an exchange occurring
on or after June 24, 2003.
(b) Effective dates. This section applies
to exchanges occurring on or after June 24,
2003.
Par. 3. Section 1.358–7 is added to read
as follows:
§1.358–7 Transfers by partners and
partnerships to corporations.
(a) Transfers by partners of partnership
interests. For purposes of section 358(h),
a transfer of a partnership interest to a corporation is treated as a transfer of the partner’s share of each of the partnership’s assets and an assumption by the corporation
of the partner’s share of partnership liabilities (including section 358(h) liabilities, as
defined in paragraph (d) of this section).
See paragraph (e) Example 2 of this section.
(b) Transfers by partnerships. If a corporation assumes a section 358(h) liability from a partnership in an exchange to
which section 358(a) applies, then, for purposes of applying section 705 (determination of basis of partner’s interest) and
§1.704–1(b), any reduction, under section
358(h)(1), in the partnership’s basis in corporate stock received in the transaction
is treated as an expenditure of the partnership described in section 705(a)(2)(B).
See paragraph (e) Example 1 of this section. This expenditure must be allocated
among the partners in accordance with section 704(b) and (c) and §1.752–7(c). If
a partner’s share of the reduction, under
section 358(h)(1), in the partnership’s basis in corporate stock exceeds the partner’s
basis in the partnership interest, then the
partner recognizes gain equal to the excess,
which is treated as gain from the sale or
exchange of a partnership interest. This
paragraph does not apply to the extent that
§1.752–7(j)(4) applies to the assumption
of the §1.752–7 liability by the corporation.
(c) Assumption of section 358(h) liability by partnership followed by transfer of
partnership interest or partnership property to a corporation—trade or business
exception. Where a partnership assumes
a section 358(h) liability from a partner

1351

and, subsequently, the partner transfers all
or part of the partner’s partnership interest
to a corporation in an exchange to which
section 358(a) applies, then, for purposes
of applying section 358(h)(2), the section
358(h) liability is treated as associated
only with the contribution made to the
partnership by that partner. See paragraph
(e) Example 2 of this section. Similar
rules apply where a partnership assumes
a section 358(h) liability of a partner and
a corporation subsequently assumes that
section 358(h) liability from the partnership in an exchange to which section
358(a) applies.
(d) Section 358(h) liabilities defined.
For purposes of this section, section 358(h)
liabilities are liabilities described in section 358(h)(3).
(e) Examples. The following examples
illustrate the provisions of this section. Assume, for purposes of these examples, that
the obligation assumed by the corporation
does not reduce the shareholder’s basis in
the corporate stock under section 358(d).
The examples are as follows:
Example 1. Transfer of partnership property to
corporation.
In 2004, in an exchange to which section
351(a) applies, PRS, a cash basis taxpayer, transfers
$2,000,000 cash to Corporation X, also a cash basis
taxpayer, in exchange for Corporation X shares and
the assumption by Corporation X of $1,000,000 of
accounts payable incurred by PRS. At the time of the
exchange, PRS has two partners, A, a 90% partner,
who has a $2,000,000 basis in the PRS interest, and
B, a 10% partner, who has a $50,000 basis in the
PRS interest. Assume that, under section 358(h)(1),
PRS’s basis in the Corporation X stock is reduced
by the accounts payable assumed by Corporation X
($1,000,000). Under paragraph (b) of this section,
A’s and B’s bases in PRS must be reduced, but not
below zero, by their respective shares of the section
358(h)(1) basis reduction. If either partner’s share
of the section 358(h)(1) basis reduction exceeds the
partner’s basis in the partnership interest, then the
partner recognizes gain equal to the excess. A’s share
of the section 358(h) basis reduction is $900,000
(90% of $1,000,000). Therefore, A’s basis in the
PRS interest is reduced to $1,100,000 ($2,000,000
- $900,000). B’s share of the section 358(h) basis
reduction is $100,000 (10% of $1,000,000). Because B’s share of the section 358(h) basis reduction
($100,000) exceeds B’s basis in the PRS interest
($50,000), B’s basis in the PRS interest is reduced
to $0 and B recognizes $50,000 of gain. This gain is
treated as gain from the sale of the PRS interest.
Example 2. Transfer of partnership interest to
corporation. In 2004, A contributes undeveloped
land with a value and basis of $4,000,000 in exchange
for a 50% interest in PRS and an assumption by PRS
of $2,000,000 of pension liabilities from a separate
business that A conducts. A’s basis in the PRS interest immediately after the contribution is A’s basis in

June 27, 2005

the land, $4,000,000, unreduced by the amount of the
pension liabilities. PRS develops the land as a landfill. Before PRS has economically performed with
respect to the pension liabilities, A transfers A’s interest in PRS to Corporation X, in an exchange to
which section 351 applies. At the time of the exchange, the value of A’s PRS interest is $2,000,000,
A’s basis in PRS is $4,000,000, and A has no share
of partnership liabilities other than the pension liabilities. For purposes of applying section 358(h), the
transfer of the PRS interest to Corporation X is treated
as a transfer to Corporation X of A’s share of PRS assets and an assumption by Corporation X of A’s share
of the pension liabilities of PRS ($2,000,000). Because the pension liabilities were not assumed by PRS
from A in an exchange in which the trade or business associated with the liability was transferred to
PRS, the transfer of the PRS interest to Corporation
X is not excepted from section 358(h) under section
358(h)(2). See paragraph (c) of this section. Under
section 358(h), A’s basis in the Corporation X stock
is reduced by the $2,000,000 of pension liabilities.

(f) Effective date. This section applies
to assumptions of liabilities by a corporation occurring on or after June 24, 2003.
Par. 4. Section 1.704–1 is amended as
follows:
1. Paragraph (b)(1)(ii)(a) is amended
by removing the language “The” at the beginning of the first sentence and adding
“Except as otherwise provided in this section, the” in its place.
2. Paragraph (b)(2)(iv)(b) is amended
by adding a sentence at the end of the paragraph.
3.
Paragraph (b)(2)(iv)(b)(2) is
amended by removing the language “secured by such contributed property” in the
parenthetical.
4. Paragraph (b)(2)(iv)(b)(2) is further
amended by removing the language “under
section 752” in the parenthetical.
5.
Paragraph (b)(2)(iv)(b)(5) is
amended by removing the language “secured by such distributed property” in the
parenthetical.
6. Paragraph (b)(2)(iv)(b)(5) is further
amended by removing the language “under
section 752” in the parenthetical.
The addition reads as follows:
§1.704–1 Partner’s distributive share.
*****
(b) * * *
(2) * * *
(iv) * * *
(b) * * * For liabilities assumed before
June 24, 2003, references to liabilities in
this paragraph (b)(2)(iv)(b) shall include
only liabilities secured by the contributed

June 27, 2005

or distributed property that are taken into
account under section 752(a) and (b).
*****
§1.704–2 [Amended]
Par. 5. In §1.704–2, paragraph (b)(3)
is amended by adding the language
“or a §1.752–7 liability (as defined in
§1.752–7(b)(3)(i)) assumed by the partnership from a partner on or after June 24,
2003” at the end of the sentence.
Par. 6. Section 1.704–3 is amended as
follows:
1. The paragraph heading for (a)(7) is
revised.
2. Two sentences are added to the end
of paragraph (a)(7).
3. Paragraphs (a)(8)(ii) and (iii) are
removed and reserved and paragraph
(a)(8)(iv) is added.
4. Paragraph (a)(12) is added.
5. Two additional sentences are added
at the end of paragraph (f).
The revisions and additions read as follows:
§1.704–3 Contributed property.
(a) * * *
(7) Transfer of a partnership interest.* * * This rule does not apply to any
person who acquired a partnership interest from a §1.752–7 liability partner in a
transaction to which paragraph (e)(1) of
§1.752–7 applies. See §1.752–7(c)(1).
(8) Special rules—(i) Disposition in a
nonrecognition transaction.* * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized amounts. To the extent
that a partnership properly capitalizes all
or a portion of an item as described in paragraph (a)(12) of this section, then the item
or items to which such cost is properly capitalized is treated as section 704(c) property with the same amount of built-in loss
as corresponds to the amount capitalized.
*****
(12) §1.752–7 liabilities.
Except
as otherwise provided in §1.752–7,
§1.752–7 liabilities (within the meaning of §1.752–7(b)(2)) are section 704(c)
property (built-in loss property that at the
time of contribution has a book value that
differs from the contributing partner’s adjusted tax basis) for purposes of applying

1352

the rules of this section. See §1.752–7(c).
To the extent that the built-in loss associated with the §1.752–7 liability exceeds
the cost of satisfying the §1.752–7 liability
(as defined in §1.752–7(b)(3)), the excess
creates a “ceiling rule” limitation, within
the meaning of §1.704–3(b)(1), subject
to the methods of allocation set forth in
§1.704–3(b), (c) and (d).
*****
(f) Effective dates. * * * Except as
otherwise provided in §1.752–7(k), paragraphs (a)(8)(iv) and (a)(12) apply to
§1.752–7 liability transfers, as defined in
§1.752–7(b)(4), occurring on or after June
24, 2003. See §1.752–7(k).
Par. 7. Section 1.704–4 is amended as
follows:
1. The paragraph heading for (d)(1) is
revised.
2. Paragraphs (d)(1)(ii) and (iii) are
removed and reserved and paragraph
(d)(1)(iv) is added.
3. Paragraph (g) is revised.
The additions and revisions read as follows:
§1.704–4 Distribution of contributed
property.
(d) Special rules—(1) Nonrecognition transactions, installment obligations,
contributed contracts, and capitalized
costs—(i) Nonrecognition transactions.
***
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to
which the cost of section 704(c) property
is properly capitalized is treated as section
704(c) property for purposes of section
704(c)(1)(B) and this section to the extent
that such property is treated as section
704(c) property under §1.704–3(a)(8)(iv).
See §1.737–2(d)(3) for a similar rule in
the context of section 737.
*****
(g) Effective dates. This section applies
to distributions by a partnership to a partner on or after January 9, 1995, except
that paragraph (d)(1)(iv) applies to distributions by a partnership to a partner on or
after June 24, 2003.
Par. 8. Section 1.705–1 is amended by
adding paragraph (a)(8) to read as follows:

2005–26 I.R.B.

§1.705–1 Determination of basis of
partner’s interest.
(a) * * *
(8) For basis adjustments necessary to
coordinate sections 705 and 358(h), see
§1.358–7(b). For certain basis adjustments
with respect to a §1.752–7 liability assumed by a partnership from a partner, see
§1.752–7.
*****
Par. 9. Section 1.737–2 is amended as
follows:
1. The paragraph heading for (d)(3) is
revised.
2. Paragraphs (d)(3)(ii) and (iii) are
removed and reserved and paragraph
(d)(3)(iv) is added.
The additions and revisions read as follows:
§1.737–2 Exceptions and special rules.
(d) * * *
(3) Nonrecognition transactions, installment sales, contributed contracts,
and capitalized costs—(i) Nonrecognition
transactions. * * *
(ii) [Reserved]
(iii) [Reserved]
(iv) Capitalized costs. Property to
which the cost of section 704(c) property
is properly capitalized is treated as section
704(c) property for purposes of section
737 to the extent that such property is
treated as section 704(c) property under
§1.704–3(a)(8)(iv). See §1.704–4(d)(1)
for a similar rule in the context of section
704(c)(1)(B).
*****
Par. 10. Section 1.737–5 is revised to
read as follows:
§1.737–5 Effective dates.
Sections 1.737–1, 1.737–2, 1.737–3,
and 1.737–4 apply to distributions by a
partnership to a partner on or after January
9, 1995, except that §1.737–2(d)(3)(iv)
applies to distributions by a partnership to
a partner on or after June 24, 2003.
Par. 11. Section 1.752–0 is amended as
follows:
1. The section heading and introductory
text of §1.752–0 are revised.
2. An entry for §1.752–1(a)(4) is added.
3. Entries for §1.752–1(a)(4)(i), (ii),
(iii), and (iv) are added.

