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

Case 1:05-cv-00231-EJD

Document 167-3
lO6TH CONGRESS 1

Filed 04/21/2008

Page 1 of 8
REPORT

1st Session I HOUSE OF REPRESENTATNES

f

106-289

TAXAYER REFUN AN RELIEF ACT OF 1999

CONFERENCE REPORT
TO ACCOMPAN

H.R. 2488

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AVGUST 4, 1999.-0rdered t¡ be printe

U.S. GOVERNNT PRIING OFFICE
SB-J71

WASHINGTON: 1999

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lltrher of outstanding shares of the S
i¡itied person if the individual is either
~O-percent shareholder group" or (2) a

possible tax avoidance issues relating to the use of S corporation

ESOPs and believe that further study of these issues, and further
legislation, may be appropriate.

Iilp.r group" if the number of deemedllHl and his or her family members is
ilp-emed lO-percent shareholder if the

IcIer". An individual is a member of a
1110er of outstanding shares of the cor-

O. Modify Anti-abuse Rules Related to Assumption of Liabilthe Code)

ities (sec. 1318 of the Senate amendment and sec. 357 of
Present Law

:: individual's deemed-owned shares is liiber of outstanding shars of stock of
li.' the ESOP, and (2) the individual's ihl by the ESOP. An individual's share

of a deemed 20-percent shareholder

Generally, no gain or loss is recognzed if property is exchanged for stock of a controlled corporation. The transferor may

recognze gain to the extent other property ("boot") is received by

mean: (1) stock allocated to the ac-in ESOP is determined in the same

the transferor. The assumption of liabilties by the transferee generally is not treated as boot received by the transferor. The as-

~IUocation of stock under the terms of

circumstances in the light of which the arangement for the assumption or acquisition was made, it appears that the pricipal

sumption of a liability is treated as boot to the transferor, however, "(nf, taking into consideration the nature of the liability and the

ilji.ng whether disqualifed individuals
lG outstanding stock of the corporation,

purose of the taxpayer . _ . was a purpose to avoid Federal in-

come tax on the exchange, or . . . if not such purpose, was not a
the liabilty was the avoidance of tax on the exchange.

l:Hres owned directly by an individual
family attribution rues of section 318

bona fide business purpose." Sec. 357(b). Thus, this exception re-

quires that the principal purpose of having the transferee assume

hid/' certain other famly members, as
oily members of an individual include iial, (2) an ancestor or lineal descendn' her spouse, (3) a sibling of the indiouse) and any lineal descendant of the
, ;:pouse of any person described in (2)

The transferor's basis in the stock of the transferee received in the exchange is the basis of the propertY..ontributed, reduced by

the amount of any liability assumed, but generally increased in the amount of any gain recognzed by the transferor on the exchae. If the transferee assumes liabilties in excess of the basis of assets
transferred, the transferor recognizes gain in the amount of the ex-

:k and similar interests are or are not
.i.ibutable to such interests as appro~:c ,. w"" Ie! he takmi inT.n account if so

i to prescribe rules under which hold-

cess. However, this gain recogntion rule does not apply if the assumption of a liability is treated as boot under the tax avoidance

rule. Stock basis is reduced, however, for such an assumption.193

iiises of the provision. For example, it

For other liabilities (where the assumption is not treated as boot under the tax avoidance rule), no gain recogntion or basis reduction is required for the assumption of a liabilty that would give

c,li .f) "ndu.di.ais ùwnirig at least 50 corporation and that such interests :Hunt if so doing would result in disless than 50 percent of the stock of the

rise to a deduction.

nizations.

Similar rules apply in connection with certain tax-free reorgaA diferent set of rules applies with respect to parnerships.

.vision is generally effective with renly 14, 1999, or an ESOP established
::, employer maintaining the plan was fi date, the provision is effective with
¡ifî,p-r .July 14, 1999.

n:r December 31, 2000. In the case of

However, generally a partner's basis in its partnership interest is the basis of property contributed. Liabilities afect that basis by

the partnership has assumed the partner's liabilties, and an increase in basis to the extent the parner has assumed liabilties of
the parnership. Similarly, there is an incrl!ase (or decrease) in

causing a decrease in basis of the partnership interest to the extent

basis for an increase (or decrease) in the partner's share of parner-

Li-ie Agreement JC does not include the Senate amend!1t:erned that ESOPs of S corporations

ship liabilties.'

