Free Response to Motion [Dispositive] - District Court of Federal Claims - federal

Case 1:05-cv-00231-EJD

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(JOIN COMI\U'll.Kll; PRI

TAX LEGISLATION ENACTED IN THE tOOTH CONGRESS
PRPARD BY TH STAF
OF TH

GENERA EXLAATION OF

JOIN COMMTlEE ON TAXTION

APRI 19, 2001

;; GOVERNMENT
Appendix A8
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I EXHIBIT

U.S. GOVENT PRIG OFFCE
7l..52
WASHIGTON : 2001

JCS-2-1

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the agency's curent policy with respect to publihig as part of an

offcial series corrections to data found to be in error for reasons of computational error. The Congress believed such a review should be made both with respect to the error anounced on September

28, 2000, and as a matter for the futu for those rare circumtances where such a simar computational error might once agai arse.
Effective Date The provision is effective on the date of enactment (December 21,
2000).

Revenue Effect
The provision is estiated to reduce Federal fiscal year budget receipts and to increase outlays. The provision is estiated to re-

duce Federal fisca year budget receipts by $9 mion in 2001 and $20 miQn in 2002. The proviion is estiated to increase Federal fiscal year outlays by 1970 millon in 2001, 1570 mion in 2002,
510 mion in 2009, 550 milion in in 2010. 1560milion in 2003, and $500 mion 2004, 550 milion in 2005, I. Prevent Duplication or Acceleration of Loss Though Assec. 358 of the Code) 174

540 miion in 2006, 520 millon in 2007, 520 mion in 2008,

suption of Certin Liabilties (sec. 309 of H. 6662 and
Present and prior Law
Generaly, no gain or loss is recognzed when one or more per-

sons tranfer propert to a corporation in exchange for stock and imediately afer the exchange such person or persons control the corporation. However, a tranferor recognzes gain to the extent it

receives money or other properly ("boot") as par of the exchange
(sec. 351).

The assumption of liabilties by the controlled corporation gen-

eraly is not treated as boot received by the transferor,175 except that the transferor recognzes gai to the extnt that the liabilties

assumed exceed the total of the adjusted basis of the propert
tranferred to the controlled corporation pursuant to the exchange

(sec. 357(c)).

The assuption of liabilties by the controlled corporation gen-

eraly reduces the tranferor's basis in the stock of the controlled

corporation that asumed the liabilties. The transferor's basis in the stock of the controlled corporation is the same as the basis of the propert contrbuted to the controlled corporation, increased by the amount of any gai (or dividend) recogned by the transferor
174Se H.R 5542, the "Taxayer Relier Act of 2000," inoorpotte by reference in H.R. 2614 (f. Rep. 106-1004. Oct. 26. 2000), as passed by the House of ReprentativeS. which contaed an identioa proviion. On Apri 4, 2000. Senators Roth and Moynan introduced a hil (8.2354)
that is the sae as the proviion in H.R. 5542. On Octber 19, 1999, a subtatially simil

proviion was released for markup by Senator Roth, the Chai of Lhe Senate Commtte on
Relief Eirnsion Act of 1999" (S. Rep. 106-201, Oct. 26, 1999). .

Fince. That proviion was reportd by the Sete Fice Commtt in 8. 1792, the "Tax
17õThe assumption of liabilties is trete as boot if it ca be shown that "the pricipal pur-

pose" of the assumption is ta avoidace on the exchane, or is a non-bna fide busines purose (see. 357(b)).