2005–26 I.R.B.

4. Entries for §1.752–6 and §1.752–7
are added.
The revision and additions read as follows:
§1.752–0 Table of contents.
This section lists the major paragraphs
that appear in §§1.752–1 through 1.752–7.
§1.752–1 Treatment of partnership
liabilities.
(a) * * *
(4) Liability defined.
(i) In general.
(ii) Obligation.
(iii) Other liabilities.
(iv) Effective date.
*****
§1.752–6 Partnership assumption of
partner’s section 358(h)(3) liability after
October 18, 1999, and before June 24,
2003.
(a) In general.
(b) Exceptions.
(1) In general.
(2) Transactions described in Notice
2000–44.
(c) Example.
(d) Effective date.
(1) In general.
(2) Election to apply §1.752–7.
§1.752–7 Partnership assumption of
partner’s §1.752–7 liability on or after
June 24, 2003.
(a) Purpose and structure.
(b) Definitions.
(1) Assumption.
(2) Adjusted value.
(3) §1.752–7 liability.
(i) In general.
(ii) Amount and share of §1.752–7 liability.
(iii) Example.
(4) §1.752–7 liability transfer.
(i) In general.
(ii) Terminations under section
708(b)(1)(B).
(5) §1.752–7 liability partner.
(i) In general.
(ii) Tiered partnerships.
(A) Assumption by a lower-tier partnership.
(B) Distribution of partnership interest.

1353

(6) Remaining built-in loss associated
with a §1.752–7 liability.
(i) In general.
(ii) Partial dispositions and assumptions.
(7) §1.752–7 liability reduction.
(i) In general.
(ii) Partial dispositions and assumptions.
(8) Satisfaction of §1.752–7 liability.
(9) Testing date.
(10) Trade or business.
(i) In general.
(ii) Examples.
(c) Application of section 704(b) and
(c) to assumed §1.752–7 liabilities.
(1) In general.
(i) Section 704(c).
(ii)Section 704(b).
(2) Example.
(d) Special rules for transfers of partnership interests, distributions of partnership
assets, and assumptions of the §1.752–7 liability after a §1.752–7 liability transfer.
(1) In general.
(2) Exceptions.
(i) In general.
(ii) Examples.
(e) Transfer of §1.752–7 liability partner’s partnership interest.
(1) In general.
(2) Examples.
(3) Exception for nonrecognition transactions.
(i) In general.
(ii) Examples.
(f) Distribution in liquidation of
§1.752–7 liability partner’s partnership
interest.
(1) In general.
(2) Example.
(g) Assumption of §1.752–7 liability by
a partner other than §1.752–7 liability partner.
(1) In general.
(2) Consequences to §1.752–7 liability
partner.
(3) Consequences to partnership.
(4) Consequences to assuming partner.
(5) Example.
(h) Notification by the partnership
(or successor) of the satisfaction of the
§1.752–7 liability.
(i) Special rule for amounts that are capitalized prior to the occurrence of an event
described in paragraphs (e), (f), or (g).
(1) In general.
(2) Example.

June 27, 2005

(j) Tiered partnerships.
(1) Look-through treatment.
(2) Trade or business exception.
(3) Partnership as a §1.752–7 liability
partner.
(4) Transfer of §1.752–7 liability by
partnership to another partnership or corporation after a transaction described in
paragraphs (e), (f), or (g).
(i) In general.
(ii) Subsequent transfers.
(5) Example.
(k) Effective dates.
(1) In general.
(2) Election to apply this section to assumptions of liabilities occurring after October 18, 1999, and before June 24, 2003.
(i) In general.
(ii) Manner of making election.
(iii) Filing of amended returns.
(iv) Time for making election.
Par. 12. In §1.752–1, paragraph (a)(4)
is added to read as follows:
§1.752–1 Treatment of partnership
liabilities.
(a) * * *
(4) Liability defined—(i) In general.
An obligation is a liability for purposes of
section 752 and the regulations thereunder
(§1.752–1 liability), only if, when, and to
the extent that incurring the obligation—
(A) Creates or increases the basis of any
of the obligor’s assets (including cash);
(B) Gives rise to an immediate deduction to the obligor; or
(C) Gives rise to an expense that is not
deductible in computing the obligor’s taxable income and is not properly chargeable
to capital.
(ii) Obligation. For purposes of this
paragraph and §1.752–7, an obligation
is any fixed or contingent obligation to
make payment without regard to whether
the obligation is otherwise taken into account for purposes of the Internal Revenue
Code. Obligations include, but are not
limited to, debt obligations, environmental obligations, tort obligations, contract
obligations, pension obligations, obligations under a short sale, and obligations
under derivative financial instruments
such as options, forward contracts, futures
contracts, and swaps.
(iii) Other liabilities.
For obligations that are not §1.752–1 liabilities,
see §§1.752–6 and 1.752–7.

June 27, 2005

(iv) Effective date. Except as otherwise provided in §1.752–7(k), this paragraph (a)(4) applies to liabilities that are
incurred or assumed by a partnership on or
after June 24, 2003.
*****
§1.752–5(a) [Amended]
Par. 13. In §1.752–5, paragraph (a) is
amended by removing the language “Unless” at the beginning of the first sentence
and adding “Except as otherwise provided
in §§1.752–1 through 1.752–4, unless” in
its place.
Par. 14. Section 1.752–6 is added to
read as follows:
§1.752–6 Partnership assumption of
partner’s section 358(h)(3) liability after
October 18, 1999, and before June 24,
2003.
(a) In general. If, in a transaction described in section 721(a), a partnership
assumes a liability (defined in section
358(h)(3)) of a partner (other than a liability to which section 752(a) and (b)
apply), then, after application of section
752(a) and (b), the partner’s basis in the
partnership is reduced (but not below the
adjusted value of such interest) by the
amount (determined as of the date of the
exchange) of the liability. For purposes of
this section, the adjusted value of a partner’s interest in a partnership is the fair
market value of that interest increased by
the partner’s share of partnership liabilities under §§1.752–1 through 1.752–5.
(b) Exceptions—(1) In general. Except
as provided in paragraph (b)(2) of this section, the exceptions contained in section
358(h)(2)(A) and (B) apply to this section.
(2) Transactions described in Notice
2000–44. The exception contained in
section 358(h)(2)(B) does not apply to
an assumption of a liability (defined in
section 358(h)(3)) by a partnership as part
of a transaction described in, or a transaction that is substantially similar to the
transactions described in, Notice 2000–44,
2000–2 C.B. 255. See §601.601(d)(2) of
this chapter.
(c) Example. The following example
illustrates the principles of paragraph (a) of
this section:
Example. In 1999, A and B form partnership
PRS. A contributes property with a value and basis of
$200, subject to a nonrecourse debt obligation of $50

1354

and a fixed or contingent obligation of $100 that is
not a liability to which section 752(a) and (b) applies,
in exchange for a 50% interest in PRS. Assume that,
after the contribution, A’s share of partnership liabilities under §§1.752–1 through 1.752–5 is $25. Also
assume that the $100 liability is not associated with a
trade or business contributed by A to PRS or with assets contributed by A to PRS. After the contribution,
A’s basis in PRS is $175 (A’s basis in the contributed
land ($200) reduced by the nonrecourse debt assumed
by PRS ($50), increased by A’s share of partnership
liabilities under §§1.752–1 through 1.752–5 ($25)).
Because A’s basis in the PRS interest is greater than
the adjusted value of A’s interest, $75 (the fair market value of A’s interest ($50) increased by A’s share
of partnership liabilities ($25)), paragraph (a) of this
section operates to reduce A’s basis in the PRS interest (but not below the adjusted value of that interest) by the amount of liabilities described in section 358(h)(3) (other than liabilities to which section
752(a) and (b) apply) assumed by PRS. Therefore,
A’s basis in PRS is reduced to $75.

(d) Effective date—(1) In general. This
section applies to assumptions of liabilities
occurring after October 18, 1999, and before June 24, 2003.
(2) Election to apply §1.752–7.
The partnership may elect, under
§1.752–7(k)(2), to apply the provisions
referenced in §1.752–7(k)(2)(ii) to all assumptions of liabilities by the partnership
occurring after October 18, 1999, and before June 24, 2003. Section 1.752–7(k)(2)
describes the manner in which the election
is made.
§1.752–6T [Removed]
Par. 15. Section 1.752–6T is removed.
Par. 16. Section 1.752–7 is added to
read as follows:
§1.752–7 Partnership assumption of
partner’s §1.752–7 liability on or after
June 24, 2003.
(a) Purpose and structure. The purpose
of this section is to prevent the acceleration or duplication of loss through the
assumption of obligations not described in
§1.752–1(a)(4)(i) in transactions involving partnerships. Under paragraph (c) of
this section, any such obligation that is
assumed by a partnership from a partner in
a transaction governed by section 721(a)
is treated as section 704(c) property. Paragraphs (e), (f), and (g) of this section
provide rules for situations where a partnership assumes such an obligation from
a partner and, subsequently, that partner
transfers all or part of the partnership interest, that partner receives a distribution

2005–26 I.R.B.

in liquidation of the partnership interest, or
another partner assumes part or all of that
obligation from the partnership. These
rules prevent the duplication of loss by
prohibiting the partnership and any person other than the partner from whom the
obligation was assumed from claiming a
deduction, loss, or capital expense to the
extent of the built-in loss associated with
the obligation. These rules also prevent
the acceleration of loss by deferring the
partner’s deduction or loss attributable to
the obligation (if any) until the satisfaction
of the §1.752–7 liability (within the meaning of paragraph (b)(8) of this section).
Paragraph (d) of this section provides a
number of exceptions to paragraphs (e),
(f), and (g) of this section, including a de
minimis exception. Paragraph (i) provides
a special rule for situations in which an
amount paid to satisfy a §1.752–7 liability
is capitalized into other partnership property. Paragraph (j) of this section provides
special rules for tiered partnership transactions.
(b) Definitions. For purposes of this
section, the following definitions apply:
(1) Assumption. The principles of
§1.752–1(d) and (e) apply in determining
if a §1.752–7 liability has been assumed.
(2) Adjusted value. The adjusted value
of a partner’s interest in a partnership is the
fair market value of that interest increased
by the partner’s share of partnership liabilities under §§1.752–1 through 1.752–5.
(3) §1.752–7 liability—(i) In general.
A §1.752–7 liability is an obligation described in §1.752–1(a)(4)(ii) to the extent
that either —
(A) The obligation is not described in
§1.752–1(a)(4)(i); or
(B) The amount of the obligation (under paragraph (b)(3)(ii) of this section) exceeds the amount taken into account under
§1.752–1(a)(4)(i).
(ii) Amount and share of §1.752–7 liability. The amount of a §1.752–7 liability (or, for purposes of paragraph (b)(3)(i)
of this section, the amount of an obligation) is the amount of cash that a willing assignor would pay to a willing assignee to assume the §1.752–7 liability in
an arm’s-length transaction. If the obligation arose under a contract in exchange
for rights granted to the obligor under that
contract, and those contractual rights are
contributed to the partnership in connection with the partnership’s assumption of

2005–26 I.R.B.

