Federal Register / Vol. 70, No.

99 / Tuesday, May 24, 2005 / Proposed Rules 29675

elect to apply these regulations Box 7604, Ben Franklin Station, The following collections of
retroactively for contracts issued before Washington, DC 20044. Submissions information in this proposed regulation
the date that is one year after the may be hand-delivered Monday through are in § 1.83–3(l):
regulations are published as final Friday between the hours of 8 a.m. and (1) Requirement that electing
regulations in the Federal Register, 4 p.m. to CC:PA:LPD:PR (REG–105346– partnerships submit an election with the
provided that the taxpayer does not later 03), Courier’s Desk, Internal Revenue partnership tax return.
determine qualification of those Service, 1111 Constitution Avenue, (2) Requirement that certain partners
contracts in a manner that is NW., Washington, DC, or sent submit a document to the partnership;
inconsistent with these regulations. electronically, via the IRS Internet site (3) Requirement that such documents
at http://www.irs.gov/regs or via the be retained; and
Mark E. Matthews, (4) Requirement that partnerships
Federal eRulemaking Portal at http://
Deputy Commissioner for Services and www.regulations.gov (IRS REG–105346– submit a termination document with the
Enforcement. partnership tax return as one method of
03).
[FR Doc. 05–10166 Filed 5–20–05; 8:45 am] terminating the election.
FOR FURTHER INFORMATION CONTACT: These collections of information are
BILLING CODE 4830–01–P
Concerning the section 83 regulations, required by the IRS to determine
Stephen Tackney at (202) 622–6030; whether the amount of tax has been
DEPARTMENT OF THE TREASURY concerning the subchapter K calculated correctly. The respondents
regulations, Audrey Ellis or Demetri are partnerships and partners or other
Internal Revenue Service Yatrakis at (202) 622–3060; concerning service providers.
submissions, the hearing, and/or to be The estimated total annual reporting
26 CFR Part 1 placed on the building access list to and/or recordkeeping burden is 112,500
attend the hearing, Robin Jones, (202) hours.
[REG–105346–03]
622–7180 (not toll free numbers). The estimated annual burden per
RIN 1545–BB92 SUPPLEMENTARY INFORMATION: respondent/recordkeeper varies from .10
hours to 10 hours, depending on
Partnership Equity for Services Paperwork Reduction Act individual circumstances, with an
AGENCY: Internal Revenue Service (IRS), The collection of information estimated average of 1 hour for
Treasury. contained in this notice of proposed partnerships and .25 hour for a partner
rulemaking has been submitted to the or service provider. The estimated
ACTION: Partial withdrawal of notice of
Office of Management and Budget for number of respondents and/or
proposed rulemaking, notice of
review in accordance with the recordkeepers is 100,000 partnerships
proposed rulemaking, and notice of
Paperwork Reduction Act of 1995 (44 and 50,000 partners or other service
public hearing.
U.S.C. 3507(d)). Comments on the providers.
SUMMARY: This document withdraws the collection of information should be sent The estimated annual frequency of
remaining portion of the notice of to the Office of Management and responses (used for reporting
proposed rulemaking published in the Budget, Attn: Desk Officer for the requirements only) is on occasion.
Federal Register on June 3, 1971 (36 FR Department of the Treasury, Office of An agency may not conduct or
10787) and contains proposed Information and Regulatory Affairs, sponsor, and a person is not required to
regulations relating to the tax treatment Washington, DC 20503, with copies to respond to, a collection of information
of certain transfers of partnership equity the Internal Revenue Service, Attn: IRS unless it displays a valid control
in connection with the performance of Reports Clearance Officer, number assigned by the Office of
services. The proposed regulations SE:W:CAR:MP:T:T:SP, Washington, DC Management and Budget.
provide that the transfer of a partnership 20224. Comments on the collection of Books or records relating to a
interest in connection with the information should be received by July collection of information must be
performance of services is subject to 25, 2005. Comments are specifically retained as long as their contents may
section 83 of the Internal Revenue Code requested concerning: become material in the administration
(Code) and provide rules for Whether the proposed collection of of any internal revenue law. Generally,
coordinating section 83 with information is necessary for the proper tax returns and tax return information
partnership taxation principles. The performance of the functions of the IRS, are confidential as required by 26 U.S.C.
proposed regulations also provide that including whether the information will 6103.
no gain or loss is recognized by a have practical utility; Background
partnership on the transfer or vesting of The accuracy of the estimated burden Partnerships issue a variety of
an interest in the transferring associated with the proposed collection instruments in connection with the
partnership in connection with the of information (see below); performance of services. These
performance of services for the How the quality, utility, and clarity of instruments include interests in
transferring partnership. This document the information to be collected may be partnership capital, interests in
also provides a notice of public hearing enhanced; partnership profits, and options to
on these proposed regulations. How the burden of complying with acquire such interests (collectively,
DATES: Written or electronic comments the proposed collection of information partnership equity). On June 5, 2000,
must be received by August 22, 2005. may be minimized, including through the Treasury Department and the IRS
Outlines of topics to be discussed at the the application of automated collection issued Notice 2000–29 (2000–1 C.B.
public hearing scheduled for October 5, techniques or other forms of information 1241), inviting public comment on the
2005, at 10 a.m. must be received by technology; and Federal income tax treatment of the
September 14, 2005. Estimates of capital or start-up costs exercise of an option to acquire a
ADDRESSES: Send submissions to: and costs of operation, maintenance, partnership interest, the exchange of
CC:PA:LPD:PR (REG–105346–03), room and purchase of services to provide convertible debt for a partnership
5203, Internal Revenue Service, P.O. information. interest, and the exchange of a preferred

