# Prop. Treas. Reg. § 1.56A-20: AFSI adjustments to apply certain subchapter K principles. Proposed regulation, not in force. REG-112129-23, 89 FR 75062, published 2024-09-13 . Interprets 26 U.S.C. § 56A. Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows: (a) Overview —(1) In general. This section provides rules under sections 56A(c)(15)(B) and (e) of the Code for determining AFSI adjustments for a CAMT entity that is a partner in a partnership, including the CAMT entity's distributive share of AFSI from a partnership investment under section 56A(c)(2)(D) of the Code, to take into account certain principles under subchapter K. Paragraph (b) of this section sets forth the scope of this section and provides a general rule for FSI resulting from transactions between a CAMT entity and a partnership in which the CAMT entity is a partner. Paragraph (c) of this section provides special rules for contributions of property by a CAMT entity to a partnership. Paragraph (d) of this section provides special rules for distributions of property by a partnership if one or more of its partners is a CAMT entity. Paragraph (e) of this section provides rules regarding the treatment of partner and partnership liabilities for purposes of the section 56A regulations. Paragraph (f) of this section provides special rules for partial nonrecognition transactions under sections 721(a) and 731(b) of the Code. Paragraph (g) of this section provides rules regarding the maintenance of books and records and reporting requirements to comply with the rules of this section. Paragraph (h) of this section provides examples illustrating the application of the rules in this section. Paragraph (i) of this section provides the applicability date of this section. (2) Scope of rules. This section applies to contributions to or distributions from a partnership. However, this section does not apply to contributions to or distributions from a partnership of stock of a foreign corporation except with respect to the effect on the CAMT basis of a partnership investment for a distribution of stock of a foreign corporation that is distributed in the same transaction as other property under paragraph (d)(2)(iii) of this section. See § 1.56A-4(b) for rules that apply if stock of a foreign corporation is contributed to or distributed by a partnership. (b) General operating rules. Except as otherwise provided in this section, in the case of a transaction between a CAMT entity and a partnership, each of the CAMT entity, any other partners in that partnership, and the partnership in which the CAMT entity is a partner includes in its AFSI any income, expense, gain, or loss reflected in its FSI as a result of the transaction. (c) Contributions of property —(1) In general. Subject to paragraph (e) of this section and except as provided in paragraph (f) of this section, if property is contributed by a CAMT entity (contributor) to a partnership in a transaction to which section 721(a) applies, any gain or loss reflected in the CAMT entity's FSI from the property transfer is included in the CAMT entity's AFSI in accordance with paragraphs (c)(2)(i) through (iv) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting to the CAMT entity or the partnership from the transaction (for example, FSI gain or loss resulting from a deconsolidation or dilution, a revaluation to the fair market value of partnership assets for FSI purposes, or the application of paragraph (e) of this section) is not disregarded for AFSI purposes. (2) Contribution of property with financial accounting built-in gain or loss —(i) Deferred sale approach. Subject to paragraph (e) of this section and except as provided in paragraphs (c)(2)(ii) through (iv) and (f) of this section, a contributor that contributes property to a partnership in a transaction described in paragraph (c)(1) of this section (deferred sale property) includes the amount of deferred sale gain or loss (as determined under paragraph (c)(2)(i)(A) of this section) in its AFSI ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (c)(2)(i)(B) through (F) of this section) beginning on the first day of the month the deferred sale property is contributed to the partnership (in the case of deferred sale property described in paragraph (c)(2)(i)(B), (C), (D), or (F) of this section) or the first day of the month described in paragraph (c)(2)(i)(E) of this section (in the case of deferred sale property described in paragraph (c)(2)(i)(E) of this section). For purposes of the preceding sentence— (A) The amount of deferred sale gain or loss is the amount of gain or loss reflected in the contributor's FSI resulting from the contribution of deferred sale property, and if the contribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the contributor's CAMT basis in the deferred sale property at the time of contribution rather than the contributor's