the contractual obligation, then the amount
of the §1.752–7 liability or obligation is
the amount of cash, if any, that a willing
assignor would pay to a willing assignee
to assume the entire contract. A partner’s
share of a partnership’s §1.752–7 liability
is the amount of deduction that would be
allocated to the partner with respect to the
§1.752–7 liability if the partnership disposed of all of its assets, satisfied all of
its liabilities (other than §1.752–7 liabilities), and paid an unrelated person to assume all of its §1.752–7 liabilities in a fully
taxable arm’s-length transaction (assuming such payment would give rise to an immediate deduction to the partnership).
(iii) Example. In 2005, A, B, and C form partnership PRS. A contributes $10,000,000 in exchange
for a 25% interest in PRS and PRS’s assumption of
a debt obligation. The debt obligation was issued
for cash and the issue price was equal to the stated
redemption price at maturity ($5,000,000). The debt
obligation bears interest, payable quarterly, at a fixed
rate of interest, which was a market rate of interest
when the debt obligation was issued. At the time of
the assumption, all accrued interest has been paid.
Prior to the partnership assuming the obligation, interest rates decrease, resulting in the debt obligation
bearing an above-market interest rate. Assume that,
as a result of the decline in interest rates, A would
have had to pay a willing assignee $6,000,000 to assume the debt obligation. The assumption of the debt
obligation by PRS from A is treated as an assumption of a §1.752–1(a)(4)(i) liability in the amount of
$5,000,000 (the portion of the total amount of the
debt obligation that has created basis in A’s assets,
that is, the $5,000,000 that was issued in exchange
for the debt obligation ) and an assumption of a
§1.752–7 liability in the amount of $1,000,000 (the
difference between the total obligation, $6,000,000,
and the §1.752–1(a)(4)(i) liability, $5,000,000).

(4) §1.752–7 liability transfer—(i) In
general. Except as provided in paragraph
(b)(4)(ii) of this section, a §1.752–7 liability transfer is any assumption of a
§1.752–7 liability by a partnership from a
partner in a transaction governed by section 721(a).
(ii) Terminations under section
708(b)(1)(B). In determining if a deemed
contribution of assets and assumption of
liability as a result of a technical termination is treated as a §1.752–7 liability
transfer, only §1.752–7 liabilities that
were assumed by the terminating partnership as part of an earlier §1.752–7 liability
transfer are taken into account and, then,
only to the extent of the remaining built-in
loss associated with that §1.752–7 liability.
(5) §1.752–7 liability partner—(i) In
general. A §1.752–7 liability partner is

1355

a partner from whom a partnership assumes a §1.752–7 liability as part of a
§1.752–7 liability transfer or any person
who acquires a partnership interest from
the §1.752–7 liability partner in a transaction to which paragraph (e)(3) of this section applies.
(ii) Tiered partnerships—(A) Assumption by a lower-tier partnership. If, in
a §1.752–7 liability transfer, a partnership (lower-tier partnership) assumes a
§1.752–7 liability from another partnership (upper-tier partnership), then both the
upper-tier partnership and the partners of
the upper-tier partnership are §1.752–7
liability partners. Therefore, paragraphs
(e) and (f) of this section apply on a
sale or liquidation of any partner’s interest in the upper-tier partnership and
on a sale or liquidation of the upper-tier
partnership’s interest in the lower-tier
partnership. See paragraph (j)(3) of this
section. If, in a §1.752–7 liability transfer, the upper-tier partnership assumes
a §1.752–7 liability from a partner, and,
subsequently, in another §1.752–7 liability
transfer, a lower-tier partnership assumes
that §1.752–7 liability from the upper-tier
partnership, then the partner from whom
the upper-tier partnership assumed the
§1.752–7 liability continues to be the
§1.752–7 liability partner of the lower-tier
partnership with respect to the remaining
built-in loss associated with that §1.752–7
liability. Any new built-in loss associated
with the §1.752–7 liability that is created
on the assumption of the §1.752–7 liability from the upper-tier partnership by
the lower-tier partnership is shared by all
the partners of the upper-tier partnership
in accordance with their interests in the
upper-tier partnership, and each partner
of the upper-tier partnership is treated as
a §1.752–7 liability partner with respect
to that new built-in loss. See paragraph
(e)(3)(ii), Example 3 of this section.
(B) Distribution of partnership interest. If, in a transaction described in
§1.752–7(e)(3), an interest in a partnership
(lower-tier partnership) that has assumed
a §1.752–7 liability is distributed by a
partnership (upper-tier partnership) that is
the §1.752–7 liability partner with respect
to that liability, then the persons receiving
interests in the lower-tier partnership are
§1.752–7 liability partners with respect to
the lower-tier partnership to the same extent that they were prior to the distribution.

June 27, 2005

(6) Remaining built-in loss associated
with a §1.752–7 liability. (i) In general.
The remaining built-in loss associated with
a §1.752–7 liability equals the amount of
the §1.752–7 liability as of the time of the
assumption of the §1.752–7 liability by the
partnership, reduced by the portion of the
§1.752–7 liability previously taken into account by the §1.752–7 liability partner under paragraph (j)(3) of this section and adjusted as provided in paragraph (c) of this
section and §1.704–3 for—
(A) Any portion of that built-in loss associated with the §1.752–7 liability that is
satisfied by the partnership on or prior to
the testing date (whether capitalized or deducted); and
(B) Any assumption of all or part of the
§1.752–7 liability by the §1.752–7 liability partner (including any assumption that
occurs on the testing date).
(ii) Partial dispositions and assumptions. In the case of a partial disposition
of the §1.752–7 liability partner’s partnership interest or a partial assumption of
the §1.752–7 liability by another partner,
the remaining built-in loss associated with
§1.752–7 liability is prorated based on the
portion of the interest sold or the portion
of the §1.752–7 liability assumed.
(7) §1.752–7 liability reduction—(i) In
general. The §1.752–7 liability reduction
is the amount by which the §1.752–7 liability partner is required to reduce the basis in the partner’s partnership interest by
operation of paragraphs (e), (f), and (g) of
this section. The §1.752–7 liability reduction is the lesser of —
(A) The excess of the §1.752–7 liability
partner’s basis in the partnership interest
over the adjusted value of that interest (as
defined in paragraph (b)(2) of this section);
or
(B) The remaining built-in loss associated with the §1.752–7 liability (as defined
in paragraph (b)(6) of this section without
regard to paragraph (b)(6)(ii) of this section).
(ii) Partial dispositions and assumptions. In the case of a partial disposition
of the §1.752–7 liability partner’s partnership interest or a partial assumption of the
§1.752–7 liability by another partner, the
§1.752–7 liability reduction is prorated
based on the portion of the interest sold
or the portion of the §1.752–7 liability
assumed.

June 27, 2005

(8) Satisfaction of §1.752–7 liability—In general. A §1.752–7 liability is
treated as satisfied (in whole or in part)
on the date on which the partnership (or
the assuming partner) would have been
allowed to take the §1.752–7 liability into
account for federal tax purposes but for
this section. For example, a §1.752–7 liability is treated as satisfied when, but for
this section, the §1.752–7 liability would
give rise to—
(i) An increase in the basis of the partnership’s or the assuming partner’s assets
(including cash);
(ii) An immediate deduction to the partnership or to the assuming partner;
(iii) An expense that is not deductible in
computing the partnership’s or the assuming partner’s taxable income and not properly chargeable to capital account; or
(iv) An amount realized on the sale or
other disposition of property subject to that
liability if the property was disposed of by
the partnership or the assuming partner at
that time.
(9) Testing date. The testing date is—
(i) For purposes of paragraph (e) of this
section, the date of the sale, exchange,
or other disposition of part or all of the
§1.752–7 liability partner’s partnership interest;
(ii) For purposes of paragraph (f) of this
section, the date of the partnership’s distribution in liquidation of the §1.752–7 liability partner’s partnership interest; and
(iii) For purposes of paragraph (g) of
this section, the date of the assumption (or
partial assumption) of the §1.752–7 liability by a partner other than the §1.752–7 liability partner.
(10) Trade or business—(i) In general.
A trade or business is a specific group of
activities carried on by a person for the purpose of earning income or profit, other than
a group of activities consisting of acquiring, holding, dealing in, or disposing of
financial instruments, if the activities included in that group include every operation that forms a part of, or a step in, the
process of earning income or profit. Such
group of activities ordinarily includes the
collection of income and the payment of
expenses. The group of activities must
constitute the carrying on of a trade or
business under section 162(a) (determined
as though the activities were conducted by
an individual).

1356

(ii) Examples. The following examples
illustrate the provisions of this paragraph
(b)(10):
Example 1. Corporation Y owns, manages, and
derives rental income from an office building and also
owns vacant land that may be subject to environmental liabilities. Corporation Y contributes the land subject to the environmental liabilities to PRS in a transaction governed by section 721(a). PRS plans to develop the land as a landfill. The contribution of the
vacant land does not constitute the contribution of a
trade or business because Corporation Y did not conduct any significant business or development activities with respect to the land prior to the contribution.
Example 2. For the past 5 years, Corporation X
has owned and operated gas stations in City A, City
B, and City C. Corporation X transfers all of the assets
associated with the operation of the gas station in City
A to PRS for interests in PRS and the assumption by
PRS of the §1.752–7 liabilities associated with that
gas station. PRS continues to operate the gas station
in City A after the contribution. The contribution of
the gas station to PRS constitutes the contribution of
a trade or business.
Example 3. For the past 7 years, Corporation Z
has engaged in the manufacture and sale of household
products. Throughout this period, Corporation Z has
maintained a research department for use in connection with its manufacturing activities. The research
department has 10 employees actively engaged in the
development of new products. Corporation Z contributes the research department to PRS in exchange
for a PRS interest and the assumption by PRS of pension liabilities with respect to the employees of the research department. PRS continues the research operations on a contractual basis with several businesses,
including Corporation Z. The contribution of the research operations to PRS constitutes a contribution of
a trade or business.

(c) Application of section 704(b) and
(c) to assumed §1.752–7 liabilities—(1)
In general—(i) Section 704(c). Except as
otherwise provided in this section, sections
704(c)(1)(A) and (B), section 737, and the
regulations thereunder, apply to §1.752–7
liabilities. See §1.704–3(a)(12). However, §1.704–3(a)(7) does not apply to any
person who acquired a partnership interest from a §1.752–7 liability partner in a
transaction to which paragraph (e)(1) of
this section applies.
(ii) Section 704(b). Section 704(b) and
§1.704–1(b) apply to a post-contribution
change in the value of a §1.752–7 liability. If there is a decrease in the value of
a §1.752–7 liability that is reflected in
the capital accounts of the partners under §1.704–1(b)(2)(iv)(f), the amount of
the decrease constitutes an item of income for purposes of section 704(b) and
§1.704–1(b). Conversely, if there is an increase in the value of a §1.752–7 liability
that is reflected in the capital accounts of
the partners under §1.704–1(b)(2)(iv)(f),

2005–26 I.R.B.

the amount of the increase constitutes an
item of loss for purposes of section 704(b)
and §1.704–1(b).
(2) Example. The following example
illustrates the provisions of this paragraph
(c):
Example—(i) Facts. In 2004, A, B, and C form
partnership PRS. A contributes Property 1 with a
fair market value and basis of $400X, subject to a
§1.752–7 liability of $100X, for a 25% interest in

A

PRS. B contributes $300X cash for a 25% interest
in PRS, and C contributes $600X cash for a 50%
interest in PRS. Assume that the partnership complies with the substantial economic effect safe harbor
of §1.704–1(b)(2). Under §1.704–1(b)(2)(iv)(b),
A’s capital account is credited with $300X (the fair
market value of Property 1, $400X, less the §1.752–7
liability assumed by PRS, $100X). In accordance
with §§1.752–7(c)(1)(i) and 1.704–3, the partnership
can use any reasonable method for section 704(c)
purposes. In this case, the partnership elects the

B

traditional method under §1.704–3(b) and also elects
to treat the deductions or losses attributable to the
§1.752–7 liability as coming first from the built-in
loss. In 2005, PRS earns $200X of income and uses it
to satisfy the §1.752–7 liability which has increased
in value to $200X. Assume that the cost to PRS of
satisfying the §1.752–7 liability is deductible by
PRS. The $200X of partnership income is allocated
according to the partnership agreement, $50X to A,
$50X to B, and $100X to C.