'.3 Puuat to section 357(c)92XA). liabilities tht ar treate as assumed in a ta avoidance tranaction under section 357(b)(1) are not with the scope of section 357(cX3) or secon 358(d)(2) under present law. Thus, the transferee's assumption of a liabilty that is trte as

avoid or inappropriately defer taxes. provision as a first step in addressing

a ta avoidace transaction under ser,tion 357(bXlJ is treate as the tranferor's reeipt of
rie to a deduction.

money for purses of 358 and related provisions, regardless of whether Ù1e liabilty would give

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House Bil

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No provision.

Senate Amendment The Senate amendment deletes the limitation that the assumption of liabilities anti-abuse rule only applies to tax avoidance on the exchange itself, and changes "the principal purpose" standard
to "a principal purpose." The provision also afects the basis rule

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that requires a decrease in the transferor's basis in the transferee's

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stock when a liabilty, the payment of which would give rise to a

deduction, is treated as boot under the tax avoidance rue. The committee report refers to a specifc type of transaction involving

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certain contingent liabilties as one example of a transaction that
abilties on or afer July 15, 1999.

is of concern under present law. Effective date.-The provision is effective for assumptions of li-

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Conference Agreement
It is also expected that the Treasury Deparment will promptly examine the use of parnerships and apply similar rules (for example, with respect to adjustments to the basis of a partnership interest with respect to certain contingent liabilities) where there is a
principal purpse of avoiding Federal~income tax through the use

The conference agreement follows the Senate amendment.

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of a transaction that includes the assumption of liabilties by a

parnership. The conferees note that pursuant to section 7805(b)(3),

if necessar to prevent abuse, the Secretar could determne that any reguations applying such rules should be effective on the same date as this provision, i.e., July 15, 1999.

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No inference is intended regarding the proper treatment of any transaction under present law.
Senate amendment.

Effective date.-The effective date is the same as that of the

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P. Reuire Consistent Treatment and Provide Basis Allocation Rules for Transfers of Intangibles in Certain Non-

recognition Transactions (sec. 1319 of the Senate amendment and sees. 351 and 721 of the Code) Present Law

transfer property to a corporation solely in exchange for .stock in

Generally, no gain or loss is recognzed if one or more persons

the corporation and, immediately after the exchange such person or
persons are in control of the corporatioñ. Similarly, no gain or loss is recognzed in the case of a contribution of property in exchange

for a parnership interest. Neither the rhternal Revenue Code nor
the regulations provide the meaning of the requirement that a per-

son "transfer property" in exchange for stock (or a partnership interest). The Internal Revenue Service interprets the requirement
consistent with the "sale or other disposition of property" language
in the context of a taxable disposition of propert. See, e.g., Rev.

RuL. 69-156, 1969-1 C.B. 101. Thus, a transfer of less than "all

005

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106m CONGRESS 1

REPORT

2d Session HOUSE OF REPRESENTATIVS

106-1033

MAKING OMNIBUS CONSOLIDATED AND
EMERGENCY SUPPLEMENTAL APPROPRIATIONS FOR FISCAL YEAR 2001

CONFERENCE REPORT
TO ACCOMPAN

H.R. 4577

DECEMBER 15, 2000.-0rdered to be printed

~ GOVeRNMENT

I EXHIBI
,i Appendix A3

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1017

in December 1974, when the values for the months of Apri through October 1974 were recalculated and released with issuance of the November CPI. Therefore, past precedent does not strictly apply to
the present situation.

The conferees believe that integrty of offcial government data

is vital to policymakers and private individuals and businesses

throughout the country. The conferees emphasize that the CPI
plays an important role in economic planning. For this reason the

conferees arc concerned that, while the BLS has published corrected CPI numbers for 2000, the BLS does not intend to publish correct CPI numbers for 1999 as part of the offcial CPI series. To its credit, the BLS anounced the error publicly. The national press 50 In the absence of a correction to the offcial reported the error. CPI series, the Federal government wil be left in the position of maintaining, as an offcial data series, index numbers that the Federal government has admitted are incorrect. The conferees believe that the public's trust in the integrity of offcial government data
is a paramount goal and the conferees strongly encourage the Com-

missioner of the Bureau of Labor Statistics to review carefully the
agency's current policy with respect to publishing as par of an off-

cial series corrections to data found to be in error for reasons of
computational error. The conferees believe such a review should be made both with respect to the error announced on September 28,
2000, and as a matter for the future for those rare circumstances

when such a similar computational error might once again arise.
i. PREVENT DUPLICATION OR ACCELERATION OF Loss THROUGH MSUMPTION OF CERTAIN LIABILITIES (SEC. 309 OF THE BILL AND SEC. 358 OF THE CODE)
PRESENT LAW

Generally, no gain or loss is recognized when one or more persons transfer property to a corporation in exchange for stock and

immediately after the exchange such person or persons control the corporation. However, a transferor recognizes gain to the extent it receives money or other property ("boot") as part of the exchange
(sec. 351).

