[Federal Register: July 16, 2004 (Volume 69, Number 136)]
[Rules and Regulations]
[Page 42551-42559]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16jy04-2]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9137]
RIN 1545-BA81
Partnership Transactions Involving Long-Term Contracts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to
partnership transactions involving contracts accounted for under a
long-term contract method of accounting. The regulations are necessary
to resolve issues that were reserved in final regulations under section
460 that were published in the Federal Register on May 15, 2002,
addressing other mid-contract changes in taxpayer engaged in completing
such contracts. The effect of the regulations is to explain the tax
consequences of these partnership transactions.
DATES: Effective Date: These regulations are effective July 16, 2004.
Applicability Date: These regulations apply to transactions on or
after May 15, 2002.
FOR FURTHER INFORMATION CONTACT: Richard Probst at (202) 622-3060 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 460 of the Internal Revenue Code generally requires that
taxpayers determine taxable income from a long-term contract using the
percentage-of-completion method (PCM). Under regulations finalized in
2001 (TD 8929, 2001-1 C.B. 756), a taxpayer using the PCM generally
includes a portion of the total contract price in income for each
taxable year that the taxpayer incurs contract costs allocable to the
long-term contract. More specifically, to determine the income from a
long-term contract, the taxpayer first computes the completion factor
for the contract, which is the percentage of the estimated total
allocable contract costs that the taxpayer has incurred (based on the
all events test of section 461, including economic performance,
regardless of the taxpayer's method of accounting) through the end of
the taxable year. Second, the taxpayer computes the amount of
cumulative gross receipts from the contract by multiplying the
completion factor by the total contract price, which is the amount that
the taxpayer reasonably expects to receive under the contract. Third,
the taxpayer computes the amount of current-year gross receipts, which
is the difference between the cumulative gross receipts for the current
taxable year and the cumulative gross receipts for the immediately
preceding taxable year. This difference may be a loss (a negative
number) based on revisions to estimates of total allocable contract
costs or total contract price. Fourth, the taxpayer takes into account
both the current-year gross receipts and the amount of allocable
contract costs actually incurred during the taxable year. To the extent
any portion of the total contract price has not been included in
taxable income by the completion year, section 460(b)(1) and the
regulations require the taxpayer to include that portion in income for
the taxable year following the completion year.
A long-term contract or a portion of a long-term contract that is
exempt from the PCM may be accounted for under any permissible method,
including the completed contract method (CCM). Under the CCM, a
taxpayer does not take into account the gross contract price and
allocable contract costs until the contract is complete, even though
progress payments are received in years prior to completion.
A taxpayer generally must allocate costs to a contract subject to
section 460(a) in the same manner as direct and indirect costs are
capitalized to property produced by a taxpayer under section 263A. The
regulations provide exceptions, however, that reflect the differences
in the cost allocation rules of sections 263A and 460.
Section 460(h) directs the Secretary to prescribe regulations to
the extent necessary or appropriate to carry out the purpose of section
460, including regulations to prevent a taxpayer from avoiding section
460 by using related parties, pass-through entities, intermediaries,
options, and other similar arrangements.
On May 15, 2002, final regulations under section 460 were issued to
address a mid-contract change in taxpayer engaged in completing a
contract accounted for under a long-term contract method of accounting
(TD 8995; 2002-23 I.R.B. 1070). The regulations divide the rules
regarding a mid-contract change in taxpayer into two categories--
constructive completion transactions and step-in-the-shoes
transactions.
In a constructive completion transaction, the taxpayer that
originally accounted for the long-term contract (old taxpayer) must
recognize income from the contract as of the time of the transaction.
The contract price used to determine the amount of income recognized by
the taxpayer is the amount realized from the transaction, reduced by
any amounts paid by the old taxpayer to the taxpayer subsequently
accounting for the long-term contract (new taxpayer) that are allocable
to the contract. Similarly, the new taxpayer in a constructive
completion transaction is treated as though it entered into a new
contract as of the date of the transaction. The new taxpayer's contract
price is the amount that the new taxpayer reasonably expects to receive
under the contract, reduced by the price paid by the new taxpayer for
the contract, and increased by any amounts paid by the old taxpayer to
the new taxpayer that are allocable to the contract. In contrast, in a
step-in-the-shoes transaction, the
[[Page 42552]]
old taxpayer's obligation to account for the contract terminates on the
date of the transaction and is assumed by the new taxpayer. The new
taxpayer must assume the old taxpayer's methods of accounting for the
contract, with both the contract price and allocable contract costs
based on amounts taken into account by both parties.
The final section 460 regulations provide that a contribution to a
partnership in a transaction described in section 721(a), a transfer of
a partnership interest, and a distribution by a partnership to which
section 731 applies (other than a distribution of a contract accounted
for under a long-term contract method of accounting) are step-in-the-
shoes transactions. In a notice issued concurrently with the final
regulations, Notice 2002-37 (2002-23 I.R.B. 1095), the Treasury
Department and IRS announced their intention to publish regulations
setting forth the special rules that apply to these partnership
transactions and described many of these rules. The notice further
provided that these regulations would apply to contributions,
transfers, and distributions occurring on or after May 15, 2002. On
August 6, 2003, a notice of proposed rulemaking (REG-128203-02)
relating to partnership transactions involving contracts accounted for
under a long-term contract method of accounting was published in the
Federal Register (68 FR 46516). Comments were received from the public
in response to the notice of proposed rulemaking. No public hearing was
requested or held. After consideration of all comments, the proposed
regulations are adopted as amended by this Treasury decision.
Explanation and Summary of Contents
The regulations proposed on August 6, 2003 provide that the
constructive completion rules do not apply to a transfer by a
partnership (transferor partnership) of all of its assets and
liabilities to a second partnership (transferee partnership) in an
exchange described in section 721, followed by a distribution of the
interest in the transferee partnership in liquidation of the transferor
partnership, under Sec. 1.708-1(b)(4) (relating to terminations under
section 708(b)(1)(B)) or Sec. 1.708-1(c)(3)(i) (relating to certain
partnership mergers). One commentator suggested clarifying that the
constructive completion rules apply to other distributions of an
interest in a partnership (lower-tier partnership) holding one or more
contracts accounted for under a long-term contract method of accounting
by another partnership (upper-tier partnership). This comment has been
adopted.
One commentator suggested that the final regulations clarify the
application of the constructive completion rules if a partnership that
holds a contract accounted for under a long-term contract method of
accounting terminates under section 708(b)(1)(A) because the number of
its owners is reduced to one. In response to this comment, the final
regulations provide that the entire contract will be treated as being
distributed from the partnership for purposes of the constructive
completion rules, because the partnership ceases to exist for tax
purposes. In addition, the final regulations provide that the
partnership must apply the constructive completion rules immediately
prior to the transaction or transactions resulting in the termination
of the partnership.