C

Book

Tax

Book

Tax

Book

Tax

$300
50
(25)

$400
50
(125)

$300
50
(25)

$300
50
(25)

$600
100
(50)

$600
100
(50)

$325

$325

$325

$325

$650

$650

(ii) Analysis. Pursuant to paragraph (c) of this
section, $100X of the deduction attributable to the
satisfaction of the §1.752–7 liability is specially allocated to A, the §1.752–7 liability partner, under
section 704(c)(1)(A) and §1.704–3. No book item
corresponds to this tax allocation. The remaining
$100X of deduction attributable to the satisfaction of
the §1.752–7 liability is allocated, for both book and
tax purposes, according to the partnership agreement,
$25X to A, $25X to B, and $50X to C. If the partnership, instead, satisfied the §1.752–7 liability over a
number of years, the first $100X of deduction with respect to the §1.752–7 liability would be allocated to
A, the §1.752–7 liability partner, before any deduction with respect to the §1.752–7 liability would be
allocated to the other partners. For example, if PRS
were to satisfy $50X of the §1.752–7 liability, the
$50X deduction with respect to the §1.752–7 liability
would be allocated to A for tax purposes only. No deduction would arise for book purposes. If PRS later
paid a further $100X in satisfaction of the §1.752–7
liability, $50X of the deduction with respect to the
§1.752–7 liability would be allocated, solely for tax
purposes, to A and the remaining $50X would be allocated, for both book and tax purposes, according
to the partnership agreement. Under these circumstances, the partnership’s method of allocating the
built-in loss associated with the §1.752–7 liability is
reasonable.

(d) Special rules for transfers of partnership interests, distributions of partnership assets, and assumptions of the
§1.752–7 liability after a §1.752–7 liability transfer—(1) In general. Except as
provided in paragraphs (d)(2) and (i) of
this section, paragraphs (e), (f), and (g) of

2005–26 I.R.B.

this section apply to certain partnership
transactions occurring after a §1.752–7
liability transfer.
(2) Exceptions—(i) In general. Paragraphs (e), (f), and (g) of this section do
not apply—
(A) If the partnership assumes the
§1.752–7 liability as part of a contribution
to the partnership of the trade or business
with which the liability is associated, and
the partnership continues to carry on that
trade or business after the contribution (for
the definition of a trade or business, see
paragraph (b)(10) of this section); or
(B) If, immediately before the testing
date, the amount of the remaining built-in
loss with respect to all §1.752–7 liabilities assumed by the partnership (other than
§1.752–7 liabilities assumed by the partnership with an associated trade or business) in one or more §1.752–7 liability
transfers is less than the lesser of 10% of
the gross value of partnership assets or
$1,000,000.
(ii) Examples. The following examples
illustrate the principles of this paragraph
(d)(2):

Initial Contribution
Income
Satisfaction of Liability

tion by PRS of pension liabilities with respect to the
employees engaged in Business A. PRS plans to carry
on Business A after the contribution. Because PRS
has assumed the pension liabilities as part of a contribution to PRS of the trade or business with which
the liabilities are associated, the treatment of the pension liabilities is not affected by paragraphs (e), (f),
and (g) of this section with respect to any transaction
occurring after the §1.752–7 liability transfer of the
pension liabilities.
Example 2. (i) Facts. The facts are the same as in
Example 1, except that PRS also assumes from Corporation X certain pension liabilities with respect to
the employees of Business B. At the time of the assumption, the amount of the pension liabilities with
respect to the employees of Business A is $3,000,000
(the A liabilities) and the amount of the pension liabilities associated with the employees of Business B (the
B liabilities) is $2,000,000. Two years later, Corporation X sells its interest in PRS to Y for $9,000,000.
At the time of the sale, the remaining built-in loss associated with the A liabilities is $2,100,000, the remaining built-in loss associated with the B liabilities
is $900,000, and the gross value of PRS’s assets (excluding §1.752–7 liabilities) is $20,000,000. Assume
that PRS has no §1.752–7 liabilities other than those
assumed from Corporation X.

Example 1. For the past 5 years, Corporation X,
a C corporation, has been engaged in Business A and
Business B. In 2004, Corporation X contributes Business A, in a transaction governed by section 721(a), to
PRS in exchange for a PRS interest and the assump-

1357

June 27, 2005

PRS Balance Sheet at Time of X’s Sale of PRS Interest (in millions)
Assets
$20

Liabilities
Gross Assets (including Business A)
A Liabilities
B Liabilities

($2.1)
(0.9)
(ii) Analysis. The only liabilities assumed by PRS
from Corporation X that were not assumed as part
of Corporation X’s contribution of Business A were
the B liabilities. Immediately before the testing date,
the remaining built-in loss associated with the B liabilities ($900,000) was less than the lesser of 10%
of the gross value of PRS’s assets ($2,000,000) or
$1,000,000. Therefore, paragraph (d)(2)(i)(B) of this
section applies to exclude Corporation X’s sale of the
PRS interest to Y from the application of paragraph
(e) of this section.

(e) Transfer of §1.752–7 liability partner’s partnership interest—(1) In general.
Except as provided in paragraphs (d)(2),
(e)(3), and (i) of this section, immediately before the sale, exchange, or other
disposition of all or a part of a §1.752–7
liability partner’s partnership interest,
the §1.752–7 liability partner’s basis in
the partnership interest is reduced by the
§1.752–7 liability reduction (as defined in
paragraph (b)(7) of this section). No deduction, loss, or capital expense is allowed
to the partnership on the satisfaction of
the §1.752–7 liability (within the meaning of paragraph (b)(8) of this section) to
the extent of the remaining built-in loss
associated with the §1.752–7 liability (as
defined in paragraph (b)(6) of this section).

For purposes of section 705(a)(2)(B) and
§1.704–1(b)(2)(ii)(b) only, the remaining
built-in loss associated with the §1.752–7
liability is not treated as a nondeductible,
noncapital expenditure of the partnership.
Therefore, the remaining partners’ capital
accounts and bases in their partnership
interests are not reduced by the remaining
built-in loss associated with the §1.752–7
liability. If the partnership (or any successor) notifies the §1.752–7 liability partner
of the satisfaction of the §1.752–7 liability, then the §1.752–7 liability partner is
entitled to a loss or deduction. The amount
of that deduction or loss is, in the case of a
partial satisfaction of the §1.752–7 liability, the amount that the partnership would,
but for this section, take into account on
the partial satisfaction of the §1.752–7
liability (but not, in total, more than the
§1.752–7 liability reduction) or, in the case
of a complete satisfaction of the §1.752–7
liability, the remaining §1.752–7 liability
reduction. To the extent of the amount that
the partnership would, but for this section,
take into account on the satisfaction of the
§1.752–7 liability, the character of that

deduction or loss is determined as if the
§1.752–7 liability partner had satisfied the
liability. To the extent that the §1.752–7
liability reduction exceeds the amount that
the partnership would, but for this section,
take into account on the satisfaction of
the §1.752–7 liability, the character of the
§1.752–7 liability partner’s loss is capital.
(2) Examples. The following examples
illustrate the principles of paragraph (e)(1)
of this section:
Example 1. (i) Facts. In 2004, A, B, and C form
partnership PRS. A contributes Property 1 with a fair
market value of $5,000,000 and basis of $4,000,000
subject to a §1.752–7 liability of $2,000,000 in
exchange for a 25% interest in PRS. B contributes
$3,000,000 cash in exchange for a 25% interest in
PRS, and C contributes $6,000,000 cash in exchange
for a 50% interest in PRS. In 2006, when PRS has
a section 754 election in effect, A sells A’s interest
in PRS to D for $3,000,000. At the time of the
sale, the basis of A’s PRS interest is $4,000,000, the
remaining built-in loss associated with the §1.752–7
liability is $2,000,000, and PRS has no liabilities (as
defined in §1.752–1(a)(4)). Assume that none of the
exceptions of paragraph (d)(2) of this section apply
and that the satisfaction of the §1.752–7 liability
would have given rise to a deductible expense to A.
In 2007, PRS pays $3,000,000 to satisfy the liability.

PRS Balance Sheet (in millions)
Assets
Value
$5
$9

Basis
$4
$9

Liabilities/Equity
Basis
Value
Property 1
Cash

(ii) Sale of A’s PRS interest. Immediately before the sale of the PRS interest to D, A’s basis in
the PRS interest is reduced (to $3,000,000) by the
§1.752–7 liability reduction, i.e., the lesser of the excess of A’s basis in the PRS interest ($4,000,000)
over the adjusted value of that interest ($3,000,000),
$1,000,000, or the remaining built-in loss associated

June 27, 2005

$2

—

$3
$3
$6

$4
$3
$6

with the §1.752–7 liability, $2,000,000. Therefore,
A neither realizes nor recognizes any gain or loss on
the sale of the PRS interest to D. D’s basis in the
PRS interest is $3,000,000. D’s share of the adjusted
basis of partnership property, as determined under
§1.743–1(d), equals D’s interest in the partnership’s
previously taxed capital of $2,000,000 (the amount

1358

§1.752–7 Liability
Partner’s Equity:
A
B
C

of cash that D would receive on a liquidation of the
partnership, $3,000,000, increased by the amount of
tax loss that would be allocated to D in the hypothetical transaction, $0, and reduced by the amount of tax
gain that would be allocated to D in the hypothetical
transaction, $1,000,000). Therefore, the positive basis adjustment under section 743(b) is $1,000,000.

2005–26 I.R.B.

Computation of §1.752–7 Liability Reduction (in millions)
1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest

$4
(3)

3. Difference
4. Remaining built-in loss from §1.752–7 liability

$1
2

5. §1.752–7 liability reduction (lesser of 3 or 4)

$1

Gain/Loss on Sale of A’s PRS Interest (in millions)
1. Amount realized on sale
2. Less basis of PRS interest
Original
§1.752–7 liability reduction

$3
4
1

Difference

($3)

3. Gain/Loss

0

(iii) Satisfaction of §1.752–7 liability. Neither
PRS nor any of its partners is entitled to a deduction, loss, or capital expense upon the satisfaction
of the §1.752–7 liability to the extent of the remaining built-in loss associated with the §1.752–7 liability
($2,000,000). PRS is entitled to a deduction, how-

ever, for the amount by which the cost of satisfying
the §1.752–7 liability exceeds the remaining built-in
loss associated with the §1.752–7 liability. Therefore,
in 2007, PRS may deduct $1,000,000 (cost to satisfy
the §1.752–7 liability, $3,000,000, less the remaining built-in loss associated with the §1.752–7 liabil-

ity, $2,000,000). If PRS notifies A of the satisfaction
of the §1.752–7 liability, then A is entitled to an ordinary deduction in 2007 of $1,000,000 (the §1.752–7
liability reduction).