AFS basis; (B) The applicable recovery period for deferred sale property that is section 168 property (as defined in § 1.56A-15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A-16(b)(4)) and that is placed in service by the contributor in a taxable year prior to the taxable year in which the property becomes deferred sale property is the full recovery period that was assigned to the property by the contributor in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes; (C) The applicable recovery period for deferred sale property that is section 168 property or qualified wireless spectrum and that is either placed in service and contributed to a partnership in the same taxable year or is contributed and placed in service by the partnership in the same taxable year as the contribution, is the recovery period used by the partnership to depreciate or amortize the deferred sale property for regular tax purposes; (D) The applicable recovery period for deferred sale property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum in the hands of the contributor or the partnership is the recovery period used by the partnership to depreciate or amortize the deferred sale property for AFS purposes; (E) If the deferred sale property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is contributed to the partnership, but is placed in service by the partnership in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partnership for the deferred sale property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the contributor begins on the first day of the first month of that subsequent taxable year; and (F) The applicable recovery period for deferred sale property that is not described in paragraphs (c)(2)(i)(B) through (E) of this section is 15 years. (ii) Inclusion of deferred sale gain upon a decrease in contributor's distributive share percentage —(A) In general. If the contributor's distributive share percentage (as determined under § 1.56A-5(e)(2)) in the partnership decreases by more than one-third following its contribution of deferred sale property (whether by sale or exchange, liquidation of all or part of the contributor's interest in the partnership, dilution or deconsolidation, or otherwise), then the contributor includes in its AFSI for the taxable year in which the decrease occurs an amount of the deferred sale gain equal to the product of the amount described in paragraph (c)(2)(ii)(B) of this section and the percentage described in paragraph (c)(2)(ii)(C) of this section. Any amount of deferred sale gain remaining after application of this paragraph is included in the contributor's AFSI as provided in paragraph (c)(2)(ii)(D) of this section. Deferred sale loss, if any, is not accelerated under this paragraph (c)(2)(ii) as a result of decrease in in a contributor's distributive share percentage unless the decrease is the result of the contributor disposing of its entire investment in the partnership. (B) The amount. The amount referenced in paragraph (c)(2)(ii)(A) of this section is the amount of deferred sale gain with respect to the deferred sale property that has not yet been included in the contributor's AFSI as of the date immediately before the transaction resulting in the decrease in the contributor's distributive share percentage. (C) The percentage. The percentage referenced in paragraph (c)(2)(ii)(A) of this section is the percentage change in the contributor's distributive share percentage resulting from the transaction. (D) Continued ratable inclusion of remaining deferred sale gain or loss. The amount (if any) of deferred sale gain or loss with respect to deferred sale property remaining after application of paragraph (c)(2)(ii)(A) of this section will continue to be included in the contributor's AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. (iii) Inclusion of deferred sale gain or loss upon disposition of deferred sale property. If the partnership sells, distributes, or otherwise disposes of deferred sale property (including by distribution to the contributor or the partnership's contribution of the deferred sale property to another CAMT entity in a recognition or nonrecognition transaction), then the contributor includes in its AFSI in the taxable year of the disposition, the amount of any deferred sale gain or loss with respect to the deferred sale property that has yet to be included in the contributor's AFSI as of the date of the disposition. For rules regarding the effects of property distributions on the AFSI of a partnership and its CAMT entity partner, see paragraphs (d)(1) and (2) of this section. (iv) Inclusion of deferred sale gain upon an acceleration event described in § 1.721(c)-4(b). If section 721(a) applies to a contribution of deferred sale property due to the application of the gain deferral method described in § 1.721(c)-3 and an acceleration event described