Consistent with Sec. 1.706-1(c)(2)(ii), the proposed regulations
generally provide that upon the transfer or liquidation of an interest
in a partnership holding a contract accounted for under a long-term
contract method of accounting, the step-in-the-shoes rules apply to a
contract accounted for under a long-term contract method of accounting
only if the partnership's books are properly closed with respect to
that contract under section 706. The proposed regulations provide that
if the partnership's books are not closed with respect to the contract,
the partnership shall compute its income or loss from each contract
accounted for under a long-term contract method of accounting for the
period that includes the date of the transfer or liquidation as though
no change in taxpayer had occurred with respect to that contract, and
may pro rate income from the contract under a reasonable method
complying with section 706. The proposed regulations also provide
similar rules for distributions of property (other than a contract
accounted for under a long-term contract method of accounting) from a
partnership holding a long-term contract, and for contributions of
property (other than a contract accounted for under a long-term
contract method of accounting) to a partnership holding a contract
accounted for under a long-term contract method of accounting.
The proposed regulations requested comments regarding whether
similar rules should be provided with respect to transfers of stock in
an S corporation holding a contract accounted for under a long-term
contract method of accounting. Under section 1377(a)(1) and Sec.
1.1377-1(a), each shareholder's pro rata share of any S corporation
item for any taxable year is generally the sum of the amounts
determined with respect to the shareholder by assigning an equal
portion of the item to each day of the S corporation's taxable year,
and then dividing that portion pro rata among the shares outstanding on
that day. Under section 1377(a)(2) and Sec. 1.1377-1(b), an S
corporation may elect to close its books if a shareholder's entire
interest in an S corporation is terminated during the S corporation's
taxable year, and the corporation and all affected shareholders agree.
No comments were received.
The Treasury Department and IRS have concluded that similar rules
should be provided for transfers of S corporation stock and conversions
to and from S corporation status. Thus, the final regulations generally
provide that upon the transfer of stock in an S corporation holding a
contract accounted for under a long-term contract method of accounting,
or the conversion to or from S corporation status by a corporation
holding such a contract, the step-in-the-shoes rules apply to the
contract only if the S corporation's books are closed under section
1362(e)(3), section 1362(e)(6)(C), section 1362(e)(6)(D), section
1377(a)(2), or Sec. 1.1502-76. If the S corporation's books are not
closed, the S corporation computes its income or loss from the contract
for the period that includes the date of the transfer as though no
change in taxpayer had occurred with respect to the contract, and must
pro rate income from the contract in accordance with the rules
generally applicable to such transfers or conversions.
In Rev. Rul. 73-301 (1973-2 C.B. 215), the IRS ruled that the
progress payments described in the ruling did not constitute a
liability within the meaning of section 752. See also Rev. Rul. 81-241
(1981-2 C.B. 146) (citing and following Rev. Rul. 73-301). The proposed
regulations requested comments regarding whether there are
circumstances under which the receipt of progress payments under a
contract accounted for under a long-term contract method of accounting
could give rise to a liability under section 752, and, if so, how the
regulations would need to be revised to account for such liabilities.
No written comments were received. However, if a contract accounted for
under a long-term contract method of accounting is contributed to a
partnership, then, to the extent that progress payments give rise to a
liability, section 752(b) would require the transferring partner to
reduce its basis in its partnership by the
[[Page 42553]]
amount of that liability, either when the contract is contributed (to
the extent that the liability is allocated to other partners) or when
the liability is extinguished. Thus, because the proposed regulations
require the partner to reduce the partner's basis in its partnership
interest by the amount of progress payments received, the proposed
regulations could require two reductions in basis for the same
payments.
Ordinarily, progress payments do not give rise to liabilities
within the meaning of section 752 and the regulations thereunder.
However, to the extent that there is a case in which a progress payment
gives rise to such a liability, the Treasury Department and IRS agree
that taxpayers should not be required to reduce their basis twice for
the same progress payment, and believe that a similar rule should be
provided for transfers to corporations. Accordingly, upon a
contribution of a contract accounted for under a long-term contract
method of accounting to a partnership or corporation, the final
regulations provide that the required reduction in basis for progress
payments received does not apply to the extent that such progress
payments give rise to a liability (other than a liability described in
section 357(c)(3)).
Finally, one commentator suggested that the regulations clarify
that the fair market value of a contract contributed to a partnership
does not necessarily equal the full amount of expected remaining profit
on the contributed contract. The Treasury Department and IRS believe
that it is sufficiently clear under the proposed regulations that the
fair market value of the contributed contract is determined under
general tax principles. Thus, this comment has not been adopted.
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 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 its impact on small
businesses.
Drafting Information
The principal authors of these regulations are Matthew Lay and
Richard Probst of the Office of the Associate Chief Counsel
(Passthroughs and Special Industries). However, personnel from other
offices of the Treasury Department and IRS participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.460-0 is amended as follows:
0
1. Revising the entry for paragraph 1.460-4(k)(2)(iv).
0
2. Adding entries for Sec. 1.460-4(k)(2)(iv)(A) through (E).
0
3. Revising the entry for Sec. 1.460-4(k)(3)(iv).
0
4. Revising the entry for Sec. 1.460-4(k)(3)(iv)(A)(2) and adding
entries for Sec. 1.460-4(k)(3)(iv)(C) and (D).
0
5. Revising the entry for Sec. 1.460-4(k)(3)(v).
0
6. Adding entries for Sec. 1.460-4(k)(3)(v)(A) through (D).
0
7. Adding entries for Sec. 1.460-6(g)(3)(ii)(D)(1) and (2).
The revisions and additions read as follows:
Sec. 1.460-0 Outline of regulations under section 460.
* * * * *
Sec. 1.460-4 Methods of accounting for long-term contracts.
* * * * *
(k) * * *
(2) * * *
(iv) Special rules relating to distributions of certain contracts by
a partnership.
(A) In general.
(B) Old taxpayer.
(C) New taxpayer.
(D) Basis rules.
(E) Section 751.
(1) In general.
(2) Ordering rules.
(3) * * *
(iv) Special rules related to certain corporate and partnership
transactions.
(A) * * *
(2) Basis adjustment in excess of stock or partnership interest
basis.
* * * * *
(C) Definition of old taxpayer and new taxpayer for certain
partnership transactions.
(D) Exceptions to step-in-the-shoes rules for S corporations.
(v) Special rules relating to certain partnership transactions.
(A) Section 704(c).
(1) Contributions of contracts.
(2) Revaluations of partnership property.
(3) Allocation methods.
(B) Basis adjustments under sections 743(b) and 734(b).
(C) Cross reference.
(D) Exceptions to step-in-the-shoes rules.
* * * * *
Sec. 1.460-6 Look-back method.
* * * * *
(g) * * *
(3) * * *
(ii) * * *
(D) * * *
(1) In general.
(2) Special rules for certain pass-through entity transactions.
* * * * *
0
Par. 3. Section 1.460-4 is amended as follows:
0
1. Revising the sixth sentence in paragraph (k)(1).
0
2. Revising paragraph (k)(2)(iv).
0
3. Removing the first word ``The'' in paragraph (k)(3)(i), adding in
its place ``Except as otherwise provided in paragraph (k)(3)(v)(D) of
this section, the''.
