# Bulletin No. 1999–51

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Bulletin No. 1999–51
December 20, 1999

Internal Revenue

bulletin
HIGHLIGHTS
OF THIS ISSUE

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

INCOME TAX
Rev. Rul. 99–54, page 675.
Low-income housing credit; satisfactory bond; “bond
factor” amounts for the period October through December 1999. This ruling announces the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the
period October through December 1999.

Rev. Rul. 99–55, page 675.
LIFO; price indexes; department stores. The October
1999 Bureau of Labor Statistics price indexes are accepted
for use by department stores employing the retail inventory
and last-in, first-out inventory methods for valuing inventories
for tax years ended on, or with reference to, October 31,
1999.

Notice 99–57, page 692.
Guidance is provided under section 705 of the Code relating
to certain situations where gain or loss may be improperly
created by adjusting the basis of a partnership interest for
partnership income that is not subject to tax, or for partnership losses or deductions that are permanently denied, with
respect to a partner.

Notice 99–58, page 693.
Authorized IRS e-file providers, Form 1040 on-line transmitters, and financial institutions may apply to obtain a Debt Indicator for their customer/client taxpayers in exchange for
screening individual income tax returns for potential abuse
and reporting the findings to the IRS.

ESTATE TAX
T.D. 8846, page 679.

Rev. Rul. 99–56, page 676.
Timber casualty losses. The decisions in Westvaco Corp.
v. United States and Weyerhaueser v. United States pertain
to single, identifiable property (SIP) in relation to casualty
losses. Rev. Ruls. 66–9 and 73–51 revoked.

Rev. Rul. 99–57, page 678.
Applying section 1032 to partnership transaction.
This ruling explains the tax consequences to a partnership
and a corporate partner where the corporate partner contributes its own stock to the partnership, and the partnership later exchanges the stock with a third party in a taxable transaction.

Final regulations under sections 2055 and 2056 of the Code
relate to the effect of certain Administration expenses on the
valuation of property that qualifies for the estate tax charitable or marital deduction. Rev. Ruls. 66–233, 73–98,
80–159, 93–48 obsoleted.

GIFT TAX
T.D. 8845, page 683.
Final regulations under sections 2001, 2504, and 6501(c)
of the Code relate to the valuation of prior gifts in determining estate and gift tax liability, and to the commencement of
the period of limitations for assessing and collecting gift tax.

Finding Lists begin on page ii.
Announcement of Declatory Judgement Proceedings Under Section 7428 on page 699.

Department of the Treasury
Internal Revenue Service

The IRS Mission
Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities

and by applying the tax law with integrity and fairness to
all.

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and proce-

dures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Subparts. Also included in this part are Bank Secrecy Act Administrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semiannual period, respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 42.—Low-Income
Housing Credit

Rev. Rul. 99–54

Low-income housing credit; satisfactory bond; “bond factor” amounts for
the period October through December
1999. This ruling announces the monthly
bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during
the period October through December
1999.

In Rev. Rul. 90–60, 1990–2 C.B. 3, the
Internal Revenue Service provided guidance to taxpayers concerning the general
methodology used by the Treasury Department in computing the bond factor
amounts used in calculating the amount of
bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal
Revenue Code. It further announced that
the Secretary would publish in the Internal Revenue Bulletin a table of “bond fac-

tor” amounts for dispositions occurring
during each calendar month.
This revenue ruling provides in Table 1
the bond factor amounts for calculating
the amount of bond considered satisfactory under § 42(j)(6) for dispositions of
qualified low-income buildings or interests therein during the period October
through December 1999, and includes
bond factor amounts previously published
for dispositions occurring during the period January through September 1999.

Table 1
Rev. Rul. 99–54
Monthly Bond Factor Amounts for Dispositions Expressed As a Percentage of Total Credits
Calendar Year Building Placed in Service or, if Section 42(f)(1) Election Was Made, the Succeeding Calendar Year
Month of
Disposition

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

Jan ‘99
Feb ‘99
Mar ‘99
Apr ‘99
May ‘99
Jun ‘99
Jul ‘99
Aug ‘99
Sep ‘99
Oct ‘99
Nov ‘99
Dec ‘99

44.10
44.10
44.10
45.71
45.71
45.71
45.71
45.71
45.71
45.71
45.71
45.71

57.48
57.48
57.48
60.18
60.18
60.18
60.18
60.18
60.18
60.18
60.18
60.18

70.98
70.98
70.98
75.06
75.06
75.06
75.06
75.06
75.06
75.06
75.06
75.06

72.56
72.35
72.14
76.82
76.60
76.39
76.18
75.97
75.77
75.57
75.37
75.18

74.67
74.45
74.24
79.83
79.60
79.38
79.16
78.94
78.73
78.52
78.32
78.12

77.09
76.85
76.62
83.22
82.97
82.73
82.50
82.27
82.05
81.83
81.61
81.40

79.54
79.29
79.05
86.70
86.44
86.18
85.93
85.69
85.45
85.22
85.00
84.78

81.87
81.60
81.35
90.11
89.83
89.56
89.30
89.04
88.80
88.56
88.32
88.10

84.18
83.90
83.63
93.55
93.26
92.97
92.70
92.44
92.19
91.94
91.71
91.48

86.70
86.40
86.11
97.27
96.96
96.66
96.38
96.11
95.85
95.60
95.37
95.14

89.33
89.00
88.69
101.15
100.81
100.51
100.22
99.95
99.69
99.45
99.23
99.01

92.33
91.92
91.56
105.33
104.97
104.65
104.36
104.10
103.86
103.65
103.46
103.28

92.81
92.81
92.81
107.43
107.43
107.43
107.43
107.43
107.43
107.43
107.43
107.43

For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see the following revenue rulings:
Rev.
Rul.98–3, 1998–2 I.R.B. 4, for dispositions occurring during the calendar
years 1996 and 1997; Rev. Rul. 98–13,
1998–11 I.R.B. 4, for dispositions occurring during the period January
through March 1998; Rev. Rul. 98–31,
1998–25 I.R.B. 4, for dispositions occurring during the period April through
June 1998; Rev. Rul. 98–45, 1998–38
I.R.B. 4, for dispositions occurring during the period July through September
1998; and Rev. Rul. 99–1, 1999–2
I.R.B. 4, for dispositions occurring during the period October through December 1998.

1999–51 I.R.B.

DRAFTING INFORMATION
The principal author of this revenue ruling
is Gregory N. Doran of the Office of Assistant
Chief Counsel (Passthroughs and Special Industries). For further information regarding
this revenue ruling, contact Mr. Doran on
(202) 622-3040 (not a toll-free call).

Section 165.—Losses
26 CFR 1.165–7: Casualty losses.

If a taxpayer suffers a timber casualty
loss, what is the single, identifiable property that the taxpayer will use to compute
the amount of the casualty loss? See Rev.
Rul. 99–56, page 676.

675

Section 472.—Last-in, First-out
Inventories
26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department
stores. The October 1999 Bureau of
Labor Statistics price indexes are accepted for use by department stores employing the retail inventory and last-in,
first-out inventory methods for valuing
inventories for tax years ended on, or with
reference to, October 31, 1999.

Rev. Rul. 99–55
The following Department Store Inventory Price Indexes for October 1999 were
issued by the Bureau of Labor Statistics.

December 20, 1999

The indexes are accepted by the Internal Revenue Service, under §
1.472–1(k) of the Income Tax Regulations and Rev. Proc. 86–46, 1986–2
C.B. 739, for appropriate application to
inventories of department stores employing the retail inventory and last-in,

first-out inventory methods for tax
years ended on, or with reference to,
October 31, 1999.
The Department Store Inventory
Price Indexes are prepared on a national basis and include (a) 23 major
groups of departments, (b) three special

combinations of the major groups - soft
goods, durable goods, and miscellaneous goods, and (c) a store total,
which covers all departments, including some not listed separately, except
for the following: candy, food, liquor,
tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
Oct.
1998

Oct.
1999

Percent Change
from Oct. 1998
to Oct. 19991

1. Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .548.9
2. Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .637.5
3. Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . .679.2
4. Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .921.6
5. Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .640.2
6. Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .572.6
7. Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .308.9
8. Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . . . . . . . . . . .551.6
9. Women’s Outerwear and Girls’ Wear . . . . . . . . . . . . . . . . . . . . . . .423.5
10. Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .620.1
11. Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .607.8
12. Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . .521.0
13. Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .982.7
14. Notions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .757.6
15. Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .946.4
16. Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .673.7
17. Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .601.0
18. Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .817.1
19. Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .238.3
20. Radio and Television . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70.6
21. Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .102.8
22. Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129.5
23. Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.9

545.8
625.6
653.3
881.2
645.2
571.7
328.9
536.7
416.9
627.5
631.1
508.8
969.2
771.7
985.6
692.3
603.3
792.9
234.8
64.2
96.5
128.8
106.8

-0.6
-1.9
-3.8
-4.4
0.8
-0.2
6.5
-2.7
-1.6
1.2
3.8
-2.3
-1.4
1.9
4.1
2.8
0.4
-3.0
-1.5
-9.1
-6.1
-0.5
-1.0

Groups 1 - 15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .612.7
Groups 16 - 20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .460.5
Groups 21 - 23: Misc. Goods2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .107.3
Store Total3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .556.9

612.3
448.6
102.7
550.9

-0.1
-2.6
-4.3
-1.1

Groups

1 Absence of a minus sign before percentage change in this column

signifies price increase.
2 Indexes on a January 1986=100 base.
3 The store total index covers all departments, including some not listed separately, except for the following: candy, food,

liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Alan J. Tomsic of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further information regarding this revenue ruling, contact Mr. Tomsic on (202) 622-4970 (not
a toll-free call).

December 20, 1999

Section 611.—Allowance of
Deduction for Depletion

tion to casualty losses. Rev. Ruls. 66–9
and 73–51 revoked.

26 CFR 1.611–3: Rules applicable to timber. (Also,
section 165; 1.165–7.)

Rev. Rul. 99–56

Timber casualty losses. The decisions
in Westvaco Corp. v. United States and
Weyerhaueser v. United States pertain to
single, identifiable property (SIP) in rela-

ISSUE

676

The Internal Revenue Service has reconsidered Rev. Rul. 66–9, 1966–1 C.B.
39, and Rev. Rul. 73–51, 1973–1 C.B. 75,

1999–51 I.R.B.

in light of the decisions in Westvaco Corp.
v. United States, 639 F.2d 700 (Ct. Cl.
1980), and Weyerhaeuser v. United States,
92 F.3d 1148 (1996), rev’g in part and
aff’g in part, 32 Fed. Cl. 80 (1994), cert.
denied, 519 U.S. 1091 (1997).
LAW AND ANALYSIS
Section 1.165–7(b)(2) of the Income
Tax Regulations provides that a casualty
loss must be determined by reference to a
single, identifiable property (SIP) damaged or destroyed by casualty. Rev. Rul.
66–9 holds that, in the case of a casualty
loss to timber, the SIP damaged or destroyed by casualty is the quantity of timber—the units (board feet, log scale,
cords, or other units) of wood in standing
trees that are available and suitable for exploitation and use by forest industries—
rendered unfit for use by casualty (in that
case, a hurricane). Rev. Rul. 66–9 articulates two interrelated concepts. One is the
definition of SIP; the other is the sufficiency of damage giving rise to a casualty
loss. It defines SIP to be the quantity of
timber destroyed by the casualty. It regards only total destruction of the timber
to be legally sufficient to trigger a casualty loss. The revenue ruling holds that
the loss from the sale or other disposition
of the timber that was not destroyed by
the hurricane should be determined at the
time of sale or other disposition by subtracting the adjusted basis of the quantity
of timber disposed of from the amount received for that timber.
Rev. Rul. 73–51, in considering the allowance of a section 165 casualty loss on
account of an ice storm, repeats the SIP
definition of Rev. Rul. 66–9 and holds
that the physical damage (in that case,
broken crowns or root damage that
stunted tree growth) to the merchantable
trees did not result in any of the existing
timber being rendered unfit for use.
The Court of Claims, in Westvaco,
decided that the SIP damaged or
destroyed by storms and fires included all
of the taxpayer’s standing timber in the
district (block) directly affected by each
casualty and not just the units of timber
contained in the trees suffering mortal
injury. The court enunciated the standard
that the appropriate SIP is any unit of
property that has an identifiable adjusted
basis and that is reasonable and logical
and identifiable in relation to the area

