Liabilities Assumed in
Certain Corporate Lansactions

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8924] RIN 1545-AY63

TITLE: Liabilities Assumed in Certain Corporate Transactions

AGENCY: Internal Revenue Service (IRS), Treasury

ACTION: Temporary and final regulations.

SUMMARY: These temporary and final regulations relate to the
assumption of liabilities in certain corporate transactions under
section 301 of the Internal Revenue Code. The temporary and final
regulations affect corporations and their shareholders. Changes to
the applicable law were made by the Miscellaneous Trade and
Technical Corrections Act of 1999, Public Law 106-36 (113 Stat.
127). The text of these temporary regulations also serves as the
text of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section of this
issue of the Federal Register .

DATES: Effective Date: These regulations are effective January 4,
2001. Applicability Date: For dates of applicability, see the
Effective Dates portion of the preamble under SUPPLEMENTARY
INFORMATION.

FOR FURTHER INFORMATION CONTACT: Mary Dean, (202) 622-7550 (not a
toll-free number).

SUPPLEMENTARY INFORMATION

background

A. State of the Law Before the Miscellaneous Trade and Technical
Corrections Act of 1999.2 Section 301(b)(2) of the Internal Revenue
Code (Code) provides that in a distribution of property made by a
corporation to a shareholder with respect to its stock, the amount
of the distribution shall be reduced (but not below zero) by (A) the
amount of any liability of the corporation assumed by the
shareholder in connection with the distribution and (B) the amount
of any liability to which the property was subject immediately
before, and after, the distribution. See also §1.301-1(g) of
the regulations. Section 357 of the Code generally provides rules
for the treatment of the assumption of liabilities in connection
with transfers of property to which section 351 or 361 of the Code
applies. Prior to the Miscellaneous Trade and Technical Corrections
Act of 1999 (the Act), section 357(a) provided that, except as
otherwise provided, in such transfers the assumption of the
transferor's liability or acquisition of property subject to a
liability is not treated as money or other property, i.e., is not
treated as boot received by the transferor.

Prior to the Act, section 357(c) provided that in an exchange to
which section 351 applies or section 361 applies by reason of a
section 368(a)(1)(D) reorganization, if the sum of the amount of the
liabilities assumed plus the amount of the liabilities to which the
property transferred is subject exceeds the total of the adjusted
basis of the property transferred pursuant to such exchange, then
such excess is considered as a gain from the sale or exchange of a
capital asset or of property which is not a capital asset, as the
case may be.

B. Enactment of Amendments to Section 357

The Act amended the language in section 357(a) and (c) and added new
section 357(d). Under the amendment to section 357(a) and (c), the
reference to the acquisition of an asset subject to a liability was
eliminated. Section 357(c) gain will be realized only on the excess
of the amount of liabilities assumed over the adjusted basis of the
property transferred in the transaction. New section 357(d) sets
forth the rules for determining the amount of both recourse and
nonrecourse liabilities assumed. Section 357(d) states that except
as provided in regulations, a recourse liability (or portion
thereof) is treated as having been assumed if, based on all the
facts and circumstances, the transferee has agreed to, and is
expected to, satisfy such liability, whether or not the transferor
has been relieved of such liability. A nonrecourse liability is
treated as having been assumed by the transferee of any asset
subject to such liability, except that the amount of nonrecourse
liability treated as having been assumed is reduced by the lesser of
(A) the amount of such liability which an owner of other assets not
transferred to the transferee and also subject to such liability has
agreed with the transferee to, and is expected to, satisfy, or (B)
the fair market value of such other assets. Congress provided these
clarifications because certain interpretations of the existing law
failed to adequately reflect the true economics of many
transactions, resulting in inappropriate positions claimed by
taxpayers. See S. Rep. No. 106-2, at 75 (1999).

Section 357(d)(3) directs the Secretary to prescribe regulations
necessary to carry out the purposes of subsection (d). It also
authorizes the Secretary to prescribe regulations which provide that
the manner in which a liability is treated as assumed under
subsection (d) is applied, where appropriate, elsewhere in the Code.
C. Application of Regulatory Authority to Section 301 The Treasury
and the IRS have determined that it is appropriate to apply the
rules of section 357(d), relating to the manner in which a liability
is treated as assumed, to distributions of property under section
301 of the Code. Section 301(b)(2)(A) provides that the amount of
the distribution will be reduced if the transferee assumes a
liability of the corporation. Section 301(b)(2)(B) provides that the
amount of the distribution will be reduced if the transferee
receives property subject to a liability. These two sections do not
provide specific rules for determining the amount of liabilities
assumed, as contained in section 357(d). The lack of specific rules
has led to interpretations of existing law that fail to reflect the
true economics of certain transactions. For reasons similar to those
that motivated the enactment of section 357(d), these
interpretations are inappropriate for purposes of section 301.
Notice 99- 59, 1999-52 I.R.B. 761, illustrates one such case. In the
transaction addressed in Notice 99-59, a corporation distributes
property subject to a recourse liability, with the expectation that
the distributee will take the position that it receives little or no
net distribution, even though it is anticipated that the distributor
will later satisfy its continuing primary liability on the debt.

