Proposed Rule2023-25715
Transactions Between Related Persons and Partnerships
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 27, 2023
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations that would update regulations regarding whether persons are treated as related persons who are subject to certain special rules pertaining to transactions with partnerships. The regulations affect partnerships that enter into transactions with related persons that result in gain or loss on a sale or exchange of property or result in a difference in the time at which income and deductions are recognized because of the persons' different methods of accounting.
Full Text
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<title>Federal Register, Volume 88 Issue 226 (Monday, November 27, 2023)</title>
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[Federal Register Volume 88, Number 226 (Monday, November 27, 2023)]
[Proposed Rules]
[Pages 82792-82796]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2023-25715]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-131756-11]
RIN 1545-BI49
Transactions Between Related Persons and Partnerships
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would update
regulations regarding whether persons are treated as related persons
who are subject to certain special rules pertaining to transactions
with partnerships. The regulations affect
[[Page 82793]]
partnerships that enter into transactions with related persons that
result in gain or loss on a sale or exchange of property or result in a
difference in the time at which income and deductions are recognized
because of the persons' different methods of accounting.
DATES: Written or electronic comments and requests for a public hearing
must be received by February 26, 2024. Requests for a public hearing
must be submitted as prescribed in the ``Comments and Requests for a
Public Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and
REG-131756-11). Once submitted to the Federal eRulemaking Portal,
comments cannot be edited or withdrawn. The Department of Treasury
(Treasury Department) and the IRS will publish any comments submitted
electronically and comments submitted on paper to the IRS's public
docket. Send paper submissions to: CC:PA:LPD:PR (REG-131756-11), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations
relating to section 267, Livia Piccolo, (202) 317-7007 (not a toll-free
number); concerning the proposed regulation relating to section 707,
Charles D. Wien, (202) 317-5279 (not a toll-free number); and
concerning the submission of comments and requests for a public
hearing, Vivian Hayes, (202) 317-6960 (not a toll-free number) or by
sending an email to <a href="/cdn-cgi/l/email-protection#19696c7b75707a717c786b70777e6a59706b6a377e766f"><span class="__cf_email__" data-cfemail="ff8f8a9d93969c979a9e8d9691988cbf968d8cd1989089">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 267 and 707 of the Internal
Revenue Code (Code) relating to the disallowance or deferral of
deductions for losses and expenses in certain transactions with
partnerships and related persons (proposed regulations). The proposed
regulations would remove Sec. 1.267(b)-1(b) and amend Sec. 1.267(a)-1
to remove the application of Questions and Answers 2 and 3 in Sec.
1.267(a)-2T(c) for taxable years ending on or after the date the
Treasury decision adopting these regulations as final regulations is
published in the Federal Register. In addition, the proposed
regulations would amend Sec. 1.707-1(b).
In general, section 267(a)(1) provides that a taxpayer may not
deduct a loss on the sale or exchange of property with a related person
as defined in section 267(b). Section 267(a)(2) sets forth a ``matching
rule'' that provides that if because of a payee's method of accounting,
an amount is not (unless paid) includible in the payee's gross income,
the taxpayer (payor) may not deduct the otherwise deductible amount
until the payee includes the amount in gross income if the taxpayer and
payee are related persons within the meaning of section 267(b) on the
last day of the taxpayer's taxable year in which the amount otherwise
would have been deductible.
As part of enacting the Internal Revenue Code of 1954, Public Law
83-591, ch. 736, 68A Stat. 1 (1954), Congress added section 707(b)(1)
to the Code to address the sale or exchange of property between a
partnership and a partner owning, directly or indirectly, more than 50
percent of the capital or profit interest in the partnership. 68A Stat.
at 243. Given a lack of statutory and regulatory guidance addressing
transactions between a partnership and a related person who was not a
partner, the Treasury Department and the IRS issued Sec. 1.267(b)-1(b)
in 1958. See TD 6312, 23 FR 7035 (Sep. 11, 1958).