0
4. Revising paragraph (k)(3)(i)(I).
0
5. Redesignating paragraphs (k)(3)(i)(J), (K) and (L) as paragraphs
(k)(3)(i)(K), (L) and (M), respectively.
0
6. Adding a new paragraph (k)(3)(i)(J).
0
7. Revising newly designated paragraph (k)(3)(i)(K).
0
8. Revising paragraph (k)(3)(iv).
0
9. Revising paragraph (k)(3)(v).
0
10. Adding paragraph (k)(5) Example 9 through Example 13.
0
11. Revising the first sentence in paragraph (k)(6).
The additions and revisions read as follows.
Sec. 1.460-4 Methods of accounting for long-term contracts.
* * * * *
(k) * * *
(1) * * * Special rules relating to the treatment of certain
partnership transactions are provided in paragraphs (k)(2)(iv) and
(k)(3)(v) of this section. * * *
(2) * * *
(iv) Special rules relating to distributions of certain contracts
by a partnership--(A) In general. The constructive completion rules of
paragraph (k)(2) of this section apply both to the distribution of a
contract accounted for under a long-term contract method of accounting
by a
[[Page 42554]]
partnership to a partner and to the distribution of an interest in a
partnership (lower-tier partnership) holding (either directly or
through other partnerships) one or more contracts accounted for under a
long-term contract method of accounting by another partnership (upper-
tier partnership). Notwithstanding the previous sentence, the
constructive completion rules of paragraph (k)(2) of this section do
not apply to a transfer by a partnership (transferor partnership) of
all of its assets and liabilities to a second partnership (transferee
partnership) in an exchange described in section 721, followed by a
distribution of the interest in the transferee partnership in
liquidation of the transferor partnership, under Sec. 1.708-1(b)(4)
(relating to terminations under section 708(b)(1)(B)) or Sec. 1.708-
1(c)(3)(i) (relating to certain partnership mergers). If a partnership
that holds a contract accounted for under a long-term contract method
of accounting terminates under section 708(b)(1)(A) because the number
of its owners is reduced to one, the entire contract will be treated as
being distributed from the partnership for purposes of the constructive
completion rules, and the partnership must apply paragraph (k)(2) of
this section immediately prior to the transaction or transactions
resulting in the termination of the partnership.
(B) Old taxpayer. The partnership that distributes the contract is
treated as the old taxpayer for purposes of paragraph (k)(2)(ii) of
this section. For purposes of determining the total contract price (or
gross contract price) under paragraph (k)(2)(ii) of this section, the
fair market value of the contract is treated as the amount realized
from the transaction. For purposes of determining each partner's
distributive share of partnership items, any income or loss resulting
from the constructive completion must be allocated among the partners
of the old taxpayer as though the partnership closed its books on the
date of the distribution.
(C) New taxpayer. The partner receiving the distributed contract is
treated as the new taxpayer for purposes of paragraph (k)(2)(iii) of
this section. For purposes of determining the total contract price (or
gross contract price) under paragraph (k)(2)(iii) of this section, the
new taxpayer's basis in the contract (including the uncompleted
property, if applicable) after the distribution (as determined under
section 732) is treated as consideration paid by the new taxpayer that
is allocable to the contract. Thus, the total contract price (or gross
contract price) of the new contract is reduced by the partner's basis
in the contract (including the uncompleted property, if applicable)
immediately after the distribution.
(D) Basis rules. For purposes of determining the new taxpayer's
basis in the contract (including the uncompleted property, if
applicable) under section 732, and the amount of any basis adjustment
under section 734(b), the partnership's basis in the contract
(including the uncompleted property, if applicable) immediately prior
to the distribution is equal to--
(1) The partnership's allocable contract costs (including
transaction costs);
(2) Increased (or decreased) by the amount of cumulative taxable
income (or loss) recognized by the partnership on the contract through
the date of the distribution (including amounts recognized as a result
of the constructive completion); and
(3) Decreased by the amounts that the partnership has received or
reasonably expects to receive under the contract.
(E) Section 751--(1) In general. Contracts accounted for under a
long-term contract method of accounting are unrealized receivables
within the meaning of section 751(c). For purposes of section 751, the
amount of ordinary income or loss attributable to a contract accounted
for under a long-term contract method of accounting is the amount of
income or loss that the partnership would take into account under the
constructive completion rules of paragraph (k)(2) of this section if
the contract were disposed of for its fair market value in a
constructive completion transaction, adjusted to account for any income
or loss from the contract that is allocated under section 706 to that
portion of the taxable year of the partnership ending on the date of
the distribution, sale, or exchange.
(2) Ordering rules. Because the distribution of a contract
accounted for under a long-term contract method of accounting is the
distribution of an unrealized receivable, section 751(b) may apply to
the distribution. A partnership that distributes a contract accounted
for under a long-term contract method of accounting must apply
paragraph (k)(2)(ii) of this section before applying the rules of
section 751(b) to the distribution.
(3) * * *
(i) * * *
(I) Contributions of contracts accounted for under a long-term
contract method of accounting to which section 721(a) applies;
(J) Contributions of property (other than contracts accounted for
under a long-term contract method of accounting) to a partnership that
holds a contract accounted for under a long-term contract method of
accounting;
(K) Transfers of partnership interests (other than transfers which
cause the partnership to terminate under section 708(b)(1)(A));
* * * * *
(iv) Special rules related to certain corporate and partnership
transactions--(A) Old taxpayer--basis adjustment--(1) In general.
Except as provided in paragraph (k)(3)(iv)(A)(2) of this section, in
the case of a transaction described in paragraph (k)(3)(i)(D), (E), or
(I) of this section, the old taxpayer must adjust its basis in the
stock or partnership interest of the new taxpayer by--
(i) Increasing such basis by the amount of gross receipts the old
taxpayer has recognized under the contract; and
(ii) Reducing such basis by the amount of gross receipts the old
taxpayer has received or reasonably expects to receive under the
contract (except to the extent such gross receipts give rise to a
liability other than a liability described in section 357(c)(3)).
(2) Basis adjustment in excess of stock or partnership interest
basis. If the old and new taxpayer do not join in the filing of a
consolidated Federal income tax return, the old taxpayer may not adjust
its basis in the stock or partnership interest of the new taxpayer
under paragraph (k)(3)(iv)(A)(1) of this section below zero and the old
taxpayer must recognize ordinary income to the extent the basis in the
stock or partnership interest of the new taxpayer otherwise would be
adjusted below zero. If the old and new taxpayer join in the filing of
a consolidated Federal income tax return, the old taxpayer must create
an (or increase an existing) excess loss account to the extent the
basis in the stock of the new taxpayer otherwise would be adjusted
below zero under paragraph (k)(3)(iv)(A)(1) of this section. See Sec.
1.1502-19 and 1.1502-32(a)(3)(ii).