1999–51 I.R.B.

affected by the casualty. The court also
held that the allowable loss for casualty is
not limited to merchantable units of timber totally destroyed.
In Weyerhaeuser, the United States Court
of Appeals for the Federal Circuit held that
the SIP damaged or destroyed by several forest fires and a volcanic eruption affecting
taxpayer’s timber property was the block,
that subdivision of a taxpayer’s forest holdings selected by the taxpayer as a means of
tracking the adjusted basis in the timber pursuant to section 1.611–(3)(d)(1). Consistent
with Westvaco, a casualty loss was allowed
for trees that were damaged but not rendered
worthless.
HOLDING
In light of the court decisions in
Westvaco and Weyerhaeuser the Service is
revoking Rev. Rul. 66–9 and Rev. Rul.
73–51.
EFFECT ON OTHER REVENUE
RULINGS
Rev. Rul. 66–9, 1966–1 C.B. 39, and
Rev. Rul. 73–51, 1973–1 C.B. 75, are
revoked.
DRAFTING INFORMATION
The principal author of this revenue ruling is Richard T. Probst of the Office of
Assistant Chief Counsel (Passthroughs and
Special Industries). For further information
regarding this revenue ruling, contact
Richard T. Probst on (202) 622-3120 (not a
toll-free call).

Section 701.—Partners, not
Partnership, Subject to Tax
26 CFR 1.701–2: Anti-abuse rule.

Is the partnership viewed as an entity or
as an aggregate of its partners when determining whether a corporate partner must
recognize any gain or loss that the partnership allocates to it upon the sale or exchange in a taxable transaction of the
partner’s stock contributed by the partner
to the partnership? See Rev. Rul. 99–57,
page 678.

677

Section 704.—Partner’s
Distributive Share
26 CFR 1.704.3: Contributed property.

What is a partner’s correct amount of
gain or loss from a partnership’s sale or
exchange in a taxable transaction of stock
in the partner contributed to the partnership by the partner? See Rev. Rul. 99–57,
page 678.

Section 705.—Determination of
Basis of Partner’s Interest
What basis adjustment should be made
to reflect that amount of gain or loss allocated to a partner that contributes its own
stock to a partnership upon the partnership’s sale or exchange in a taxable transaction of that stock when the partner may
not recognize that gain or loss under §
1032 of the Internal Revenue Code? See
Rev. Rul. 99–57, page 678.

Section 721.—Nonrecognition of
Gain or Loss on Contribution
Does a partner that contributes shares
of its own stock to a partnership in exchange for a partnership interest recognize gain or loss on that contribution? See
Rev. Rul. 99–57, page 678.

Section 722.—Basis of
Contributing Partner’s Interest
What basis does a partner that contributes shares of its own stock to a partnership in exchange for a partnership interest have in its partnership interest? See
Rev. Rul. 99–57, page 678.

Section 723.—Basis of Property
Contributed to Partnership
What basis does a partnership have
in the stock of one of its partners contributed by that partner in exchange for
a partnership interest? See Rev. Rul.
99–57, page 678.

December 20, 1999

Section 1001.—Determination
of Amount of and Recognition of
Gain or Loss
What is a partnership’s amount of
gain or loss on the sale or exchange in a
taxable transaction of stock of one of
its partners contributed to the partnership by that partner? See Rev. Rul.
99–57, on this page.

Section 1011.—Adjusted Basis
for Determining Loss
What is a partnership’s basis in the stock
of one of its partners contributed to the
partnership by that partner when computing the amount of gain or loss on the sale
or exchange in taxable transaction of that
stock? See Rev. Rul. 99–57, on this page .

Section 1032.—Exchange of
Stock For Property
26 CFR 1.1032–1: Disposition by a corporation of
its own capital stock. (Also, sections 701, 704, 705,
721, 722, 723, 1001, 1011; 1.701–2(e), 1.704–3.)

Applying section 1032 to partnership
transaction. This ruling explains the tax
consequences to a partnership and a corporate partner where the corporate partner
contributes its own stock to the partnership, and the partnership later exchanges
the stock with a third party in a taxable
transaction.

Rev. Rul. 99–57
ISSUE
What are the tax consequences to a
partnership and a corporate partner where
the corporate partner contributes its own
stock to the partnership, and the partnership later exchanges the stock with a third
party in a taxable transaction?
FACTS
A, a corporation taxed under subchapter C of the Internal Revenue Code, and
B, an individual, form AB partnership for
bona fide business purposes. A contributes 100 shares of its own stock, valued at $100x, with a basis of zero, to AB
in exchange for a 50 percent partnership
interest. B contributes a parcel of real

December 20, 1999

property with a value and adjusted basis
equal to $100x in exchange for a 50 percent partnership interest. Under the partnership agreement, A and B each will be
allocated a 50 percent share of all partnership items. One year later, after the value
of the stock has increased to $120x, AB
purchases property valued at $60x from C
in exchange for 50 shares of A stock and
transfers 50 shares of A stock to D in exchange for services valued at $60x.
LAW
Section 701 states that the partners in a
partnership, and not the partnership, are
liable for the income tax imposed by
Chapter 1.
Sections 702(a)(1) and 702(a)(2) provide that in determining the partners’ income tax, each partner shall take into account separately the partner’s distributive
share of partnership gains or losses from
sales or exchanges of capital assets.
Section 704(b) provides that a partner’s
distributive share of income, gain, loss,
deduction, or credit (or item thereof) is
determined in accordance with the partner’s interest in the partnership (determined by taking into account all facts and
circumstances), if (1) the partnership
agreement does not provide as to the partner’s distributive share of income, gain,
loss, deduction, or credit (or item
thereof), or (2) the allocation to a partner
under the agreement of income, gain,
loss, deduction, or credit (or item thereof)
does not have substantial economic effect.
Section 704(c)(1)(A) provides that income, gain, loss, and deduction with respect to property contributed to a partnership by a partner is shared among the
partners so as to take account of the variation between the basis of the property to
the partnership and its fair market value at
the time of contribution (the built-in gain
or loss).
Section 1.704–3(a)(3) of the Income
Tax Regulations defines § 704(c) property
as property contributed to a partnership if,
at the time of contribution, its book value
differs from the contributing partner’s adjusted tax basis. Book value is equal to
the fair market value of the property at the
time of contribution.
Section 705(a)(1) provides that the adjusted basis of a partner’s interest in a
partnership shall be increased by the sum

678

of the partner’s distributive share for the
taxable year and prior taxable years of:
(A) taxable income of the partnership as
determined under § 703(a), (B) income of
the partnership exempt from income tax,
and (C) the excess of the deductions for
depletion over the basis of the property
subject to depletion.
Section 721(a) provides a general nonrecognition rule for a partner’s contributions of property to a partnership in exchange for a partnership interest. The rule
is subject to a limited exception in §
721(b).
Section 722 provides that the basis of
an interest in a partnership acquired by a
contribution of property, including
money, to the partnership shall be the
amount of the money and the adjusted
basis of the property to the contributing
partner at the time of the contribution increased by the amount (if any) of gain
recognized under § 721(b) to the contributing partner at the time.
Section 723 states that the basis of
property contributed to a partnership is
the adjusted basis of the property to the
partner at the time of contribution increased by the amount (if any) of gain
recognized by the contributing partner
under § 721(b).
Section 1001 provides that the gain
from the sale or other disposition of property shall be the excess of the amount realized over the adjusted basis provided in
§ 1011. The amount realized from the
sale or other disposition of property shall
be the sum of any money received plus
the fair market value of property (other
than money) received.
Section 1011 provides that the adjusted
basis for determining gain or loss from
the sale or other disposition of property
by a partnership, whenever acquired, shall
be the basis determined under § 1012 and
other applicable sections of subchapters O
and K.
Section 1032(a) states that a corporation does not recognize gain or loss on the
receipt of money or other property in exchange for the corporation’s stock. Prior
to the enactment of § 1032, a corporation
potentially could recognize gain or loss
by purchasing and reselling its own
shares, even though it would not have recognized gain or loss on the disposition of
newly issued shares. This disparity,
which gave rise to tax avoidance opportu-

1999–51 I.R.B.

nities through selective loss recognition,
was eliminated by Congress with the enactment of § 1032. H.R. Rep. No. 1337,
83d Cong., 2d Sess. A268 (1954).
Section 1.1032–1(a) provides that a
transfer by a corporation of shares of its
own stock as compensation for services is
considered, for purposes of § 1032(a), as
a disposition by the corporation of the
shares for money or other property.
Rev. Rul. 74–503, 1974–2 C.B. 117,
considers the tax consequences of a parent corporation’s transfer to its subsidiary
of its own treasury stock in a transaction
to which § 351 applies. The ruling holds
that, under certain circumstances, the
basis of the parent corporation’s treasury
stock in the hands of the parent corporation is zero. Accordingly, under the transferred basis rule of § 362(a), the subsidiary corporation’s basis of the treasury
stock of the parent corporation is also
zero.
Partnership taxation is a mixture of
provisions that treat the partnership as
an aggregate of its members or as a separate entity. Under the aggregate approach, each partner is treated as the
owner of an undivided interest in partnership assets and operations. Under
the entity approach, the partnership is
treated as a separate entity in which
partners have no direct interest in partnership assets and operations. In enacting subchapter K, Congress indicated
that aggregate, rather than entity, concepts should be applied if the concepts
are more appropriate in applying other
provisions of the Code. S.Rep. No.
1622, 83d Cong., 2d Sess. 89 (1954) and
H.R. Conf. Rep. No. 2543, 83d Cong.,
2d Sess. 59 (1954); See also Treas. Reg.
§ 1.701–2(e) (1994).

realizes $120x of gain ($60x on the exchange of stock for property and $60x on
the payment of stock for services). AB allocates $100x of gain to A under § 704(c),
and allocates the remaining $20x pursuant
to the partnership agreement, $10x each
to A and B.
If A’s share of the gain from the use of
its stock in these transactions was not
subject to § 1032, A would recognize
$110x of gain. Section 1032 is intended
to prevent a corporation from recognizing gain or loss when dealing in its own
stock. Under § 704(b) and 704(c), a corporate partner contributing its own stock
generally will be allocated an amount of
gain attributable to its stock that corresponds to its economic interest in the
stock held by the partnership. Accordingly, use of the aggregate theory of partnerships is appropriate in determining the
application of § 1032 with respect to gain
allocated to a corporate partner. Under §
1032, A’s share of the gain resulting from
AB’s exchange of A stock will not be subject to tax. In addition, A increases its
basis in its partnership interest in AB
under § 705 by $110x, the amount equal
to A’s share of the gain resulting from
AB’s exchange of A stock, thereby preserving the nonrecognition result of the
transaction in accordance with the policy
underlying § 1032.
Furthermore, in keeping with the nonrecognition policy underlying § 1032, an
analysis similar to that described above
would apply to a transaction in which a
corporate partner is allocated a loss from
a transaction involving the disposition of
stock of the corporate partner held by the
partnership.

