n-05-15.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Partnership Anti-Mixing Bowl Regulations

Notice 2005-15

The Internal Revenue Service intends to promulgate regulations under §§ 704
and 737 of the Internal Revenue Code to address the income tax consequences of
distributions of property following partnership mergers.
BACKGROUND
Rev. Rul. 2004-43, 2004-18 I.R.B. 842, holds that new § 704(c) gain or loss is
created when assets are contributed by the transferor partnership to the continuing
partnership in an assets-over merger. Rev. Rul. 2004-43 also holds that § 704(c)(1)(B)
applies to the newly created § 704(c) gain or loss in property contributed by the
transferor partnership to the continuing partnership in an assets-over partnership
merger, but does not apply to reverse § 704(c) gain or loss resulting from a revaluation
of property in the continuing partnership. In addition, Rev. Rul. 2004-43 holds that for
purposes of § 737(b), net precontribution gain includes the newly created § 704(c) gain
or loss in property contributed by the transferor partnership to the continuing partnership
in an assets-over partnership merger, but does not include reverse § 704(c) gain or loss
resulting from a revaluation of property in the continuing partnership.
Some commentators have argued that Rev. Rul. 2004-43 is not consistent with
the current regulations under §§ 704(c)(1)(B) and 737, and that the conclusions in the

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ruling should not be applied retroactively. In response to these comments, the Treasury
Department and the Service intend to issue regulations under §§ 704(c)(1)(B) and 737
implementing the principles of the ruling. The regulations will be effective for
distributions occurring after January 19, 2005. Rev. Rul. 2005-10, published in this
issue of the Internal Revenue Bulletin, revokes Rev. Rul. 2004-43.
DESCRIPTION OF REGULATIONS
The regulations will apply the principles of Rev. Rul. 2004-43 to distributions of
property following assets-over partnership mergers. The regulations will apply to
distributions of property with newly created § 704(c) gain or loss whether or not that
gain or loss is treated as reverse § 704(c) gain or loss as the result of a revaluation by
the transferor partnership. The regulations also will apply to distributions of property
with original § 704(c) gain or loss that existed upon contribution to the transferor
partnership. However, the regulations will provide that if the transferor partnership in an
assets-over merger holds contributed property with original § 704(c) gain or loss, the
seven year periods in §§ 704(c)(1)(B) and 737 do not restart with respect to that gain or
loss as a result of the merger.
The regulations will provide that § 704(c)(1)(B) does not apply to newly created
§ 704(c) gain or loss in property contributed by the transferor partnership to the
continuing partnership in an assets-over partnership merger involving partnerships
owned by the same owners in the same proportions. In addition, the regulations will
provide that for purposes of § 737, net precontribution gain does not include newly
created § 704(c) gain or loss in property contributed by the transferor partnership to the
continuing partnership in an assets-over partnership merger involving partnerships

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owned by the same owners in the same proportions. In order for merging partnerships
to qualify for the exceptions described in this paragraph, each partner’s percentage
interest in the transferor partnership’s capital, profits, losses, distributions, liabilities, and
all other items must be the same as the partner’s percentage interest in those items of
the continuing partnership.
EFFECTIVE DATES

The regulations will be effective for distributions from partnerships made after
January 19, 2005.
REQUEST FOR COMMENTS
Comments are requested regarding whether there are any other commonly
owned partnerships that should be excepted from the principles of Rev. Rul. 2004-43,
and, if so, under what circumstances the exceptions should apply. Comments are
specifically requested regarding the application of §§ 704(c)(1)(B) and 737, including
the previously contributed property exception of § 737(d)(1), to a distribution of property,
after an assets-over partnership merger, to a partner who had been a partner in the
transferor partnership, where the distributed property was held by the transferor
partnership prior to the merger. Comments are also requested regarding whether the
continuing partnership may apply a § 704(c) method to original § 704(c) gain or loss that
is different than the method applied by the transferor partnership, and whether the
continuing partnership may apply a § 704(c) method to newly created § 704(c) gain or
loss that is different than the method that it applies to original § 704(c) gain or loss.
Comments are also requested regarding whether there are any additional issues
that should be addressed in the regulations. For example, comments are requested

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regarding whether the regulations should apply the principles of §§ 704(c)(1)(B) and
737 to reverse section 704(c) gain or loss. Comments are also requested regarding
whether the tiered partnership rule of § 1.704-3(a)(9) of the Income Tax Regulations
should be modified or expanded to provide rules, similar to those applicable to assets-
over partnership mergers, for the application of §§ 704(c)(1)(B) and 737, as well as
§ 704(c)(1)(A), to tiered partnership arrangements.
Comments may be submitted on or before July 19, 2005, to Internal Revenue
Service, PO Box 7604, Washington, DC 20044, Attn: CC:PA:LPD:PR (Notice 2005-15),
Room 5203. Submissions may also be hand-delivered Monday through Friday between
the hours of 8 a.m. and 4 p.m. to the Courier’s Desk at 1111 Constitution Avenue, NW,
Washington DC 20224, Attn: CC:PA:LPD:PR (Notice 2005-15), Room 5203.
Submissions may also be sent electronically via the internet to the following email
address:
Notice.comments@irscounsel.treas.gov. Include the notice number (Notice
2005-15) in the subject line.
The principal author of this notice is Laura Fields of the Office of Associate Chief
Counsel (Passthroughs & Special Industries). For further information regarding this
notice contact Ms. Fields at (202) 622-3050 (not a toll-free call).