in § 1.721(c)-4(b) occurs, then the contributor includes in its AFSI for the contributor's taxable year of the event, the amount of any deferred sale gain with respect to the deferred sale property that has yet to be included in the contributor's AFSI as of the date of the acceleration event. If a partial acceleration event described in § 1.721(c)-5(d) occurs, then the contributor includes in its AFSI in the taxable year of the event an amount of deferred sale gain that bears the same ratio to the total amount of any deferred sale gain that has yet to be included in the contributor's AFSI immediately before the event, that the taxable gain required to be recognized under § 1.721(c)-5(d)(2) or (3) bears to the total amount of remaining built-in gain (as defined in § 1.721(c)-1(b)(13)) with respect to section 721(c) property, as computed for regular tax purposes. The amount (if any) of deferred sale gain with respect to deferred sale property remaining after application of this paragraph (c)(2)(iv) will continue to be included in the contributor's AFSI ratably on a monthly basis over the remaining applicable recovery period of the deferred sale property. These acceleration events are in addition to the acceleration events under paragraphs (c)(2)(ii) and (iii) of this section. (v) Tiered partnerships. If the contributor is a partnership, the deferred sale gain or loss included in the contributor partnership's AFSI for a taxable year in accordance with this paragraph (c)(2) is included in the distributive share amounts of the partners of the contributor partnership (whether or not the partners were partners of the contributor at the time of contribution) in proportion to their distributive share percentages for the taxable year, as determined under § 1.56A-5(e)(2). Similar rules apply to any partner in the chain of partnerships that owns an interest directly or indirectly in the contributor. (3) Basis rules —(i) Basis of property contributed to partnership. The partnership's initial CAMT basis in property contributed to a partnership by a CAMT entity at the time of the contribution is the partnership's initial AFS basis in the contributed property at the time of the contribution, regardless of whether section 721(a) applies, in whole or in part, to the contribution. (ii) Basis of partnership investment for contributed property. The initial CAMT basis of an interest in a partnership investment acquired by a contributor upon a contribution of property to the partnership to which section 721(a) applies is the contributor's AFS basis in the acquired partnership investment, decreased by any deferred sale gain or increased by any deferred sale loss that is required to be included in the contributor's AFSI in accordance with paragraph (c)(2) of this section. See § 1.56A-5(j) for rules that apply to adjustments to CAMT basis of a partnership investment for contributions of stock of a foreign corporation. The contributor's initial CAMT basis in the acquired partnership investment is subsequently increased or decreased— (A) On the last day of each taxable year during the applicable recovery period by an amount equal to the deferred sale gain or loss, respectively, required to be included in AFSI in each taxable year in accordance with paragraph (c)(2)(i) of this section (without duplication of any increases or decreases to CAMT basis under paragraph (c)(3)(ii)(B) of this section); or (B) Immediately prior to an event causing all or a portion of the deferred sale gain to be accelerated into AFSI in accordance with paragraph (c)(2)(ii) of this section, by an amount equal to the sum of the deferred sale gain or loss that accrued in accordance with paragraph (c)(2)(i) of this section prior to the event and the amount required to be included in AFSI under paragraph (c)(2)(ii) of this section. (d) Distributions of property —(1) Gain or loss recognized by partnership —(i) In general. Except as provided in paragraph (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies, any gain or loss reflected in the partnership's FSI with respect to the property transferred is disregarded for purposes of determining the partnership's modified FSI and instead is included in the CAMT entity partners' distributive share amounts (as provided in § 1.56A-5(e)(1)(iv)) in accordance with paragraphs (d)(1)(ii) and (iii) and (d)(2) of this section. As provided in paragraph (b) of this section, any other FSI amount resulting from the transaction (for example, FSI gain or loss to a partner resulting from a deconsolidation or dilution, or a revaluation to fair market value of other partnership assets for FSI purposes) is not disregarded for purposes of determining the AFSI of the partner or the modified FSI of the partnership. (ii) Deferred distribution gain or loss approach. Subject to paragraph (e) of this section and except as provided in paragraphs (d)(1)(iii), (d)(2)(ii), and (f) of this section, if a partnership distributes property to a partner in a transaction to which section 731(b) applies (deferred distribution property), the amount of deferred distribution gain or loss (as determined under paragraph (d)(1)(ii)(A) of this section) is included in each CAMT entity partner's distributive share amount (in accordance with their allocable shares as provided in paragraph (d)(2) of this section) ratably, on a monthly basis, over the applicable recovery period (as determined under paragraphs (d)(1)(ii)(B) through (F) of this section) beginning on the first day of the month in which the distribution occurs (in the case of deferred distribution property described in paragraph (d)(1)(ii)(B), (C), (D), or (F) of this section), or the first day of the month described in paragraph (d)(1)(ii)(E) of this section (in the case of deferred distribution property described in paragraph (d)(1)(ii)(E) of this section). For purposes of the preceding sentence— (A) The amount of deferred distribution gain or loss is the amount of gain or loss reflected in the partnership's FSI resulting from the distribution of deferred distribution property, and if the distribution is treated as a sale or exchange for AFS purposes, such gain or loss is redetermined by reference to the partnership's CAMT basis in the deferred distribution property at the time of distribution rather than the partnership's AFS basis; (B) The applicable recovery period for deferred distribution property that is section 168 property (as defined in § 1.56A-15(b)(6)) or qualified wireless spectrum (as defined in § 1.56A-16(b)(4)) and that is placed in service by the partnership in a taxable year prior to the taxable year in which the property becomes deferred distribution property is the full recovery period that was assigned to the property by the partnership in the taxable year such property was placed in service for purposes of depreciating or amortizing the property for regular tax purposes; (C) The applicable recovery period for deferred distribution property that is section 168 property or qualified wireless spectrum and that is either placed in service by a partnership and distributed by the partnership to a partner in the same taxable year or is distributed by the partnership to a partner and placed in service by the partner in the same taxable year as the distribution is the recovery period used by the partner to depreciate or amortize the deferred sale property for the taxable year of the distribution for regular tax purposes; (D) The applicable recovery period for deferred distribution property subject to depreciation or amortization for AFS purposes that is not section 168 property or qualified wireless spectrum is the recovery period that was used by the partnership to depreciate or amortize the deferred sale property for AFS purposes; (E) If the deferred distribution property that is section 168 property or qualified wireless spectrum has not been placed in service in the same taxable year it is distributed to the partner, but is placed in service by the partner in the immediately subsequent taxable year and thus subject to depreciation in that subsequent taxable year, the applicable recovery period is the recovery period for regular tax purposes that is used by the partner for the deferred distribution property in the immediately subsequent taxable year, and the inclusion of the deferred sale gain or loss by the partnership begins on the first day of the first month of that subsequent taxable year; and (F) The applicable recovery period for deferred distribution property that is not described in paragraphs (d)(1)(ii)(B) through (E) of this section is 15 years. (iii) Acceleration of deferred distribution gain or loss. If a partnership described in paragraph (d)(1)(ii) of this section engages in an acceleration transaction, then the partners of the partnership that are CAMT entities include in their distributive share amounts, in the manner provided in paragraph (d)(2) of this section, the amount of any deferred distribution gain or loss with respect to the deferred distribution property that has yet to be included in such partners' distributive share amounts as of the date immediately before the acceleration transaction for the partnership's taxable year in which the acceleration transaction occurs. For purposes of this paragraph (d)(1)(iii), the term acceleration transaction means, with respect to a partnership described in paragraph (d)(1)(ii) of this section— (A) A termination of the partnership under section 708(b)(1) of the Code as a result of a dissolution or liquidation; (B) A sale or exchange of all or substantially all of the partnership's assets; or (C) A merger or consolidation of the partnership with one or more partnerships in which the partnership is not the resulting partnership for regular