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on the exchange, and reduced by the amount of any money or propert received, and by the amount of any loss recognized by the

tranferor (sec. 358). For this purose, the assumption of a liabilty
is treated as money received by the transferor. An exception to the general treatment of assumptions of liabilities applies to assumptions of liabilities that would give rise to a deduction, provided the incurence of such liabilties did not result

in the creation or increase of basis of any propert. The assumption

of such liabilties is not treated as money received by the transferor
in determining whether the transferor has gai on the exchange.
Similarly, the transferor's basis in the stock of the controlled cor-

poration is not reduced by the assumption of such liabilties. The
groundwater remediation would be covered by this exception.176
Reasons for Change 177

Internal Revenue Servce has rued that the assumption by an ac-

crual basis corporation of certain contingent liabilties for soil and

The Congress was concerned about a tye of transacton in which

taxpayers seek to accelerate, and potentialY duplicate, deductions
involving cert liabilties. As an exaple, assume a transferor
corporation tranfers assets with a fai market value basis in exchange for preferred stock of the tranferee corporation, plus the transferee's assumption of a contigent liabilty that is deductible in the future. The transferor claims a basis in the stock received

equal to the basis of the assets. However, the value of the stock is

reduced by the amount of the liabilty, creatIg a potential loss. The transferor may then attmpt to accelerate the deduction that

would be attributable to the liabilty by sellg or exchanng the

stock. Fuhermore, the tranferee might take the position that it

is entitled to deduct the payments on the liability, effectively dupli-

cating the deduction attrbutable to the liabilty. The conference report to the Taxayer Refud and Relief Act of 1999 contained a provision that would have amended the "pricipal
purose" aspect of the anti-abuse rue. The Congress believed that
a dierent approach is more appropriate; one that eliates any
loss on the sale of stock attributable to such liabilties.

Explanation of Provision
Undcr the provision, if the basis of stock (determed without regard to this provision) received by a tranferor as part of a tax-free

exchange with a controlled corporation exceeds the fair market value of the stock, then the basis of the stock rcceived is reduced
(but not below the fai market value) by the amount (determed as of the date of the exchange) of any liabilty that (1) is assumed
17"ReV. Ru\. 9á-74, 1995-2 C.B. 36. The niing addressed a \'arent corporation's trsfer to

a subsidiar of substatially aU the assets of a manufactug usineas. in exchange for stok and the assumption of liabilties assocate with the business, including certfl contingent environmental remediation liabilties. These liabilties arose due to containation of land duri the parent corpration's operation of the manufacturg business. The trasferor had no plan or intention to dispose of (or to have the subsidiary issue) any subsidiar stok. The IR nied that the contingent liabilities would nut reuce the trasferor's basis in the stok of tbe subsidiary because the liabilities had not ben taen into account by the transferor prior to the trafer and had not given rise to deductions or basis for the transferor. ¡nThe reasons for chage are taen frm S. 1792, the '"ax Relief Eicnsion Act of 199"
(s. Rep. 10&-201, Oct. 26. 1999). 47.

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in exchange for such stock, and (2) did not otherwse reduce the tranferor's basis of the stock by reason of the assumption. Except
as provided by the Secretary of the Treasur, this provision does

not apply where the trade or business with which the liability is associated is transferred to the corporation as par of the exchange,

or where substantialy al the assets with which the liability is associated are tranferred to the corporation as part of the exchange.

The.exceptions for transfers of a trade or business, or of substantially al the assets, with which a liabilty is associated, are in-

tended to obviate the Deed for valuation or basis reduction in such cases. The exceptions are not intended to apply to situations involving the selective tranfer of assets that may bear some relationship to the liabilty, but that do not represent the ful scope of the trade or business, (or substantialy al the assets) with which the liabilty is associated. For puroses of the provision, the term ''labilty'' includes any fied or contingent obligation to make payment, without regard to

whether such obligation or potential obligation is otherwse taken

into account under the Code. The determnation whether a liabilty (as more broadly defined for puroses of this provision) has been assumed is made in accordance with the provisions of section 357(d)(1) of the Code. Under the standard of 357(d)(1), a recourse

liabilty is treated as assumed if, based on al the facts and cir-

cumtances, the tranferee has agreed to and is expected to satisfy

such liabilty (or porton thereof), whether or not the transferor has
been relieved of the liabilty. For example, if a transferee corpora-