Section 1.267(b)-1(b) applies an aggregate theory of partnerships
to provide that any transaction described in section 267(a) between a
partnership and a person other than a partner is considered as
occurring between the other person and the members of the partnership
separately. Specifically, Sec. 1.267(b)-1(b) provides that if the
other person and a partner are within any of the relationships
specified in section 267(b), no deductions with respect to the
transaction between the other person and the partnership will be
allowed: (i) to the related partner to the extent of the related
partner's distributive share of partnership deductions for losses or
unpaid expenses or interest resulting from the transactions, and (ii)
to the other person to the extent the related partner acquires an
interest in any property sold to or exchanged with the partnership by
the other person at a loss, or to the extent of the related partner's
distributive share of the unpaid expenses or interest payable to the
partnership by the other person as a result of the transaction.
The U.S. Tax Court upheld the validity of Sec. 1.267(b)-1(b) and
its use of the aggregate theory in Casel v. Commissioner, 79 T.C. 424
(1982). However, subsequent statutory changes to sections 267 and
707(b) have made Sec. 1.267(b)-1(b) inconsistent with the statute.
In 1982, Congress enacted section 3(h)(1) of the Subchapter S
Revision Act of 1982, Public Law 97-354, 96 Stat. 1669, 1689 (1982) to
add section 267(b)(10) to the Code to disallow a deduction resulting
from a transaction between a commonly-controlled partnership and an S
corporation. Specifically, section 267(b)(10) provides that an S
corporation and a partnership were related persons if the same persons
owned more than 50 percent of the outstanding stock of the S
corporation and more than 50 percent of the capital interest or the
profits interest in the partnership.
In 1984, Congress enacted section 174(b)(1) of the Tax Reform Act
of 1984 (TRA 1984), Public Law 98-369, 98 Stat. 494, 705 (1984), to add
section 267(e) to the Code generally to extend the matching rule of
section 267(a)(2) to transactions between a partnership and a partner
or a person related to a partner (within the meaning of sections 267(b)
or 707(b)(1)). Congress also enacted section 174(b)(3) of the TRA 1984,
98 Stat. at 707, to amend section 267(b)(10) to include C corporations
as well as S corporations.
In 1985, the Treasury Department and the IRS issued Sec. 1.267(a)-
2T(c) to provide guidance for transactions between related
partnerships. Consistent with the legislative history of the TRA 1984,
the regulations generally apply an aggregate theory of partnerships in
deferring deductions according to the partners' aggregate interests in
the payor partnership. See S. Rep. No. 98-169, 98th Cong., 2nd Sess.,
at 496 and n. 17 (1984); TD 7991, 49 FR 46992 (Nov. 30, 1984).
In the Tax Reform Act of 1986 (TRA 1986), Public Law 99-514, 100
Stat. 2085 (1986), Congress amended section 707(b) in two ways. First,
Congress revised sections 707(b)(1)(A) and 707(b)(2)(A) to expand the
application of those provisions to a person who is not a partner and
modified section 707(b)(2) to reduce the thresholds described in that
section from more than 80 percent of profits or capital to more than 50
percent of profits or capital for purposes of treating recognized gain
between related persons as ordinary income. As amended by section
1812(c)(3) of the TRA 1986, 100 Stat. at 2834, the loss disallowance
rules of section 707(b)(1)(A) and the character of gain rules of
section 707(b)(2)(A) apply to transactions between a partnership and
any person (a partner or non-partner) who directly or indirectly owns
more than 50 percent of the capital or profits interest in the
partnership. See
[[Page 82794]]
sections 707(b)(1)(A), (b)(2)(A), and (b)(3).
Second, in enacting section 642(a)(2) of the TRA 1986, 100 Stat. at
2284, Congress amended section 707(b)(1)(B) to provide that for
purposes of the matching rule in section 267(a)(2), two partnerships in
which the same persons own, directly or indirectly, more than 50
percent of the capital interests or profits interests are treated as
related persons within the meaning of section 267(b). The related
committee reports state that the modifications to section 707(b), and
in particular to section 707(b)(1)(B), were intended to replace
Questions and Answers 2 and 3 of Sec. 1.267(a)-2T(c). See H. Rept. No.
99-426, 99th Cong., 1st Sess., at 940 and n. 7 (1986), 1986-3 C.B. Vol.
2, at 940 and n. 7; S. Rep. No. 99-313, 99th Cong., 2nd Sess., at 960
and n. 7, 1986-3 C.B. Vol. 3, 959, 960 and n. 7.