ANALYSIS

If a corporate partner contributes its
own stock to a partnership in exchange
for a partnership interest, and the partnership later exchanges the stock in a
taxable transaction, then the partnership
will realize gain that will be allocated to
the partners under § 704. Under § 1032,
however, the corporate partner will not
recognize the gain allocated to it with
respect to the sale or exchange of the
stock. Furthermore, under § 705, the
corporate partner increases its basis in
its partnership interest by an amount
equal to its share of the gain resulting
from the partnership’s sale or exchange

When A contributes its own stock to
AB, no gain or loss is recognized to A or
AB under § 721(a). AB’s basis in the
stock is zero under § 723, and A’s basis in
its partnership interest in AB is zero under
§ 722. Cf. Rev. Rul. 74–503, 1974–2
C.B. 117. When AB subsequently purchases property from C in exchange for A
stock and pays A stock to D in exchange
for services, there is a realization of gain
by AB measured by the difference between the basis of the stock and the value
of the property and services received. AB

1999–51 I.R.B.

HOLDING

679

of the stock.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Robert Honigman of the Office
of the Assistant Chief Counsel
(Passthroughs and Special Industries).
However, other personnel from the IRS
and Treasury Department participated in
its development. For further information
regarding this revenue ruling contact
Robert Honigman at (202) 622-3050 (not
a toll-free call).

Section 2056.—Bequests, Etc.,
to Surviving Spouse
26 CFR 20.2056(b)–4: Marital deduction; valuation
of interest passing to surviving spouse.

T.D. 8846
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
Deductions for Transfers for Public,
Charitable, and Religious Uses; In
General
Marital Deduction; Valuation of
Interest Passing to Surviving
Spouse
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the effect of
certain administration expenses on the
valuation of property that qualifies for
either the estate tax marital deduction
under section 2056 of the Internal
Revenue Code or the estate tax charitable
deduction under section 2055. The
regulations distinguish between estate
transmission expenses, which reduce the
value of property for marital and
charitable deduction purposes, and estate
management expenses, which generally
do not reduce the value of property for
these purposes.
EFFECTIVE DATES: These regulations
are effective on December 3, 1999.

December 20, 1999

FOR FURTHER INFORMATION
CONTACT: Deborah Ryan, (202) 6223090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 16, 1998, the Treasury
Department and the IRS published in the
Federal Register (63 FR 69248) a notice
of proposed rulemaking (REG–114663–97,
1999-6 I.R.B. 15) relating to the effect of
certain administration expenses on the valuation of property which qualifies for the
estate tax marital or charitable deduction.
The proposed regulations were issued in response to the decision of the Supreme
Court of the United States in Commissioner
v. Estate of Hubert, 520 U.S. 93 (1997)
(1997–2 C.B. 231). Written comments responding to the notice of proposed rulemaking were received, and a public hearing
was held on April 21, 1999, at which time
oral testimony was presented. This Treasury decision adopts final regulations with
respect to the notice of proposed rulemaking. A summary of the principal comments
received and revisions made in response to
those comments is provided below.
The proposed regulations set forth the
substantive provisions as applied to the
estate tax marital deduction in
§20.2056(b)–4(a). For the estate tax charitable deduction, the proposed regulations
(under §20.2055–1(d)(6)) merely crossreference the rules for the marital deduction.
Several commentators suggested that
the regulations under section 2055 should
contain specific rules relating to the charitable deduction, rather than just a crossreference. The Treasury and the IRS
agree with this suggestion. The final regulations contain rules under §20.2055–3
specifically addressing the effect of administration expenses on the valuation of
property when all or a portion of the interests in property qualify for the estate tax
charitable deduction.
Several commentators stated that the
distinction between estate transmission
expenses and estate management expenses was not clearly made in the proposed regulations and requested more
concrete definitions of each type of expense. In response to these comments,
the final regulations characterize estate

December 20, 1999

transmission expenses as those expenses
that would not have been incurred except
for the decedent’s death. Although the
amount of these expenses cannot be calculated with any degree of certainty on
the date of the decedent’s death, they are
expenses that are incurred because of the
decedent’s death. Estate management expenses, on the other hand, are characterized in the final regulations as expenses
that would be incurred with respect to the
property even if the decedent had not
died; that is, expenses incurred in investing, maintaining, and preserving the
property. These are expenses that typically would have been incurred with respect to the property by the decedent before death or by the beneficiaries had
they received the property on the date of
death without any intervening period of
administration. In order to be certain
that all expenses are classified as either
transmission expenses or management
expenses, transmission expenses are defined to include all expenses that are not
management expenses.
Three commentators stated that the different treatment accorded to estate transmission expenses and estate management
expenses under the proposed regulations
creates a new federal standard for allocating expenses that may be contrary to the
manner in which the expenses must be
charged under state law. However, the
Treasury and the IRS believe that the allocation of administration expenses based
on the distinction between transmission
and management expenses provides the
most accurate measure of the value of the
property which passes to the surviving
spouse or to the charity at the moment of
the decedent’s death for federal estate tax
marital and charitable deduction purposes. Transmission expenses that are
charged to the property passing to the surviving spouse or to the charity reduce the
amount of that property as of the date of
the decedent’s death because the expenses, as well as the transfer to the surviving spouse or to charity, are a consequence of, and arise as a result of, the
decedent’s death. In contrast, management expenses do not generally reduce
the amount of the property passing from
the decedent as of the date of the decedent’s death because these expenses are
incurred in producing income and preserving and maintaining the property be-

680

tween the date of the decedent’s death and
the date of distribution. These expenses
are the ongoing, year-to-year expenses incurred in the investment, preservation,
and maintenance of property by property
owners.
In response to other comments, the
final regulations illustrate the application
of these rules to pecuniary bequests to the
surviving spouse. If, under the terms of
the governing instrument or applicable
local law, the recipient of a pecuniary bequest is not entitled to income earned
until distribution, the income is not included in the definition of the marital or
charitable share. Thus, the amount of the
property passing to the surviving spouse
or charity for which a marital or charitable deduction is allowable will not be reduced even if estate transmission or estate
management expenses are paid out of the
income earned by assets that will be used
to satisfy the pecuniary bequest.
Two commentators requested guidance
in applying the regulations to estates that
are intended to be nontaxable. Accordingly, the final regulations add two examples, one involving a formula designed to
produce zero estate taxes and the other involving a pecuniary bequest designed to
utilize the applicable exclusion amount
under section 2010.
Many of the comments concerned the
special rule of §20.2056(b)–4(e)(2)(ii) of
the proposed regulations. Under the special rule, the value of the deductible property interest is not increased as a result of
the decrease in the federal estate tax liability that is attributable to the deduction
of estate management expenses as expenses ofadministration under section
2053 on the federal estate tax return. A
similar rule would have applied for purposes of the estate tax charitable deduction.
Several of these commentators argued
that the special rule is inconsistent with
sections 2056(a) and 2055(c), because
the value of the property passing to the
surviving spouse or charity should be reduced only by the estate taxes actually
paid. Thus, an estate should be permitted
the full benefit of deducting management
expenses on the federal estate tax return,
including an increase to the marital or
charitable deduction based on the resultant decrease in tax payable from the marital or charitable share.

1999–51 I.R.B.

Conversely, other commentators asserted that the special rule does not conform with section 2056(b)(9). Section
2056(b)(9) provides that nothing in section 2056 or any other estate tax provision
shall allow the value of any interest in
property to be deducted for federal estate
tax purposes more than once with respect
to the same decedent. These commentators pointed out that if estate management
expenses paid from the marital or charitable share are deducted on the federal estate tax return, and no reduction is made
to the allowable amount of the marital or
charitable deduction, then the same property interest is deducted twice in violation
of section 2056(b)(9).
After considering these comments, the
Treasury and the IRS have eliminated the
special rule of the proposed regulations.
The final regulations provide that estate
management expenses attributable to, and
payable from, the property interest passing to the surviving spouse or charity do
not reduce the value of the property interest. However, pursuant to section
2056(b)(9), the allowable amount of the
marital or charitable deduction is reduced
by the amount of these management expenses if they are deducted on the Federal
estate tax return.
The Treasury and the IRS believe that
the principles which apply for determining the value of the marital and charitable
deductions should also apply for determining the value of property that passes
from one decedent to another when calculating the amount of the credit for tax on
prior transfers under section 2013.
Therefore, the final regulations amend
§20.2013–4(b) by adding a cross reference to §20.2056(b)–4(d).
Effective Dates
The regulations under sections 2055 and
2056 are applicable to estates of decedents dying on or after December 3,
1999. The regulations under section
2013 are applicable to transfers from
estates of decedents dying on or after
December 3, 1999.
Effect on Other Documents
The following publications are obsolete
as of December 3, 1999:
Rev. Rul. 66–233 (1996–2 C.B. 428)
Rev. Rul. 73–98 (1973–1 C.B. 407)
Rev. Rul. 80–159 (1980–1 C.B. 206)

1999–51 I.R.B.

Rev. Rul. 93–48

(1993–2 C.B. 270)

Special Analyses
This rule is not a significant regulatory
action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and, because the regulations do not
impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, these regulations were
submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is Deborah Ryan, Office of the Assistant Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and Treasury Department participated in their development.

*****
Amendments to the Regulations
Accordingly, 26 CFR part 20 is
amended as follows:
PART 20—ESTATE TAX; ESTATES OF
DECEDENTS DYING AFTER
AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2013–4 is amended
by:
1. Removing “and” at the end of paragraph (b)(2).
2. Redesignating paragraph (b)(3) as
paragraph (b)(4).
3. Adding a new paragraph (b)(3).
The addition reads as follows:
§20.2013–4 Valuation of property
transferred.
*****
(b) * * *
(3)(i) By the amount of administration
expenses in accordance with the principles of §20.2056(b)–4(d).

681

(ii) This paragraph (b)(3) applies to
transfers from estates of decedents dying
on or after December 3, 1999; and
*****
Par. 3. Section 20.2055–3 is amended
by:
1. Revising the section heading.
2. Adding a paragraph heading for
paragraph (a).
3. Redesignating the text of paragraph
(a) following the heading and paragraphs
(b) and (c) as paragraph (a)(1), and
paragraphs (a)(2) and (a)(3), respectively.
4. Adding a new paragraph (b).
The revision and additions read as follows:
§20.2055–3 Effect of death taxes and
administration expenses.
(a) Death taxes. * * *
(b) Administration expenses—(1) Definitions—(i) Management expenses. Estate management expenses are expenses
that are incurred in connection with the
investment of estate assets or with their
preservation or maintenance during a reasonable period of administration. Examples of these expenses could include investment advisory fees, stock brokerage
commissions, custodial fees, and interest.
(ii) Transmission expenses. Estate
transmission expenses are expenses that
would not have been incurred but for the
decedent’s death and the consequent necessity of collecting the decedent’s assets,
paying the decedent’s debts and death
taxes, and distributing the decedent’s
property to those who are entitled to receive it. Estate transmission expenses include any administration expense that is
not a management expense. Examples of
these expenses could include executor
commissions and attorney fees (except to
the extent of commissions or fees specifically related to investment, preservation,
and maintenance of the assets), probate
fees, expenses incurred in construction
proceedings and defending against will
contests, and appraisal fees.
(iii) Charitable share. The charitable
share is the property or interest in property that passed from the decedent for
which a deduction is allowable under section 2055(a) with respect to all or part of
the property interest. The charitable share
includes, for example, bequests to charitable organizations and bequests to a charitable lead unitrust or annuity trust, a charitable remainder unitrust or annuity trust,

December 20, 1999

and a pooled income fund, described in
section 2055(e)(2). The charitable share
also includes the income produced by the
property or interest in property during the
period of administration if the income,
under the terms of the governing instrument or applicable local law, is payable to
the charitable organization or is to be
added to the principal of the property interest passing in whole or in part to the
charitable organization.
(2) Effect of transmission expenses.
For purposes of determining the charitable deduction, the value of the charitable
share shall be reduced by the amount of
the estate transmission expenses paid
from the charitable share.
(3) Effect of management expenses attributable to the charitable share. For
purposes of determining the charitable deduction, the value of the charitable share
shall not be reduced by the amount of the
estate management expenses attributable
to and paid from the charitable share.
Pursuant to section 2056(b)(9), however,
the amount of the allowable charitable deduction shall be reduced by the amount of
any such management expenses that are
deducted under section 2053 on the decedent’s federal estate tax return.
(4) Effect of management expenses not
attributable to the charitable share. For
purposes of determining the charitable deduction, the value of the charitable share
shall be reduced by the amount of the estate management expenses paid from the
charitable share but attributable to a property interest not included in the charitable
share.
(5) Example. The following example
illustrates the application of this paragraph (b):
Example. The decedent, who dies in 2000,
leaves his residuary estate, after the payment of
debts, expenses, and estate taxes, to a charitable remainder unitrust that satisfies the requirements of
section 664(d). During the period of administration,
the estate incurs estate transmission expenses of
$400,000. The residue of the estate (the charitable
share) must be reduced by the $400,000 of transmission expenses and by the Federal and State estate
taxes before the present value of the remainder interest passing to charity can be determined in accordance with the provisions of §1.664–4 of this chapter. Because the estate taxes are payable out of the
residue, the computation of the estate taxes and the
allowable charitable deduction are interrelated. See
paragraph (a)(2) of this section.