tion does not formally assume a recourse obligation or potential obligation of the tranferor, but intead agrees and is expected to in-

demn the tranferor with respect to al or a porton of a such an
obligation, then the amount that is ageed to be indemnfied is

treated as assumed for puroses of the proviion, whether or not

the transferor has been relieved of such liabilty. Similarly, a non-

recoure liabilty is treated as assumed by the tranferee of any
asset subject to such liabilty.178 The application of the provision is ilustrated in the following ex-

ample: Assume a taayer transfers assets with an adjusted basis

the corporation assumes $40 of liabilties (the payment of which would give rise to a deduction). Thus, the value of the stock re. ceived by the transferor is $60. Under prior law, the basis of the

and fair market value of $100 to its wholly-owned corpration and

stock would have been $100. The provision requires that the basis

of the stock be reduced to $60 (i.e., a reduction of $40). Except as
provided by the Secretary, no basis reduction is requied if the tranferred assets consisted of the trade or business, or substantialy al the assets, with which the liability is associated.

The proviion does not change the tax tratment with respect to

the tranferee corporation.

The Seceta of the Treaur Secretar is directed to prescribe rues providig appropriate adjustments to prevent the acceleration or duplication of losses through the assumption of liabilities (as defied in the provision) in transactions involvig partnerships. The

178 Section 357(d)(2) contas a limitation iii the case of certin nonreure liabilitie-q. Also, under section 357, reguations, if issued, may provide for diferent results.

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Secretar may also provide appropriate adjustments in the case of
tranactions involving S corporations. In the case of S corporations,

such rues may be applied instead of the otherwe applicable basis reduction rues.

Effective Date
The provision is effectve for assumptions of liabilties on or afer

october 19, 1999. Except as provided by the Secretary, the rues

addressing tranactions involving parerships are effective for as-

sumptions of liabilities on or afer October 19, 1999. Any rues addressing tranactions involvig S corporations may liewise be effective for assumptions of liabilties on or afer October. 19, 1999,

or such later date as may be prescribed in such rues. Revenue Effect
The provision is estited to increae Federal fiscal year budget

receipts by $13 mion in 2001, $15 milion in 2002, $17 mion in
2003, $19 mion in 2004, $21 mion in 2005, $23 mion in 2006,

$25 mion in 2007, $27 mion in 2008, $29 miion in 2009, and $31 mion in 2010.
J. Diclosue of Retu Inormation to the Congrssional

Budget Ofce (sec. 310 of H.R 5662 and new see. 6103(j)(6) of the Code)

Present and Prr Law
Federal tax retu and retu inormation are confdential and caot be disclosed unless authoried by the Code. Section 6103 authorizes cert agencies to receive'ta retur and retu inor-

mation for statitical use and for other specifed purses.179 Section 6103 alo permts the Secretar of the Treasur ("the Secreta) to provide retu inormtion to any person authoried to

receive it by any mode or mean that the Secretar determes neccr and civi penalties.181

essar or appropriate.180 Persons makg unuthoried disclosures
Explanation of Provision

or inpections of tax retus and retu inormtion are subject to
The Congrssional Budget Offce ("CBO") is in the process of developing the capabilty to make projectons of the Social Securty
and Medicai'e program over long periods of tie. To facitate the development and operation of long-term models of Soial Secuty

and Medicare, CBO needs contiuig access to record from the IRS. Specicaly, CBO seeks two SSA files that contai retu in-

formation-the Social Secty Eargs Reord and the Master
Beneficiar Record. These fies conta individua eags data compiled from ta retu (Form W-2), wbicli are protecte frm

diclosure by section 6103. In addition, CBO may request other reords, includig those matched with surey data.
179 E.g., see. 6103(j), and 61030)() and (5).
lBSee 6103(pJ(2J(B).
181 See se. 7431, 7213, and 7213A.

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