The assumption of liabilities by the controlled corporation gen-

erally is not treated as boot received by the transferor,sl except

that the transferor recognizes gain to the extent that the liabilities

assumed exceed the total of the adjusted basis of the property
(sec. 357(c)).

transferred to the controlled corporation pursuant to the exchange
SaFar example, John M. Berry, "Inflation Higher Thnn Reported," The Washington Post,
September 27, 2000, p. E-l, John M. Berry, ''Rent Error Leads to Revision Of the CPI," The

Washington Post, September 29, 2000. p. E-J, Nicholas Kulish. "Major Price Index h Revióed Upwsrd A. Re.ult of Error:' The Wall Street Journal. September 28,2000, p. A2, and Nicholas I\ulish, "Second-Period GDP Rose at 5.6% Anual Rotc," The Wall Street Journal, September 29, 2000, p. A2. The conferees observe that these press reports highlight the potential confusion for the public regarding these data. The Washington Post reported that "the CPI figure. fur
1999 wei'e nut revised" (September 29, 2000 story) while The Wall Street Journal reportd that

"( t)he BLS said a complete revision of all the data sets would be released" (September 28, 2000 story) and "it lBLS) announced that it would revise the index" (September 29, 2000 story).
51 'The assumption of liabilities is treated as boot if it can be shown t.hat "the principal purpose" of the assumption is tax avoidance on the exchange, or is a non.bona fide business purpose
(sec. 357(b)).

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The assumption of liabiliies by the controlled corporation generally reduces the transferor's basis in the stock of the controlled

corporation that assumed the liabilties. The transferor's basis in the stock of the controlled corporation is the same as the basis of
the property contributed to the controlled corporation, increased by

the amount of any gain (or dividend) recognized by the transferor

on the exchange, and reduced by the amount of any money or prop-

erty received, and by the amount of any loss recognized by the

transferor (sec. 358). For this purpose, the assumption of a liability
is treated as money received by the transferor. An exception to the general treatment of assumption of liabil-

ities applies to assumptions of liabilties that would give rise to a deduction, provided the incurrence of such liabilities did not result in the creation or increase of basis of any property. The assumption of such liabilities is not treated as money received by the transferor
in determining whether the transferor has gain on the exchange.
Similarly, the transferor's basis in the stock of the controlled cor-

poration is not reduced by the assumption of such liabilities. The
Internal Revenue Service has ruled that the assumption by an ac-

crual basis corporation of certain contingent liabilities for soil and groundwater remediation would be covered by this exception.52
HOUSE BILL

No provision. However, H.R. 5542 contains a provisions to limit
the acceleration or duplication of losses through assumptions of liabilities.

Under H.R. 5542, if the basis of stock (determined without re-

gard to this provision) received by a transferor as par of a tax-free
value of the stock, then the basis of the stock received is reduced

exchange with a controlled corporation exceeds the fair market
(but not below the fair market value) by the amount (determined as of the date of the exchange) of any liability that (1) is assumed in exchange for such stock, and (2) did not otherwise reduce the

transferor's basis of the stock by reason on the assumption. Except
as provided by the Secretary of the Treasury, this provision does

not apply where the trade or business with which the liability is
ated ar transferred to the corporation as par of the exchange.

associated is transferred to the corporation as part of the exchange, or where substantially all the assets which the liability is associ-

The exception for transfers of a trade or business, or of substantially all the assets, with which a liability is associated, are intended to obviate the need for valuation or basis reduction in such cases. The exceptions are not intended to apply to situation involving the selective transfer of assets that may bear some relationship
to the liabilty, but that do not represent the full scope of the trade
52Rev. RuL. 95-74, 1995-2 C.B. 36. The ruling addressed a parent corporation's trani;f~r to

a ~ubsidiHry of substantially all the assets of a manufacturing business, in exchange fur stuck and the assumption of liabilities associat. with the business, including certain contigent envjronment:l remediation liubiltic3.-Thcsc liabilities arose due to contamination of land during the
parent corporation's operation of the manufacturing business. The transferor had no plan or in-

tention to dispose of (or to have the subsidiary issue) any subsidiary stock. The IRS ruled that

because the liabilities had not been taken into account by the transferor prior to the transferor
and had not given rise to deductions or basis for the transferor.