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 29676 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules

interest in a partnership for a common 1983), the Treasury Department and the service provider becomes a shareholder
interest in that partnership. On January IRS do not believe that there is a for purposes of subchapter S).
22, 2003, the Treasury Department and substantial basis for distinguishing These principles differ from Rev.
the IRS published in the Federal among partnership interests for Proc. 2001–43. Under that revenue
Register (REG–103580–02) (68 FR 2930), purposes of section 83. All partnership procedure, if a partnership profits
proposed regulations regarding the interests constitute personal property interest is transferred in connection
Federal income tax consequences of under state law and give the holder the with the performance of services, then
noncompensatory partnership options, right to share in future earnings from the holder of the partnership interest
convertible equity, and convertible debt. partnership capital and labor. Moreover, may be treated as a partner even if no
In the preamble to those proposed some commentators have suggested that section 83(b) election is made, provided
regulations, the Treasury Department the same tax rules should apply to both that certain conditions are met.
and the IRS requested comments on the partnership profits interests and Certain changes to the regulations
proposed amendment to § 1.721–1(b)(1) partnership capital interests. These under both subchapter K and section 83
that was published in the Federal commentators have suggested that are needed to coordinate the principles
Register on June 3, 1971 (36 FR 10787), taxpayers may exploit any differences in of subchapter K with the principles of
and on the Federal income tax the tax treatment of partnership profits section 83. Among the changes that are
consequences of the issuance of interests and partnership capital proposed in these regulations are: (1)
partnership capital interests in interests. The Treasury Department and Conforming the subchapter K rules to
connection with the performance of the IRS agree with these comments. the section 83 timing rules; (2) revising
services and options to acquire such Therefore, all of the rules in these the section 704(b) regulations to take
interests. In response to the comments proposed regulations and the into account the fact that allocations
received, the Treasury Department and accompanying proposed revenue with respect to an unvested interest may
the IRS are withdrawing the proposed procedure (described below) apply be forfeited; and (3) providing that a
amendment to § 1.721–1(b)(1) and equally to partnership capital interests partnership generally recognizes no gain
issuing these proposed regulations, and partnership profits interests. or loss on the transfer of an interest in
which prescribe rules on the application However, a right to receive allocations the partnership in connection with the
of section 83 to partnership interests and distributions from a partnership performance of services for that
and the Federal income tax that is described in section 707(a)(2)(A) partnership. In addition, Rev. Procs. 93–
consequences associated with the is not a partnership interest. In section 27 (1993–2 C.B. 343), and 2001–43
transfer, vesting, and forfeiture of 707(a)(2)(A), Congress directed that (2001–2 C.B. 191), which generally
partnership interests transferred in such an arrangement should be provide for nonrecognition by both the
characterized according to its substance, partnership and the service provider on
connection with the performance of
that is, as a disguised payment of the transfer of a profits interest in the
services.
compensation to the service provider. partnership for services performed for
Explanation of Provisions See S. Rep. No. 98–169, 98 Cong. 2d that partnership, must be modified to be
Sess., at 226 (1984). consistent with these proposed
1. Application of Section 83 to
Section 83(b) allows a person who regulations. Accordingly, in conjunction
Partnership Interests
receives substantially nonvested with these proposed regulations, the IRS
Section 83 generally applies to a property in connection with the is issuing Notice 2005–43 (2005–24
transfer of property by one person to performance of services to elect to I.R.B.). That Notice contains a proposed
another in connection with the include in gross income the difference revenue procedure that, when finalized,
performance of services. The courts between: (A) The fair market value of will obsolete Rev. Procs. 93–27 and
have held that a partnership capital the property at the time of transfer 2001–43. The Treasury Department and
interest is property for this purpose. See (determined without regard to a the IRS intend for these proposed
Schulman v. Commissioner, 93 T.C. 623 restriction other than a restriction which regulations and the proposed revenue
(1989) (section 83 governs the issuance by its terms will never lapse); and (B) procedure to become effective at the
of an option to acquire a partnership the amount paid for such property. same time. The proposed amendments
interest as compensation for services Under section 83(b)(2), the election to the regulations under section 83 and
provided as an employee); Kenroy, Inc. under section 83(b) must be made subchapter K, as well as the Notice, are
v. Commissioner, T.C. Memo 1984–232. within 30 days of the date of the transfer described in further detail below.
Therefore, the proposed regulations of the property to the service provider. The proposed revenue procedure and
provide that a partnership interest is Consistent with the principles of certain parts of the proposed regulations
property within the meaning of section section 83, the proposed regulations (as described below) only apply to a
83, and that the transfer of a partnership provide that, if a partnership interest is transfer by a partnership of an interest
interest in connection with the transferred in connection with the in that partnership in connection with
performance of services is subject to performance of services, and if an the performance of services for that
section 83. election under section 83(b) is not partnership (compensatory partnership
The proposed regulations apply made, then the holder of the partnership interests). The Treasury Department and
section 83 to all partnership interests, interest is not treated as a partner until the IRS request comments on the
without distinguishing between the interest becomes substantially income tax consequences of transactions
partnership capital interests and vested. If a section 83(b) election is involving related persons, such as, for
partnership profits interests. Although made with respect to such an interest, example, the transfer of an interest in a
the application of section 83 to the service provider will be treated as a lower-tier partnership in exchange for
partnership profits interests has been partner for purposes of Subtitle A of the services provided to the upper-tier
the subject of controversy, see, e.g., Code. These rules are similar to the partnership.
Campbell v. Commissioner, T.C. Memo current rules pertaining to substantially
1990–162, aff’d in part and rev’d in part, nonvested stock in a subchapter S 2. Timing of Partnership’s Deduction
943 F.2d 815 (8th Cir. 1991), n. 7; St. corporation. See § 1.1361–1(b)(3) (upon Except as otherwise provided in
John v. U.S., 84–1 USTC 9158 (C.D. Ill. an election under section 83(b), the § 1.83–6(a)(3), if property is transferred

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 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules 29677