(3) Subsequent dispositions of certain contracts. If the old
taxpayer disposes of a contract in a transaction described in paragraph
(k)(3)(i)(D), (E), or (I) of this section that the old taxpayer
acquired in a transaction described in paragraph (k)(3)(i)(D), (E), or
(I) of this section, the basis adjustment rule of this paragraph
(k)(3)(iv)(A) is applied by treating the old taxpayer as having
recognized the amount of gross receipts recognized by the previous old
taxpayer under the contract and any amount recognized by the previous
old taxpayer with respect to the contract in connection with the
transaction in which the old taxpayer
[[Page 42555]]
acquired the contract. In addition, the old taxpayer is treated as
having received or as reasonably expecting to receive under the
contract any amount the previous old taxpayer received or reasonably
expects to receive under the contract. Similar principles will apply in
the case of multiple successive transfers described in paragraph
(k)(3)(i)(D), (E), or (I) of this section involving the contract.
(B) New taxpayer--(1) Contract price adjustment. Generally,
payments between the old taxpayer and the new taxpayer with respect to
the contract in connection with the transaction do not affect the
contract price. Notwithstanding the preceding sentence and paragraph
(k)(3)(iii)(B) of this section, however, in the case of transactions
described in paragraph (k)(3)(i)(B), (D), (E), or (I) of this section,
the total contract price (or gross contract price) must be reduced to
the extent of any amount recognized by the old taxpayer with respect to
the contract in connection with the transaction (e.g., any amount
recognized under section 351(b) or section 357 that is attributable to
the contract and any income recognized by the old taxpayer pursuant to
the basis adjustment rule of paragraph (k)(3)(iv)(A) of this section).
(2) Basis in contract. The new taxpayer's basis in a contract
(including the uncompleted property, if applicable) acquired in a
transaction described in paragraphs (k)(3)(i)(A) through (E) or
paragraph (k)(3)(i)(I) of this section will be computed under section
362, section 334, or section 723, as applicable. Upon a new taxpayer's
completion (actual or constructive) of a CCM or a PCM contract acquired
in a transaction described in paragraphs (k)(3)(i)(A) through (E) or
paragraph (k)(3)(i)(I) of this section, the new taxpayer's basis in the
contract (including the uncompleted property, if applicable) is reduced
to zero. The new taxpayer is not entitled to a deduction or loss in
connection with any basis reduction pursuant to this paragraph
(k)(3)(iv)(B)(2).
(C) Definition of old taxpayer and new taxpayer for certain
partnership transactions. For purposes of paragraphs (k)(3)(ii), (iii)
and (iv) of this section, in the case of a transaction described in
paragraph (k)(3)(i)(I) of this section, the partner contributing the
contract to the partnership is treated as the old taxpayer, and the
partnership receiving the contract from the partner is treated as the
new taxpayer.
(D) Exceptions to step-in-the-shoes rules for S corporations. Upon
a transfer described in paragraph (k)(3)(i)(F) of this section or a
conversion described in paragraph (k)(3)(i)(G) of this section,
paragraphs (k)(3)(ii) and (iii) of this section apply to a contract
accounted for under a long-term contract method of accounting only if
the S corporation's books are closed under section 1362(e)(3), section
1362(e)(6)(C), section 1362(e)(6)(D), section 1377(a)(2), or Sec.
1.1502-76 on the date of the transfer or conversion. In these cases,
the corporation is treated as both the old taxpayer and the new
taxpayer for purposes of paragraphs (k)(3)(ii) and (iii) of this
section. In all other cases involving these transfers, the corporation
shall compute its income or loss from each contract accounted for under
a long-term contract method of accounting for the period that includes
the date of the transaction as though no change in taxpayer had
occurred with respect to the contract, and must allocate the income or
loss from the contract for that period in accordance with the rules
generally applicable to transfers of S corporation stock and
conversions to or from S corporation status. This paragraph
(k)(3)(iv)(D) is applicable for transactions on or after July 16, 2004.
In addition, this paragraph (k)(3)(iv)(D) may be relied upon for
transactions on or after May 15, 2002.
(v) Special rules relating to certain partnership transactions--(A)
Section 704(c)--(1) Contributions of contracts. The principles of
section 704(c)(1)(A), section 737, and the regulations thereunder apply
to income or loss with respect to a contract accounted for under a
long-term contract method of accounting that is contributed to a
partnership. The amount of built-in income or built-in loss
attributable to a contributed contract that is subject to section
704(c)(1)(A) is determined as follows. First, the contributing partner
must take into account any income or loss required under paragraph
(k)(3)(ii)(A) of this section for the period ending on the date of the
contribution. Second, the partnership must determine the amount of
income or loss that the contributing partner would take into account if
the contract were disposed of for its fair market value in a
constructive completion transaction. This calculation is treated as
occurring immediately after the partner has applied paragraph
(k)(3)(ii)(A) of this section, but before the contribution to the
partnership. Finally, this amount is reduced by the amount of income,
if any, that the contributing partner is required to recognize as a
result of the contribution.
(2) Revaluations of partnership property. The principles of section
704(c) and Sec. 1.704-3 apply to allocations of income or loss with
respect to a long-term contract that is revalued by a partnership under
Sec. 1.704-1(b)(2)(iv)(f). The amount of built-in income or built-in
loss attributable to such a contract is equal to the amount of income
or loss that would be taken into account if, at the time of the
revaluation, the contract were disposed of for its fair market value in
a constructive completion transaction.
(3) Allocation methods. In the case of a contract accounted for
under the CCM, any built-in income or loss under section 704(c) is
taken into account in the year the contract is completed. In the case
of a contract accounted for under a long-term contract method of
accounting other than the CCM, any built-in income or loss under
section 704(c) must be taken into account in a manner that reasonably
accounts for the section 704(c) income or loss over the remaining term
of the contract.
(B) Basis adjustments under sections 743(b) and 734(b). For
purposes of Sec. Sec. 1.743-1(d), 1.755-1(b), and 1.755-1(c), the
amount of ordinary income or loss attributable to a contract accounted
for under a long-term contract method of accounting is the amount of
income or loss that the partnership would take into account under the
constructive completion rules of paragraph (k)(2) of this section if,
at the time of the sale of a partnership interest or the distribution
to a partner, the partnership disposed of the contract for its fair
market value in a constructive completion transaction. If all or part
of the transferee's basis adjustment under section 743(b) or the
partnership's basis adjustment under section 734(b) is allocated to a
contract accounted for under a long-term contract method of accounting,
the basis adjustment shall reduce or increase, as the case may be, the
affected party's income or loss from the contract. In the case of a
contract accounted for under the CCM, the basis adjustment is taken
into account in the year in which the contract is completed. In the
case of a contract accounted for under a long-term contract method of
accounting other than the CCM, the portion of that basis adjustment
that is recovered in each taxable year of the partnership must be
determined by the partnership in a manner that reasonably accounts for
the adjustment over the remaining term of the contract.
(C) Cross reference. See paragraph (k)(2)(iv)(E) of this section
for rules relating to the application of section 751 to the transfer of
an interest in a partnership holding a contract accounted for under a
long-term contract method of accounting.
