Notice 2006-15

a.

Commentators have suggested that, in
these situations, it may be appropriate to
permit or require the distributee partner to
recognize capital gain to the extent the adjusted basis of the distributed hot assets exceeds that partner’s basis in the partnership
interest. In Example 3, A could elect, or
be required, to recognize capital gain equal
to the amount by which the adjusted basis
of the distributed hot assets exceeds that
partner’s basis in the partnership interest
($50), thereby increasing A’s basis to $50.
The distributed hot asset would take a $50
basis in A’s hands under § 732(b), and no
§ 734(b) adjustment would be made to the
retained hot asset. If A recognizes capital
gain on the distribution, future regulations
could permit an equivalent increase to the
basis of the partnership’s retained cold assets.
Section 4. REQUEST FOR
COMMENTS
The Treasury Department and the Service are conducting a study of the current § 751(b) regulations and are considering alternative approaches to achieving the
purpose of the statute that would provide
greater simplicity. For example, it may
be possible to provide safe harbor methods for calculating the share of ordinary
income or capital gain that should be recognized as a result of a disproportionate
distribution that may reduce some administrative burden but still serve the purpose
of the statute. In this regard, the Treasury Department and the Service request
comments on the approaches discussed in
this notice (as well as other possible approaches) to determining a partner’s share
of hot assets and to prescribing the tax consequences of a disproportionate distribution. Comments are requested concerning
the following issues:
A. For purposes of determining each
partner’s share of partnership assets
before and after a distribution that may be
subject to § 751(b),
1.

Whether the hypothetical sale approach (combined with the application of § 704(c) principles) for
determining each partner’s share of
partnership assets provides an accurate and appropriate measure for
purposes of § 751(b). In particular,

2006–8 I.R.B.

2.

3.

Whether special rules would be
necessary to address situations in
which the distributee partner’s interest in unrealized appreciation
in hot assets prior to the distribution exceeds the partner’s interest in partnership capital after the
distribution;
b. Whether the hypothetical sale approach should be modified to take
into account changes in allocations that are planned or may occur in the future or changes in the
partner’s interest in anticipated
future appreciation and depreciation in partnership assets;
c. The extent to which regulations
adopting the hypothetical sale approach should take into account
the distributee partner’s basis in
the partnership interest and basis adjustments under §§ 734(b)
and 743(b), including basis adjustments resulting from the distribution;
d. Whether the partners’ shares of
partnership liabilities should be
considered in determining the
partners’ shares of partnership
assets, and how the rules of § 752
should be coordinated with those
of § 751(b).
Whether § 751(b) should be limited
to transactions that change the partners’ shares of unrealized appreciation in hot assets or should also apply
to transactions that change the partners’ shares of unrealized depreciation in hot assets.
Whether other approaches to determining a partner’s share of partnership hot and cold assets should be considered.

B. For purposes of simplifying the tax
consequences of a distribution that is
subject to § 751(b), whether the hot
asset sale approach is an appropriate
method of applying § 751(b) or whether
other approaches should be considered.
Comments are specifically requested on
the following:
1.

Whether the regulations should provide a simple safe harbor that approximates the appropriate taxation of a
disproportionate distribution and, if

501

so, the appropriate parameters and
availability of such a safe harbor.
2. Whether the current § 751(b) regulations should be generally retained
or retained in combination with a
safe harbor, or whether the current
§ 751(b) regulations should be completely revised to adopt a new paradigm such as the hot asset sale approach.
3. Whether mandatory or elective capital
gain recognition should be included in
the hot asset sale approach.
Comments should be submitted in
writing on or before August 2, 2006,
and should include a reference to Notice 2006–14. In addition to the topics on which comments are specifically requested above, comments are
requested on any other matters that should
be addressed in future guidance under
§ 751(b). Comments may be submitted to CC:PA:LPD:PR (Notice 2006–14),
Room 5226, Internal Revenue Service,
PO Box 7604, Ben Franklin Station,
Washington, DC 20044. Alternatively,
comments may be submitted electronically via the following e-mail address:
Notice.Comments@irscounsel.treas.gov.
Please include “Notice 2006–14” in the
subject line of any electronic communications. Submissions may be hand delivered
Monday through Friday between the hours
of 8 a.m. and 5 p.m. to CC:PA:LPD:PR
(Notice 2006–14), Courier’s Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW, Washington, DC 20224.
DRAFTING INFORMATION
The principal author of this notice is
Charlotte Chyr of the Office of Associate
Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Charlotte Chyr at
(202) 622–3070 (not a toll-free call).