PRS’s Deduction on Satisfaction of Liability (in millions)
1. Amount paid by PRS to satisfy §1.752–7 liability
2. Remaining built-in loss for §1.752–7 liability

$3
(2)

3. Difference

$1

Example 2. The facts are the same as in Example 1 except that, at the time of A’s sale of the
PRS interest to D, PRS has a nonrecourse liability
of $4,000,000, of which A’s share is $1,000,000.
A’s basis in PRS is $5,000,000. At the time of the
sale of the PRS interest to D, the adjusted value of
A’s interest is $4,000,000 (the fair market value of
the interest ($3,000,000), increased by A’s share of
partnership liabilities ($1,000,000)). The difference
between the basis of A’s interest ($5,000,000) and

the adjusted value of that interest ($4,000,000) is
$1,000,000. Therefore, the §1.752–7 liability reduction is $1,000,000 (the lesser of this difference or the
remaining built-in loss associated with the §1.752–7
liability, $2,000,000). Immediately before the sale
of the PRS interest to D, A’s basis is reduced from
$5,000,000 to $4,0000,000. A’s amount realized
on the sale of the PRS interest to D is $4,000,000
($3,000,000 paid by D, increased under section
752(d) by A’s share of partnership liabilities, or

$1,000,000). Therefore, A neither realizes nor recognizes any gain or loss on the sale. D’s basis in the
PRS interest is $4,000,000. Because D’s share of the
adjusted basis of partnership property is $3,000,000
(D’s share of the partnership’s previously taxed
capital, $2,000,000, plus D’s share of partnership
liabilities, $1,000,000), the basis adjustment under
section 743(b) is $1,000,000.

PRS Balance Sheet (in millions)
Assets
Value
$5
$13

Basis
$4
$13

2005–26 I.R.B.

Value

Liabilities/Equity
Basis

Property 1
Cash
$4
$2

—
—

$3
$3
$6

$5
$4
$8

1359

Nonrecourse Debt
§1.752–7 Liability
Partner’s Equity
A
B
C

June 27, 2005

Computation of §1.752–7 Liability Reduction (in millions)
$5

1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest
Value of PRS interest
A’s share of nonrecourse debt

3
1
(4)

Total

1
2

3. Difference between 1 and 2
4. Remaining built-in loss from §1.752–7 liability
5. §1.752–7 liability reduction (lesser of 3 or 4)

$1

Gain/Loss on Sale of A’s PRS Interest (in millions)
1. Amount realized on sale
Value of PRS interest
A’s share of nonrecourse debt

$3
1
$4

Total
2. Less basis of PRS interest
Original
§1.752–7 liability reduction

$5
$1
($4)

Difference
3. Gain/Loss
Example 3. The facts are the same as in Example 1, except that the satisfaction of the §1.752–7 liability would have given rise to a capital expense to
A or PRS. Neither PRS nor any of its partners are
entitled to a capital expense upon the satisfaction of
the §1.752–7 liability to the extent of the remaining built-in loss associated with the §1.752–7 liability ($2,000,000). PRS may, however, increase the basis of appropriate partnership assets by the amount by
which the cost of satisfying the §1.752–7 liability exceeds the remaining built-in loss associated with the
§1.752–7 liability. Therefore, in 2007, PRS may capitalize $1,000,000 (cost to satisfy the §1.752–7 liability, $3,000,000, less the remaining built-in loss associated with the §1.752–7 liability, $2,000,000) to the
appropriate partnership assets. If A is notified by PRS
that the §1.752–7 liability has been satisfied, then A
is entitled to a capital loss in 2007 as provided in paragraph (e)(1) of this section, the year of the satisfaction
of the §1.752–7 liability.

(3) Exception for nonrecognition transactions—(i) In general. Paragraph (e)(1)
of this section does not apply where a
§1.752–7 liability partner transfers all or
part of the partner’s partnership interest
in a transaction in which the transferee’s
basis in the partnership interest is determined in whole or in part by reference to
the transferor’s basis in the partnership
interest. In addition, paragraph (e)(1) of
this section does not apply to a distribution of an interest in the partnership
(lower-tier partnership) that has assumed
the §1.752–7 liability by a partnership
that is the §1.752–7 liability partner
(upper-tier partnership) if the partners
of the upper-tier partnership that were
§1.752–7 liability partners with respect

June 27, 2005

0

to the lower-tier partnership prior to the
distribution continue to be §1.752–7 liability partners with respect to the lower-tier
partnership after the distribution. See
paragraphs (b)(4)(ii) and (j)(3) of this section for rules on the application of this
section to partners of the §1.752–7 liability partner.
(ii) Examples. The following examples
illustrate the provisions of this paragraph
(e)(3):
Example 1. Transfer of partnership interest to
lower-tier partnership. (i) Facts. In 2004, X contributes undeveloped land with a value and basis of
$2,000,000 and subject to environmental liabilities of
$1,500,000 to partnership LTP in exchange for a 50%
interest in LTP. LTP develops the land as a landfill. In
2005, in a transaction governed by section 721(a), X
contributes the LTP interest to UTP in exchange for a
50% interest in UTP. In 2008, X sells the UTP interest
to A for $500,000. At the time of the sale, X’s basis in
UTP is $2,000,000, the remaining built-in loss associated with the environmental liability is $1,500,000,
and the gross value of UTP’s assets is $2,500,000.
The environmental liabilities were not assumed by
LTP as part of a contribution by X to LTP of a trade
or business with which the liabilities were associated.
(See paragraph (b)(10)(ii), Example 1 of this section.)
(ii) Analysis. Because UTP’s basis in the LTP interest is determined by reference to X’s basis in the
LTP interest, X’s contribution of the LTP interest to
UTP is exempted from the rules of paragraph (e)(1)
of this section. Under paragraph (j)(1) of this section,
X’s contribution of the LTP interest to UTP is treated
as a contribution of X’s share of the assets of LTP and
UTP’s assumption of X’s share of the LTP liabilities
(including §1.752–7 liabilities). Therefore, X’s transfer of the LTP interest to UTP is a §1.752–7 liability
transfer. The §1.752–7 liabilities deemed transferred

1360

by X to UTP are not associated with a trade or business transferred to UTP for purposes of paragraph
(d)(2)(i)(A) of this section, because they were not associated with a trade or business transferred by X to
LTP as part of the original §1.752–7 liability transfer.
See paragraph (j)(2) of this section. Because none of
the exceptions described in paragraph (d)(2) of this
section apply to X’s taxable sale of the UTP interest
to A in 2008, paragraph (e)(1) of this section applies
to that sale.
Example 2. Transfer of partnership interest to
corporation. The facts are the same as in Example 1,
except that, rather than transferring the LTP interest to
UTP in 2005, X contributes the LTP interest to Corporation Y in an exchange to which section 351 applies.
Because Corporation Y’s basis in the LTP interest is
determined by reference to X’s basis in that interest,
X’s contribution of the LTP interest is exempted from
the rules of paragraph (e)(1) of this section. But see
section 358(h) and §1.358–7 for appropriate basis adjustments.
Example 3. Partnership merger. (i) Facts. In
2004, A, B, C, and D form equal partnership PRS1.
A contributes Blackacre with a value and basis of
$2,000,000 to PRS1 and PRS1 assumes from A
$1,500,000 of pension liabilities unrelated to Blackacre. B, C, and D each contribute $500,000 cash
to PRS1. PRS1 uses the cash contributed by B, C,
and D ($1,500,000) to purchase Whiteacre. In 2006,
PRS1 merges into PRS2 in an assets-over merger under §1.708–1(c)(3). Assume that, under §1.708–1(c),
PRS2 is the surviving partnership and PRS1 is the
terminating partnership. At the time of the merger,
the value of Blackacre is still $2,000,000, the remaining built-in loss with respect to the pension liabilities
is still $1,500,000, but the value of Whiteacre has
declined to $500,000.
(ii) Deemed assumption by PRS2 of PRS1 liabilities. Under §1.708–1(c)(3), the merger is treated as
a contribution of the assets and liabilities of PRS1
to PRS2, followed by a distribution of the PRS2 in-

2005–26 I.R.B.

terests by PRS1 in liquidation of PRS1. Because
PRS2 assumes a §1.752–7 liability (the pension liabilities) of PRS1, PRS1 is a §1.752–7 liability partner of PRS2. Under paragraph (b)(5)(ii)(A) of this
section, A is also §1.752–7 liability partner of PRS2
to the extent of the remaining $1,500,000 built-in loss
associated with the pension liabilities. B, C, and D are
not §1.752–7 liability partners with respect to PRS1.
If the amount of the pension liabilities had increased
between the date of PRS1’s assumption of those liabilities from A and the date of the merger of PRS1
into PRS2, then B, C, and D would be §1.752–7 liability partners with respect to PRS2 to the extent of
their respective shares of that increase. See paragraph
(b)(5)(ii) of this section.
(iii) Deemed distribution of PRS2 interests. Paragraph (e)(1) does not apply to PRS1’s deemed distribution of the PRS2 interests, because, under paragraph (b)(5)(ii)(B) of this section, all of the partners
that were §1.752–7 liability partners with respect to
PRS2 before the distribution, i.e., A, continue to be
§1.752–7 liability partners after the distribution. After the distribution, A’s share of the pension liabilities
now held by PRS2 will continue to be $1,500,000.
Example 4. Partnership division; no shifting
of §1.752–7 liability. The facts are the same as in
Example 3, except that PRS1 does not merge with
PRS2, but instead contributes Blackacre to PRS2 in
exchange for PRS2 interests and the assumption by
PRS2 of the pension liabilities. Immediately thereafter, PRS1 distributes the PRS2 interests to A and B
in liquidation of their interests in PRS1. The analysis
is the same as in Example 3. After the assumption
of the pension liabilities by PRS2, A is a §1.752–7
liability partner with respect to PRS2. After the
distribution of a PRS2 interest to A, A continues to
be a §1.752–7 liability partner with respect to PRS2,
and the amount of A’s built-in loss with respect to
the §1.752–7 liabilities continues to be $1,500,000.
Therefore, paragraph (e)(1) of this section does not
apply to the distribution of the PRS2 interests to A
and B.
Example 5. Partnership division; shifting of
§1.752–7 liability. The facts are the same as in
Example 4, except that PRS1 distributes the PRS2
interests not to A and B, but to C and D, in liquidation
of their interests in PRS1. After this distribution, A

does not continue to be a §1.752–7 liability partner of
PRS2, because A no longer has an interest in PRS2.
Therefore, paragraph (e)(1) of this section applies to
the distribution of the PRS2 interests to C and D.