tax purposes (as determined under § 1.708-1(c)). (2) Partner inclusions of deferred distribution gain or los s—(i) Partners' allocable shares of deferred distribution gain or loss. Deferred distribution gain or loss is allocated among the CAMT entity partners in proportion to their distributive share percentages for the taxable year of the distribution, as determined under § 1.56A-5(e)(2). (ii) Acceleration of a partner's allocable share of deferred distribution gain or loss. If a CAMT entity partner disposes of its entire investment in the partnership, including through a liquidating distribution by the partnership, the partner includes in its distributive share amount for the partner's taxable year in which the disposition occurs its allocable share of any deferred distribution gain or loss that has not yet been included in the partner's distributive share amount as of the disposition date. (iii) FSI resulting to a partner from a distribution of property or money. If a distribution of property or money from a partnership to a CAMT entity partner results in any gain, loss, or other amount being reflected in the FSI of the partner, then such gain, loss or other amount is redetermined using the relevant CAMT basis, if applicable, and included in the partner's AFSI in the taxable year in which the property or money is distributed to the partner. For purposes of this paragraph (d)(2)(iii), if the relevant CAMT basis is the partner's CAMT basis in its partnership investment. (A) Money distributed in the same transaction as property is treated as reducing CAMT basis, if applicable under § 1.56A-5(j)(3)(i), prior to any distribution of property; (B) Stock in a foreign corporation distributed in the same transaction is treated as reducing CAMT basis under § 1.56A-5(j)(3)(xii) prior to any distribution of property other than stock in a foreign corporation; and (C) Principles similar to § 1.731-1(a)(1)(ii) apply for purposes of calculating the effect of the distribution on AFSI. (iv) Tiered partnerships. If any partner of the distributing partnership is a partnership for Federal tax purposes, the deferred distribution gain or loss included in the partner's distributive share amount for a taxable year in accordance with paragraph (d)(2)(i) of this section is included in its CAMT entity partners' distributive share amounts (whether or not the partners were partners in the partnership at the time of the distribution) in proportion to their distributive share percentages for the taxable year, as determined under § 1.56A-5(e)(2). Similar rules apply to any CAMT entity partner in the chain of partnerships that owns an interest, directly or indirectly, in the partnership that is a partner in the distributing partnership. (3) Basis rules —(i) Basis of distributed property. A CAMT entity partner's initial CAMT basis in property distributed by a partnership is the partner's initial basis in the property for AFS purposes, determined immediately after the distribution. (ii) Basis of partner's investment in partnership. The CAMT basis of a CAMT entity partner's investment in a partnership following the partnership's distribution of property is increased or decreased— (A) At the end of each taxable year during the applicable recovery period by the amount required to be included in the partner's distributive share amount in each taxable year in accordance with paragraph (d)(1)(ii) of this section; and (B) Immediately prior to an acceleration event specified in paragraph (d)(1)(iii) or (d)(2)(ii) of this section by the amount of deferred distribution gain or loss not previously included in the partner's distributive share amount in accordance with paragraph (d)(1)(ii) of this section. (e) Liability allocation rules— (1) General rule. The treatment of partner and partnership liabilities for purposes of determining a CAMT entity partner's or partnership's AFSI is based on the applicable liability treatment for AFS purposes and not under section 752 of the Code. (2) Application of rules to contributions and distributions. For purposes of determining whether section 721(a) or 731(b) applies to a transaction, section 752 is inapplicable. As a result, any rules relating to liabilities for regular tax purposes, such as the rules relating to liabilities under §§ 1.707-5 and 1.707-6, do not apply. (f) Proportionate deferred sale approach for partial nonrecognition transactions under sections 721(a) and 731(b). This paragraph (f) applies if a transfer of property by a partner to a partnership does not constitute a nonrecognition transaction under section 721(a) for regular tax purposes (or would not constitute a nonrecognition transaction under section 721(a) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part, or if a transfer of property by a partnership to a partner would not constitute a nonrecognition transaction under section 