in connection with the performance of partnership’s deduction for the transfer 706(d)(2)(A) does not apply to such a
services, then the service recipient’s of property in connection with the transfer.
deduction, if any, is allowed only for performance of services. Some
the taxable year of that person in which commentators suggested that the 4. Accounting for Compensatory
or with which ends the taxable year of proposed regulations require that the Partnership Interests
the service provider in which the partnership’s deduction be allocated A. Transfer of Compensatory
amount is included as compensation. among the partners in accordance with Partnership Interest
See section 83(h). In contrast, under their interests in the partnership prior to
section 706(a) and § 1.707–1(c), the transfer. Under the proposed regulations, the
guaranteed payments described in Section 706(d)(1) provides generally service provider’s capital account is
section 707(c) are included in the that, if, during any taxable year of a increased by the amount the service
partner’s income in the partner’s taxable partnership, there is a change in any provider takes into income under
year within or with which ends the partner’s interest in the partnership, section 83 as a result of receiving the
partnership’s taxable year in which the each partner’s distributive share of any interest, plus any amounts paid for the
partnership deducted the payments. item of income, gain, loss, deduction, or
interest. Some commentators suggested
Under § 1.721–1(b)(2) of the current credit of the partnership for such
that the amount included in the service
regulations, an interest in partnership taxable year shall be determined by the
use of any method prescribed by provider’s income under section 83,
capital issued by the partnership as
regulations which takes into account the plus the amount paid for the interest,
compensation for services rendered to
the partnership is treated as a varying interests of the partners in the may differ from the amount of capital
guaranteed payment under section partnership during the taxable year. that the partnership has agreed to assign
707(c). Some commentators suggested Regulations have not yet been issued to the service provider. These
that the proposed regulations should describing the rules for taking into commentators contend that the
resolve the potential conflict between account the varying interests of the substantial economic effect safe harbor
the timing rules of section 83 and the partners in the partnership during a in the section 704(b) regulations should
timing rules of section 707(c). taxable year. Section 1.706–1(c)(2)(ii) be amended to allow partnerships to
Under the proposed regulations, provides that, in the case of a sale, reallocate capital between the historic
partnership interests issued to partners exchange, or liquidation of a partner’s partners and the service provider to
for services rendered to the partnership entire interest in a partnership, the accord with the economic agreement of
are treated as guaranteed payments. partner’s share of partnership items for the parties.
Also, the proposed regulations provide the taxable year may be determined by
The reallocation of partnership capital
that the section 83 timing rules override either: (1) Closing the partnership’s
the timing rules of section 706(a) and books as of the date of the transfer in these circumstances is not consistent
§ 1.707–1(c) to the extent they are (closing of the books method); or (2) with the policies underlying the
inconsistent. Accordingly, if a allocating to the departing partner that substantial economic effect safe harbor
partnership transfers property to a partner’s pro rata part of partnership and the capital account maintenance
partner in connection with the items that the partner would have rules. The purpose of the substantial
performance of services, the timing and included in the partner’s taxable income economic effect safe harbor is to ensure
the amount of the related income had the partner remained a partner until that, to the extent that there is an
inclusion and deduction is determined the end of the partnership taxable year economic benefit or burden associated
by section 83 and the regulations (proration method). The Treasury with a partnership allocation, the
thereunder. Department and the IRS believe that partner to whom the allocation is made
In drafting these regulations, the section 706(d)(1) adequately ensures receives the economic benefit or bears
Treasury Department and the IRS that partnership deductions that are the economic burden. Under section 83,
considered alternative approaches for attributable to the portion of the the economic benefit of receiving a
resolving the timing inconsistency partnership’s taxable year prior to a new partnership interest in connection with
between section 83 and section 707(c). partner’s entry into the partnership are the performance of services is the
One alternative approach considered allocated to the historic partners. amount that is included in the
was to provide that the transfer of Section 706(d)(2), however, places compensation income of the service
property in connection with the additional limits on how partnerships
provider, plus the amount paid for the
performance of services is not treated as may allocate these deductions. Under
interest. This is the amount by which
a guaranteed payment within the section 706(d)(2)(B), payments for
services by a partnership using the cash the service partner’s capital account
meaning of section 707(c). This
approach was not adopted in the receipts and disbursements method of should be increased.
proposed regulations due to, among accounting are allocable cash basis As explained in section 6 below, a
other things, concern that such a items. Under section 706(d)(2)(A), if proposed revenue procedure issued
characterization of these transfers could during any taxable year of a partnership concurrently with these proposed
have unintended consequences on the there is a change in any partner’s regulations would allow a partnership,
application of provisions of the Code interest in the partnership, then (except its partners, and the service provider to
outside of subchapter K that refer to to the extent provided in regulations) elect to treat the fair market value of a
guaranteed payments. The Treasury each partner’s distributive share of any partnership interest as equal to the
Department and the IRS request allocable cash basis item must be liquidation value of that interest. If such
comments on alternative approaches for determined under the proration method. an election is made, the capital account
resolving the timing inconsistency To allow partnerships to allocate of a service provider receiving a
between section 83 and section 707(c). deductions with respect to property
partnership interest in connection with
transferred in connection with the
3. Allocation of Partnership’s Deduction the performance of services is increased
performance of services under a closing
The proposed regulations provide of the books method, the proposed by the liquidation value of the
guidance regarding the allocation of the regulations provide that section partnership interest received.

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 29678 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules

B. Forfeiture of Certain Compensatory of § 1.83–6(c) apply. As a result, the the Code provides authority for such a
Partnership Interests partnership generally will have gross rule.
If an election under section 83(b) has income in the taxable year of the
5. Valuation of Compensatory
been made with respect to a forfeiture equal to the amount of the
Partnership Interests
substantially nonvested interest, the allowable deduction to the service
recipient partnership upon the transfer Commentators requested guidance
holder of the nonvested interest may be regarding the valuation of partnership
allocated partnership items that may of the interest as a result of the making
of the section 83(b) election, regardless interests transferred in connection with
later be forfeited. For this reason, the performance of services. Section 83
allocations of partnership items while of the fair market value of the
partnership’s assets at the time of generally provides that the recipient of
the interest is substantially nonvested property transferred in connection with
cannot have economic effect. Under the forfeiture.
In certain circumstances, the the performance of services recognizes
proposed regulations, such allocations income equal to the fair market value of
partnership will not have enough
will be treated as being in accordance the property, disregarding lapse
income and gain to fully offset prior
with the partners’ interests in the restrictions. See Schulman v.
allocations of loss to the forfeiting
partnership if: (a) The partnership service provider. The proposed revenue Commissioner, 93 T.C. 623 (1989).
agreement requires that the partnership procedure includes a rule that requires However, some authorities have
make forfeiture allocations if the interest the recapture of losses taken by the concluded that, under the particular
for which the section 83(b) election is service provider prior to the forfeiture of facts and circumstances of the case, a
made is later forfeited; and (b) all the interest to the extent that those partnership profits interest had only a
material allocations and capital account losses are not recaptured through speculative value or that the fair market
adjustments under the partnership forfeiture allocations of income and gain value of a partnership interest should be
agreement not pertaining to to the service provider. This rule does determined by reference to the
substantially nonvested partnership not provide the other partners in the liquidation value of that interest. See
interests for which a section 83(b) partnership with the opportunity to § 1.704–1(e)(1)(v); Campbell v.
election has been made are recognized increase their shares of partnership loss Commissioner, 943 F.2d 815 (8th Cir.
under section 704(b). This safe harbor (or reduce their shares of partnership 1991); St. John v. U.S., 1984–1 USTC
does not apply if, at the time of the income) for the year of the forfeiture by 9158 (C.D. Ill. 1983). But see Diamond
section 83(b) election, there is a plan the amount of loss that was previously v. Commissioner, 492 F.2d 286 (7th Cir.
that a substantially nonvested interest allocated to the forfeiting service 1974) (holding under pre-section 83 law
will be forfeited. All of the facts and provider. that the receipt of a profits interest with
circumstances (including the tax status In other circumstances, the a determinable value at the time of
of the holder of the substantially partnership will not have enough receipt resulted in immediate taxation);
nonvested interest) will be considered deductions and loss to fully offset prior Campbell v. Commissioner, T.C. Memo
in determining whether there is a plan allocations of income to the forfeiting 1990–162, aff’d in part and rev’d in part,
that the interest will be forfeited. In service provider. It appears that, in such 943 F.2d 815 (8th Cir. 1991).
such a case, the partners’ distributive a case, section 83(b)(1) may prohibit the The Treasury Department and the IRS
shares of partnership items shall be service provider from claiming a loss have determined that, provided certain
determined in accordance with the with respect to partnership income that requirements are satisfied, it is
partners’ interests in the partnership was previously allocated to the service appropriate to allow partnerships and
under § 1.704–1(b)(3). provider. However, a forfeiting partner service providers to value partnership
Generally, forfeiture allocations are is entitled to a loss for any basis in a interests based on liquidation value.
allocations to the service provider of partnership that is attributable to This approach ensures consistency in
partnership gross income and gain or contributions of money or property to the treatment of partnership profits
gross deduction and loss (to the extent the partnership (including amounts paid interests and partnership capital
such items are available) that offset for the interest) remaining after the interests, and accords with other
prior distributions and allocations of forfeiture allocations have been made. regulations issued under subchapter K,
partnership items with respect to the See § 1.83–2(a). such as the regulations under section
forfeited partnership interest. These Comments are requested as to 704(b).
rules are designed to ensure that any whether the regulations should require In accordance with these proposed
partnership income (or loss) that was or allow partnerships to create notional regulations, the revenue procedure
allocated to the service provider prior to tax items to make forfeiture allocations proposed in Notice 2005–43 (2005–24
the forfeiture is offset by allocations on where the partnership does not have I.R.B.) will, when finalized, provide
the forfeiture of the interest. Also, to enough actual tax items to make such additional rules that partnerships,
carry out the prohibition under section allocations. Comments are also partners, and persons providing services
83(b)(1) on deductions with respect to requested as to whether section 83(b)(1) to the partnership in exchange for
amounts included in income under should be read to allow a forfeiting interests in that partnership would be
section 83(b), these rules generally service provider to claim a loss with required to follow when electing under
cause a forfeiting partner to be allocated respect to partnership income that was § 1.83–3(l) of these proposed regulations
partnership income to offset any previously allocated to the service to treat the fair market value of those
distributions to the partner that reduced provider and not offset by forfeiture interests as being equal to the
the partner’s basis in the partnership allocations of loss and deduction and, if liquidation value of those interests. For
below the amount included in income so, whether it is appropriate to require this purpose, the liquidation value of a
under section 83(b). the other partners in the partnership to partnership interest is the amount of
Forfeiture allocations may be made recognize income in the year of the cash that the holder of that interest
out of the partnership’s items for the forfeiture equal to the amount of the loss would receive with respect to the
entire taxable year. In determining the claimed by the service provider. In interest if, immediately after the transfer
gross income of the partnership in the particular, comments are requested as to of the interest, the partnership sold all
taxable year of the forfeiture, the rules whether section 83 or another section of of its assets (including goodwill, going

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 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules 29679

concern value, and any other intangibles generally will be required to recognize subject to section 83, may occur under
associated with the partnership’s any income or loss attributable to the circumstances other than those
operations) for cash equal to the fair partnership’s assets as those assets are described in the proposed rules for
market value of those assets, and then sold, depreciated, or amortized. treating the holder of a
liquidated. The rule providing for nonrecognition noncompensatory option as a partner.
of gain or loss does not apply to the The Treasury Department and the IRS
6. Application of Section 721 to transfer or substantial vesting of an request comments on whether anti-
Partnership on Transfer interest in an eligible entity, as defined abuse rules are necessary to prevent
There is a dispute among in § 301.7701–3(a) of the Procedure and taxpayers from using the rules in these
commentators as to whether a Administration Regulations, that proposed regulations or the rules in
partnership should recognize gain or becomes a partnership under Notice 2005–43 to inappropriately shift
loss on the transfer of a compensatory § 301.7701–3(f)(2) as a result of the items of partnership income or loss
partnership interest. Some transfer or substantial vesting of the between the service provider and the
commentators believe that, on the interest. See McDougal v. other partners.
transfer of such an interest, the Commissioner, 62 T.C. 720 (1974)
partnership should be treated as (holding that the service recipient 9. Retroactive Allocations
satisfying its compensation obligation recognized gain on the transfer of a one- Section 761(c) generally allows a
with a fractional interest in each asset half interest in appreciated property to partnership to modify its agreement at
of the partnership. Under this deemed the service provider, immediately prior any time on or prior to the due date for
sale of assets theory, the partnership to the contribution by the service the partnership’s return for the taxable
would recognize gain or loss equal to recipient and the service provider of year (without regard to extensions).
the excess of the fair market value of their respective interests in the property Thus, for example, a partnership could,
each partial asset deemed transferred to to a newly formed partnership). at the end of its taxable year, amend its
the service provider over the partnership agreement to provide that a
partnership’s adjusted basis in that 7. Revaluations of Partnership Property service provider was entitled to a
partial asset. Other commentators The proposed regulations concerning substantially vested or nonvested
believe that a partnership should not noncompensatory partnership options interest in partnership profits and losses
recognize gain or loss on the transfer of published on January 22, 2003, from the beginning of the partnership’s
a compensatory partnership interest. contained special rules regarding the taxable year. It is expected that, if a
They argue, among other things, that the revaluations of partnership property substantially vested compensatory
transfer of such an interest is not while noncompensatory partnership partnership interest is transferred to an
properly treated as a realization event options were outstanding. Specifically, employee or independent contractor (or
for the partnership because no property the regulations proposed modifications an election under section 83(b) is made
owned by the partnership has changed to § 1.704–1(b)(2)(iv)(f) and (h) to with respect to the transfer of a
hands. They also argue that taxing a provide that any revaluation during the substantially nonvested compensatory
partnership on the transfer of such an period in which there are outstanding partnership interest to an employee or
interest would result in inappropriate noncompensatory options generally independent contractor), the
gain acceleration, would be difficult to must take into account the fair market partnership will report the transfer on
administer, and would cause value, if any, of outstanding options. Form W–2, ‘‘Wage and Tax Statement,’’
economically similar transactions to be These proposed regulations do not or Form 1099–MISC, ‘‘Miscellaneous
taxed differently. contain similar provisions, because Income,’’ as appropriate. The Form W–
Generally, when appreciated property under recently proposed modifications 2 or Form 1099-MISC would be issued
is used to pay an obligation, gain on the to the regulations under § 1.704– to the service provider by the
property is recognized. The Treasury 1(b)(2)(iv), the obligation to issue a partnership by January 31 of the year
Department and the IRS are still partnership interest in satisfaction of an following the calendar year in which the
analyzing whether an exception to this option agreement is a liability that is partnership interest is transferred, and
general rule is appropriate on the taken into account in determining the the partnership would file such forms
transfer of an interest in the capital or fair market value of partnership assets with the Social Security Administration
profits of a partnership to satisfy certain as a result of a revaluation. See REG– or IRS, respectively, by February 28
partnership obligations (such as the 106736–00, 68 FR 37434 (June 24, 2003) (March 31 if filed electronically) of the
obligations to pay interest or rent). (relating to the assumption of certain year following the calendar year in
However, the Treasury Department and obligations by partnerships from which the partnership interest is
the IRS believe that partnerships should partners). transferred. The service provider would
not be required to recognize gain on the be required to report any income
transfer of a compensatory partnership 8. Characterization Rule recognized on the transfer of the
interest. Such a rule is more consistent The proposed regulations concerning partnership interest on the service
with the policies underlying section noncompensatory partnership options provider’s return for the taxable year (of
721—to defer recognition of gain and published on January 22, 2003 the service provider) in which the
loss when persons join together to contained a rule (§ 1.761–3) providing transfer occurs.
conduct a business—than would be a that the holder of a noncompensatory It is unclear whether the retroactive
rule requiring the partnership to option is treated as a partner under commencement date of such an interest
recognize gain on the transfer of these certain circumstances. However, the should be treated as the date of the
types of interests. Therefore, the Treasury Department and the IRS have transfer of the interest for purposes of
proposed regulations provide that concluded that these proposed section 83 and other provisions of the
partnerships are not taxed on the regulations should not contain a similar Code outside of subchapter K. If the
transfer or substantial vesting of a rule for partnership options transferred retroactive effective date of the interest
compensatory partnership interest. in connection with the performance of is treated as the transfer date for all
Under § 1.704–1(b)(4)(i) (reverse section services because of the possibility that purposes, a number of administrative
704(c) principles), the historic partners constructive transfers of property, concerns arise. For example, the