(D) Exceptions to step-in-the-shoes rules. Upon a contribution
described in
[[Page 42556]]
paragraph (k)(3)(i)(J) of this section, a transfer described in
paragraph (k)(3)(i)(K) of this section, or a distribution described in
paragraph (k)(3)(i)(L) of this section, paragraphs (k)(3)(ii) and (iii)
of this section apply to a contract accounted for under a long-term
contract method of accounting only if the partnership's books are
properly closed with respect to that contract under section 706. In
these cases, the partnership is treated as both the old taxpayer and
the new taxpayer for purposes of paragraphs (k)(3)(ii) and (iii) of
this section. In all other cases involving these transactions, the
partnership shall compute its income or loss from each contract
accounted for under a long-term contract method of accounting for the
period that includes the date of the transaction as though no change in
taxpayer had occurred with respect to the contract, and must allocate
the income or loss from the contract for that period under a reasonable
method complying with section 706.
* * * * *
(5) * * *
Example 9. Constructive completion--PCM--distribution of
contract by partnership --(i) Facts. In Year 1, W, X, Y, and Z each
contribute $100,000 to form equal partnership PRS. In Year 1, PRS
enters into a contract. The total contract price is $1,000,000 and
the estimated total allocable contract costs are $800,000. In Year
1, PRS incurs costs of $600,000 and receives $650,000 in progress
payments under the contract. Under the contract, PRS performed all
of the services required in order to be entitled to receive the
progress payments, and there was no obligation to return the
payments or perform any additional services in order to retain the
payments. PRS properly accounts for the contract under the PCM. In
Year 2, PRS distributes the contract to X in liquidation of X's
interest. PRS incurs no costs and receives no progress payments in
Year 2 prior to the distribution. At the time of the distribution,
PRS's only asset other than the long-term contract and the partially
constructed property is $450,000 cash ($400,000 initially
contributed and $50,000 in excess progress payments). The fair
market value of the contract is $150,000. Pursuant to the
distribution, X assumes PRS's contract obligations and rights. In
Year 2, X incurs additional allocable contract costs of $50,000. X
correctly estimates at the end of Year 2 that X will have to incur
an additional $75,000 of allocable contract costs in Year 3 to
complete the contract (rather than $150,000 as originally estimated
by PRS). Assume that X properly accounts for the contract under the
PCM, that PRS has no income or loss other than income or loss from
the contract, and that PRS has an election under section 754 in
effect in Year 2.
(ii) Tax consequences to PRS. For Year 1, PRS reports receipts
of $750,000 (the completion factor multiplied by total contract
price ($600,000/$800,000 x $1,000,000)) and costs of $600,000, for a
profit of $150,000, which is allocated equally among W, X, Y, and Z
($37,500 each). Immediately prior to the distribution of the
contract to X in Year 2, the contract is deemed completed. Under
paragraph (k)(2)(iv)(B) of this section, the fair market value of
the contract ($150,000) is treated as the amount realized from the
transaction. For purposes of applying the PCM in Year 2, the total
contract price is $800,000 (the sum of the amounts received under
the contract and the amount treated as realized from the transaction
($650,000 + $150,000)) and the total allocable contract costs are
$600,000. Thus, in Year 2 PRS reports receipts of $50,000 (total
contract price minus receipts already reported ($800,000 -
$750,000)), and costs incurred in Year 2 of $0, for a profit of
$50,000. Under paragraph (k)(2)(iv)(B) of this section, this profit
must be allocated among W, X, Y, and Z as though the partnership
closed its books on the date of the distribution. Accordingly, each
partner's distributive share of this income is $12,500.
(iii) Tax consequences to X. X's basis in its interest in PRS
immediately prior to the distribution is $150,000 (X's $100,000
initial contribution, increased by $37,500, X's distributive share
of Year 1 income, and $12,500, X's distributive share of Year 2
income). Under paragraph (k)(2)(iv)(D) of this section, PRS's basis
in the contract (including the uncompleted property, if applicable)
immediately prior to the distribution is equal to $150,000 (the
partnership's allocable contract costs, $600,000, increased by the
amount of income recognized by PRS on the contract through the date
of the distribution (including amounts recognized as a result of the
constructive completion), $200,000, decreased by the amounts that
the partnership has received or reasonably expects to receive under
the contract, $650,000). Under section 732, X's basis in the
contract (including the uncompleted property) after the distribution
is $150,000. Under paragraph (k)(2)(iv)(C) of this section, X's
basis in the contract (including the uncompleted property) is
treated as consideration paid by X that is allocable to the
contract. X's total contract price is $200,000 (the amount remaining
to be paid under the terms of the contract less the consideration
allocable to the contract ($350,000-$150,000)). For Year 2, X
reports receipts of $80,000 (the completion factor multiplied by the
total contract price [($50,000/$125,000) x $200,000]) and costs of
$50,000 (the costs incurred after the distribution of the contract),
for a profit of $30,000. For Year 3, X reports receipts of $120,000
(the total contract price minus receipts already reported ($200,000
- $80,000)) and costs of $75,000, for a profit of $45,000.
(iv) Section 734(b). Because X's basis in the contract
(including the uncompleted property) immediately after the
distribution, $150,000, is equal to PRS's basis in the contract
(including the uncompleted property) immediately prior to the
distribution, there is no basis adjustment under section 734(b).
Example 10. Constructive completion--CCM--distribution of
contract by partnership --(i) Facts. The facts are the same as in
Example 9, except that PRS and X properly account for the contract
under the CCM.
(ii) Tax consequences to PRS. PRS reports no income or costs
from the contract in Year 1. Immediately prior to the distribution
of the contract to X in Year 2, the contract is deemed completed.
Under paragraph (k)(2)(iv)(B) of this section, the fair market value
of the contract ($150,000) is treated as the amount realized from
the transaction. For purposes of applying the CCM in Year 2, the
gross contract price is $800,000 (the sum of the amounts received
under the contract and the amount treated as realized from the
transaction ($650,000 + $150,000)) and the total allocable contract
costs are $600,000. Thus, in Year 2 PRS reports profits of $200,000
($800,000 - $600,000). This profit must be allocated among W, X, Y,
and Z as though the partnership closed its books on the date of the
distribution. Accordingly, each partner's distributive share of this
income is $50,000.
(iii) Tax consequences to X. X's basis in its interest in PRS
immediately prior to the distribution is $150,000 ($100,000 initial
contribution, increased by $50,000, X's distributive share of Year 2
income). Under paragraph (k)(2)(iv)(D) of this section, PRS's basis
in the contract (including the uncompleted property, if applicable)
immediately prior to the distribution is equal to $150,000 (the
partnership's allocable contract costs, $600,000, increased by the
amount of cumulative taxable income recognized by PRS on the
contract through the date of the distribution (including amounts
recognized as a result of the constructive completion), $200,000,
decreased by the amounts that the partnership has received or
reasonably expects to receive under the contract, $650,000). Under
section 732, X's basis in the contract (including the uncompleted
property) after the distribution is $150,000. Under paragraph
(k)(2)(iv)(C) of this section, X's basis in the contract is treated
as consideration paid by X that is allocable to the contract. Under
the CCM, X reports no gross receipts or costs in Year 2. For Year 3,
the completion year, X reports its gross contract price of $200,000
(the amount remaining to be paid under the terms of the contract
less the consideration allocable to the contract ($350,000 -
$150,000)) and its total allocable contract costs of $125,000 (the
allocable contract costs that X incurred to complete the contract
($50,000 + $75,000)), for a profit of $75,000.