731(b) for regular tax purposes (or would not constitute a nonrecognition transaction under section 731(b) for regular tax purposes considering the application of paragraph (e) of this section), in whole or in part. If this paragraph (f) applies, then the CAMT entity partner or partnership includes in its AFSI or modified FSI, as applicable, for the taxable year of the transfer an amount (if any) of the FSI reflected on the partner's or the partnership's AFS resulting from the transaction that bears the same ratio to the total amount of gain or loss reflected in the partner's or partnership's FSI resulting from the transaction (with the amount of such gain or loss being redetermined using the CAMT basis of the property) that the taxable gain or loss that would be recognized without application of section 752 and the exceptions relating to liabilities in §§ 1.707-5 and 1.707-6 bears to the taxable gain or loss realized on the transfer as determined for regular tax purposes. Any FSI resulting from the transaction but not included in a CAMT entity partner's or partnership's AFSI or modified FSI, as applicable, because of the rules in paragraph (c) or (d) of this section is deferred and included in the partner's AFSI or the partners' distributive share amounts, as appropriate, in accordance with paragraph (c) or (d) of this section. (g) Maintenance of books and records and reporting requirements —(1) Information to be included in books and records. A partnership and each CAMT entity that is a partner in the partnership must include in its respective books and records the information necessary for the partnership and each CAMT entity to comply with the rules of this section and § 1.56A-5. As applicable for a partnership or partner to comply with the rules of this section and § 1.56A-5, the information to be maintained in its respective books and records includes, without limitation— (i) The recovery periods used to depreciate deferred sale property and deferred distribution property for regular tax purposes; (ii) The properties contributed to the partnership that had a built-in gain or loss at the time of contribution and the amount of the built-in gain or loss with respect to each property for AFSI purposes; (iii) The CAMT basis of any property contributed to or distributed from the partnership; and (iv) The amount of deferred distribution gain or loss to be allocated among, and included in the distributive share amounts of, the partners of the partnership. (2) Reporting requirements —(i) In general. Subject to the notice requirement in § 1.56A-5(i)(3)(iii), a partnership must report to a CAMT entity partner the information required for the CAMT entity partner to comply with the rules of this section and § 1.56A-5, including, without limitation— (A) The recovery periods used to depreciate deferred sale property; (B) The date on which the partnership sold, distributed, or otherwise disposed of deferred sale property; (C) The date on which an acceleration event described in § 1.721(c)-4(b) occurred; and (D) The amount of deferred distribution gain or loss resulting from a distribution of property that is included in the CAMT entity partner's distributive share amount under paragraph (d) of this section. (ii) Form of reporting. A partnership may report information to a CAMT entity partner in any reasonable manner sufficient for a CAMT entity partner to comply with the rules of this section, provided, that if any information relates to the determination of a CAMT entity partner's distributive share amount with respect to its investment in the partnership, the partnership must report the information consistently with the reporting requirements described in § 1.56A-5(h). (h) Examples. The following examples illustrate the application of the rules in this section. (1) Example 1: Contribution of property to an existing partnership with no deferred sale gain or loss —(i) Facts. On July 1, 2024, X, a domestic corporation, contributes land with an AFS basis of $20,000x and a fair market value of $20,000x to PRS, a partnership, in exchange for a 20% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. No gain or loss is reflected in X's FSI as a result of the property transfer. Following the transfer, X's AFS basis in its investment in PRS is $20,000x. PRS's initial AFS basis in the land is $20,000x. At the time of contribution, Y, a domestic corporation, held a 55% interest in the capital and profits of PRS, and various individuals owned the remaining 45%. (ii) Analysis. Although this is a contribution of property to which paragraph (c)(1) of this section would apply, because no gain or loss is reflected in X's FSI as a result of the property transfer, there is no deferred sale gain or loss. Under paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its partnership investment is equal to $20,000x ($20,000x AFS basis of X's