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 29680 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules

partnership may not, by the January 31 single election form in order to rely on Drafting Information
deadline, have the information the safe harbor described in that The principal authors of these
necessary to issue Form W–2 or Form paragraph. Partnerships that desire to regulations are Audrey Ellis and
1099–MISC to the service provider. elect to use the safe harbor described in Demetri Yatrakis of the Office of
Also, the service provider may not, by § 1.83–3(l), but which do not have Associate Chief Counsel (Passthroughs
the due date for filing the section 83(b) partnership agreements containing these and Special Industries), and Stephen
election, have the information necessary provisions, are required to obtain Tackney of the Office of Associate Chief
to file the election. The Treasury partner-level consents to the election. Counsel (Tax Exempt and Government
Department and the IRS request However, these partnerships are Entities). However, other personnel
comments on the timing for section 83 expected to be rare. Moreover, in most from the IRS and Treasury Department
purposes of retroactive transfers of cases the partners in such partnerships participated in their development.
partnership interests and on any actions are not expected to be small businesses.
that may be appropriate to address the Therefore, a Regulatory Flexibility Withdrawal of Notice of Proposed
associated administrative concerns. Analysis under the Regulatory Rulemaking
10. Information Reporting to Partners Flexibility Act (5 U.S.C. chapter 6) is Accordingly, under the authority of
not required. Pursuant to section 7805(f) 26 U.S.C. 7805, § 1.721–1(b) of the
As explained above, the proposed of the Code, this notice of proposed
regulations treat the transfer of a notice of proposed rulemaking that was
rulemaking will be submitted to the published in the Federal Register on
partnership interest to a partner in Chief Counsel for Advocacy of the Small
connection with the performance of June 3, 1971 (36 FR 10787) is
Business Administration for comment withdrawn.
services as a guaranteed payment. To on its impact on small business.
ensure that the service provider partner List of Subjects in 26 CFR Part 1
has the information necessary to include Comments and Public Hearing
the transfer in income for the taxable Income taxes, Reporting and record
Before these proposed regulations are keeping requirements.
year in which the transfer occurs (rather adopted as final regulations,
than the taxable year in which or with consideration will be given to any Proposed Amendments to the
which ends the partnership taxable year electronic or written comments (a Regulations
in which the transfer occurs), the signed original and eight copies) that are Accordingly, 26 CFR part 1 is
Treasury Department and the IRS are submitted timely to the IRS. The IRS proposed to be amended as follows:
considering the possibility of amending and the Treasury Department request
the section 6041 regulations to provide comments on the clarity of the proposed PART 1—INCOME TAXES
that this type of guaranteed payment rules and how they can be made easier
must be reported by the partnership on Paragraph 1. The authority citation
to understand. All comments will be
Form 1099–MISC, which is required to for part 1 continues to read, in part, as
available for public inspection and
be issued to the service provider on or follows:
copying.
before January 31 of the year following Authority: 26 U.S.C. 7805 * * *
A public hearing has been scheduled
the calendar year of such transfer. The
for October 5, 2005, beginning at 10 a.m. Par. 2. Section 1.83–3 is amended as
Treasury Department and the IRS
in the IRS Auditorium, Internal Revenue follows:
request comments on whether such a
Building, 1111 Constitution Avenue, 1. Paragraph (e) is amended by adding
requirement is appropriate and
NW., Washington, DC. Due to building two new sentences after the first
administrable.
security procedures, visitors must enter sentence.
Proposed Effective Date at the Constitution Avenue entrance. In 2. Paragraph (l) is added.
These regulations are proposed to addition, all visitors must present photo The revision and addition read as
apply to transfers of property on or after identification to enter the building. follows:
the date final regulations are published Because of access restrictions, visitors
will not be admitted beyond the § 1.83–3 Meaning and use of certain terms.
in the Federal Register.
immediate entrance area more than 30 * * * * *
Special Analyses minutes before the hearing starts. For (e) Property. * * * Accordingly,
It has been determined that this notice information about having your name property includes a partnership interest.
of proposed rulemaking is not a placed on the building access list to The previous sentence is effective for
significant regulatory action as defined attend the hearing, see the FOR FURTHER transfers on or after the date final
in Executive Order 12866. Therefore, a INFORMATION CONTACT portion of this regulations are published in the Federal
regulatory assessment is not required. It preamble. Register. * * *
also has been determined that section The rules of 26 CFR 601.601(a)(3) * * * * *
553(b) of the Administrative Procedure apply to the hearing. Persons who wish (l) Special rules for the transfer of a
Act (5 U.S.C. chapter 5) does not apply to present oral comments must submit partnership interest. (1) Subject to such
to these regulations. It is hereby written comments and an outline of the additional conditions, rules, and
certified that the collection of topics to be discussed and the time to procedures that the Commissioner may
information in these regulations will not be devoted to each topic (a signed prescribe in regulations, revenue
have a significant economic impact on original and eight (8) copies) by rulings, notices, or other guidance
a substantial number of small entities. September 14, 2005. A period of 10 published in the Internal Revenue
This certification is based upon the fact minutes will be allotted to each person Bulletin (see § 601.601(d)(2)(ii)(b) of this
that the reporting burden, as discussed for making comments. An agenda chapter), a partnership and all of its
earlier in this preamble, is not expected showing the scheduling of the speakers partners may elect a safe harbor under
to be significant. Partnerships with will be prepared after the deadline for which the fair market value of a
partnership agreements that contain the reviewing outlines has passed. Copies of partnership interest that is transferred in
binding provisions referred to in § 1.83– the agenda will be available free of connection with the performance of
3(l) only will be required to submit a charge at the hearing. services is treated as being equal to the