(6)

Cross

reference.

December 20, 1999

See

§20.2056(b)–4(d) for additional examples
applicable to the treatment of administration expenses under this paragraph (b).
(7) Effective date. The provisions of
this paragraph (b) apply to estates of
decedents dying on or after December 3,
1999.
Par. 4. Section 20.2056(b)–4 is
amended by:
1. Removing the last two sentences of
paragraph (a).
2. Redesignating paragraph (d) as
paragraph (e).
3. Adding a new paragraph (d).
The addition reads as follows:
§20.2056(b)–4 Marital deduction; valuation of interest passing to surviving
spouse.
*****
(d) Effect of administration expenses—
(1) Definitions—(i) Management expenses. Estate management expenses are
expenses that are incurred in connection
with the investment of estate assets or
with their preservation or maintenance
during a reasonable period of administration. Examples of these expenses could
include investment advisory fees, stock
brokerage commissions, custodial fees,
and interest.
(ii) Transmission expenses. Estate
transmission expenses are expenses that
would not have been incurred but for the
decedent’s death and the consequent necessity of collecting the decedent’s assets,
paying the decedent’s debts and death
taxes, and distributing the decedent’s
property to those who are entitled to receive it. Estate transmission expenses include any administration expense that is
not a management expense. Examples of
these expenses could include executor
commissions and attorney fees (except to
the extent of commissions or fees specifically related to investment, preservation,
and maintenance of the assets), probate
fees, expenses incurred in construction
proceedings and defending against will
contests, and appraisal fees.
(iii) Marital share. The marital share
is the property or interest in property that
passed from the decedent for which a deduction is allowable under section
2056(a). The marital share includes the
income produced by the property or interest in property during the period of ad-

682

ministration if the income, under the
terms of the governing instrument or applicable local law, is payable to the surviving spouse or is to be added to the
principal of the property interest passing
to, or for the benefit of, the surviving
spouse.
(2) Effect of transmission expenses.
For purposes of determining the marital
deduction, the value of the marital share
shall be reduced by the amount of the estate transmission expenses paid from the
marital share.
(3) Effect of management expenses attributable to the marital share. For purposes of determining the marital deduction, the value of the marital share shall
not be reduced by the amount of the estate
management expenses attributable to and
paid from the marital share. Pursuant to
section 2056(b)(9), however, the amount
of the allowable marital deduction shall
be reduced by the amount of any such
management expenses that are deducted
under section 2053 on the decedent’s Federal estate tax return.
(4) Effect of management expenses not
attributable to the marital share. For purposes of determining the marital deduction, the value of the marital share shall
be reduced by the amount of the estate
management expenses paid from the marital share but attributable to a property interest not included in the marital share.
(5) Examples. The following examples
illustrate the application of this paragraph
(d):
Example 1. The decedent dies after 2006 having
made no lifetime gifts. The decedent makes a bequest of shares of ABC Corporation stock to the
decedent’s child. The bequest provides that the
child is to receive the income from the shares from
the date of the decedent’s death. The value of the
bequeathed shares on the decedent’s date of death is
$3,000,000. The residue of the estate is bequeathed
to a trust for which the executor properly makes an
election under section 2056(b)(7) to treat as qualified terminable interest property. The value of the
residue on the decedent’s date of death, before the
payment of administration expenses and Federal and
State estate taxes, is $6,000,000. Under applicable
local law, the executor has the discretion to pay administration expenses from the income or principal
of the residuary estate. All estate taxes are to be paid
from the residue. The State estate tax equals the
State death tax credit available under section 2011.
During the period of administration, the estate incurs
estate transmission expenses of $400,000, which the
executor charges to the residue. For purposes of determining the marital deduction, the value of the

1999–51 I.R.B.

residue is reduced by the Federal and State estate
taxes and by the estate transmission expenses. If the
transmission expenses are deducted on the Federal
estate tax return, the marital deduction is $3,500,000
($6,000,000 minus $400,000 transmission expenses
and minus $2,100,000 Federal and State estate
taxes). If the transmission expenses are deducted on
the estate’s Federal income tax return rather than on
the estate tax return, the marital deduction is
$3,011,111 ($6,000,000 minus $400,000 transmission expenses and minus $2,588,889 Federal and
State estate taxes).
Example 2. The facts are the same as in Example
1, except that, instead of incurring estate transmission expenses, the estate incurs estate management
expenses of $400,000 in connection with the residue
property passing for the benefit of the spouse. The
executor charges these management expenses to the
residue. In determining the value of the residue
passing to the spouse for marital deduction purposes, a reduction is made for Federal and State estate taxes payable from the residue but no reduction
is made for the estate management expenses. If the
management expenses are deducted on the estate’s
income tax return, the net value of the property passing to the spouse is $3,900,000 ($6,000,000 minus
$2,100,000 Federal and State estate taxes). A marital deduction is claimed for that amount, and the taxable estate is $5,100,000.
Example 3. The facts are the same as in Example
1, except that the estate management expenses of
$400,000 are incurred in connection with the bequest of ABC Corporation stock to the decedent’s
child. The executor charges these management expenses to the residue. For purposes of determining
the marital deduction, the value of the residue is reduced by the Federal and State estate taxes and by
the management expenses. The management expenses reduce the value of the residue because they
are charged to the property passing to the spouse
even though they were incurred with respect to stock
passing to the child. If the management expenses
are deducted on the estate’s Federal income tax return, the marital deduction is $3,011,111
($6,000,000 minus $400,000 management expenses
and minus $2,588,889 Federal and State estate
taxes). If the management expenses are deducted on
the estate’s Federal estate tax return, rather than on
the estate’s Federal income tax return, the marital
deduction is $3,500,000 ($6,000,000 minus
$400,000 management expenses and minus
$2,100,000 in Federal and State estate taxes).
Example 4. The decedent, who dies in 2000, has
a gross estate of $3,000,000.
Included in the gross estate are proceeds of
$150,000 from a policy insuring the decedent’s life
and payable to the decedent’s child as beneficiary.
The applicable credit amount against the tax was fully
consumed by the decedent’s lifetime gifts. Applicable State law requires the child to pay any estate taxes
attributable to the life insurance policy. Pursuant to
the decedent’s will, the rest of the decedent’s estate
passes outright to the surviving spouse. During the
period of administration, the estate incurs estate management expenses of $150,000 in connection with the
property passing to the spouse. The value of the property passing to the spouse is $2,850,000 ($3,000,000
less the insurance proceeds of $150,000 passing to the

1999–51 I.R.B.

child). For purposes of determining the marital deduction, if the management expenses are deducted on
the estate’s income tax return, the marital deduction is
$2,850,000 ($3,000,000 less $150,000) and there is a
resulting taxable estate of $150,000 ($3,000,000 less
a marital deduction of $2,850,000). Suppose, instead,
the management expenses of $150,000 are deducted
on the estate’s estate tax return under section 2053 as
expenses of administration. In such a situation,
claiming a marital deduction of $2,850,000 would be
taking a deduction for the same $150,000 in property
under both sections 2053 and 2056 and would shield
from estate taxes the $150,000 in insurance proceeds
passing to the decedent’s child. Therefore, in accordance with section 2056(b)(9), the marital deduction
is limited to $2,700,000, and the resulting taxable estate is $150,000.
Example 5. The decedent dies after 2006 having
made no lifetime gifts. The value of the decedent’s
residuary estate on the decedent’s date of death is
$3,000,000, before the payment of administration expenses and Federal and State estate taxes. The decedent’s will provides a formula for dividing the decedent’s residuary estate between two trusts to reduce
the estate’s Federal estate taxes to zero. Under the
formula, one trust, for the benefit of the decedent’s
child, is to be funded with that amount of property
equal in value to so much of the applicable exclusion
amount under section 2010 that would reduce the estate’s Federal estate tax to zero. The other trust, for
the benefit of the surviving spouse, satisfies the requirements of section 2056(b)(7) and is to be funded
with the remaining property in the estate. The State
estate tax equals the State death tax credit available
under section 2011. During the period of administration, the estate incurs transmission expenses of
$200,000. The transmission expenses of $200,000 reduce the value of the residue to $2,800,000. If the
transmission expenses are deducted on the Federal estate tax return, then the formula divides the residue so
that the value of the property passing to the child’s
trust is $1,000,000 and the value of the property passing to the marital trust is $1,800,000. The allowable
marital deduction is $1,800,000. The applicable exclusion amount shields from Federal estate tax the entire $1,000,000 passing to the child’s trust so that the
amount of Federal and State estate taxes is zero. Alternatively, if the transmission expenses are deducted
on the estate’s Federal income tax return, the formula
divides the residue so that the value of the property
passing to the child’s trust is $800,000 and the value
of the property passing to the marital trust is
$2,000,000. The allowable marital deduction remains
$1,800,000. The applicable exclusion amount shields
from Federal estate tax the entire $800,000 passing to
the child’s trust and $200,000 of the $2,000,000 passing to the marital trust so that the amount of Federal
and State estate taxes remains zero.
Example 6. The facts are the same as in Example 5, except that the decedent’s will provides that
the child’s trust is to be funded with that amount of
property equal in value to the applicable exclusion
amount under section 2010 allowable to the decedent’s estate. The residue of the estate, after the
payment of any debts, expenses, and Federal and
State estate taxes, is to pass to the marital trust.
The applicable exclusion amount in this case is
$1,000,000, so the value of the property passing to

683

the child’s trust is $1,000,000. After deducting the
$200,000 of transmission expenses, the residue of
the estate is $1,800,000 less any estate taxes. If
the transmission expenses are deducted on the
Federal estate tax return, the allowable marital deduction is $1,800,000, the taxable estate is zero,
and the Federal and State estate taxes are zero. Alternatively, if the transmission expenses are deducted on the estate’s Federal income tax return,
the net value of the property passing to the spouse
is $1,657,874 ($1,800,000 minus $142,106 estate
taxes). A marital deduction is claimed for that
amount, the taxable estate is $1,342,106, and the
Federal and State estate taxes total $142,106.
Example 7. The decedent, who dies in 2000,
makes an outright pecuniary bequest of
$3,000,000 to the decedent’s surviving spouse, and
the residue of the estate, after the payment of all
debts, expenses, and Federal and State estate
taxes, passes to the decedent’s child. Under the
terms of the applicable local law, a beneficiary of a
pecuniary bequest is not entitled to any income on
the bequest. During the period of administration,
the estate pays estate transmission expenses from
the income earned by the property that will be distributed to the surviving spouse in satisfaction of
the pecuniary bequest. The income earned on this
property is not part of the marital share. Therefore, the allowable marital deduction is
$3,000,000, unreduced by the amount of the estate
transmission expenses.