partnership investment following the transfer−$0 deferred sale gain or loss). Under paragraph (c)(3)(i) of this section, PRS has an initial CAMT basis in the land equal to its initial AFS basis of the land, which is also $20,000x. If X's receipt of the 20% interest in capital and profits of PRS causes PRS to become deconsolidated from Y for AFS purposes, then, under paragraph (b)(2) of this section, any gain or loss included in Y's FSI because of the deconsolidation for AFS purposes would not be excluded from Y's AFSI under this section. (2) Example 2: Contribution of property to a new partnership with deferred sale gain —(i) Facts. X and Y, each a domestic corporation that uses the calendar year as its taxable year, form partnership PRS on July 1, 2024. X contributes Asset 1, which is section 168 property, in exchange for a 40% interest in the capital and profits of PRS in a transaction to which section 721(a) applies. Immediately before the contribution, Asset 1 had an AFS basis of $4,000x, a CAMT basis of $3,000x, and a fair market value of $10,000x. The property transfer results in $6,000x of FSI being reflected in X's AFS for 2024, which is calculated for AFS purposes by subtracting the AFS basis of Asset 1 from the fair market value ($10,000x−$4,000x). For regular tax purposes, X uses a 5-year recovery period for Asset 1. Following the transfer, X's initial AFS basis in its investment in PRS is $10,000x. PRS's initial AFS basis in Asset 1 is $10,000x. (ii) Analysis. The FSI resulting from the transfer is included in X's AFSI in accordance with paragraph (c)(2) of this section under the deferred sale approach. First, the amount of FSI resulting from the transfer must be redetermined using the CAMT basis of the property instead of the AFS basis of the property, which results in a redetermined FSI amount of $7,000x ($10,000x−$3,000x). This redetermined FSI amount is included in X's AFSI ratably over the applicable recovery period. Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) of this section, the recovery period is the recovery period used by X to depreciate the deferred sale property for regular tax purposes, or 5 years. Accordingly, X includes $700x in AFSI in 2024 (($7,000x deferred sale gain)/(60 months (the 5-year recovery period determined on a monthly basis)) × 6 months (the number of months, including partial months, remaining in X's taxable year from the date of the contribution)). X will include the remaining $6,300x of deferred sale gain in AFSI in 2025 through 2029. Under paragraph (c)(3)(i) of this section, PRS's initial CAMT basis in Asset 1 equals its AFS basis of Asset 1 following the transfer, or $10,000x. Under paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its investment in PRS is $3,000x (the $10,000x initial AFS basis of the partnership investment−the $7,000x of deferred sale gain). X's CAMT basis in its partnership investment is increased by the amount of deferred sale gain included in its AFSI in accordance with paragraph (c)(3)(ii) of this section and § 1.56A-5(j)(3). (3) Example 3: Acceleration of deferred sale gain upon disposition of a portion of CAMT entity's partnership investment —(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section ( Example 2 ), except that, effective July 1, 2026, X sold a portion of its investment in PRS and, after the sale, X's distributive share percentage under § 1.56A-5(c)(2) is reduced from 40% to 25%. (ii) Analysis —(A) Determine the amount of deferred gain accelerated. Under paragraph (c)(2)(ii) of this section, X includes $1,575x in AFSI in 2026 because of the sale, determined as follows: **Table 1 to Paragraph (h)(3)(ii)(A)** | | | | --- | --- | | Deferred gain under paragraph (c)(2)(i) of this section | $7,000x | | Less deferred gain previously included in AFSI | ($2,800x) | | Remaining deferred gain under paragraph (b)(2)(i) of this section | $4,200x | | Distributive share percentage prior to sale | 40% | | Distributive share percentage after sale | 25% | | Percentage change in ownership ((40%−25%)/40%) | 37.5% | | Amount included in AFSI under paragraph (c)(2)(ii) of this section ($4,200x × 0.375) | $1,575x | (B) Calculation of CAMT basis upon disposition of a portion of a CAMT entity's partnership investment. In addition to the $1,575x that X includes in AFSI in 2026 because of the sale, X must also include in AFSI in 2026 the portion of the deferred sale gain that accrued from January 1 through June 30 of 2026, and a portion of the remaining deferred sale gain required to be included at the end of 2026 based on the remaining recovery period of Asset 1. Per the preceding calculation, there is $2,625x deferred sale gain remaining ($4,200x less $1,575x). Accordingly, X includes in AFSI $1,137.5x ($700x deferred sale gain that accrued from January 1 through June 30, 2026, plus $437.5 (($2,625x deferred sale gain remaining after