(iv) Section 734(b). The results under section 734(b) are the
same as in Example 9.
Example 11. Step-in-the-shoes--PCM--contribution of contract to
partnership --(i) Facts. In Year 1, X enters into a contract that X
properly accounts for under the PCM. The total contract price is
$1,000,000 and the estimated total allocable contract costs are
$800,000. In Year 1, X incurs costs of $600,000 and receives
$650,000 in progress payments under the contract. Under the
contract, X performed all of the services required in order to be
entitled to receive the progress payments, and there was no
obligation to return the payments or perform any additional services
in order to retain the
[[Page 42557]]
payments. In Year 2, X contributes the contract (including the
uncompleted property) with a basis of $0 and $125,000 of cash to
partnership PRS in exchange for a one-fourth partnership interest. X
incurs costs of $10,000, and receives no progress payments in Year 2
prior to the contribution of the contract. X and the other three
partners of PRS share equally in its capital, profits, and losses.
The parties determine that, at the time of the contribution, the
fair market value of the contract is $160,000. Following the
contribution in Year 2, PRS incurs additional allocable contract
costs of $40,000. PRS correctly estimates at the end of Year 2 that
it will have to incur an additional $75,000 of allocable contract
costs in Year 3 to complete the contract (rather than $150,000 as
originally estimated by PRS).
(ii) Tax consequences to X. For Year 1, X reports receipts of
$750,000 (the completion factor multiplied by the total contract
price ($600,000/$800,000 x $1,000,000)) and costs of $600,000, for a
profit of $150,000. Because the mid-contract change in taxpayer
results from a transaction described in paragraph (k)(3)(i)(I) of
this section, X is not treated as completing the contract in Year 2.
Under paragraph (k)(3)(ii)(A) of this section, for Year 2, X reports
receipts of $12,500 (the completion factor multiplied by the total
contract price ($610,000/$800,000 x $1,000,000, or $762,500),
decreased by receipts already reported, $750,000) and costs of
$10,000, for a profit of $2,500. Under section 722, X's initial
basis in its interest in PRS is $125,000. Pursuant to paragraph
(k)(3)(iv)(A)(1) of this section, X must increase its basis in its
interest in PRS by the amount of gross receipts X recognized under
the contract, $762,500, and reduce its basis by the amount of gross
receipts X received under the contract, the $650,000 in progress
payments. Accordingly, X's basis in its interest in PRS is $237,500.
(iii) Tax consequences to PRS. Because the mid-contract change
in taxpayer results from a step-in-the-shoes transaction, PRS must
account for the contract using the same methods of accounting used
by X prior to the transaction. The total contract price is the sum
of any amounts that X and PRS have received or reasonably expect to
receive under the contract, and total allocable contract costs are
the allocable contract costs of X and PRS. For Year 2, PRS reports
receipts of $134,052 (the completion factor multiplied by the total
contract price [($650,000/$725,000) - $1,000,000], $896,552,
decreased by receipts reported by X, $762,500) and costs of $40,000,
for a profit of $94,052. For Year 3, PRS reports receipts of
$103,448 (the total contract price minus prior year receipts
($1,000,000 x $896,552)) and costs of $75,000, for a profit of
$28,448.
(iv) Section 704(c). The principles of section 704(c) and Sec.
1.704-3 apply to allocations of income or loss with respect to the
contract contributed by X. In this case, the amount of built-in
income that is subject to section 704(c) is the amount of income or
loss that the contributing partner would take into account if the
contract were disposed of for its fair market value in a
constructive completion transaction. This calculation is treated as
occurring immediately after the partner has applied paragraph
(k)(3)(ii)(A) of this section, but before the contribution to the
partnership. In a constructive completion transaction, the total
contract price would be $810,000 (the sum of the amounts received
under the contract and the amount realized in the deemed sale
($650,000 + $160,000)). X would report receipts of $47,500 (total
contract price minus receipts already reported ($810,000 -
$762,500)) and costs of $0, for a profit of $47,500. Thus, the
amount of built-in income that is subject to section 704(c) is
$47,500. The partnership must apply section 704(c) to this income in
a manner that reasonably accounts for the income over the remaining
term of the contract. For example, in Year 2, PRS could allocate
$26,810 to X under section 704(c) (the amount of built-in income,
$47,500, multiplied by a fraction, the numerator of which is the
completion factor for the year, $650,000/725,000, less the
completion factor for the prior year, $610,000/$800,000, and the
denominator of which is 100 percent reduced by the completion factor
for the taxable year preceding the event creating the section 704(c)
income or loss, $610,000/$800,000). The remaining $67,242 would be
allocated equally among all of the partners. In Year 3, the
completion year, PRS could allocate $20,690 to X under section
704(c) ($47,500 x [($725,000/$725,000 -$650,000/$725,000) / (100
percent - $610,000/$800,000)]). The remaining $7,758 would be
allocated equally among all the partners.
Example 12. Step-in-the-shoes--CCM--contribution of contract to
partnership --(i) Facts. The facts are the same as in Example 11,
except that X and PRS properly account for the contract under the
CCM, and X has a basis of $610,000 in the contract (including the
uncompleted property).
(ii) Tax consequences to X. X reports no income or costs from
the contract in Years 1 or 2. X is not treated as completing the
contract in Year 2. Under section 722, X's initial basis in its
interest in PRS is $735,000 (the sum of $125,000 cash and X's basis
of $610,000 in the contract (including the uncompleted property)).
Pursuant to paragraph (k)(3)(iv)(A)(1)(ii) of this section, X must
reduce its basis in its interest in PRS by the amount of gross
receipts X received under the contract, or $650,000. Accordingly,
X's basis in its interest in PRS is $85,000.
(iii) Tax consequences to PRS. PRS must account for the contract
using the same methods of accounting used by X prior to the
transaction. Under the CCM, PRS reports no gross receipts or costs
in Year 2. For Year 3, the completion year, PRS reports its gross
contract price of $1,000,000 (the sum of any amounts that X and PRS
have received or reasonably expect to receive under the contract),
and total allocable contract costs of $725,000 (the allocable
contract costs of X and PRS), for a profit of $275,000.
(iv) Section 704(c). In this case, the amount of built-in income
that is subject to section 704(c) is the amount of income or loss
that the contributing partner would take into account if the
contract were disposed of for its fair market value in a
constructive completion transaction. This calculation is treated as
occurring immediately after the partner has applied paragraph
(k)(3)(ii)(A) of this section, but before the contribution to the
partnership. In a constructive completion transaction, X would
report its gross contract price of $810,000 (the sum of the amounts
received under the contract and the amount realized in the deemed
sale ($650,000 + $160,000)) and its total allocable contract costs
of $610,000, for a profit of $200,000. Thus, the amount of built-in
income that is subject to section 704(c) is $200,000. Out of PRS's
income of $275,000, in Year 3, $200,000 must be allocated to X under
section 704(c), and the remaining $75,000 is allocated equally among
all of the partners.