(6) Effective date. The provisions of
this paragraph (d) apply to estates of
decedents dying on or after December 3,
1999.
*****
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved November 22, 1999.
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on December 2, 1999, 8:45 a.m., and published in the
issue of the Federal Register for December 3, 1999,
64 F.R. 67763)

Section 6501.—Limitations on
Assessment and Collection
26 CFR 301.6501(c)–1: Exceptions to general period
of limitations on assessment and collection.

T.D. 8845
DEPARTMENT OF THE TREASURY
Internal Revenue Service

December 20, 1999

26 CFR Part 20
Adequate Disclosure of Gifts
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to changes
made to Internal Revenue Code sections
2001, 2504, and 6501 by the Taxpayer
Relief Act of 1997 and the Internal Revenue Service Restructuring and Reform
Act of 1998 regarding the valuation of
prior gifts in determining estate and gift
tax liability, and the period of limitations for assessing and collecting gift
tax. These regulations are necessary because section 6501(c)(9) now requires
that a gift must be adequately disclosed
on a gift tax return in order to commence the running of the period of limitations on assessment with respect to the
gift. Once the period of limitations expires, the amount of that gift as reported
on the return may not be adjusted for
purposes of determining future gift and
estate tax liability. The regulations provide guidance on what constitutes adequate disclosure for purposes of the
statute.
DATES: These regulations are effective
December 3, 1999.
FOR FURTHER INFORMATION
CONTACT: William L. Blodgett, (202)
622-3090 (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 (44
U.S.C. 3507) under control number
1545–1637. Responses to this collection
of information are mandatory.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the collection of information displays a valid
OMB control number.
The reporting burden contained in
§301.6501(c)–1(f) is reflected in the
burden for Form 709, “U.S. Gift (and

December 20, 1999

Generation-Skipping Transfer) Tax Return.”
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, OP:FS:FP, 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 be 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
On December 22, 1998, the IRS published in the Federal Register (63 FR
70701) a notice of proposed rulemaking
(REG–106177–98, 1998–2 C.B. 344)
under sections 2001 and 2504 relating to
the value of prior gifts for purposes of
computing the estate and gift tax, and
under section 6501 relating to the period
for assessment and collection of gift tax.
Written comments responding to the notice of proposed rulemaking were received and a hearing was held on April
28, 1999, at which time oral testimony
was presented. This document adopts
final regulations with respect to this notice of proposed rulemaking. A summary
of the principal comments received and
the revisions made in response to those
comments is provided below.
1. Requirements for Adequate Disclosure
Under section 6501(c)(9), the period of
limitations on the assessment of gift tax
with respect to a gift will commence to
run only if the gift is adequately disclosed
on the gift tax return. The proposed regulations provide a list of information required to satisfy the adequate disclosure
standard.
In general, the comments objected to
the quantity, detail, and nature of the information required under the proposed
regulations. In some cases, information
required in the proposed regulations is not
required in the final regulations. However, Treasury and the IRS continue to believe that the adequate disclosure rule was
intended to afford the IRS a viable means

684

to identify the returns that should be examined, with a minimum expenditure of
resources. Further, the more complete
and comprehensive the information filed
with the return is, the more readily the
IRS will be able to identify the returns
that should not be examined, thus saving
taxpayers needless expenditures of time
and money.
Several commentators suggested that
the language in §301.6501–1(f)(2) of the
proposed regulations imposed two requirements for adequate disclosure. That
is, the taxpayer had to provide information adequate to apprise the IRS of the nature of the gift, etc. and in addition, the
taxpayer had to provide the information
listed in the regulation. In response to
these comments, the final regulations
clarify that the adequate disclosure requirement is satisfied if the information
listed in the regulation is provided.
Some commentators argued that Congress intended that the new adequate disclosure requirements be the same as the
existing disclosure requirements under
prior section 6501(c)(9) for pre-August 5,
1997 gifts of property subject to the special valuation rules of sections 2701 and
2702. Therefore, the commentators suggested that the IRS adopt the disclosure
requirements under §301.6501(c)–1(e)(2)
for transfers of those interests. This suggestion was not adopted. The IRS and
Treasury believe it is necessary to expand
on those disclosure requirements to address the broader range of transfers covered by the new legislation, as well as
transactions and entities that may not
have been prevalent when the prior regulations were promulgated.
Under the proposed regulations, if
property is transferred in trust, taxpayers
are required to provide a brief description
of the terms of the trust. In response to
comments, the final regulations provide
that taxpayers may submit a complete
copy of the trust document in lieu of a description of the trust terms.
The proposed regulations require the
submission of a detailed description of the
method used in determining the fair market value of the property, including “any
relevant financial data.” Commentators
contended that “any relevant financial
data” is a subjective concept that lacks
specificity. Rather, the regulations should
specify exactly what financial data must

1999–51 I.R.B.

be submitted, such as balance sheets, net
earnings statements, etc. In response to
these comments, the final regulations require that any financial data that was used
in valuing the interest must be submitted.
This ensures that the information requested is available and was deemed relevant by the person valuing the interest.
Several commentators expressed concern over the requirement in the proposed
regulations that, if a less-than-100-percent interest in a non-actively traded entity is transferred, the taxpayer must submit a statement regarding the fair market
value of 100 percent of the entity determined without regard to any discounts. It
was contended that a less-than-100-percent interest in an operating company
may not be valued based on a pro rata
portion of the value of 100 percent of the
entity; rather the appraiser often will determine the value based on indicia other
than the value of the entire entity, such as
the price/earnings ratio of stock in comparable publicly-traded entities. Because
the entire entity is not valued in these situations, valuing 100 percent of the entity
would not be relevant. One comment
stated that this requirement would be reasonable in valuing an interest in nonactively-traded entities, such as entities
holding securities or real estate, since in
those cases the value of an interest in the
entity would be determined based on a
pro rata portion of the value of 100 percent of the entity. In response to these
comments, the final regulations do not require a statement of the fair market value
of 100 percent of the entity (without regard to any discounts), if the value of the
interest in the entity is properly determined without using the net asset value of
the entire entity. If 100 percent of the
value of the entity is not disclosed, the
taxpayer bears the burden of demonstrating that the fair market value of the entity
is properly determined by a method other
than a method based on the net value of
the assets held by the entity.
The proposed regulations also require
valuation information for each entity (and
its assets) that is owned or controlled by
the entity subject to the transfer. Comments indicated that this requirement
would be difficult to satisfy, because in
some cases the information would not be
within the control of the taxpayer and the
entity subject to the transfer would not

1999–51 I.R.B.

normally be required to maintain the financial records with respect to lowertiered entities. The comments suggested
that information on the lower-tiered entities should be required only to the extent
such information is essential to a reasonable appraisal of the interest transferred
and is in the personal control of the taxpayer. Many commentators suggested
that the regulations require the submission of only that information that a qualified and competent appraiser would use in
valuing the interest. In response to these
comments, the final regulations provide
that the information on the lower-tiered
entities must be submitted if the information is relevant and material in determining the value of the interest in the entity.
Finally, comments suggested that a
properly completed appraisal would contain all the information that is material
and relevant to the valuation of the transferred property and, therefore, should be
sufficient to satisfy any disclosure requirement. Accordingly, under the final
regulations, an appraisal satisfying specific requirements may be submitted in
lieu of a detailed description of the
method used to determine the fair market
value and in lieu of information regarding
tiered entities.
The proposed regulations require a
statement of relevant facts that would apprise the IRS of the nature of any potential gift tax controversy concerning the
transfer, or instead of that statement, a
concise description of the legal issue presented by the facts. This requirement is
similar to the disclosure required to avoid
the accuracy-related penalty under section 6662. It was intended to enable the
IRS to easily identify issues presented so
that the IRS could evaluate whether an
examination is warranted during the initial review of the gift tax return. Commentators indicated that the requirement
was too subjective and open-ended, since
it would be difficult for a practitioner to
identify or anticipate “any” potential controversy. In response to these comments,
that requirement has been eliminated
from the final regulations. The proposed
regulations also require that the taxpayer
submit a statement describing any position taken that is contrary to any temporary or final regulations or any revenue
ruling. Commentators were concerned
that this requirement could be interpreted

685

as including both regulations and revenue
rulings that are published after the gift tax
return is filed that interpret earlier IRS positions. In response to these comments,
the final regulations limit the required
statement to positions taken that are contrary to any proposed, temporary or final
regulation, and any revenue ruling published at the time the transfer occurred.
Commentators also noted that, under
the proposed regulations, if a taxpayer
failed to provide, for example, one item of
information, the adequate disclosure requirement would not be satisfied, regardless of the significance of the item. The
comments suggested that “substantial
compliance” with the requirements of the
regulations or a good-faith effort to comply should be deemed actual compliance.
This suggestion was not adopted in view
of the difficulty in defining and illustrating what would constitute substantial
compliance. However, it is not intended
that the absence of any particular item or
items would necessarily preclude satisfaction of the regulatory requirements, depending on the nature of the item omitted
and the overall adequacy of the information provided.
In response to comments, a rule was
added regarding the application of the adequate disclosure rules in the case of
“split gifts” under section 2513. Under
this rule, gifts attributed to the non-donor
spouse are deemed to be adequately disclosed if the gifts are adequately disclosed
on the return filed by the donor spouse.
2. Finality with Respect to Adequately
Disclosed Gifts
Under the proposed regulations, if a
transfer is adequately disclosed on the gift
tax return, and the period for assessment
of gift tax has expired, then the IRS is
foreclosed from adjusting the value of the
gift under section 2504(c) (for purposes
of determining the current gift tax liability) and under section 2001(f) (for purposes of determining the estate tax liability). However, the IRS is not precluded
from making adjustments involving legal
issues, even if the gift was adequately disclosed. This position was based on longstanding regulations applying section
2504(c) and relevant case law.
Comments suggested that this rule is
contrary to Congressional intent in enacting section 2001(f) and amending section
2504(c) to provide a greater degree of fi-

December 20, 1999

nality with respect to the gift and estate
tax statutory scheme. In response to these
comments, the final regulations preclude
adjustments with respect to all issues related to a gift once the gift tax statute of
limitations expires with respect to that
gift.
3. Non-gift Transactions
Under the proposed regulations, a completed transfer that did not constitute a
gift would be considered adequately disclosed if the taxpayer submitted the information required for adequate disclosure
and an explanation describing why the
transfer was not subject to the gift tax.
One commentator suggested that the adequate disclosure requirement should be
waived if the taxpayer reasonably, in
good faith, believes the transfer is not a
gift (for example, a salary payment made
to a child employed in a family business).
Another commentator noted that the standard for adequate disclosure is higher for
a “non-gift” than it is for a gift transaction
since, in the non-gift situation, the donor
must provide all the information required
by the regulation and a statement why the
transaction is not a gift. Another comment requested more guidance for reporting non-gift business transactions. In response to the comments, the final
regulations limit the information required
in a non-gift situation. In addition, the
final regulations provide that completed
transfers to members of the transferor’s
family (as defined in section
2032A(e)(2)) in the ordinary course of
operating a business are deemed to be adequately disclosed, even if not reported
on a gift tax return, if the item is properly
reported by all parties for income tax purposes. For example, in the case of a
salary payment made to a child of the
donor employed in the donor’s business,
the transaction will be treated as adequately disclosed for gift tax purposes if
the salary payment is properly reported by
the business and the child on their income
tax returns. This exception only applies
to transactions conducted in the ordinary
course of operating a business. It does
not apply, for example, in the case of a
sale of property (including a business) by
a parent to a child.
4. Effective Date Provisions
Several comments were received regarding clarification of the statutory effective date rules.

