Today, Treasury and the IRS issued final and temporary regulations (TD 9722) preventing a corporate partner from avoiding corporate-level gain through transactions with a partnership involving equity interests of the partner.  The text of the temporary regulations serves as the text of concurrently issued proposed regulations (REG-149518-03). 

According to the preamble to the final and temporary regulations, the “purpose of these regulations authorized under section 337(d) is to prevent corporate taxpayers from using a partnership to circumvent gain required to be recognized under section 311(b) or section 336(a).”  The regulations apply when a partnership, either directly or indirectly, owns, acquires, or distributes stock of the corporate partner.  Under these regulations, a corporate partner may recognize gain when it is treated as acquiring or increasing its interest in stock of the corporate partner held by a partnership in exchange for appreciated property in a manner that avoids gain recognition under section 311(b) or section 336(a).  These regulations also retain, with some modifications, the deemed redemption rule imposed under the now-withdrawn 1992 proposed regulations.

The final and temporary regulations are effective June 12.  Comments on the proposed regulations are due by September 10.