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 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules 29681

liquidation value of that interest for paragraph (l). If the partnership is (iv) * * *
transfers on or after the date final unable to produce a record of a (b) * * *
regulations are published in the Federal particular document, the election will (1) the amount of money contributed
Register if the following conditions are be treated as not made, generally by that partner to the partnership and,
satisfied: resulting in termination of the election. in the case of a compensatory
(i) The partnership must prepare a The safe harbor election also may be partnership interest (as defined in
document, executed by a partner who terminated by the partnership preparing § 1.721–1(b)(3)) that is transferred on or
has responsibility for Federal income a document, executed by a partner who after the date final regulations are
tax reporting by the partnership, stating has responsibility for Federal income published in the Federal Register, the
that the partnership is electing, on tax reporting by the partnership, which amount included on or after that date in
behalf of the partnership and each of its states that the partnership, on behalf of the partner’s compensation income
partners, to have the safe harbor apply the partnership and each of its partners, under section 83(a), (b), or (d)(2).
irrevocably as of the stated effective date is revoking the safe harbor election on * * * * *
with respect to all partnership interests the stated effective date, and attaching (f) * * *
transferred in connection with the the document to the tax return for the (5) * * *
performance of services while the safe partnership for the taxable year that (iii) In connection with the transfer or
harbor election remains in effect and includes the effective date of the vesting of a compensatory partnership
attach the document to the tax return for revocation. interest (as defined in § 1.721–1(b)(3))
the partnership for the taxable year that Par. 3. Section 1.83–6 is amended by that is transferred on or after the date
includes the effective date of the revising the first sentence of paragraph final regulations are published in the
election. (b) to read as follows: Federal Register, but only if the transfer
(ii) Except as provided in paragraph or vesting results in the service provider
(l)(1)(iii) of this section, the partnership § 1.83–6 Deduction by employer. recognizing income under section 83 (or
agreement must contain provisions that * * * * * would result in such recognition if the
are legally binding on all of the partners (b) Recognition of gain or loss. Except interest had a fair market value other
stating that— as provided in section 721 and section than zero).
(A) The partnership is authorized and 1032, at the time of a transfer of * * * * *
directed to elect the safe harbor; and property in connection with the (4) * * *
(B) The partnership and each of its performance of services the transferor (xii) Substantially nonvested
partners (including any person to whom recognizes gain to the extent that the interests—(a) In general. If a section
a partnership interest is transferred in transferor receives an amount that 83(b) election has been made with
connection with the performance of exceeds the transferor’s basis in the respect to a substantially nonvested
services) agrees to comply with all property. * * * interest, the holder of the nonvested
requirements of the safe harbor with * * * * * interest may be allocated partnership
respect to all partnership interests Par. 4. Section 1.704–1 is amended as income, gain, loss, deduction, or credit
transferred in connection with the follows: (or items thereof) that will later be
performance of services while the 1. In paragraph (b)(0), an entry is forfeited. For this reason, allocations of
election remains effective. added to the table for § 1.704– partnership items while the interest is
(iii) If the partnership agreement does substantially nonvested cannot have
1(b)(4)(xii).
not contain the provisions described in economic effect.
2. In paragraph (b)(1)(ii)(a), a sentence
paragraph (l)(1)(ii) of this section, or the (b) Deemed Compliance with
is added at the end of the paragraph.
provisions are not legally binding on all Partners’ Interests in the Partnership. If
3. Paragraph (b)(2)(iv)(b)(1) is revised.
of the partners of the partnership, then 4. Paragraph (b)(2)(iv)(f)(5)(iii) is a section 83(b) election has been made
each partner in a partnership that revised. with respect to a substantially
transfers a partnership interest in 5. Paragraph (b)(4)(xii) is added. nonvested interest, allocations of
connection with the performance of 6. Paragraph (b)(5) Example 29 is partnership items while the interest is
services must execute a document added. substantially nonvested will be deemed
containing provisions that are legally The additions and revisions read as to be in accordance with the partners’
binding on that partner stating that— follows: interests in the partnership if—
(A) The partnership is authorized and (1) The partnership agreement
directed to elect the safe harbor; and § 1.704–1 Partner’s distributive share. requires that the partnership make
(B) The partner agrees to comply with * * * * * forfeiture allocations if the interest for
all requirements of the safe harbor with (b) * * * (0) * * * which the section 83(b) election is made
respect to all partnership interests is later forfeited; and
transferred in connection with the * * * * * (2) All material allocations and capital
performance of services while the Substantially nonvested interests— account adjustments under the
election remains effective. 1.704–1(b)(4)(xii) partnership agreement not pertaining to
(2) The specified effective date of the * * * * * substantially nonvested partnership
safe harbor election may not be prior to (1) * * * interests for which a section 83(b)
the date that the safe harbor election is (ii) * * * (a) * * * In addition, election has been made are recognized
executed. The partnership must retain paragraph (b)(4)(xii) and paragraph under section 704(b).
such records as may be necessary to (b)(5) Example 29 of this section apply (c) Forfeiture allocations. Forfeiture
indicate that an effective election has to compensatory partnership interests allocations are allocations to the service
been made and remains in effect, (as defined in § 1.721–1(b)(3)) that are provider (consisting of a pro rata portion
including a copy of the partnership’s transferred on or after the date final of each item) of gross income and gain
election statement under this paragraph regulations are published in the Federal or gross deduction and loss (to the
(l), and, if applicable, the original of Register. extent such items are available) for the
each document submitted to the * * * * * taxable year of the forfeiture in a
partnership by a partner under this (2) * * * positive or negative amount equal to—