December 20, 1999

One comment requested clarification of
the effective date of section 6501(c)(9), as
amended. The Taxpayer Relief Act of
1997 provides that the amendments to
section 6501(c)(9) (commencing the running of the period of limitations only if
the gift is adequately disclosed) apply to
gifts made in calendar years ending after
August 5, 1997 (that is, all gifts made in
calendar year 1997 and thereafter). However, the underlying legislative history indicates that the amendment to section
6501(c)(9) applies “to gifts made in calendar years after the date of enactment
[August 5, 1997]”. H.R. Conf. Rep. No.
220, 105th Cong., 1st Sess. 408 (1997).
Notwithstanding this statement in the legislative history, the statutory language is
clear that the section as amended applies
to all gifts made during the 1997 calendar
year, and thereafter. In the final regulations, the statutory effective date language is restated in a manner that makes it
clear that section 6501(c)(9) as amended
applies to all gifts made after December
31, 1996.
Another comment suggested clarification of the application of the adequate disclosure rules and the interaction between
sections 2504(c) and 6501(c)(9) with respect to gifts made between January 1,
1997, and August 6, 1997, since section
2504(c) as amended applies only to gifts
made after August 5, 1997, but section
6501(c)(9) as amended applies to all gifts
made in 1997. In response to this comment, an example has been added under
§25.2504–2(c) involving a situation
where a gift is made prior to August 6,
1997, that is not adequately disclosed on
the return filed for 1997. The example
clarifies that the period for assessment
with respect to the pre-August 6, 1997
gift does not commence to run because
the gift is not adequately disclosed. Accordingly, a gift tax may be assessed with
respect to the gift at any time, and
notwithstanding the effective date for section 2504(c), that 1997 gift can be adjusted as a part of prior taxable gifts in determining subsequent gift tax liability.
Further, the 1997 gift can be adjusted as
part of taxable gifts under section 2001 in
determining estate tax liability.
Finally, in response to another comment, an example has been added illustrating the application of the effective
date rules in a similar fact pattern, where

686

the gifts are made in a calendar year prior
to 1997. The example illustrates that the
IRS may not revalue the gifts, for purposes of determining prior taxable gifts
for gift tax purposes, if a gift tax was paid
and assessed with respect to the calendar
year, and the period for assessment has
expired. Since the gifts were made prior
to 1997, the rules of section 2504(c) and
section 6501 prior to amendment apply.
However, the IRS may adjust the gifts for
purposes of determining adjusted taxable
gifts for estate tax purposes.
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. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regulations, and because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was submitted to the Small Business Administration
for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is William L. Blodgett, Office of Assistant 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 20, 25, 301
and 602 are amended as follows:
PART 20—ESTATE TAX; ESTATES
OF DECEDENTS DYING AFTER AUGUST 16, 1954
Paragraph 1. The authority citation for
part 20 continues to read in part as follows:

1999–51 I.R.B.

Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2001–1 is revised to
read as follows:
§20.2001–1 Valuation of adjusted taxable gifts and section 2701(d) taxable
events.
(a) Adjusted taxable gifts made prior to
August 6, 1997. For purposes of determining the value of adjusted taxable gifts
as defined in section 2001(b), if the gift
was made prior to August 6, 1997, the
value of the gift may be adjusted at any
time, even if the time within which a gift
tax may be assessed has expired under
section 6501. This paragraph (a) also applies to adjustments involving issues
other than valuation for gifts made prior
to August 6, 1997.
(b) Adjusted taxable gifts and section
2701(d) taxable events occurring after
August 5, 1997. For purposes of determining the amount of adjusted taxable
gifts as defined in section 2001(b), if,
under section 6501, the time has expired
within which a gift tax may be assessed
under chapter 12 of the Internal Revenue
Code (or under corresponding provisions
of prior laws) with respect to a gift made
after August 5, 1997, or with respect to an
increase in taxable gifts required under
section 2701(d) and §25.2701–4 of this
chapter, then the amount of the taxable
gift will be the amount as finally determined for gift tax purposes under chapter
12 of the Internal Revenue Code and the
amount of the taxable gift may not thereafter be adjusted. The rule of this paragraph (b) applies to adjustments involving
all issues relating to the gift, including
valuation issues and legal issues involving the interpretation of the gift tax law.
(c) Finally determined. For purposes
of paragraph (b) of this section, the
amount of a taxable gift as finally determined for gift tax purposes is—
(1) The amount of the taxable gift as
shown on a gift tax return, or on a statement attached to the return, if the Internal
Revenue Service does not contest such
amount before the time has expired under
section 6501 within which gift taxes may
be assessed;
(2) The amount as specified by the Internal Revenue Service before the time
has expired under section 6501 within
which gift taxes may be assessed on the
gift, if such specified amount is not timely
contested by the taxpayer;

1999–51 I.R.B.

(3) The amount as finally determined
by a court of competent jurisdiction; or
(4) The amount as determined pursuant
to a settlement agreement entered into between the taxpayer and the Internal Revenue Service.
(d) Definitions. For purposes of paragraph (b) of this section, the amount is finally determined by a court of competent
jurisdiction when the court enters a final
decision, judgment, decree or other order
with respect to the amount of the taxable
gift that is not subject to appeal. See, for
example, section 7481 regarding the finality of a decision by the U.S. Tax Court.
Also, for purposes of paragraph (b) of this
section, a settlement agreement means
any agreement entered into by the Internal
Revenue Service and the taxpayer that is
binding on both. The term includes a
closing agreement under section 7121, a
compromise under section 7122, and an
agreement entered into in settlement of
litigation involving the amount of the taxable gift.
(e) Expiration of period of assessment.
For purposes of determining if the time
has expired within which a tax may be assessed under chapter 12 of the Internal
Revenue Code, see §301.6501(c)–1(e)
and (f) of this chapter.
(f) Effective dates. Paragraph (a) of
this section applies to transfers of property by gift made prior to August 6, 1997,
if the estate tax return for the donor/decedent’s estate is filed after December 3,
1999. Paragraphs (b) through (e) of this
section apply to transfers of property by
gift made after August 5, 1997, if the gift
tax return for the calendar period in which
the gift is made is filed after December 3,
1999.
PART 25—GIFT TAX; GIFTS MADE
AFTER DECEMBER 31, 1954
Par. 3. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 4. In §25.2504–1, a sentence is
added at the end of paragraph (d) to read
as follows:
§25.2504–1 Taxable gifts for preceding
calendar periods.
*****
(d) * * * However, see §25.2504–2(b)
regarding certain gifts made after August
5, 1997.

687

Par. 5. Section 25.2504–2 is revised to
read as follows:
§25.2504–2 Determination of gifts for
preceding calendar periods.
(a) Gifts made before August 6, 1997.
If the time has expired within which a tax
may be assessed under chapter 12 of the
Internal Revenue Code (or under corresponding provisions of prior laws) on the
transfer of property by gift made during a
preceding calendar period, as defined in
§25.2502–1(c)(2), the gift was made prior
to August 6, 1997, and a tax has been assessed or paid for such prior calendar period, the value of the gift, for purposes of
arriving at the correct amount of the taxable gifts for the preceding calendar periods (as defined under §25.2504–1(a)), is
the value used in computing the tax for
the last preceding calendar period for
which a tax was assessed or paid under
chapter 12 of the Internal Revenue Code
or the corresponding provisions of prior
laws. However, this rule does not apply
where no tax was paid or assessed for the
prior calendar period. Furthermore, this
rule does not apply to adjustments involving issues other than valuation. See
§25.2504–1(d).
(b) Gifts made or section 2701(d) taxable events occurring after August 5,
1997. If the time has expired under section 6501 within which a gift tax may be
assessed under chapter 12 of the Internal
Revenue Code (or under corresponding
provisions of prior laws) on the transfer of
property by gift made during a preceding
calendar period, as defined in
§25.2502–1(c)(2), or with respect to an
increase in taxable gifts required under
section 2701(d) and §25.2701–4, and the
gift was made, or the section 2701(d) taxable event occurred, after August 5, 1997,
the amount of the taxable gift or the
amount of the increase in taxable gifts, for
purposes of determining the correct
amount of taxable gifts for the preceding
calendar periods (as defined in
§25.2504–1(a)), is the amount that is finally determined for gift tax purposes
(within the meaning of §20.2001–1(c) of
this chapter) and such amount may not be
thereafter adjusted. The rule of this paragraph (b) applies to adjustments involving
all issues relating to the gift including valuation issues and legal issues involving
the interpretation of the gift tax law. For
purposes of determining if the time has

December 20, 1999

expired within which a gift tax may be assessed, see §301.6501(c)–1(e) and (f) of
this chapter.
(c) Examples. The following examples
illustrate the rules of paragraphs (a) and
(b) of this section:
Example 1. (i) Facts. In 1996, A transferred closely-held stock in trust for the
benefit of B, A’s child. A timely filed a
Federal gift tax return reporting the 1996
transfer to B. No gift tax was assessed or
paid as a result of the gift tax annual exclusion and the application of A’s available unified credit. In 2001, A transferred
additional closely-held stock to the trust.
A’s Federal gift tax return reporting the
2001 transfer was timely filed and the
transfer was adequately disclosed under
§301.6501(c)–1(f)(2) of this chapter. In
computing the amount of taxable gifts, A
claimed annual exclusions with respect to
the transfers in 1996 and 2001. In 2003,
A transfers additional property to B and
timely files a Federal gift tax return reporting the gift.
(ii) Application of the rule limiting adjustments to prior gifts. Under section
2504(c), in determining A’s 2003 gift tax
liability, the amount of A’s 1996 gift can
be adjusted for purposes of computing
prior taxable gifts, since that gift was
made prior to August 6, 1997, and therefore, the provisions of paragraph (a) of
this section apply. Adjustments can be
made with respect to the valuation of the
gift and legal issues presented (for example, the availability of the annual exclusion with respect to the gift). However,
A’s 2001 transfer was adequately disclosed on a timely filed gift tax return
and, thus, under paragraph (b) of this section, the amount of the 2001 taxable gift
by A may not be adjusted (either with respect to the valuation of the gift or any
legal issue) for purposes of computing
prior taxable gifts in determining A’s 2003
gift tax liability.
Example 2. (i) Facts. In 1996, A transferred closely-held stock to B, A’s child.
A timely filed a Federal gift tax return reporting the 1996 transfer to B and paid
gift tax on the value of the gift reported on
the return. On August 1, 1997, A transferred additional closely-held stock to B
in exchange for a promissory note signed
by B. Also, on September 10, 1997, A
transferred closely-held stock to C, A’s
other child. On April 15, 1998, A timely