(f) Distribution in liquidation of
§1.752–7 liability partner’s partnership
interest—(1) In general. Except as provided in paragraphs (d)(2) and (i) of this
section, immediately before a distribution
in liquidation of a §1.752–7 liability partner’s partnership interest, the §1.752–7
liability partner’s basis in the partnership
interest is reduced by the §1.752–7 liability
reduction (as defined in paragraph (b)(7)
of this section). This rule applies before
section 737. No deduction, loss, or capital
expense is allowed to the partnership on
the satisfaction of the §1.752–7 liability
(within the meaning of paragraph (b)(8) of
this section) to the extent of the remaining
built-in loss associated with the §1.752–7
liability (as defined in paragraph (b)(6)
of this section). For purposes of section
705(a)(2)(B) and §1.704–1(b)(2)(ii)(b)
only, the remaining built-in loss associated with the §1.752–7 liability is not
treated as a nondeductible, noncapital expenditure of the partnership. Therefore,
the remaining partners’ capital accounts
and bases in their partnership interests are
not reduced by the remaining built-in loss
associated with the §1.752–7 liability. If
the partnership (or any successor) notifies the §1.752–7 liability partner of the
satisfaction of the §1.752–7 liability, then
the §1.752–7 liability partner is entitled to
a loss or deduction. The amount of that
deduction or loss is, in the case of a partial
satisfaction of the §1.752–7 liability, the
amount that the partnership would, but for

this section, take into account on the partial satisfaction of the §1.752–7 liability
(but not, in total, more than the §1.752–7
liability reduction) or, in the case of a
complete satisfaction of the §1.752–7 liability, the remaining §1.752–7 liability
reduction. To the extent of the amount that
the partnership would, but for this section,
take into account on satisfaction of the
§1.752–7 liability, the character of that
deduction or loss is determined as if the
§1.752–7 liability partner had satisfied the
liability. To the extent that the §1.752–7
liability reduction exceeds the amount that
the partnership would, but for this section,
take into account on satisfaction of the
§1.752–7 liability, the character of the
§1.752–7 liability partner’s loss is capital.
(2) Example. The following example
illustrates the provision of this paragraph
(f):
Example. (i) Facts. In 2004, A, B, and C form
partnership PRS. A contributes Property 1 with a fair
market value and basis of $5,000,000 subject to a
§1.752–7 liability of $2,000,000 for a 25% interest
in PRS. B contributes $3,000,000 cash for a 25% interest in PRS, and C contributes $6,000,000 cash for
a 50% interest in PRS. In 2012, when PRS has a
section 754 election in effect, PRS distributes Property 2, which has a basis and fair market value of
$3,000,000, to A in liquidation of A’s PRS interest.
At the time of the distribution, the fair market value
of A’s PRS interest is still $3,000,000, the basis of
that interest is still $5,000,000, and the remaining
built-in loss associated with the §1.752–7 liability is
still $2,000,000. Assume that none of the exceptions
of paragraph (d)(2) of this section apply to the distribution and that the satisfaction of the §1.752–7 liability would have given rise to a deductible expense to
A. In 2013, PRS pays $1,000,000 to satisfy the entire
§1.752–7 liability.

PRS Balance Sheet (in millions)
Assets
Value
$5
$9

Liabilities/Equity
Basis
$5
$9

Value

(ii) Liquidation of A’s PRS interest. Immediately
before the distribution of Property 2 to A, A’s basis in the PRS interest is reduced (to $3,000,000) by
the §1.752–7 liability reduction, i.e., the lesser of the
excess of A’s basis in the PRS interest ($5,000,000)
over the adjusted value ($3,000,000) of that interest

2005–26 I.R.B.

Basis

Property 1
Cash
$2

—

$3
$3
$6

$5
$3
$6

($2,000,000) or the remaining built-in loss associated with the §1.752–7 liability ($2,000,000). Therefore, A’s basis in Property 2 under section 732(b) is
$3,000,000. Because this is the same as the partnership’s basis in Property 2 immediately before the

1361

§1.752–7 Liability
Partner’s Equity:
A
B
C

distribution, the partnership’s basis adjustment under
section 734(b) is $0.

June 27, 2005

Computation of §1.752–7 Liability Reduction (in millions)
$5

1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest

(3)

3. Difference

$2
2

4. Remaining built-in loss from §1.752–7 liability
5. §1.752–7 liability reduction (lesser of 3 or 4)
(iii) Satisfaction of §1.752–7 liability. PRS is
not entitled to a deduction, loss, or capital expense
on the satisfaction of the §1.752–7 liability to the
extent of the remaining built-in loss associated with
the §1.752–7 liability ($2,000,000). Because this

$2
amount exceeds the amount paid by PRS to satisfy
the §1.752–7 liability ($1,000,000), PRS is not entitled to any deduction for the §1.752–7 liability in
2013. If, however, PRS notifies A of the satisfaction
of the §1.752–7 liability, A is entitled to an ordinary

deduction in 2013 of $1,000,000 (the amount paid in
satisfaction of the §1.752–7 liability) and a capital
loss of $1,000,000 (the remaining §1.752–7 liability
reduction).

PRS’s Deduction on Satisfaction of Liability (in millions)
$1

Amount paid by PRS to satisfy §1.752–7 liability
Remaining built-in loss for §1.752–7 liability

(2)

Difference (but not below zero)

$0

(g) Assumption of §1.752–7 liability
by a partner other than §1.752–7 liability
partner—(1) In general. If this paragraph
(g) applies, section 704(c)(1)(B) does not
apply to an assumption of a §1.752–7 liability from a partnership by a partner other
than the §1.752–7 liability partner. The
rules of paragraph (g)(2) of this section
apply only if the §1.752–7 liability partner
is a partner in the partnership at the time
of the assumption of the §1.752–7 liability
from the partnership. The rules of paragraphs (g)(3) and (4) of this section apply
to any assumption of the §1.752–7 liability
by a partner other than the §1.752–7 liability partner, whether or not the §1.752–7
liability partner is a partner in the partnership at the time of the assumption from the
partnership.
(2) Consequences to §1.752–7 liability
partner. If, at the time of an assumption
of a §1.752–7 liability from a partnership
by a partner other than the §1.752–7 liability partner, the §1.752–7 liability partner remains a partner in the partnership,
then the §1.752–7 liability partner’s basis
in the partnership interest is reduced by the
§1.752–7 liability reduction (as defined in
paragraph (b)(7) of this section). If the assuming partner (or any successor) notifies
the §1.752–7 liability partner of the satisfaction of the §1.752–7 liability (within the
meaning of paragraph (b)(8) of this section), then the §1.752–7 liability partner is
entitled to a deduction or loss. The amount
of that deduction or loss is, in the case of a
partial satisfaction of the §1.752–7 liability, the amount that the assuming partner

June 27, 2005

would, but for this section, take into account on the satisfaction of the §1.752–7
liability (but not, in total, more than the
§1.752–7 liability reduction) or, in the case
of a complete satisfaction of the §1.752–7
liability, the remaining §1.752–7 liability
reduction. To the extent of the amount that
the assuming partner would, but for this
section, take into account on the satisfaction of the §1.752–7 liability, the character of that deduction or loss is determined
as if the §1.752–7 liability partner had satisfied the liability. To the extent that the
§1.752–7 liability reduction exceeds the
amount that the assuming partner would,
but for this section, take into account on
the satisfaction of the §1.752–7 liability,
the character of the §1.752–7 liability partner’s loss is capital.
(3) Consequences to partnership. Immediately after the assumption of the
§1.752–7 liability from the partnership by
a partner other than the §1.752–7 liability partner, the partnership must reduce
the basis of partnership assets by the remaining built-in loss associated with the
§1.752–7 liability (as defined in paragraph
(b)(6) of this section). The reduction in
the basis of partnership assets must be allocated among partnership assets as if that
adjustment were a basis adjustment under
section 734(b).
(4) Consequences to assuming partner.
No deduction, loss, or capital expense is
allowed to an assuming partner (other than
the §1.752–7 liability partner) on the satisfaction of the §1.752–7 liability assumed
from a partnership to the extent of the re-

1362

maining built-in loss associated with the
§1.752–7 liability. Instead, upon the satisfaction of the §1.752–7 liability, the assuming partner must adjust the basis of
the partnership interest, any assets (other
than cash, accounts receivable, or inventory) distributed by the partnership to the
partner, or gain or loss on the disposition
of the partnership interest, as the case may
be. These adjustments are determined as if
the assuming partner’s basis in the partnership interest at the time of the assumption
were increased by the lesser of the amount
paid (or to be paid) to satisfy the §1.752–7
liability or the remaining built-in loss associated with the §1.752–7 liability. However, the assuming partner cannot take into
account any adjustments to depreciable basis, reduction in gain, or increase in loss
until the satisfaction of the §1.752–7 liability.
(5) Example. The following example
illustrates the provisions of this paragraph
(g):
Example. (i) Facts. In 2004, A, B, and C form
partnership PRS. A contributes Property 1, a nondepreciable capital asset with a fair market value and
basis of $5,000,000, in exchange for a 25% interest
in PRS and assumption by PRS of a §1.752–7 liability of $2,000,000. B contributes $3,000,000 cash for
a 25% interest in PRS, and C contributes $6,000,000
cash for a 50% interest in PRS. PRS uses the cash
contributed to purchase Property 2. In 2007, PRS
distributes Property 1, subject to the §1.752–7 liability to B in liquidation of B’s interest in PRS. At
the time of the distribution, A’s interest in PRS still
has a value of $3,000,000 and a basis of $5,000,000,
and B’s interest in PRS still has a value and basis
of $3,000,000. Also at that time, Property 1 still
has a value and basis of $5,000,000, Property 2 still
has a value and basis of $9,000,000, and the remain-

2005–26 I.R.B.

ing built-in loss associated with the §1.752–7 liability
still is $2,000,000. Assume that none of the exceptions of paragraph (d)(2)(i) of this section apply to

the assumption of the §1.752–7 liability by B and that
the satisfaction of the §1.752–7 liability by A would
have given rise to a deductible expense to A. In 2010,

B pays $1,000,000 to satisfy the entire §1.752–7 liability. At that time, B still owns Property 1, which
has a basis of $3,000,000.

PRS Balance Sheet (in millions)
Assets
Value
$5
$9

Liabilities/Equity
Basis
$5
$9

Basis

Value
Property 1
Property 2

(ii) Assumption of §1.752–7 liability by B. Section 704(c)(1)(B) does not apply to the assumption
of the §1.752–7 liability by B. Instead, A’s basis in
the PRS interest is reduced (to $3,000,000) by the
§1.752–7 liability reduction, i.e., the lesser of the excess of A’s basis in the PRS interest ($5,000,000)
over the adjusted value ($3,000,000) of that interest

$2

—

$3
$3
$6

$5
$3
$6

($2,000,000), or the remaining built-in loss associated with the §1.752–7 liability as of the time of the
assumption ($2,000,000). PRS’s basis in Property 2
is reduced (to $7,000,000) by the $2,000,000 remaining built-in loss associated with the §1.752–7 liability. B’s basis in Property 1 under section 732(b) is
$3,000,000 (B’s basis in the PRS interest). This is

§1.752–7 Liability
Partner’s Equity:
A
B
C

$2,000,000 less than PRS’s basis in Property 1 before the distribution of Property 1 to B. If PRS has a
section 754 election in effect for 2007, PRS may increase the basis of Property 2 under section 734(b) by
$2,000,000.

§1.752–7 Liability Reduction (in millions)
$5

1. Basis of A’s PRS interest
2. Less adjusted value of A’s PRS interest

(3)

3. Difference

$2
2

4. Remaining built-in loss from §1.752–7 liability
5. §1.752–7 liability reduction (lesser of 3 or 4)

$2

A’s Basis in PRS after Assumption by B (in millions)
$5

1. Basis before assumption
2. Less §1.752–7 liability reduction

(2)

3. Basis after assumption

$3

PRS’s Basis in Property 2 after Assumption by B (in millions)
$9
(2)

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

2

4. Basis after assumption
(iii) Satisfaction of §1.752–7 liability. B is not
entitled to a deduction on the satisfaction of the
§1.752–7 liability in 2010 to the extent of the remaining built-in loss associated with the §1.752–7
liability ($2,000,000). As this amount exceeds the
amount paid by B to satisfy the §1.752–7 liability,

2005–26 I.R.B.

