IRS issues temporary regulations under Section 337(d)

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The IRS issued temporary regulations under Treas. Reg. Sec. 1.337(d)-3T (T.D. 9722) that are intended to prevent corporate taxpayers from using a partnership to circumvent gain under Sections 311 or 336.

Congress enacted Sections 311(b) and 336(a) in the Tax Reform Act of 1986 (P.L. 99-514) to repeal what remained of the General Utilities Doctrine, which held that corporations could generally distribute appreciated property to their shareholders without recognizing gain (General Utilities & Operating Co. v. Helverling (296 U.S. 200 (1935)). Section 311(b) requires a corporation to recognize gain when it distributes appreciated property to its shareholders, and Section 336(a) provides for gain or loss to a distributing corporation when a liquidating distribution is made. Section 337(d) provides that Treasury will prescribe regulations to carry out the purpose of the repeal of the General Utilities Doctrine.

The newly issued Treas. Reg. Sec. 1.337(d)-3T requires a corporation that holds or acquires a partnership interest (a corporate partner) to recognize gain related to a “Section 337(d) Transaction.”

A Section 337(d) transaction has the effect of a corporate partner’s exchange of its interest in appreciated property for an interest in its own stock that is owned, acquired or distributed by the underlying partnership. So a Section 337(d) transaction may occur when any of the following circumstances occurs:  

  • A corporate partner contributes appreciated property to the partnership that owns corporate partner stock.
  • The partnership acquires corporate partner stock.
  • The partnership owns corporate partner stock and distributes appreciated property to a partner other than the corporate partner.
  • The partnership distributes corporate partner stock to the corporate partner.
  • The partnership agreement is amended to increase a corporate partner’s interest in its stock.

The Deemed Redemption Rule under Treas. Reg. Sec. 1.337(d)-3T(d) says that a corporate partner that engages in a Section 337(d) transaction recognizes gain when the corporate partner’s interest in appreciated property is reduced in exchange for an increased interest in its own stock. Under Treas. Reg. Sec. 1.337(d)-3T(e), the Deemed Redemption Rule applies when the partnership distributes corporate partner stock to the corporate partner. For purposes of Treas. Reg. Sec. 1.337(d), stock of the corporate partner includes stock of a corporation that controls the corporate partner under Section 304(c).  

The regulations state exceptions for certain de minimis circumstances and certain inadvertent transactions that aren’t part of a plan to circumvent the regulations. The regulations also apply to tiered partnerships. The newly issued regulations under Treas. Reg. Sec. 337(d)-3T apply to transactions occurring on or after June 12, 2015, and are set to expire on June 11, 2018.

Andy Cordonnier
+1 202 521 1502

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