December 20, 1999

filed a gift tax return for 1997 reporting
the September 10, 1997, transfer to C and,
under §301.6501(c)–1(f)(2) of this chapter, adequately disclosed that transfer and
paid gift tax with respect to the transfer.
However, A believed that the transfer to B
on August 1, 1997, was for full and adequate consideration and A did not report
the transfer to B on the 1997 Federal gift
tax return. In 2002, A transfers additional
property to B and timely files a Federal
gift tax return reporting the gift.
(ii) Application of the rule limiting adjustments to prior gifts. Under section
2504(c), in determining A’s 2002 gift tax
liability, the value of A’s 1996 gift cannot
be adjusted for purposes of computing the
value of prior taxable gifts, since that gift
was made prior to August 6, 1997, and a
timely filed Federal gift tax return was
filed on which a gift tax was assessed and
paid. However, A’s prior taxable gifts can
be adjusted to reflect the August 1, 1997,
transfer because, although a gift tax return
for 1997 was timely filed and gift tax was
paid, under §301.6501(c)–1(f) of this
chapter the period for assessing gift tax
with respect to the August 1, 1997, transfer did not commence to run since that
transfer was not adequately disclosed on
the 1997 gift tax return. Accordingly, a
gift tax may be assessed with respect to
the August 1, 1997, transfer and the
amount of the gift would be reflected in
prior taxable gifts for purposes of computing A’s gift tax liability for 2002. A’s
September 10, 1997, transfer to C was adequately disclosed on a timely filed gift
tax return and, thus, under paragraph (b)
of this section, the amount of the September 10, 1997, taxable gift by A may not be
adjusted for purposes of computing prior
taxable gifts in determining A’s 2002 gift
tax liability.
Example 3. (i) Facts. In 1994, A transferred closely-held stock to B and C, A’s
children. A timely filed a Federal gift tax
return reporting the 1994 transfers to B
and C and paid gift tax on the value of
the gifts reported on the return. Also in
1994, A transferred closely-held stock to
B in exchange for a bona fide promissory
note signed by B. A believed that the
transfer to B in exchange for the promissory note was for full and adequate consideration and A did not report that transfer to B on the 1994 Federal gift tax
return. In 2002, A transfers additional

688

property to B and timely files a Federal
gift tax return reporting the gift.
(ii) Application of the rule limiting adjustments to prior gifts. Under section
2504(c), in determining A’s 2002 gift tax
liability, the value of A’s 1994 gifts cannot
be adjusted for purposes of computing
prior taxable gifts because those gifts
were made prior to August 6, 1997, and a
timely filed Federal gift tax return was
filed with respect to which a gift tax was
assessed and paid, and the period of limitations on assessment has expired. The
provisions of paragraph (a) of this section
apply to the 1994 transfers. However, for
purposes of determining A’s adjusted taxable gifts in computing A’s estate tax liability, the gifts may be adjusted. See
§20.2001–1(a) of this chapter.
(d) Effective dates. Paragraph (a) of
this section applies to transfers of property by gift made prior to August 6, 1997.
Paragraphs (b) and (c) of this section
apply to transfers of property by gift made
after August 5, 1997, if the gift tax return
for the calendar period in which the transfer is reported is filed after December 3,
1999.
Par. 6. In §25.2511–2, paragraph (j) is
revised to read as follows:
§25.2511–2 Cessation of donor’s dominion and control.

*****
(j) If the donor contends that a power is
of such nature as to render the gift incomplete, and hence not subject to the tax as
of the calendar period (as defined in
§25.2502–1(c)(1)) of the initial transfer,
see §301.6501(c)–1(f)(5) of this chapter.
PART 301—PROCEDURE AND ADMINISTRATION
Par. 7. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 8. Section 301.6501(c)–1 is
amended by:
1. Revising the heading to paragraph
(e).
2. Adding paragraph (f).
The revision and addition reads as follows:
§301.6501(c)–1 Exceptions to general
period of limitations on assessment and
collection.

*****
(e) Gifts subject to chapter 14 of the In-

1999–51 I.R.B.

ternal Revenue Code not adequately disclosed on the return. * * *
(f) Gifts made after December 31,
1996, not adequately disclosed on the return— (1) In general. If a transfer of
property, other than a transfer described
in paragraph (e) of this section, is not adequately disclosed on a gift tax return
(Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return”),
or in a statement attached to the return,
filed for the calendar period in which the
transfer occurs, then any gift tax imposed
by chapter 12 of subtitle B of the Internal
Revenue Code on the transfer may be assessed, or a proceeding in court for the
collection of the appropriate tax may be
begun without assessment, at any time.
2) Adequate disclosure of transfers of
property reported as gifts. A transfer will
be adequately disclosed on the return only
if it is reported in a manner adequate to
apprise the Internal Revenue Service of
the nature of the gift and the basis for the
value so reported. Transfers reported on
the gift tax return as transfers of property
by gift will be considered adequately disclosed under this paragraph (f)(2) if the
return (or a statement attached to the return) provides the following information—
(i) A description of the transferred
property and any consideration received
by the transferor;
(ii) The identity of, and relationship
between, the transferor and each transferee;
(iii) If the property is transferred in
trust, the trust’s tax identification number
and a brief description of the terms of the
trust, or in lieu of a brief description of
the trust terms, a copy of the trust instrument;
(iv) Except as provided in
§301.6501–1(f)(3), a detailed description
of the method used to determine the fair
market value of property transferred, including any financial data (for example,
balance sheets, etc. with explanations of
any adjustments) that were utilized in determining the value of the interest, any restrictions on the transferred property that
were considered in determining the fair
market value of the property, and a description of any discounts, such as discounts for blockage, minority or fractional interests, and lack of marketability,
claimed in valuing the property. In the

1999–51 I.R.B.

case of a transfer of an interest that is actively traded on an established exchange,
such as the New York Stock Exchange,
the American Stock Exchange, the NASDAQ National Market, or a regional exchange in which quotations are published
on a daily basis, including recognized foreign exchanges, recitation of the exchange where the interest is listed, the
CUSIP number of the security, and the
mean between the highest and lowest
quoted selling prices on the applicable
valuation date will satisfy all of the requirements of this paragraph (f)(2)(iv). In
the case of the transfer of an interest in an
entity (for example, a corporation or partnership) that is not actively traded, a description must be provided of any discount claimed in valuing the interests in
the entity or any assets owned by such entity. In addition, if the value of the entity
or of the interests in the entity is properly
determined based on the net value of the
assets held by the entity, a statement must
be provided regarding the fair market
value of 100 percent of the entity (determined without regard to any discounts in
valuing the entity or any assets owned by
the entity), the pro rata portion of the entity subject to the transfer, and the fair
market value of the transferred interest as
reported on the return. If 100 percent of
the value of the entity is not disclosed, the
taxpayer bears the burden of demonstrating that the fair market value of the entity
is properly determined by a method other
than a method based on the net value of
the assets held by the entity. If the entity
that is the subject of the transfer owns an
interest in another non-actively traded entity (either directly or through ownership
of an entity), the information required in
this paragraph (f)(2)(iv) must be provided
for each entity if the information is relevant and material in determining the value
of the interest; and
(v) A statement describing any position
taken that is contrary to any proposed,
temporary or final Treasury regulations or
revenue rulings published at the time of
the transfer (see §601.601(d)(2) of this
chapter).
(3) Submission of appraisals in lieu of
the information required under paragraph (f)(2)(iv) of this section. The requirements of paragraph (f)(2)(iv) of this
section will be satisfied if the donor submits an appraisal of the transferred prop-

689

erty that meets the following requirements—
(i) The appraisal is prepared by an appraiser who satisfies all of the following
requirements:
(A) The appraiser is an individual who
holds himself or herself out to the public
as an appraiser or performs appraisals on
a regular basis.
(B) Because of the appraiser’s qualifications, as described in the appraisal that
details the appraiser’s background, experience, education, and membership, if
any, in professional appraisal associations, the appraiser is qualified to make
appraisals of the type of property being
valued.
(C) The appraiser is not the donor or
the donee of the property or a member of
the family of the donor or donee, as defined in section 2032A(e)(2), or any person employed by the donor, the donee, or
a member of the family of either; and
(ii) The appraisal contains all of the following:
(A) The date of the transfer, the date on
which the transferred property was appraised, and the purpose of the appraisal.
(B) A description of the property.
(C) A description of the appraisal
process employed.
(D) A description of the assumptions,
hypothetical conditions, and any limiting
conditions and restrictions on the transferred property that affect the analyses,
opinions, and conclusions.
(E) The information considered in determining the appraised value, including
in the case of an ownership interest in a
business, all financial data that was used
in determining the value of the interest
that is sufficiently detailed so that another
person can replicate the process and arrive at the appraised value.
(F) The appraisal procedures followed,
and the reasoning that supports the analyses, opinions, and conclusions.
(G) The valuation method utilized, the
rationale for the valuation method, and
the procedure used in determining the fair
market value of the asset transferred.
(H) The specific basis for the valuation,
such as specific comparable sales or
transactions, sales of similar interests,
asset-based approaches, merger-acquisition transactions, etc.
(4) Adequate disclosure of non-gift
completed transfers or transactions.

December 20, 1999

Completed transfers to members of the
transferor’s family, as defined in section
2032A(e)(2), that are made in the ordinary course of operating a business are
deemed to be adequately disclosed under
paragraph (f)(2) of this section, even if
the transfer is not reported on a gift tax return, provided the transfer is properly reported by all parties for income tax purposes. For example, in the case of salary
paid to a family member employed in a
family owned business, the transfer will
be treated as adequately disclosed for gift
tax purposes if the item is properly reported by the business and the family
member on their income tax returns. For
purposes of this paragraph (f)(4), any
other completed transfer that is reported,
in its entirety, as not constituting a transfer by gift will be considered adequately
disclosed under paragraph (f)(2) of this
section only if the following information
is provided on, or attached to, the return—
(i) The information required for adequate disclosure under paragraphs
(f)(2)(i), (ii), (iii) and (v) of this section;
and
(ii) An explanation as to why the transfer is not a transfer by gift under chapter
12 of the Internal Revenue Code.
(5) Adequate disclosure of incomplete
transfers. Adequate disclosure of a transfer that is reported as a completed gift on
the gift tax return will commence the running of the period of limitations for assessment of gift tax on the transfer, even
if the transfer is ultimately determined to
be an incomplete gift for purposes of
§25.2511–2 of this chapter. For example,
if an incomplete gift is reported as a completed gift on the gift tax return and is adequately disclosed, the period for assessment of the gift tax will begin to run when
the return is filed, as determined under
section 6501(b). Further, once the period
of assessment for gift tax expires, the
transfer will not be subject to inclusion in
the donor’s gross estate for estate tax purposes. On the other hand, if the transfer is
reported as an incomplete gift whether or
not adequately disclosed, the period for
assessing a gift tax with respect to the
transfer will not commence to run even if
the transfer is ultimately determined to be
a completed gift. In that situation, the gift
tax with respect to the transfer may be assessed at any time, up until three years

December 20, 1999

after the donor files a return reporting the
transfer as a completed gift with adequate
disclosure.
(6) Treatment of split gifts. If a husband and wife elect under section 2513 to
treat a gift made to a third party as made
one-half by each spouse, the requirements
of this paragraph (f) will be satisfied with
respect to the gift deemed made by the
consenting spouse if the return filed by
the donor spouse (the spouse that transferred the property) satisfies the requirements of this paragraph (f) with respect to
that gift.
(7) Examples. The following examples
illustrate the rules of this paragraph (f):
Example 1. (i) Facts. In 2001, A transfers 100
shares of common stock of XYZ Corporation to A’s
child. The common stock of XYZ Corporation is
actively traded on a major stock exchange. For gift
tax purposes, the fair market value of one share of
XYZ common stock on the date of the transfer, determined in accordance with §25.2512–2(b) of this
chapter (based on the mean between the highest and
lowest quoted selling prices), is $150.00. On A’s
Federal gift tax return, Form 709, for the 2001 calendar year, A reports the gift to A’s child of 100
shares of common stock of XYZ Corporation with a
value for gift tax purposes of $15,000. A specifies
the date of the transfer, recites that the stock is publicly traded, identifies the stock exchange on which
the stock is traded, lists the stock’s CUSIP number,
and lists the mean between the highest and lowest
quoted selling prices for the date of transfer.
(ii) Application of the adequate disclosure standard. A has adequately disclosed the transfer.
Therefore, the period of assessment for the transfer
under section 6501 will run from the time the return
is filed (as determined under section 6501(b)).
Example 2. (i) Facts. On December 30, 2001, A
transfers closely-held stock to B, A’s child. A determined that the value of the transferred stock, on December 30, 2001, was $9,000. A made no other
transfers to B, or any other donee, during 2001. On
A’s Federal gift tax return, Form 709, for the 2001
calendar year, A provides the information required
under paragraph (f)(2) of this section such that the
transfer is adequately disclosed. A claims an annual
exclusion under section 2503(b) for the transfer.
(ii) Application of the adequate disclosure standard. Because the transfer is adequately disclosed
under paragraph (f)(2) of this section, the period of
assessment for the transfer will expire as prescribed
by section 6501(b), notwithstanding that if A’s valuation of the closely-held stock was correct, A was
not required to file a gift tax return reporting the
transfer under section 6019. After the period of assessment has expired on the transfer, the Internal
Revenue Service is precluded from redetermining
the amount of the gift for purposes of assessing gift
tax or for purposes of determining the estate tax liability. Therefore, the amount of the gift as reported
on A’s 2001 Federal gift tax return may not be redetermined for purposes of determining A’s prior taxable gifts (for gift tax purposes) or A’s adjusted taxable gifts (for estate tax purposes).
Example 3. (i) Facts. A owns 100 percent of the