the contingent. liabilities would noL reduce the transferor's basis in the stock of the subsidiary

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or business, (or substantially all the assets) with which the liability is associated. For purposes of the provision, the term "liability" includes
fixed 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 liability (as more broadly defined for purposes 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

liability is treated as assumed if, based on all the facts and cirbeen relieved of the liability. For example, if a transferee corporation does not formally assume a recourse obligation or potential obligation of the transferor, but instead agrees and is expected to indemnify the transferor with respect to all or a portion of such an obligation, then the amount that is agreed to be indemnified is
treated as assumed for purposes of the provision, whether or not
cumstances, the transferee has agreed to and is expected to satisfy such liability (or portion thereof), whether or not the transferor has

the transferor has been relieved of such liability. Similarly, a nonrecourse liability is treated as assumed by the transferee of any
asset subject to such liability.53

The application of the provision is ilustrated in the following

example: Assume a taxpayer transfers assets with an adjusted
basis and fair market value of $100 to its wholly-owned corporation

and the corporation assumes $40 of liabilities (the payment of which would give rise to a deduction). Thus, the value of the stock

received by the transferor is $60. Under present law, the basis of
the stock would be $100. The provision requires that the basis of t.he stock be reduced to $60 (i.e., a reduction of $40). Except as pro-

vided by the Secretary, no basis reduction is required if the transferred assets consisted of the trade or business, or substantially all the assets, with which the liability is associated.
The provision does not change the tax treatment with respect

to the transferee corporation.

The Secretary of the Treasury is directed to prescribe rules providing appropriate adjustments to prevent the acceleration or duplication of losses through the assumption of liabilities (as defined in the provision) in transactions involving partnerships. The Secretary may also provide appropriate adjustments in the case of
transactions involving S corparations. In the case of S corporations,

such rules may be applied instead of the otherwise applicable basis reduction rules.

abilities on or after October 19, 1999. Except as provided by the

Effective Date.-The provision is effective for assumptions of li-

Secretary, the rule addressing transactions involving partnerships

are effective with the same effective date. Any rules addressing
transactions involving S corporations may likewise be effective for
date as may be prescribed in such rules.
63 Section 357(d)(2) (;utains a limitation in the case of certain nonrecourse liabilties. Also,
under sedion 357, regulations, if is3ued, may provide for different results.

assumptions of liabilties on or after October 19, 1999, or such later

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1020
SENATE AMENDMENT

No provision. On April 4, 2000, Senators Roth and Moynihan introduced a bill (S. 23fi) that is the same as the provision in H.R.
5542.
CONFERENCE AGREEMENT

The conference agreement follows H.R. 5542.
J. DISCLOSURE OF RETURN INFORMATION TO THE CONGRESSIONAL

BUDGET OFFICE (SEC. 310 OF THE BIL Ai"l NEW SEC. 6lO3(j)(6) OF
THE CODE)
PRESENT LAW

Federal tax returns and return information are confidential and canot be disclosed unless authorized by the Code. Section
6103 authorizes certain agencies to receive tax returns and return

information for statistical use and for other specified puroses.54 Section 6103 also permits the Secretary of the Treasury ("the Secretary") to provide return information to any person authorized to receive it by any mode or means that the Secretary determines necessary or appropriate.55 Persons makig unauthorized disclosures or inspections of tax returns and return information are subject to 56
criminal and civil penalties.

HOUSE BILL

No provision.
SENATE AMENDMENT

No provision.
CONFERENCE AGREEMENT

Disclosure or return information The Congressional Budget Offce ("CBO") is in the process of developing the capability to make projections of the Social Security and Medicare programs over long periods of time. To facilitate the
development and operation of long-term models of Social Security

and Medicare, CBO needs continuing access to records from the

IRS. Specifically, CBO seeks two SSA fies that contain return information-the Social Securty Earnings Record and the Master
Beneficiary Record. These fies contain individual earnings data compiled from tax returs (Forms W-2), which are protected from

disclosure by section 6103. In addition, CBO may request other
records, including those matched with survey data. The conference agreement amends section 6103 to permit the Secretary to furnish to CBO return information to the extent such information is necessary for purposes of CBO's long-term models of
els of Social Securty and Medicare. It is the intent of Congress
54 E.g., sec. 6103(j), and 61030Xl) and (5).
"Sec. 6103(p)(2)fB).

Social Security and Medicare. This authority extends to the development, operation, and maintenance by CBO of its long-term mod-

66Sec. sees. 7431, 7213. and 7213A.

010