LIMITATION WILL BE ADDED TO SECTION 337 REGS DEALING WITH PARTNER EQUITY INTERESTS.

Notice 93-2

This document contains information regarding Notice of Proposed Rulemaking PS-91-90, which was filed on December 14, 1992 and published in the Federal Register on December 15, 1992 (57 Fed. Reg. 59327) (the "proposed regulations"). The proposed regulations, which were issued under section 337(d) and implement Notice 89-37, 1989-1 C.B. 679, would prevent a corporate partner from avoiding corporate- level gain through transactions with a partnership involving corporate equity interests. The proposed regulations would be effective for transactions or distributions after March 9, 1989.

The proposed regulations would apply to transactions involving stock of a corporate partner or an affiliate of the corporate partner or other equity interests in the partner or affiliate; including options, warrants, and similar interests. Under the proposed regulations, a corporation would be treated as an affiliate of a partner at the time of a deemed redemption or distribution by the partnership if, immediately thereafter, the partner and corporation are members of an affiliated group.

The Internal Revenue Service has determined that further study is appropriate for cases in which affiliation did not exist prior to a distribution of stock by a partnership to a corporate partner, but rather results from such distribution. Therefore, the proposed regulations will be amended to limit their application only to transactions in which affiliation exists immediately before the deemed redemption or distribution. Generally, application of any other affiliation rule will be prospective from the date of the issuance of subsequent regulations dealing specifically with the affiliation issue. The Service, however, is aware of certain transactions entered into to avoid the recognition of gain on appreciated property. These transactions involve the use of sections 731, 732 and 332 to realize appreciation through the receipt of cash (or other property with a fair market value basis) without recognition of the inherent gain. The Service intends to challenge these transactions under principles of existing law. In addition, the Service is considering the extent to which these transactions should be addressed through a subsequent regulation having retroactive effect.

The Service invites comments on the appropriate affiliation rule. For further information regarding this notice contact Tom Matragrano at (202) 622-7530 or Channing Brackey at (202) 622-3070 (not toll-free numbers).