$9
B is not entitled to any deduction on the satisfaction
of the §1.752–7 liability in 2010. B may, however,
increase the basis of Property 1 by the lesser of the
remaining built-in loss associated with the §1.752–7
liability ($2,000,000) or the amount paid to satisfy
the §1.752–7 liability ($1,000,000). Therefore, B’s

1363

basis in Property 1 is increased to $4,000,000. If B
notifies A of the satisfaction of the §1.752–7 liability,
then A is entitled to an ordinary deduction in 2010
of $1,000,000 (the amount paid in satisfaction of the
§1.752–7 liability) and a capital loss of $1,000,000
(the remaining §1.752–7 liability reduction).

June 27, 2005

B’s Basis in Property 1 after Satisfaction of Liability (in millions)
$3
(2)

1. Basis in Property 1 after distribution
2. Plus lesser of remaining built-in loss
or amount paid to satisfy liability

1

($1)

3. Basis in Property 1 after satisfaction of liability

(h) Notification by the partnership
(or successor) of the satisfaction of the
§1.752–7 liability. For purposes of paragraphs (e), (f), and (g) of this section,
notification by the partnership (or successor) of the satisfaction of the §1.752–7
liability must be attached to the §1.752–7
liability partner’s return (whether an original or an amended return) for the year in
which the loss is being claimed and must
include—
(1) The amount paid in satisfaction of
the §1.752–7 liability, and whether the
amounts paid were in partial or complete
satisfaction of the §1.752–7 liability;
(2) The name and address of the person
satisfying the §1.752–7 liability;
(3) The date of the payment on the
§1.752–7 liability; and
(4) The character of the loss to the
§1.752–7 liability partner with respect to
the §1.752–7 liability.

$4

(i) Special rule for amounts that are
capitalized prior to the occurrence of an
event described in paragraphs (e), (f), or
(g)—(1) In general. If all or a portion
of a §1.752–7 liability is properly capitalized (capitalized basis) prior to an event
described in paragraph (e), (f), or (g) of this
section, then, before an event described in
paragraph (e), (f), or (g) of this section, the
partnership may take the capitalized basis into account for purposes of computing cost recovery and gain or loss on the
sale of the asset to which the basis has been
capitalized (and for any other purpose for
which the basis of the asset is relevant), but
after an event described in paragraph (e),
(f), or (g) of this section, the partnership
may not take any remaining capitalized basis into account for tax purposes.
(2) Example. The following example
illustrates the provisions of this paragraph
(i):

Example. (i) Facts. In 2004, A and B form
partnership PRS. A contributes Property 1, a nondepreciable capital asset, with a fair market value and
basis of 5,000,000, in exchange for a 25% interest
in PRS and an assumption by PRS of a §1.752–7
liability of $2,000,000. B contributes $9,000,000 in
cash in exchange for a 75% interest in PRS. PRS uses
$7,000,000 of the cash to purchase Property 2, also
a nondepreciable capital asset. In 2007, when PRS’s
assets have not changed, PRS satisfies the §1.752–7
liability by paying $2,000,000. Assume that PRS
is required to capitalize the cost of satisfying the
§1.752–7 liability. In 2008, A sells his interest in
PRS to C for $3,000,000. At the time of the sale, the
basis of A’s interest is still $5,000,000.
(ii) Analysis. On the sale of A’s interest to C, A
realizes a loss of $2,000,000 on the sale of the PRS interest (the excess of $5,000,000, the basis of the partnership interest, over $3,000,000, the amount realized
on sale). The remaining built-in loss associated with
the §1.752–7 liability at that time is zero because all
of the §1.752–7 liability as of the time of the assumption of the §1.752–7 liability by the partnership was
capitalized by the partnership. The partnership may
not take any remaining capitalized basis into account
for tax purposes.

Gain/Loss on Sale of A’s PRS Interest (in millions)
$3

1. Amount realized on sale
2. Less basis of PRS interest
Original Basis
§1.752–7 liability reduction

$5
$0
($5)

Difference
3. Gain/Loss

($2)

(iii) Partial Satisfaction. Assume that, prior to
the sale of A’s interest in PRS to C, PRS had paid
$1,500,000 to satisfy a portion of the §1.752–7 liability. Therefore, immediately before the sale of the
PRS interest to C, A’s basis in the PRS interest would
be reduced (to $4,500,000) by the $500,000 remaining built-in loss associated with the §1.752–7 liability
($2,000,000 less the $1,500,000 portion capitalized

by the partnership at that time). On the sale of the
PRS interest, A realizes a loss of $1,500,000 (the excess of $4,500,000, the basis of the PRS interest, over
$3,000,000, the amount realized on the sale). Neither PRS nor any of its partners is entitled to a deduction, loss, or capital expense upon the satisfaction
of the §1.752–7 liability to the extent of the remaining built-in loss associated with the §1.752–7 liability

($500,000). If PRS notifies A of the satisfaction of
the remaining portion of the §1.752–7 liability, then
A is entitled to a deduction or loss of $500,000 (the
remaining §1.752–7 liability reduction). The partnership may not take any remaining capitalized basis into
account for tax purposes.

Gain/Loss on Sale of A’s PRS Interest (in millions)
$3

1. Amount realized on sale
2. Less basis of PRS interest
Original Basis
§1.752–7 liability reduction

$5
($0.5)
($4.5)

Difference
3. Gain/Loss

(j) Tiered partnerships—(1) Lookthrough treatment. For purposes of this

June 27, 2005

($1.5)

section, a contribution by a partner of an
interest in a partnership (lower-tier part-

1364

nership) to another partnership (upper-tier
partnership) is treated as a contribution

2005–26 I.R.B.

by the partner of the partner’s share of
each of the lower-tier partnership’s assets and an assumption by the upper-tier
partnership of the partner’s share of the
lower-tier partnership’s liabilities (including §1.752–7 liabilities). See paragraph
(e)(3)(ii) Example 1 of this section. In
addition, a partnership is treated as having
its share of any §1.752–7 liabilities of the
partnerships in which it has an interest.
(2) Trade or business exception. If a
partnership (upper-tier partnership) assumes a §1.752–7 liability of a partner,
and, subsequently, another partnership
(lower-tier partnership) assumes that
§1.752–7 liability from the upper-tier
partnership, then the §1.752–7 liability is
treated as associated only with any trade or
business contributed to the upper-tier partnership by the §1.752–7 liability partner.
The same rule applies where a partnership
assumes a §1.752–7 liability of a partner,
and, subsequently, the §1.752–7 liability
partner transfers that partnership interest
to another partnership. See paragraph
(e)(3)(ii) Example 1 of this section.
(3) Partnership as a §1.752–7 liability
partner. If a transaction described in paragraph (e), (f), or (g) of this section occurs with respect to a partnership (uppertier partnership) that is a §1.752–7 liability partner of another partnership (lowertier partnership), then such transaction will
also be treated as a transaction described
in paragraph (e), (f), or (g) of this section, as appropriate, with respect to the
partners of the upper-tier partnership, regardless of whether the upper-tier partnership assumed the §1.752–7 liability from
those partners. (See paragraph (b)(5) of
this section for rules relating to the treatment of transactions by the partners of the
upper-tier partnership). In such a case,
each partner’s share of the §1.752–7 lia-

2005–26 I.R.B.

bility reduction in the upper-tier partnership is equal to that partner’s share of the
§1.752–7 liability. The partners of the upper-tier partnership at the time of the transaction described in paragraph (e), (f), or
(g) of this section, and not the upper-tier
partnership, are entitled to the deduction
or loss on the satisfaction of the §1.752–7
liability. Similar principles apply where
the upper-tier partnership is itself owned
by one or a series of partnerships. This
paragraph does not apply to the extent that
§1.752–7(j)(4) applied to the assumption
of the §1.752–7 liability by the lower-tier
partnership.
(4) Transfer of §1.752–7 liability by
partnership to another partnership or corporation after a transaction described in
paragraph (e), (f), or (g)—(i) In general.
If, after a transaction described in paragraph (e), (f), or (g) of this section with
respect to a §1.752–7 liability assumed by
a partnership (the upper-tier partnership),
another partnership or a corporation assumes the §1.752–7 liability from the upper-tier partnership (or the assuming partner) in a transaction in which the basis of
property is determined, in whole or in part,
by reference to the basis of the property in
the hands of the upper-tier partnership (or
assuming partner), then—
(A) The upper-tier partnership (or assuming partner) must reduce its basis in
any corporate stock or partnership interest
received by the remaining built-in loss associated with the §1.752–7 liability, at the
time of the transaction described in paragraph (e), (f), or (g) of this section (but the
partners of the upper-tier partnership do
not reduce their bases or capital accounts
in the upper-tier partnership); and
(B) No deduction, loss, or capital expense is allowed to the assuming partnership or corporation on the satisfaction of

1365

the §1.752–7 liability to the extent of the
remaining built-in loss associated with the
§1.752–7 liability.
(ii) Subsequent transfers. Similar rules
apply to subsequent assumptions of the
§1.752–7 liability in transactions in which
the basis of property is determined, in
whole or in part, by reference to the basis
of the property in the hands of the transferor. If, subsequent to an assumption of
the §1.752–7 liability by a partnership in a
transaction to which paragraph (j)(4)(i) of
this section applies, the §1.752–7 liability
is assumed from the partnership by a partner other than the partner from whom the
partnership assumed the §1.752–7 liability, then the rules of paragraph (g) of this
section apply.
(5) Example. The following example
illustrates the provisions of paragraphs
(j)(3) and (4) of this section:
Example—(i) Assumption of §1.752–7 liability
by UTP and transfer of §1.752–7 liability partner’s
interest in UTP. In 2004, A, B, and C form partnership UTP. A contributes Property 1 with a fair
market value and basis of $5,000,000 subject to a
§1.752–7 liability of $2,000,000 in exchange for
a 25% interest in UTP. B contributes $3,000,000
cash in exchange for a 25% interest in UTP, and C
contributes $6,000,000 cash in exchange for a 50%
interest in UTP. UTP invests the $9,000,000 cash in
Property 2. In 2006, A sells A’s interest in UTP to
D for $3,000,000. At the time of the sale, the basis
of A’s UTP interest is $5,000,000, the remaining
built-in loss associated with the §1.752–7 liability is
$2,000,000, and UTP has no liabilities other than the
§1.752–7 liabilities assumed from A. Assume that
none of the exceptions of paragraph (d)(2) of this
section apply and that the satisfaction of the §1.752–7
liability would give rise to a deductible expense to
A and to UTP. Under paragraph (e) of this section,
immediately before the sale of the UTP interest to
D, A’s basis in UTP is reduced to $3,000,000 by the
$2,000,000 §1.752–7 liability reduction. Therefore,
A neither realizes nor recognizes any gain or loss on
the sale of the UTP interest to D. D’s basis in the
UTP interest is $3,000,000.