690

common stock of X, a closely- held corporation. X
does not hold an interest in any other entity that is
not actively traded. In 2001, A transfers 20 percent
of the X stock to B and C, A’s children, in a transfer
that is not subject to the special valuation rules of
section 2701. The transfer is made outright with no
restrictions on ownership rights, including voting
rights and the right to transfer the stock. Based on
generally applicable valuation principles, the value
of X would be determined based on the net value of
the assets owned by X. The reported value of the
transferred stock incorporates the use of minority
discounts and lack of marketability discounts. No
other discounts were used in arriving at the fair market value of the transferred stock or any assets
owned by X. On A’s Federal gift tax return, Form
709, for the 2001 calendar year, A provides the information required under paragraph (f)(2) of this
section including a statement reporting the fair market value of 100 percent of X (before taking into account any discounts), the pro rata portion of X subject to the transfer, and the reported value of the
transfer. A also attaches a statement regarding the
determination of value that includes a discussion of
the discounts claimed and how the discounts were
determined.
(ii) Application of the adequate disclosure standard. A has provided sufficient information such
that the transfer will be considered adequately disclosed and the period of assessment for the transfer
under section 6501 will run from the time the return
is filed (as determined under section 6501(b)).
Example 4. (i) Facts. A owns a 70 percent limited partnership interest in PS. PS owns 40 percent
of the stock in X, a closely-held corporation. The
assets of X include a 50 percent general partnership
interest in PB. PB owns an interest in commercial
real property. None of the entities (PS, X, or PB) is
actively traded and, based on generally applicable
valuation principles, the value of each entity would
be determined based on the net value of the assets
owned by each entity. In 2001, A transfers a 25 percent limited partnership interest in PS to B, A’s
child. On the Federal gift tax return, Form 709, for
the 2001 calendar year, A reports the transfer of the
25 percent limited partnership interest in PS and that
the fair market value of 100 percent of PS is $y and
that the value of 25 percent of PS is $z, reflecting
marketability and minority discounts with respect to
the 25 percent interest. However, A does not disclose that PS owns 40 percent of X, and that X owns
50 percent of PB and that, in arriving at the $y fair
market value of 100 percent of PS, discounts were
claimed in valuing PS’s interest in X, X’s interest in
PB, and PB’s interest in the commercial real property.
(ii) Application of the adequate disclosure standard. The information on the lower tiered entities is
relevant and material in determining the value of the
transferred interest in PS. Accordingly, because A
has failed to comply with requirements of paragraph
(f)(2)(iv) of this section regarding PS’s interest in X,
X’s interest in PB, and PB’s interest in the commercial real property, the transfer will not be considered
adequately disclosed and the period of assessment
for the transfer under section 6501 will remain open
indefinitely.
Example 5. The facts are the same as in Example
4 except that A submits, with the Federal tax return,
an appraisal of the 25 percent limited partnership in-

1999–51 I.R.B.

terest in PS that satisfies the requirements of paragraph (f)(3) of this section in lieu of the information
required in paragraph (f)(2)(iv) of this section. Assuming the other requirements of paragraph (f)(2) of
this section are satisfied, the transfer is considered
adequately disclosed and the period for assessment
for the transfer under section 6501 will run from the
time the return is filed (as determined under section
6501(b) of this chapter).
Example 6. A owns 100 percent of the stock of X
Corporation, a company actively engaged in a manufacturing business. B, A’s child, is an employee of
X and receives an annual salary paid in the ordinary
course of operating X Corporation. B reports the annual salary as income on B’s income tax returns. In
2001, A transfers property to family members and
files a Federal gift tax return reporting the transfers.
However, A does not disclose the 2001 salary payments made to B. Because the salary payments were
reported as income on B’s income tax return, the
salary payments are deemed to be adequately disclosed. The transfer of property to family members,
other than the salary payments to B, reported on the
gift tax return must satisfy the adequate disclosure requirements under paragraph (f)(2) of this section in
order for the period of assessment under section 6501
to commence to run with respect to those transfers.

(8) Effective date.

This paragraph (f)

is applicable to gifts made after December
31, 1996, for which the gift tax return for
such calendar year is filed after December
3, 1999.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In §602.101, paragraph (b) is
amended in the table by revising the entry
for 301.6501(c)–1 to read as follows:

*****
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved November 18, 1999
Jonathan Talisman,
Acting Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on December 2, 1999, 8:45 a.m., and published in the issue of
the Federal Register for December 3, 1999, 64 F.R.
67767)

§602.101 OMB Control numbers.
(b) * * *
CFR part or section where
identified and described

Current OMB
control No.

*****
301.6501(c)–1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1545–1241
1545–1637

*****

1999–51 I.R.B.

691

December 20, 1999

Part III. Administrative, Procedural, and Miscellaneous
Section 705 Special Basis Rules
Notice 99–57
The Internal Revenue Service intends
to promulgate regulations under § 705 of
the Internal Revenue Code to address certain situations where gain or loss may be
improperly created by adjusting the basis
of a partnership interest for partnership
income that is not subject to tax, or for
partnership losses or deductions that are
permanently denied, with respect to a
partner.
BACKGROUND
Section 705(a) provides that the adjusted basis of a partner’s interest in a
partnership generally shall be increased
by the partner’s distributive share of (i)
taxable income of the partnership as determined under § 703(a), (ii) income of
the partnership exempt from tax, and (iii)
the excess of the deduction for depletion
over the basis of the property subject to
depletion. Conversely, the adjusted basis
of a partner’s interest in a partnership
generally shall be decreased by the partner’s distributive share of (i) losses of the
partnership, (ii) nondeductible expenditures not properly chargeable to capital
account, and (iii) in certain cases, deductions for depletion.
The legislative history describing §
705(a) states that adjusting the basis of a
partner’s interest is necessary to prevent
unintended benefit or detriment to the
partners. Thus, a partner should add to
the basis of the partner’s partnership interest the partner’s distributive share of
nontaxable income so that the partner
does not lose the benefit of that type of
tax-exempt income. Otherwise, the partner could eventually incur a capital gain
with respect to such amounts. H.R. Rep.
No. 1337, 83d Cong., 2d Sess. A225
(1954); S. Rep. No. 1622, 83d Cong., 2d
Sess. 384 (1954).
Rev. Rul. 96–11, 1996–1 C.B. 140,
provides an example of how § 705 has
been interpreted to carry out the purposes
of this legislative history. There, a partnership made a charitable contribution of
property with a basis of $60x and fair
market value of $100x in a transaction
that qualified under § 170(c). The ruling

December 20, 1999

states that “[i]n determining whether a
transaction results in exempt income
within the meaning of § 705(a)(1)(B), or a
nondeductible, noncapital expenditure
within the meaning of § 705(a)(2)(B), the
proper inquiry is whether the transaction
has a permanent effect on the partnership’s basis in its assets, without a corresponding current or future effect on its
taxable income.” The ruling explains that
the partners’ bases in their partnership interests should be reduced only by their respective shares of the permanent decrease
in the partnership’s asset basis. This preserves the deduction for the fair market
value of appreciated property without the
recognition of the appreciation. Reducing
the partners’ bases in their partnership interests by the fair market value of the
property contributed to the charity would
subsequently cause the partners to recognize gain (or a reduced loss) upon a disposition of their interests in the partnership
attributable to the unrecognized appreciation in the property at the time of the contribution. See also Rev. Rul. 96–10,
1996–1 C.B. 138, which discusses adjustments to basis in partnership interests
where loss on sale of partnership property
is denied under § 707(b)(1) and subsequent gain is not recognized under §§
267(d) and 707(b)(1).
Section 743(a) provides that the basis
of partnership property shall not be adjusted as the result of the transfer of a
partnership interest by sale or exchange or
on the death of a partner unless an election under § 754 is in effect with respect
to the partnership.
Section 743(b) provides that, in the case
of a transfer of an interest in a partnership
by sale or exchange or upon the death of a
partner, a partnership with respect to which
an election under § 754 is in effect shall (i)
increase the basis of the partnership property by the excess of the basis to the transferee partner of the transferee partner’s interest in the partnership over the transferee
partner’s proportionate share of the adjusted basis of the partnership property, or
(ii) decrease the adjusted basis of the partnership property by the excess of the transferee partner’s proportionate share of the
adjusted basis of the partnership property
over the basis of the transferee partner’s interest in the partnership.

692

The partnership rules generally attempt
to preserve equality between a partner’s
basis in the partnership interest and the
partner’s share of inside basis in the assets
of the partnership. In order to promote
administrative convenience, however, §
743(a) departs from this general rule, allowing a partner’s basis in its partnership
interest to diverge from the partner’s
share of basis in partnership assets in situations where the partnership has not made
an election under § 754.
The failure to make a § 754 election
generally will result in a timing benefit or
detriment to the partner or partners with
divergent inside and outside bases. For
instance, consider the situation where a
person (A) purchases a 50 percent interest
in a partnership for $100x. The partnership owns one asset with a basis of $100x
and a value of $200x. If the partnership
had made a § 754 election, A would have
a $50x special basis adjustment in the
property, so that when the partnership disposed of the property for $200x, A’s special basis adjustment would exactly offset
A’s allocated share of the gain. A’s basis
in the partnership interest would remain at
$100x after the sale. Accordingly, A
would not recognize any gain upon the
sale of the partnership interest immediately thereafter.
If the partnership had not made a § 754
election, A would have no special basis
adjustment, so that when the partnership
disposed of the property for $200x, A
would be allocated $50x of gain. A’s
basis in the partnership interest would increase to $150x under § 705(a)(1)(A), so
that A would recognize an offsetting $50x
loss (or reduced gain) upon a subsequent
sale of the partnership interest. Thus,
without the § 754 election, there may be a
timing detriment to A, but the correct
amount of cumulative income or loss (albeit possibly of a different character) is
ultimately reported by A.
The correct amount of cumulative income may not be reported, however, in
certain situations in which A is not subject
to tax on the gain that results from the
failure to make the § 754 election. For instance, in the example discussed immediately above, if A was a corporation and
the property held by the partnership was A
stock, under § 1032, the gain allocated to

1999–51 I.R.B.

A (assuming that no § 754 election had
been made) would not be subject to tax.
See Rev. Rul. 99–57, published in this
issue of the Internal Revenue Bulletin. In
this situation, i

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A3cf49e1cef436904. Public record. Not legal advice.