Extension of June 28, 2005,
Safe Harbor Date
Notice 2006–15
The purpose of this notice is to extend
the June 28, 2005, grandfather date in Rev.
Proc. 2005–24, 2005–16, I.R.B. 909, until
further guidance is issued by the Internal
Revenue Service.

February 21, 2006

Rev. Proc. 2005–24 applies to any
charitable remainder annuity trust (CRAT)
or charitable remainder unitrust (CRUT)
that is created by the grantor, G, if, under
applicable state law, G’s surviving spouse,
S, has a right of election exercisable on
G’s death to receive an elective, statutory
share of G’s estate, and such share could
be satisfied in whole or in part from the assets of the CRAT or CRUT in violation of
§ 664(d)(1)(B) or (d)(2)(B) of the Internal
Revenue Code. Rev. Proc. 2005–24 provides a safe harbor procedure under which
the Service will disregard the right of election for purposes of determining whether
the CRAT or CRUT meets the requirements of § 664(d)(1)(B) or (d)(2)(B) continuously since its creation, if S irrevocably waives the right of election in the manner prescribed in the revenue procedure.
For trusts created before June 28, 2005, the
Service will disregard the right of election,
even without a waiver, but only if S does
not exercise the right of election.
Commentators have asserted that Rev.
Proc. 2005–24 places an undue burden on
taxpayers and trustees seeking to comply
with the safe harbor rule. Some commentators have recommended that the Service
withdraw the revenue procedure. Other
commentators have suggested alternative
safe harbor rules. The Service and Trea-

sury are reconsidering the approach of
Rev. Proc. 2005–24, including the safe
harbor rule. The Service and Treasury
are also considering alternative safe harbor rules. Consequently, the Service is
extending the June 28, 2005, grandfather
date. Until further guidance is published
regarding the effect of a spousal right
of election on a trust’s qualification as a
CRAT or CRUT, the Service will disregard
the existence of such a right of election,
even without a waiver as described in Rev.
Proc. 2005–24, but only if the surviving
spouse does not exercise the right of election.
The principal author of this notice is
Susan H. Levy of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information regarding this notice, contact Susan H. Levy
at (202) 622–3090 (not a toll-free call).

earnings rate” for 2004. This rate is used
by mutual life insurance companies to calculate their federal income tax liability for
taxable years beginning in 2005.
The Job Creation and Worker Assistance Act of 2002, Pub. L. 107–147, § 611,
amended § 809 by adding new paragraph
(j). Section 809(j) provides that the differential earnings rate shall be treated as zero
for purposes of computing both the differential earnings amount and the recomputed
differential earnings amount for a mutual
life insurance company’s taxable years beginning in 2001, 2002, or 2003. See Notice
2002–33, 2002–1 C.B. 989. Subsequently,
the Pension Funding Equity Act of 2004,
Pub. L. 108–218, § 205, repealed § 809 of
the Code for taxable years beginning after
December 31, 2004. Therefore, the Internal Revenue Service is required to determine a differential earnings rate for 2004
and a recomputed differential earnings rate
for 2004. The differential earnings rate for
2004 was zero. See Rev. Rul. 2005–58,
2005–36 I.R.B. 465.
The tentative determination of the rates
is set forth in Table 1.

Recomputed Differential
Earnings Rate for Mutual Life
Insurance Companies
Notice 2006–18
This notice publishes a tentative determination under § 809 of the Internal Revenue Code of the “recomputed differential
Notice 2006–18 Table 1

Tentative Determination of Rates To Be Used For Taxable Years Beginning in 2005
Recomputed differential earnings rate for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . .

0

Imputed earnings rate for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.449

Base period stock earnings rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

18.221

Current stock earnings rate for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock earnings rate for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average mutual earnings rate for 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.913
2.354
-1.876
14.261
10.450

For additional background concerning
the tentative recomputed differential earnings rate, see Notice 2002–19, 2002–1
C.B. 619.

February 21, 2006

DRAFTING INFORMATION
The principal author of this notice is
Katherine A. Hossofsky of the Office of
the Associate Chief Counsel (Financial In-

502

stitutions and Products). For further information regarding this notice, contact
Ms. Hossofsky at (202) 622–8435 (not a
toll-free call).

2006–8 I.R.B.