June 27, 2005

UTP Balance Sheet Prior to A’s Sale (in millions)
Assets
Basis
$5
$9

Value
$5
$9

Liabilities/Equity
Basis
Value
Property 1
Property 2

$2
§1.752–7 Liability
Partner’s Equity:
$3

$5

A (25%)

$3
$6

$3
$6

B (25%)
C (50%)

$12

$14

Total Equity

Gain/Loss on Sale of A’s PRS Interest to D (in millions)
$3

1. Amount realized on sale
2. Less basis of PRS interest
Original
§1.752–7 liability reduction

$5
($2)
($3)

Difference
3. Gain/Loss

0

(ii) Assumption of §1.752–7 liability by LTP from
UTP. In 2008, at a time when the estimated amount
of the §1.752–7 liability has increased to $3,500,000,
UTP contributes Property 1 and Property 2, subject to
the §1.752–7 liability, to LTP in exchange for a 50%
interest in LTP. At the time of the contribution, Property 1 still has a value and basis of $5,000,000 and
Property 2 still has a value and basis of $9,000,000.
UTP’s basis in LTP under section 722 is $14,000,000.
Under paragraph (j)(4)(i) of this section, UTP must

reduce its basis in LTP by the $2,000,000 remaining built-in loss associated with the §1.752–7 liability (as of the time of the sale of the UTP interest
by A). The partners in UTP are not required to reduce their bases in UTP by this amount. UTP is a
§1.752–7 liability partner of LTP with respect to the
entire $3,500,000 §1.752–7 liability assumed by LTP.
However, as A is no longer a partner of UTP, none of
the partners of UTP (as of the time of the assumption
of the §1.752–7 liability by LTP) are §1.752–7 liabil-

ity partners of LTP with respect to the $2,000,000 remaining built-in loss associated with the §1.752–7 liability (as of the time of the sale of the UTP interest by
A). The UTP partners (as of the time of the assumption of the §1.752–7 liability by LTP) are §1.752–7 liability partners of LTP with respect to the $1,500,000
increase in the amount of the §1.752–7 liability of
UTP since the assumption of that §1.752–7 liability
by UTP from A.

UTP Balance Sheet Immediately Before Contribution to LTP (in millions)
Assets
Value
$5
$9

Liabilities/Equity
Basis
Value

Basis
$5
$9

$2

Property 1
Property 2
§1.752–7 Liability
Assumed from A

$1.5

Additional

$3.5

Total
Partner’s Equity:
D (25%)
B (25%)
C (50%)

$2.625
$2.625
$5.25

$3
$3
$6

$10.5

$12

Total Equity

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

$14

2. Less remaining built-in loss at time of A’s sale

($2)

3. UTP’s basis in LTP
(iii) Sale by UTP of LTP interest. In 2010, UTP
sells its interest in LTP to E for $10,500,000. At
the time of the sale, the LTP interest still has a
value of $10,500,000 and a basis of $12,000,000,
and the remaining built-in loss associated with the

June 27, 2005

$12
§1.752–7 liability is $3,500,000. Under paragraph
(e) of this section, immediately before the sale, UTP
must reduce its basis in the LTP interest by the
§1.752–7 liability reduction. Under paragraph (a)(4)
of this section, the remaining built-in loss associated

1366

with the §1.752–7 liability is $1,500,000 (remaining
built-in loss associated with the §1.752–7 liability,
$3,500,000, reduced by the amount of the §1.752–7
liability taken into account under paragraph (j)(4) of
this section, $2,000,000). The difference between the

2005–26 I.R.B.

basis of the LTP interest held by UTP ($12,000,000)
and the adjusted value of that interest ($10,500,000)
is also $1,500,000. Therefore, the §1.752–7 liability
reduction is $1,500,000 and UTP’s basis in the LTP

interest must be reduced to $10,500,000. In addition, UTP’s partners must reduce their bases in their
UTP interests by their proportionate shares of the
§1.752–7 liability reduction. Thus, the basis of each

of B’s and D’s interest in UTP must be reduced by
$375,000 and the basis of C’s interest in UTP must
be reduced by $750,000. In 2011, D sells the UTP
interest to F.

Computation of §1.752–7 Liability Reduction (in millions)
$12

1. Basis of UTP’s LTP interest
2. Less adjusted value of UTP’s LTP interest

($10.5)
$1.5

3. Difference between 1 and 2
4. Remaining built-in loss from §1.752–7 liability

$1.5

5. §1.752–7 liability reduction (lesser of 3 or 4)

$1.5

Gain/Loss on Sale of UTP’s PRS Interest to E (in millions)
$10.5

1. Amount realized on sale
2. Less basis of PRS interest
Original
§1.752–7 liability reduction

$12
($1.5)
($10.5)

Difference
3. Gain/Loss

$0

Partner’s Bases in UTP Interests after Sale of LTP Interest (in millions)
Basis prior to sale
Share of §1.752–7 liability
Reduction
Basis after sale
(iv) Deduction, expense, or loss associated with
the §1.752–7 liability by LTP. In 2012, LTP pays
$3,500,000 to satisfy the §1.752–7 liability. Under
paragraphs (e) and (j)(4) of this section, LTP is not
entitled to any deduction with respect to the §1.752–7
liability. Under paragraph (j)(3) of this section, UTP
also is not entitled to any deduction with respect to
the §1.752–7 liability. If LTP notifies A, B, C and D
of the satisfaction of the §1.752–7 liability, then A is
entitled to a deduction in 2012 of $2,000,000, B and
D are each entitled to deductions in 2012 of $375,000,
and C is entitled to a deduction in 2012 of $750,000.

(k) Effective dates—(1) In general.
This section applies to §1.752–7 liability
transfers occurring on or after June 24,
2003. For assumptions occurring after
October 18, 1999, and before June 24,
2003, see §1.752–6. For §1.752–7 liability transfers occurring on or after June 24,
2003 and before May 26, 2005, taxpayers may rely on the exception for trading
and investment partnerships in paragraph
(b)(8)(ii) of 1.752–7 (2003–2 C.B. 60; 68
FR 37434).
(2) Election to apply this section to
assumptions of liabilities occurring after
October 18, 1999, and before June 24,
2003—(i) In general. A partnership may
elect to apply this section to all assump-

2005–26 I.R.B.

B
$3

C
$6

D
$3

($0.375)

($0.75)

($0.375)

$2.625

$5.25

$2.625

tions of liabilities (including §1.752–7 liabilities) occurring after October 18, 1999,
and before June 24, 2003. Such an election is binding on the partnership and all of
its partners. A partnership making such an
election must apply all of the provisions
of §1.752–1 and §1.752–7, including
§1.358–5T, §1.358–7, §1.704–1(b)(1)(ii)
§1.704–2(b)(3),
and
(b)(2)(iv)(b),
§1.704–3(a)(7), (a)(8)(iv), and (a)(12),
§1.705–1(a)(8),
§1.704–4(d)(1)(iv),
§1.732–2(d)(3)(iv), and §1.737–5.
(ii) Manner of making election. A
partnership makes an election under
this paragraph (k)(2) by attaching the
following statement to its timely filed
[Insert name and employer
return:
identification number of electing partnership] elects under §1.752–7 of the
Income Tax Regulations to be subject
to the rules of §1.358–5T, §1.358–7,
and
(2)(iv)(b),
§1.704–1(b)(1)(ii)
§1.704–3(a)(7),
§1.704–2(b)(3),
(a)(8)(iv), and (a)(12), §1.704–4(d)(1)(iv),
§1.705–1(a)(8), §1.732–2(d)(3)(iv), and
§1.737–5 with respect to all liabilities (including §1.752–7 liabilities) assumed by

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the partnership after October 18, 1999 and
before June 24, 2003. In the statement,
the partnership must list, with respect to
each liability (including each §1.752–7
liability) assumed by the partnership after
October 18, 1999, and before June 24,
2003—
(A) The name, address, and taxpayer
identification number of the partner from
whom the liability was assumed;
(B) The date on which the liability was
assumed by the partnership;
(C) The amount of the liability as of the
time of its assumption; and
(D) A description of the liability.
(iii) Filing of amended returns. An
election under this paragraph (k)(2) will be
valid only if the partnership and its partners promptly amend any returns for open
taxable years that would be affected by the
election.
(iv) Time for making election. An election under this paragraph (k)(2) must be
filed with any timely filed Federal income
tax return filed by the partnership on or after September 24, 2003, and on or before
December 31, 2005.

June 27, 2005

PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 17. The authority for part 602
continues to read as follows:

Authority: 26 U.S.C.7805.
Par. 18. In §602.101, paragraph (b) is
amended by adding an entry to the table in
numerical order to read as follows:

§602.101 OMB Control numbers.
*****
(b) * * *

CFR part or section where
identified and described

Current OMB
control No.

*****
1.752–7

...........................................................

1545–1843

*****
Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved May 16, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on May 23, 2005,
11:17 a.m., and published in the issue of the Federal Register
for May 26, 2005, 70 F.R. 30334)

Section 2518.—Disclaimers
26 CFR 25.2518: Qualified disclaimers of property.
(Also § 401; 1.401(a)(9)–5.)

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

Rev. Rul. 2005–36
ISSUE
Is a beneficiary’s disclaimer of a beneficial interest in a decedent’s individual
retirement account (IRA) a qualified disclaimer under § 2518 of the Internal Revenue Code even though, prior to making
the disclaimer, the beneficiary receives the
required minimum distribution for the year
of the decedent’s death from the IRA?

June 27, 2005

FACTS
Decedent dies in 2004. At the time of
death, Decedent is the owner of an IRA
described in § 408(a) with assets having a
fair market value of $2,000x. Decedent’s
“required beginning date,” as described in
§ 401(a)(9)(A), occurred prior to 2004, and
accordingly Decedent was receiving annual distributions from the IRA prior to
the time of death. However, at the time of
death, Decedent had not received the required minimum distribution for the 2004
calendar year.
Situation 1: Under the terms of the
IRA beneficiary designation pursuant to
the IRA governing instrument, Decedent’s spouse, Spouse, is designated as the
sole beneficiary of the IRA after Decedent’s death. A, the child of Decedent and
Spouse, is designated as the beneficiary in
the event Spouse predeceases Decedent.
Three months after Decedent’s death, in
accordance with § 1.401(a)(9)–5, A–4,
of the Income Tax Regulations, the IRA
custodian pays Spouse $100x, the required
minimum distribution for 2004. No other
amounts have been paid from the IRA
since Decedent’s date of death.
Seven months after Decedent’s death,
Spouse executes a written instrument pursuant to which Spouse disclaims the pecuniary amount of $600x of the IRA account balance plus the income attributable
to the $600x amount earned after the date
of death. The income earned by the IRA
between the date of Decedent’s death and
the date of Spouse’s disclaimer is $40x.
The disclaimer is valid and effective under applicable state law. Under applicable state law, as a result of the disclaimer,
Spouse is treated as predeceasing Decedent with respect to the disclaimed prop-

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erty. As soon as the disclaimer is made,
in accordance with the IRA beneficiary
designation, A, as successor beneficiary is
paid the $600x amount disclaimed, plus
that portion of IRA income earned between the date of death and the date of
the disclaimer attributable to the $600x
amount ($12x).
Situation 2: The facts are the same
as in Situation 1, except that, instead of
disclaiming a pecuniary amount, Spouse
validly disclaims, in the written instrument, 30 percent of Spouse’s entire interest in the principal and income of the
balance of the IRA account remaining
after the $100x required minimum distribution for 2004 and after reduction for
the pre-disclaimer income attributable to
the $100x required minimum distribution
($2x). As soon as the disclaimer is made,
in accordance with the beneficiary designation, A is paid 30 percent of the excess
of the remaining account balance over
$2x.
Situation 3: The facts are the same
as in Situation 1, except that A is designated as the sole beneficiary of the IRA
after Decedent’s death, Spouse is designated as the beneficiary in the event A
predeceases Decedent, and the $100x required minimum distribution for 2004 is
paid to A 3 months after Decedent’s death.
Seven months after Decedent’s death, A
disclaims the entire remaining balance of
the IRA account except for $2x, the income attributable to the $100x required
minimum distribution paid to A. As soon
as the disclaimer is made, in accordance
with the IRA beneficiary designation, the
balance of the IRA account, less $2x, is
distributed to Spouse as successor beneficiary. A receives a total of $102x.

2005–26 I.R.B.