Explanation of Provisions

Liabilities Assumed in Connection with Distributions to Shareholders
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 301 relating to liabilities assumed in
connection with distributions made by a corporation to shareholders
with respect to their stock. The regulations provide that the amount
of a distribution under section 301 will be reduced by the amount of
any liability that is treated as assumed by the distributee within
the meaning of section 357(d)(1) and (2).

The Treasury and the IRS intend to propose regulations under
sections 357(d) and 301 clarifying the treatment of the subsequent
payment of assumed liabilities. Prior to the issuance of such
regulations, the Treasury and the IRS believe that such payments
generally should be treated in a manner consistent with the
treatment of the liabilities assumed. Thus, in a situation where a
liability is treated as assumed by the transferee under the rules of
section 357(d), a later payment by the party whose liability was
treated as assumed should be treated in accordance with the
relationship of the parties (e.g., a distribution or capital
contribution). See, e.g., Enoch v. Commissioner, 57 T.C. 781 (1972),
acq. in part, 1974-2 C.B. 2, 4, nonacq., 1984-2 C.B. 5..5

Effective Date

The regulations apply generally to distributions occurring after
January 4, 2001. The regulations also apply to distributions
occurring on or prior to January 4, 2001, if the distribution is
made as part of a transaction described in, or substantially similar
to, the transaction in Notice 99-59, including transactions designed
to reduce gain. Under section 7805(b)(3), the Secretary may provide
that any regulation may take effect or apply retroactively to
prevent abuse. These regulations are being applied retroactively to
prevent the abuse described in Notice 99-59. No inference should be
drawn regarding the tax treatment of distributions not covered by
these regulations.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. Because no
preceding notice of proposed rulemaking is required for this
temporary regulation, the provisions of the Regulatory Flexibility
Analysis do not apply. This Treasury decision is issued pursuant to
the grants of authority in sections 357(d)(3) and 7805 of the
Internal Revenue Code. This Treasury decision provides specific
rules for determining the amount by which a distribution under
section 301(b) will be reduced, by applying the rules of section
357(d). Section 357(d) was intended to clarify the law because
certain interpretations of existing law did not reflect the
economics of certain transactions. Issuing the regulation in
proposed form would continue the difficulty in ascertaining the
appropriate reduction in distributions under section 301(b). Based
on these considerations, it is determined that this temporary
regulation will provide taxpayers with the necessary guidance and
authority to ensure equitable administration of the tax laws.
Therefore, it would be contrary to the public interest to issue this
Treasury decision with prior notice under section 553(b) or subject
to the effective date limitation of section 553(d) of title 5 of the
United States Code. Pursuant to section 7805(f) of the Internal
Revenue Code, these temporary regulations will be submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on its impact on small business.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements. Amendments
to the Regulations Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows: Authority:
26 U.S.C. 7805. * * *

Section 1.301-1 also issued under 26 U.S.C. 357(d)(3). Section
1.301-1T also issued under 26 U.S.C. 357(d)(3). * * *

Par. 2. Section 1.301-1 is amended by adding two new sentences at
the end of paragraph (g) to read as follows: §1.301-1 Rules
applicable with respect to distributions of money and other
property. * * * * *

(g) * * * This paragraph (g) applies to distributions occurring on
or before January 4, 2001. See §1.301-1T for rules for
distributions occurring after January 4, 2001, and for distributions
made on or before January 4, 2001 if the distribution is made as
part of a transaction described in, or substantially similar to, the
transaction in Notice 1999-59, 1999-52 I.R.B. 761, including
transactions designed to reduce gain (see §601.601(d)(2) of
this chapter). * * * * *

Par. 3. Section 1.301-1T is added to read as follows: §1.301-1T
Rules applicable with respect to distributions of money and other
property (temporary)..(a) through (f). [Reserved] For further
guidance, see §1.301-1(a) through (f).

(g) Reduction for liabilities - - (1) General rule. For the purpose
of section 301, no reduction shall be made for the amount of any
liability, unless the liability is assumed by the shareholder within
the meaning of section 357(d)(1) and (2).

(2) No reduction below zero. Any reduction pursuant to paragraph (g)
(1) of this section shall not cause the amount of the distribution
to be reduced below zero..(3) Effective dates - - (i) In general.
This paragraph (g) applies to distributions occurring after January
4, 2001

(ii) Retroactive application. This paragraph also applies to
distributions made on or before January 4, 2001 if the distribution
is made as part of a transaction described in, or substantially
similar to, the transaction in Notice 1999-59 (1999-52 I.R.B. 761),
including transactions designed to reduce gain (see §601.601(d)
(2) of this chapter).

Deputy Commissioner of Internal Revenue
Robert E. Wenzel

Approved: 12/20/00

Acting Assistant Secretary for Tax Policy
Jonathan Talisman

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