Explanation of Provisions
The statutory changes to sections 267 and 707(b) enacted since 1982
indicate that Congress intended for a partnership to be viewed as an
entity, rather than as an aggregate of its partners, in applying the
rules of sections 267 and 707(b). Therefore, the loss disallowance
rules of sections 267(a)(1) and 707(b)(1), the gain recharacterization
rules of section 707(b)(2), and the matching rule of section 267(a)(2)
similarly should be applied at the partnership level and not the
partner level. Accordingly, the rules relating to partnerships in Sec.
1.267(b)-1(b) and Sec. 1.267(a)-2T(c), Questions and Answers 2 and 3,
do not conform to Congress's view of how section 267 should be applied
to partnerships.
To conform the regulations under section 267 with the current
statute, the proposed regulations propose: (1) to remove Sec.
1.267(b)-1(b), (2) to amend Sec. 1.267(a)-1 to reflect the rules in
Questions and Answers 1 and 4 in Sec. 1.267(a)-2T(c) as Sec.
1.267(a)-1(d)(2) and (3); and (3) to amend Sec. 1.267(a)-1 to
terminate the application of Questions and Answers 2 and 3 in Sec.
1.267(a)-2T(c). The regulations under Sec. 1.267(a)-2T(b), which
provide questions and answers applying section 267(a)(2) and (b)
generally, would continue to apply. The Treasury Department and IRS are
aware that some of the citations in the existing regulations under
section 267 may be outdated due to subsequent legislative and
regulatory changes. However, the rules in these questions and answers
remain substantively accurate. For example, Question 1 under Sec.
1.267(a)-2T(b) refers to the completed contract method under Sec.
1.451-3(d). The substance of this answer remains correct; however, the
correct citation to the completed contract method is now under Sec.
1.460-4(d). Modifications to update incorrect citations in Sec.
1.267(a)-2T(b) are outside the scope of these proposed regulations.
Finally, these proposed regulations also revise Sec. 1.707-1(b) to
conform to the statutory changes made to sections 267 and 707(b).
Proposed Applicability Date
These regulations are proposed to apply to taxable years ending on
or after the date the Treasury decision adopting these rules as final
regulations is published in the Federal Register. Thus, Sec. 1.267(b)-
1(b) would be removed, and the revisions to Sec. 1.267(a)-1 would
apply to taxable years ending on or after the date the Treasury
decision adopting these rules as final regulations is published in the
Federal Register. Similarly, the revisions to Sec. 1.707-1(b) would
apply to sales or exchanges of property with respect to controlled
partnerships in taxable years ending on or after the date the Treasury
decision adopting these rules as final regulations is published in the
Federal Register.
Special Analyses
I. Regulatory Impact Analysis
Pursuant to the Memorandum of Agreement, Review of Treasury
Regulations under Executive Order 12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject to the requirements of
section 6 of Executive Order 12866, as amended. Therefore, a regulatory
impact assessment is not required.
II. Paperwork Reduction Act
These proposed regulations do not impose any additional information
collection requirements in the form of reporting, recordkeeping
requirements, or third-party disclosure statements. However, a taxpayer
may continue to be required to report on Form 1065, U.S. Return of
Partnership Income, information about partners that own directly or
indirectly more than 50 percent of the partnership. Data on the number
of affected taxpayers is not available.
For purposes of the Paperwork Reduction Act of 1995 (44 U.S.C.
3507(c)) (PRA), the reporting burden associated with the collection of
information for Form 1065 will be reflected in the PRA submission
associated with the income tax returns under the OMB control number
1545-0123.
The overall burden estimates associated with the OMB control number
1545-0123 is an aggregate number related to the entire package of forms
associated with the applicable OMB control number and will include, but
not isolate, the estimated burden of the tax forms that will be created
or revised as a result of these proposed regulations. These numbers are
therefore not specific to any burden imposed by these proposed
regulations. The burdens have been reported for other income tax
regulations that rely on the same information collections and the
Treasury Department and the IRS urge readers to recognize that these
numbers are duplicates and to guard against overcounting the burdens
imposed by tax provisions prior to the Act. No burden estimates
specific to the forms affected by the proposed regulations are
currently available. For the OMB control numbers discussed in this
paragraph, the Treasury Department and the IRS estimate PRA burdens on
a taxpayer-type-basis rather than a provision-specific basis. Those
estimates capture both changes made by the Act and those that arise out
of discretionary authority exercised in the proposed regulations (when
final) and other regulations that affect the compliance burden for that
form.
