Internal Revenue Bulletin:  2008-22 

June 2, 2008 

T.D. 9397

Assumption of Liabilities

Internal Revenue Service
26 CFR Part 1


Internal Revenue Service (IRS), Treasury.


Final regulations and removal of temporary regulations.


This document contains final regulations relating to the assumption of liabilities under section 358(h) of the Internal Revenue Code (Code). Section 358(h) provides that, after application of section 358(d), the basis in stock received in a nonrecognition transaction shall be reduced to the fair market value of the stock by the amount of any liability assumed in the exchange. The Treasury Department and the IRS have determined that removing an exception to section 358(h) is necessary to prevent abuse. These regulations affect corporations and their shareholders.


Effective Date: These regulations are effective on May 9, 2008.

Applicability Date: For dates of applicability, see §§1.358-5(a) and (b).


Robert M. Rhyne (202) 622-7550 (not a toll-free number).



This document contains amendments to 26 CFR part 1 under section 358(h) of the Code. As part of the Consolidated Appropriations Act of 2001 (Public Law 106-554, 114 Stat. 2763), Congress enacted, on December 21, 2000, section 358(h), applicable to assumptions of liability after October 18, 1999, to address certain transactions in which property is transferred to a corporation in exchange for both stock and the corporation’s assumption of certain obligations of the transferor. In these transactions, transferors took the position that the obligations were not liabilities within the meaning of section 357(c) or that they were described in section 357(c)(3), and, therefore, the obligations did not reduce the basis of the stock received by transferor. These assumed obligations, however, did reduce the value of the stock. The transferors then sold the stock and claimed a loss. In this way, taxpayers attempted to duplicate a loss in corporate stock and to accelerate deductions that typically are allowed only on the economic performance of these types of obligations.

Section 358(h)(1) addresses these transactions by requiring that, after application of section 358(d), the basis in stock received in an exchange to which section 351, 354, 355, 356, or 361 applies be reduced (but not below the fair market value of the stock) by the amount of any liability assumed in the exchange. Section 358(h)(2) provides exceptions to section 358(h)(1) where: (A) the trade or business with which the liability is associated is transferred to the person assuming the liability as part of the exchange; or (B) substantially all of the assets with which the liability is associated are transferred to the person assuming the liability as part of the exchange (the “Asset Exception”). The Secretary, however, has the authority to limit these exceptions. Section 358(h)(3) provides that the term “liability” for purposes of section 358(h) includes any fixed or contingent obligation to make payment without regard to whether the obligation is otherwise taken into account for purposes of the Code.

On May 26, 2005, temporary regulations (T.D. 9207, 2005-1 C.B. 1344) were published in the Federal Register (70 FR 30334) making unavailable the exception of section 358(h)(2)(B), the Asset Exception. A notice of proposed rulemaking (REG-106736-00, 2005-1 C.B. 1376) cross-referencing those temporary regulations was published in the Federal Register (71 FR 30380) on the same day.

The IRS and the Treasury Department received no comments responding to the proposed and temporary regulations. No public hearing was requested or held. The IRS and the Treasury Department have determined that making the exception of section 358(h)(2)(B) unavailable is necessary to prevent abuse; therefore, this document contains final regulations adopting the provisions of the proposed regulations with no change and the corresponding temporary regulations are removed.

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. Pursuant to 5 U.S.C. 553(d)(3) it has been determined that a delayed effective date is unnecessary because this rule finalizes, without change, currently effective temporary rules regarding the assumption of liabilities. It is hereby certified that these regulations will not have a significant economic impact on a substantial number of small entities. This certification is based upon the fact that the only impact of the regulations is to require taxpayers to calculate the basis of stock received in certain transactions more accurately. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. Chapter 6) is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:


Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

§1.358-5 also issued under 26 U.S.C. 358(h)(2). * * *

Par. 2. Section 1.358-5 is added to read as follows:

§1.358-5 Special rules for assumption of liabilities.

(a) In general. Section 358(h)(2)(B) does not apply to an exchange occurring on or after May 9, 2008.

(b) Effective/Applicability date. For exchanges occurring on or after June 24, 2003, and before May 9, 2008, see §1.358-5T as contained in 26 CFR part 1 in effect on April 1, 2007.

§1.358-5T [Removed]

Par. 3. Section 1.358-5T is removed.

Linda E. Stiff,
Deputy Commissioner for
Services and Enforcement.

Approved April 28, 2008.

Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).


(Filed by the Office of the Federal Register on May 8, 2008, 8:45 a.m., and published in the issue of the Federal Register for May 9, 2008, 73 F.R. 26321)

Drafting Information

The principal author of these regulations is Robert M. Rhyne of the Office of Associate Chief Counsel (Corporate). However, other personnel from the IRS and the Treasury Department participated in their development.

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