Example 13. Step-in-the-shoes--PCM--transfer of a partnership
interest --(i) Facts. In Year 1, W, X, Y, and Z each contribute
$100,000 to form equal partnership PRS. In Year 1, PRS enters into a
contract. The total contract price is $1,000,000 and the estimated
total allocable contract costs are $800,000. In Year 1, PRS incurs
costs of $600,000 and receives $650,000 in progress payments under
the contract. Under the contract, PRS performed all of the services
required in order to be entitled to receive the progress payments,
and there was no obligation to return the payment or perform any
additional services in order to retain the payments. PRS properly
accounts for the contract under the PCM. In Year 2, W transfers W's
interest in PRS to T for $150,000. Assume that $10,000 of PRS's Year
2 costs are incurred prior to the transfer, $40,000 are incurred
after the transfer; and that PRS receives no progress payments in
Year 2. Also assume that the fair market value of the contract on
the date of the transfer is $160,000, that PRS closes its books with
respect to the contract under section 706 on the date of the
transfer, and that PRS correctly estimates at the end of Year 2 that
it will have to incur an additional $75,000 of allocable contract
costs in Year 3 to complete the contract (rather than $150,000 as
originally estimated by PRS).
(ii) Income reporting for period ending on date of transfer. For
Year 1, PRS reports receipts of $750,000 (the completion factor
multiplied by total contract price ($600,000/$800,000 x $1,000,000))
and costs of $600,000, for a profit of $150,000. This profit is
allocated equally among W, X, Y, and Z ($37,500 each). Under
paragraph (k)(3)(ii)(A) of this section, for the part of Year 2
ending on the date of the transfer of W's interest, PRS reports
receipts of $12,500 (the completion factor multiplied by the total
contract price ($610,000/$800,000 x $1,000,000) minus receipts
already reported ($750,000)) and costs of $10,000 for a profit of
$2,500. This profit is allocated equally among W, X, Y, and Z ($625
each).
(iii) Income reporting for period after transfer. PRS must
continue to use the PCM. For the part of Year 2 beginning on the day
after the transfer, PRS reports receipts of $134,052 (the completion
factor multiplied by the total contract price decreased by receipts
reported by PRS for the period ending on the date of the transfer
[($650,000/$725,000 x $1,000,000)--$762,500]) and costs of $40,000,
for a profit of $94,052. This profit is shared equally among T, X,
Y, and Z ($23,513 each). For Year 3, PRS reports receipts of
$103,448 (the total contract price
[[Page 42558]]
minus prior year receipts ($1,000,000 - $896,552)) and costs of
$75,000, for a profit of $28,448. The profit for Year 3 is shared
equally among T, X, Y, and Z ($7,112 each).
(iv) Tax Consequences to W. W's amount realized is $150,000. W's
adjusted basis in its interest in PRS is $138,125 ($100,000
originally contributed, plus $37,500, W's distributive share of
PRS's Year 1 income, and $625, W's distributive share of PRS's Year
2 income prior to the transfer). Accordingly, W's income from the
sale of W's interest in PRS is $11,875. Under paragraph
(k)(2)(iv)(E) of this section, for purposes of section 751(a), the
amount of ordinary income attributable to the contract is determined
as follows. First, the partnership must determine the amount of
income or loss from the contract that is allocated under section 706
to the period ending on the date of the sale ($625). Second, the
partnership must determine the amount of income or loss that the
partnership would take into account under the constructive
completion rules of paragraph (k)(2) of this section if the contract
were disposed of for its fair market value in a constructive
completion transaction. Because PRS closed its books under section
706 with respect to the contract on the date of the sale, this
calculation is treated as occurring immediately after the
partnership has applied paragraph (k)(3)(ii)(A) of this section on
the date of the sale. In a constructive completion transaction, the
total contract price would be $810,000 (the sum of the amounts
received under the contract and the amount realized in the deemed
sale ($650,000 + $160,000)). PRS would report receipts of $47,500
(total contract price minus receipts already reported ($810,000 -
$762,500)) and costs of $0, for a profit of $47,500. Thus, the
amount of ordinary income attributable to the contract is $47,500,
and W's share of that income is $11,875. Thus, under Sec. 1.751-
1(a), all of W's $11,875 of income from the sale of W's interest in
PRS is ordinary income.
(v) Tax Consequences to T. T's adjusted basis for its interest
in PRS is $150,000. Under Sec. 1.743-1(d)(2), the amount of income
that would be allocated to T if the contract were disposed of for
its fair market value (adjusted to account for income from the
contract for the portion of PRS's taxable year that ends on the date
of the transfer) is $11,875. Under Sec. 1.743-1(b), the amount of
T's basis adjustment under section 743(b) is $11,875. Under
paragraph (k)(3)(v)(B) of this section, the portion of T's basis
adjustment that is recovered in Year 2 and Year 3 must be determined
by PRS in a manner that reasonably accounts for the adjustment over
the remaining term of the contract. For example, PRS could recover
$6,703 of the adjustment in Year 2 (the amount of the basis
adjustment, $11,875, multiplied by a fraction, the numerator of
which is the excess of the completion factor for the year, $650,000/
$725,000, less the completion factor for the prior year, $610,000/
$800,000, and the denominator of which is 100 percent reduced by the
completion factor for the taxable year preceding the transfer,
$610,000/$800,000). T's distributive share of income in Year 2 from
the contract would be adjusted from $23,513 to $16,810 as a result
of the basis adjustment. In Year 3, the completion year, PRS could
recover $5,172 of the adjustment ($11,875 x [($725,000/$725,000 -
$650,000/$725,000) / (100 percent - $610,000/$800,000)]). T's
distributive share of income in Year 3, the completion year, from
the contract would be adjusted from $7,112 to $1,940 as a result of
the basis adjustment.
* * * * *
(6) Effective date. Except as provided in paragraph (k)(3)(iv)(D)
of this section, this paragraph (k) is applicable for transactions on
or after May 15, 2002. * * *
0
Par. 4. Section 1.460-6 is amended by revising paragraphs (g)(3)(ii)(D)
and (g)(4) to read as follows:
Sec. 1.460-6 Look-back method.