The Treasury Department and the IRS request comments on all aspects
of information collection burdens related to the proposed regulations,
including estimates for how much time it would take to comply with the
paperwork burdens described above for each relevant form and ways for
the IRS to minimize paperwork burden. In addition, when available,
drafts of IRS forms are posted for comment at <a href="https://appsirs.gov/app/pickleist/lit/draftTaxForms.htm">https://appsirs.gov/app/pickleist/lit/draftTaxForms.htm</a>. IRS forms are available at <a href="https://www.irs.gov/forms-instructions">https://www.irs.gov/forms-instructions</a>. Forms will not be finalized until after
they have been approved by OMB under the PRA.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes
certain requirements with respect to Federal rules that are subject to
the notice and comment requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely
to have a significant economic impact on a substantial number of small
entities. The Treasury Department and the IRS certify that this
proposal will not have a significant economic impact on a substantial
number of small entities. The proposed regulations would remove certain
outdated regulations under section 267 that apply an aggregate theory
of partnerships and relocate other regulations that are not intended to
be
[[Page 82795]]
obsoleted. These regulations would preserve the status quo by updating
the existing regulations to reflect the currently effective statutory
provisions. Accordingly, this proposal is unlikely to have a
significant economic impact on any small entities affected. The
Treasury Department and the IRS invite comments on the impact on small
entities.
Pursuant to section 7805(f) of the Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel of the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
IV. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
State, local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. This rule does not include any Federal mandate that may
result in expenditures by State, local, or Tribal governments, nor does
this rule include any Federal mandate that may exceed the threshold for
the private sector.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This proposed rule does not have
federalism implications and does not impose substantial, direct
compliance costs on State and local governments or preempt State law
within the meaning of the Executive Order.
Comments and Requests for a Public Hearing
Consideration will be given to comments that are submitted timely
to the IRS as prescribed in the preamble under the ``ADDRESSES''
section. The Treasury Department and the IRS request comments on all
aspects of the proposed regulations. Any electronic and paper comments
submitted will be available at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon
request. A public hearing will be scheduled if requested in writing by
any person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register. Announcement 2023-16, 2023-
20 I.R.B. 854 (May 15, 2023), provides that public hearings will be
conducted in person, although the IRS will continue to provide a
telephonic option for individuals who wish to attend or testify at a
hearing by telephone. Any telephonic hearing will be made accessible to
people with disabilities.
Drafting Information
The principal author of these proposed regulations is Livia Piccolo
of the Office of Associate Chief Counsel (Income Tax and Accounting).
However, other personnel from the Treasury Department and the IRS
participated in the development of the regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
0
Par. 2. Section 1.267(a)-1 is amended by adding new paragraphs (d) and
(e) to read as follows:
Sec. 1.267(a)-1 Deductions disallowed.
* * * * *
(d) Rules for partnerships under the Tax Reform Act of 1984--(1) In
general. Paragraphs (d)(2) and (d)(3) of this section provide rules
under section 267(a) and related provisions, as amended by section 174
of the Tax Reform Act of 1984, Public Law 98-369, 98 Stat. 494, 705
(1984), applicable specifically to partnerships for taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal
Register]. Section 1.267(a)-2T(c) does not apply to taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal
Register].
(2) Application of section 267(a) to disallow losses and defer
otherwise deductible amounts at the partnership (entity) level. If a
loss realized by a partnership from a sale or exchange of property is
disallowed under section 267(a)(1), that loss does not enter into the
computation of the partnership's taxable income. If an amount that
otherwise would be deductible by a partnership is deferred by section
267(a)(2), that amount does not enter into the computation of the
partnership's taxable income until the taxable year of the partnership
in which falls the day on which the amount is includible in the gross
income of the person to whom payment of the amount is made.