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 29682 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules

(1) The excess (not less than zero) of restore that deficit to the partnership. At the (iv) As a result of the forfeiture of the LLC
the— beginning of Year 3, SP agrees to perform interest by SP in year 6, LLC is required to
(i) Amount of distributions (including services for LLC. In connection with the recognize income ($90) equal to the amount
deemed distributions under section performance of SP’s services and a payment of the allowable deduction on the transfer of
of $10 by SP to LLC, LLC transfers a 10% the LLC interest to SP under § 1.83–6(c). LLC
752(b) and the adjusted tax basis of any interest in LLC to SP. SP’s interest in LLC is repays SP’s $10 capital contribution to SP,
property so distributed) to the partner substantially nonvested (within the meaning reducing SP’s capital account to $120. Under
with respect to the forfeited partnership of § 1.83–3(b)). At the time of the transfer of the terms of the operating agreement, because
interest (to the extent such distributions the LLC interest to SP, LLC’s operating SP forfeited SP’s interest, SP’s distributive
are not taxable under section 731); over agreement is amended to provide that, if SP’s share of all partnership items (other than
(ii) Amounts paid for the interest and interest is forfeited, then SP is entitled to a forfeiture allocations) is zero for Year 6. To
the adjusted tax basis of property return of SP’s $10 initial contribution, and reverse SP’s prior allocations of LLC income,
contributed by the partner (including SP’s distributive share of all partnership LLC makes forfeiture allocations of $30 of
items (other than forfeiture allocations under deductions ($0 (the difference between the
deemed contributions under section
§ 1.704–1(b)(4)(xii)) will be zero with respect $10 distributed to SP and the $10 contributed
752(a)) to the partnership with respect to that interest for the taxable year of the to LLC by SP) minus $30 (the cumulative net
to the forfeited partnership interest; partnership in which the interest was LLC income allocated to SP) to SP in Year
minus forfeited. The operating agreement is also 6. Notwithstanding section 706(c) and (d),
(2) The cumulative net income (or amended to require that LLC make forfeiture these allocations may be made out of LLC’s
loss) allocated to the partner with allocations if SP’s interest is forfeited. partnership items for the entire taxable year
respect to the forfeited partnership Additionally, the operating agreement is of the forfeiture. Thus, in Year 6, $30 of
interest. amended to provide that no part of LLC’s deductions are allocated to SP, and the
(d) Positive and negative amounts. compensation deduction is allocated to the remaining $220 of net operating income
service provider to whom the interest is ($200 of gross receipts and $90 of income
For purposes of paragraph (b)(4)(xii)(c)
transferred. SP makes an election under under § 1.83–6(c) less $70 of remaining
of this section, items of income and gain section 83(b) with respect to SP’s interest in deductions) are allocated to A and B equally
are reflected as positive amounts, and LLC. Upon receipt, the fair market value of for tax purposes. In accordance with section
items of deduction and loss are reflected SP’s interest in LLC is $100. In each of Years 83(b)(1) (last sentence), SP does not receive
as negative amounts. 3, 4, 5, and 6, LLC has operating income of a deduction or capital loss for the amount
(e) Exception. Paragraph (b)(4)(xii)(b) $100 (consisting of $200 of gross receipts and ($90) that was included in SP’s compensation
of this section shall not apply to $100 of deductible expenses), and makes no income. Because LLC satisfies the
allocations of partnership items made distributions. SP forfeits SP’s interest in LLC requirements of paragraph (b)(4)(xii) of this
with respect to a substantially at the beginning of Year 6. At the time of the section, LLC’s allocations in year 6 are
nonvested interest for which the holder transfer of the interest to SP, there is no plan deemed to be in accordance with the
that SP will forfeit the interest in LLC. partners’ interests in the partnership.
has made a section 83(b) election if, at (ii) Because a section 83(b) election is
the time of the section 83(b) election, made, SP recognizes compensation income in * * * * *
there is a plan that the interest will be the year of the transfer of the LLC interest. Par. 5. Section 1.706–3 is added to
forfeited. In such a case, the partners’ Therefore, SP recognizes $90 of read as follows.
distributive shares of partnership items compensation income in the year of the
shall be determined in accordance with transfer of the LLC interest (the excess of the § 1.706–3 Property transferred in
the partners’ interests in the partnership fair market value of SP’s interest in LLC, connection with the performance of
$100, over the amount SP paid for the services.
under paragraph (b)(3) of this section. In
determining whether there is a plan that interest, $10). Under paragraph (a) Allocations of certain deductions
(b)(2)(iv)(b)(1) of this section, in Year 3, SP’s under section 83(h). The transfer of
the interest will be forfeited, the capital account is initially credited with
Commissioner will consider all of the $100, the amount paid for the interest ($10)
property subject to section 83 in
facts and circumstances (including the plus the amount included in SP’s connection with the performance of
tax status of the holder of the forfeitable compensation income upon the transfer services is not an allocable cash basis
compensatory partnership interest). under section 83(b) ($90). Under §§ 1.83–6(b) item within the meaning of section
(f) Cross references. Forfeiture and 1.721–1(b)(2), LLC does not recognize 706(d)(2)(B).
allocations may be made out of the gain on the transfer of the interest to SP. LLC (b) Forfeiture allocations. If an
partnership’s items for the entire taxable is entitled to a compensation deduction of election under section 83(b) is made
year of the forfeiture. See § 1.706–3(b) $90 under section 83(h). Under the terms of
with respect to a partnership interest
the operating agreement, the deduction is
and paragraph (b)(5) Example 29 of this that is substantially nonvested (within
allocated equally to A and B.
section. (iii) As a result of SP’s election under the meaning of § 1.83–3(b)), and that
* * * * * section 83(b), SP is treated as a partner interest is later forfeited, the partnership
(5) * * * starting from the date of the transfer of the must make forfeiture allocations to
Example 29. (i) In Year 1, A and B each LLC interest to SP in Year 3. Section 1.761– reverse prior allocations made with
contribute cash to LLC, a newly formed 1(b). In each of years 3, 4 and 5, SP’s respect to the forfeited interest. See
limited liability company classified as a distributive share of partnership income is § 1.704–1(b)(4)(xii). Although the person
partnership for Federal tax purposes, in $10 (10% of $100), A’s distributive share of forfeiting the interest may not have been
exchange for equal units in LLC. Under LLC’s partnership income is $45 (45% of $100), and
a partner for the entire taxable year,
operating agreement, each unit is entitled to B’s distributive share of partnership income
participate equally in the profits and losses is $45 (45% of $100). In accordance with the forfeiture allocations may be made out
of LLC. The operating agreement also operating agreement, SP’s capital account is of the partnership’s items for the entire
provides that the partners’ capital accounts increased (to $130) by the end of Year 5 by taxable year.
will be determined and maintained in the amounts allocated to SP, and A’s and B’s (c) Effective date. This section applies
accordance with paragraph (b)(2)(iv) of this capital accounts are increased by the to transfers of property on or after the
section, that liquidation proceeds will be amounts allocated to A and B. Because LLC date final regulations are published in
distributed in accordance with the partners’ satisfies the requirements of paragraph
the Federal Register.
positive capital account balances, and that (b)(4)(xii) of this section, LLC’s allocations in
any partner with a deficit balance in that years 3, 4 and 5 are deemed to be in Par. 6. In § 1.707–1, paragraph (c) is
partner’s capital account following the accordance with the partners’ interests in the amended by revising the second
liquidation of the partner’s interest must partnership. sentence to read as follows:

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 Federal Register / Vol. 70, No. 99 / Tuesday, May 24, 2005 / Proposed Rules 29683

§ 1.707–1 Transactions between partner (4) To the extent that a partnership Flood Elevations (BFEs) and proposed
and partnership. interest is— BFE modifications for the communities
* * * * * (i) Transferred to a partner in listed below. The BFEs are the basis for
(c) Guaranteed payments. * * * connection with the performance of the floodplain management measures
However, except as otherwise provided services rendered to the partnership, it that the community is required either to
in section 83 and the regulations is a guaranteed payment for services adopt or to show evidence of being
thereunder, a partner must include such under section 707(c); already in effect in order to qualify or
payments as ordinary income for that (ii) Transferred in connection with the remain qualified for participation in the
partner’s taxable year within or with performance of services rendered to a National Flood Insurance Program
which ends the partnership taxable year partner, it is not deductible by the (NFIP).
in which the partnership deducted such partnership, but is deductible only by DATES: The comment period is ninety
payments as paid or accrued under its such partner to the extent allowable (90) days following the second
method of accounting. * * * under Chapter 1 of the Code. publication of this proposed rule in a
* * * * * (5) This paragraph (b) applies to
newspaper of local circulation in each
Par. 7. In § 1.721–1, paragraph (b) is interests that are transferred on or after
community.
revised to read as follows. the date final regulations are published
in the Federal Register. ADDRESSES: The proposed BFEs for each
§ 1.721–1 Nonrecognition of gain or loss * * * * * community are available for inspection
on contribution. Par. 8. Section 1.761–1(b) is amended at the office of the Chief Executive
* * * * * by adding two sentences to the end of Officer of each community. The
(b)(1) Except as otherwise provided in the paragraph to read as follows. respective addresses are listed in the
this section or § 1.721–2, section 721 table below.
does not apply to the transfer of a § 1.761–1 Terms defined. FOR FURTHER INFORMATION CONTACT:
partnership interest in connection with * * * * * Doug Bellomo, P.E., Hazard
the performance of services or in (b) * * * If a partnership interest is Identification Section, Emergency
satisfaction of an obligation. The transferred in connection with the Preparedness and Response Directorate,
transfer of a partnership interest to a performance of services, and that FEMA, 500 C Street SW., Washington,
person in connection with the partnership interest is substantially DC 20472, (202) 646–2903.
performance of services constitutes a nonvested (within the meaning of SUPPLEMENTARY INFORMATION: FEMA
transfer of property to which section 83 § 1.83–3(b)), then the holder of the proposes to make determinations of
and the regulations thereunder apply. partnership interest is not treated as a BFEs and modified BFEs for each
To the extent that a partnership interest partner solely by reason of holding the community listed below, in accordance
transferred in connection with the interest, unless the holder makes an with Section 110 of the Flood Disaster
performance of services rendered by a election with respect to the interest Protection Act of 1973, 42 U.S.C. 4104,
decedent prior to the decedent’s death under section 83(b). The previous and 44 CFR 67.4(a).
is transferred after the decedent’s death sentence applies to partnership interests These proposed base flood elevations
to the decedent’s successor in interest, that are transferred on or after the date and modified BFEs, together with the
the fair market value of such interest is final regulations are published in the floodplain management criteria required
an item of income in respect of a Federal Register. by 44 CFR 60.3, are the minimum that
decedent under section 691. Mark E. Matthews, are required. They should not be
(2) Except as provided in section Deputy Commissioner for Services and construed to mean that the community
83(h) and 1.83–6(c), no gain or loss shall Enforcement. must change any existing ordinances
be recognized by a partnership upon— [FR Doc. 05–10164 Filed 5–20–05; 8:45 am] that are more stringent in their
(i) The transfer or substantial vesting floodplain management requirements.
BILLING CODE 4830–01–U
of a compensatory partnership interest; The community may at any time enact
or stricter requirements of its own, or
(ii) The forfeiture of a compensatory pursuant to policies established by other
DEPARTMENT OF HOMELAND
partnership interest. See § 1.704– Federal, state or regional entities. These
SECURITY
1(b)(4)(xii) for rules regarding forfeiture proposed elevations are used to meet
allocations of partnership items that Federal Emergency Management the floodplain management
may be required in the taxable year of Agency requirements of the NFIP and are also
a forfeiture. used to calculate the appropriate flood
(3) For purposes of this section, a 44 CFR Part 67 insurance premium rates for new
compensatory partnership interest is an buildings built after these elevations are
interest in the transferring partnership [Docket No. FEMA–D–7620] made final, and for the contents in these
that is transferred in connection with buildings.
Proposed Flood Elevation
the performance of services for that National Environmental Policy Act.
Determinations
partnership (either before or after the This proposed rule is categorically
formation of the partnership), including AGENCY: Federal Emergency excluded from the requirements of 44
an interest that is transferred on the Management Agency (FEMA), CFR part 10, Environmental
exercise of a compensatory partnership Emergency Preparedness and Response Consideration. No environmental
option. A compensatory partnership Directorate, Department of Homeland impact assessment has been prepared.
option is an option to acquire an interest Security. Regulatory Flexibility Act. The
in the issuing partnership that is granted ACTION: Proposed rule. Mitigation Division Director of the
in connection with the performance of Emergency Preparedness and Response
services for that partnership (either SUMMARY: Technical information or Directorate certifies that this proposed
before or after the formation of the comments are requested on the rule is exempt from the requirements of
partnership). proposed Base (1% annual chance) the Regulatory Flexibility Act because

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