* * * * *
(g) * * *
(3) * * *
(ii) * * *
(D) Information old taxpayer must provide--(1) In general. Except
as provided in paragraph (g)(3)(ii)(D)(2) of this section, in order to
help the new taxpayer to apply the look-back method with respect to
pre-transaction taxable years, any old taxpayer that accounted for
income from a long-term contract under the PCM or PCCM for either
regular or alternative minimum tax purposes is required to provide the
information described in this paragraph to the new taxpayer by the due
date (not including extensions) of the old taxpayer's income tax return
for the first taxable year ending on or after a step-in-the-shoes
transaction described in Sec. 1.460-4(k)(3)(i). The required
information is as follows--
(i) The portion of the contract reported by the old taxpayer under
PCM for regular and alternative minimum tax purposes (i.e., whether the
old taxpayer used PCM, the 40/60 PCCM method, or the 70/30 PCCM
method);
(ii) Any submethods used in the application of PCM (e.g., the
simplified cost-to-cost method or the 10-percent method);
(iii) The amount of total contract price reported by year;
(iv) The numerator and the denominator of the completion factor by
year;
(v) The due date (not including extensions) of the old taxpayer's
income tax returns for each taxable year in which income was required
to be reported;
(vi) Whether the old taxpayer was a corporate or a noncorporate
taxpayer by year; and
(vii) Any other information required by the Commissioner by
administrative pronouncement.
(2) Special rules for certain pass-through entity transactions. For
purposes of paragraph (g)(3)(ii)(D)(1) of this section, in the case of
a transaction described in Sec. 1.460-4(k)(3)(i)(I), the contributing
partner is treated as the old taxpayer, and the partnership is treated
as the new taxpayer. In the case of transactions described in Sec.
1.460-4(k)(3)(i)(F), (G), (J), (K), or (L), the old taxpayer is not
required to provide the information described in paragraph
(g)(3)(ii)(D)(1) of this section, because information necessary for the
new taxpayer to apply the look-back method is provided by the pass-
through entity. This paragraph (g)(3)(ii)(D) is applicable for
transactions on or after August 6, 2003.
* * * * *
(4) Effective date. Except as provided in paragraph (g)(3)(ii)(D)
of this section, this paragraph (g) is applicable for transactions on
or after May 15, 2002.
* * * * *
0
Par. 5. In Sec. 1.704-3, a sentence is added at the end of paragraph
(a)(3)(ii) to read as follows:
Sec. 1.704-3 Contributed property.
(a) * * *
(3) * * *
(ii) * * * See Sec. 1.460-4(k)(3)(v)(A) for a rule relating to the
amount of built-in income or built-in loss attributable to a contract
accounted for under a long-term contract method of accounting.
* * * * *
0
Par. 6. Section 1.722-1 is amended by adding a sentence between the
sixth and seventh sentences to read as follows:
Sec. 1.722-1 Basis of contributing partner's interest.
* * * See Sec. 1.460-4(k)(3)(iv)(A) for rules relating to basis
adjustments required where a contract accounted for under a long-term
contract method of accounting is transferred in a contribution to which
section 721(a) applies.
* * * * *
0
Par. 7. A sentence is added at the end of Sec. 1.723-1 to read as
follows:
Sec. 1.723-1 Basis of property contributed to partnership.
* * * See Sec. 1.460-4(k)(3)(iv)(B)(2) for rules relating to
adjustments to the basis of contracts accounted for using a long-term
contract method of accounting that are acquired in certain
contributions to which section 721(a) applies.
0
Par. 8. In Sec. 1.732-1, a sentence is added at the end of paragraph
(c)(1)(i) to read as follows:
Sec. 1.732-1 Basis of distributed property other than money.
* * * * *
[[Page 42559]]
(c) * * *
(1) * * *
(i) * * * See Sec. 1.460-4(k)(2)(iv)(D) for a rule determining the
partnership's basis in a long-term contract accounted for under a long-
term contract method of accounting.
* * * * *
0
Par. 9. In Sec. 1.734-1, the undesignated paragraph immediately
following paragraph (b)(1)(ii) is revised to read as follows:
Sec. 1.734-1 Optional adjustment to basis of undistributed
partnership property.
* * * * *
(b) * * *
(1) * * *
(ii) * * *
See Sec. 1.460-4(k)(2)(iv)(D) for a rule determining the
partnership's basis in a long-term contract accounted for under a long-
term contract method of accounting. The provisions of this paragraph
(b)(1) are illustrated by the following examples:
* * * * *
0
Par. 10. Section 1.743-1 is amended as follows:
0
1. A sentence is added at the end of paragraph (d)(2).
0
2. A sentence is added at the end of paragraph (j)(2).
The additions read as follows:
Sec. 1.743-1 Optional adjustment to basis of partnership property.
* * * * *
(d) * * *
(2) * * * See Sec. 1.460-4(k)(3)(v)(B) for a rule relating to the
computation of income or loss that would be allocated to the transferee
from a contract accounted for under a long-term contract method of
accounting as a result of the hypothetical transaction.
* * * * *
(j) * * *
(2) * * * See Sec. 1.460-4(k)(3)(v)(B) for rules relating to the
effect of a basis adjustment under section 743(b) that is allocated to
a contract accounted for under a long-term contract method of
accounting in determining the transferee's distributive share of income
or loss from the contract.
* * * * *
0
Par. 11. In Sec. 1.751-1, a sentence is added at the end of paragraph
(a)(2) to read as follows:
Sec. 1.751-1 Unrealized receivables and inventory items.
(a) * * *
(2) * * * See Sec. 1.460-4(k)(2)(iv)(E) for rules relating to the
amount of ordinary income or loss attributable to a contract accounted
for under a long-term contract method of accounting.
* * * * *
0
Par. 12. Section 1.755-1 is amended as follows.
0
1. Adding a sentence at the end of paragraph (b)(1)(ii).
0
2. Paragraph (c)(5) is redesignated as paragraph (c)(6).
0
3. New paragraph (c)(5) is added.
The additions read as follows:
Sec. 1.755-1 Rules for allocation of basis.
* * * * *
(b) * * *
(1) * * *
(ii) * * * See Sec. 1.460-4(k)(3)(v)(B) for a rule relating to the
computation of income or loss that would be allocated to the transferee
from a contract accounted for under a long-term contract method of
accounting as a result of the hypothetical transaction.
* * * * *
(c) * * *
(5) Cross reference. See Sec. 1.460-4(k)(3)(v)(B) for a rule
relating to the computation of unrealized appreciation or depreciation
in a contract accounted for under a long-term contract method of
accounting.
* * * * *
0
Par. 13. Section 1.1362-3 is amended by adding a sentence at the end of
paragraph (a) to read as follows:
Sec. 1.1362-3 Treatment of S termination year.
(a) * * * See Sec. 1.460-4(k)(3)(iv)(D) for rules relating to the
computation of the S corporation's income or loss from a contract
accounted for under a long-term contract method of accounting in the S
termination year.
* * * * *
0
Par. 14. Section 1.1377-1 is amended by adding a sentence is at the end
of paragraph (a)(1) to read as follows:
Sec. 1.1377-1 Pro rata share.
(a) * * *
(1) * * * See Sec. 1.460-4(k)(3)(iv)(D) for rules relating to the
computation of the shareholders' pro rata share of S corporation's
income or loss from a contract accounted for under a long-term contract
method of accounting.
* * * * *
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: July 1, 2004.
Gregory Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-15833 Filed 7-15-04; 8:45 am]
BILLING CODE 4830-01-P