(3) Application of section 267(e)(5)(C)(ii). The phrase incurred at
an annual rate not in excess of 12 percent in section 267(e)(5)(C)(ii)
refers to interest that accrues but is not includible in the income of
the person to whom payment is to be made during the taxable year of the
payor. Thus, in determining whether the requirements of section
267(e)(5) (providing an exception to certain provisions of section 267
for certain expenses and interest of partnerships owning low income
housing) are met with respect to a transaction, the requirement of
section 267(e)(5)(C)(ii) will be satisfied, even though the total
interest (both stated and unstated) paid or accrued in any taxable year
of the payor taxpayer exceeds 12 percent, if the interest in excess of
12 percent per annum, compounded semi-annually, on the outstanding loan
balance (principal and accrued but unpaid interest) is includible in
the income of the person to whom payment is to be made no later than
the last day of such taxable year of the payor taxpayer.
(e) Applicability date. Paragraph (d) of this section applies to
taxable years ending on or after [DATE OF PUBLICATION OF FINAL RULE IN
THE FEDERAL REGISTER].
0
Par. 3. Section 1.267(b)-1 is amended by revising paragraph (b) to read
as follows:
Sec. 1.267(b)-1. Relationships.
* * * * *
(b) Applicability date. This section applies to taxable years
ending on or after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL
REGISTER].
0
Par. 4. Section 1.707-1 is amended by:
0
1. Removing the language ``partner'' in paragraph (b)(1)(i) and adding
the language ``person'' in its place;
0
2. Removing the language ``the provisions of subdivision (i) of this
subparagraph,'' in paragraph (b)(1)(ii) and adding the language
``paragraph (b)(1)(i) of this section,'' in its place;
0
3. Adding new paragraph (b)(1)(iii);
[[Page 82796]]
0
4. Removing the language ``partner'' in paragraph (b)(2) and adding the
language ``person'' in its place;
0
5. Removing the language ``80 percent'' in the first and second
sentences of paragraph (b)(2) and adding the language ``50 percent'' in
its place; and
0
6. Revising paragraph (b)(3).
The additions and revision read as follows:
Sec. 1.707-1 Transactions between partner and partnership.
* * * * *
(b) * * *
(1) * * *
(iii) For purposes of matching deductions and income in the case of
expenses and interest under section 267(a)(2), two partnerships in
which the same persons own, directly or indirectly, more than 50
percent of the capital interests or profits interests in each
partnership will be treated as persons specified in section 267(b).
* * * * *
(3) Ownership of a capital or profits interest. For the purpose of
applying section 707(b), the rules for constructive ownership of stock
provided in section 267(c)(1), (2), (4), and (5) apply in determining
the extent to which a capital interest or profits interest in a
partnership is owned, directly or indirectly, by any person, including
a person who does not own a partnership interest prior to application
of 267(c). For example, where trust T is a partner in the partnership
ABT, and AW, A's wife, is the sole beneficiary of the trust, the
ownership of a capital and profits interest in the partnership by T
will be attributed to AW both for the purpose of further attributing
the ownership of such interest to A and for determining whether AW is a
constructive owner of an interest in the partnership. See section
267(c) (1), (2), and (5). Accordingly, if A, B, and T are equal
partners in ABT, because AW is treated as constructively owning the
one-third capital and profits interest in ABT owned by T and AW's
ownership is attributed to A, A will be considered as owning a more
than 50 percent capital and profits interest in ABT, and a loss
sustained by A on a sale or exchange of property with ABT will be
disallowed by section 707(b)(1)(A). Similarly, because AW is treated as
constructively owning the one-third capital and profits interest in ABT
owned by T and is attributed the ownership of A's capital and profits
interest in ABT, AW will be considered as owning a more than 50 percent
capital and profits interest in ABT and a loss sustained by AW on a
sale or exchange of property with ABT would also be disallowed by
section 707(b)(1)(A).
* * * * *
0
Par. 5. Section 1.707-9 is amended by:
0
1. Revising the section heading;
0
2. Redesignating paragraphs (a) and (b) as paragraphs (b) and (c); and
0
3. Adding new paragraph (a).
The addition and revision read as follows:
Sec. 1.707-9. Applicability dates and transitional rules.
(a) Section 1.707-1. Paragraphs (b)(1)(i) through (iii), (b)(2),
and (b)(3) of Sec. 1.707-1 apply to sales or exchanges of property
with respect to controlled partnerships in taxable years ending on or
after [DATE OF PUBLICATION OF FINAL RULE IN THE FEDERAL REGISTER].
* * * * *
Douglas W. O'Donnell,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2023-25715 Filed 11-24-23; 8:45 am]
BILLING CODE 4830-01-P
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