the sale)/(36 months (the 3-year remaining recovery period determined on a monthly basis)) × 6 months (the number of months, including partial months, remaining in X's taxable year from the date of sale))). For purposes of determining the amount of gain or loss to be included in X's AFSI as a result of a sale of its partnership investment, X must, under paragraph (c)(3)(ii) of this section, increase its CAMT basis immediately prior to the sale of the partnership investment by the sum of $2,275x ($700x deferred sale gain required to be ratably included in AFSI through June 30, 2026 + $1,575x deferred sale gain required to be included in AFSI in 2026 as a result of the sale). (4) Example 4: Partnership disposition of deferred sale property —(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section ( Example 2 ), except that PRS sells Asset 1 to an unrelated third party at the end of 2026. (ii) Analysis. Under paragraph (c)(2)(iii) of this section, X includes in AFSI in 2026 all of the $3,500x of remaining deferred sale gain with respect to Asset 1 as of the end of 2026. Under paragraph (c)(3)(ii) of this section and § 1.56A-5(k)(3), X's CAMT basis in its partnership investment will increase by the amount of deferred sale gain required to be included in AFSI, or $3,500x. (5) Example 5: Part disguised sale of property to partnership and part deferred sale gain —(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section ( Example 2 ), except that, immediately after the contribution, PRS transfers $5,000x cash to X, and X's initial AFS basis in its investment in PRS is $5,000x. Assume that, under section 707(a)(2)(B) of the Code and § 1.707-3, PRS's transfer of cash to X is treated as part of a sale of Asset 1 by X to PRS. X's adjusted tax basis in Asset 1 is $0x at the time of the transfer. (ii) Analysis: Treatment of transaction for regular tax purposes. Under section 707(a)(2)(B) and § 1.707-3, X is treated as having sold a portion of Asset 1 with a value of $5,000x to PRS in exchange for $5,000 of cash. Accordingly, X recognizes $5,000x of taxable gain for regular tax purposes ($5,000x amount realized−$0x adjusted tax basis ($0x × $5,000x/$10,000x)), and X is considered to have contributed to PRS in a transaction to which section 721(a) applies, a portion of Asset 1 with a $5,000 fair market value and an adjusted tax basis of $0x. (iii) Analysis: Proportionate deferred sale approach— (A) Determine X's AFSI inclusion amount. Under paragraph (f) of this section, X is required to include in AFSI an amount of gain or loss that bears the same ratio to the total amount of gain or loss reflected in X's FSI (but redetermined using the CAMT basis of the property) that taxable gain or loss recognized on the transfer bears to the taxable gain or loss realized on the transfer, as determined for regular tax purposes. Accordingly, X includes $3,500x in AFSI in 2024 ($7,000x of gain resulting from the transfer, redetermined using the CAMT basis of the property ($10,000x−$3,000x) × ($5,000x taxable gain recognized/$10,000x taxable gain realized)). (B) Determine X's deferred sale gain amount. X is considered to have contributed to PRS in a transaction to which section 721(a) applies, $5,000x of the fair market value of Asset 1 with an AFS basis of $2,000x ($4,000x × ($5,000x/$10,000x)) and a CAMT basis of $1,500x ($3,000x × ($5,000x/$10,000x)). Under paragraph (c)(2) of this section, the CAMT gain resulting from the transfer is included in X's AFSI in accordance with paragraph (c)(2)(i) of this section under the deferred sale approach. To do this, X first determines the amount of deferred sale gain using the CAMT basis of the property considered contributed in a deferred sale ($5,000x−$1,500x) and includes this gain, or $3,500x, in its AFSI ratably over the applicable recovery period. Because Asset 1 is section 168 property, under paragraph (c)(2)(i)(B) of this section, the applicable recovery period is the recovery period used by X to depreciate the deferred sale property for regular tax purposes, or 5 years. (C) Determine X's initial CAMT basis in its partnership investment and PRS's initial CAMT basis in Asset 1. Under paragraph (c)(3)(ii) of this section, X's initial CAMT basis in its partnership investment is $1,500x ($5,000x AFS basis of the partnership investment to X following the transfer−$3,500x deferred sale gain determined under paragraph (c)(2)(i) of this section). Under paragraph (c)(3)(i) of this section, PRS's initial CAMT basis in Asset 1 is equal to the AFS basis of the property, or $10,000x. (6) Example 6: Contribution of encumbered property —(i) Facts. The facts are the same as in paragraph (h)(2)(i) of this section ( Example 2 ), except that Asset 1 was subject to a $5,000x nonrecourse liability that would be a qualified liability under § 1.707-5, and that PRS took the property subject to such liability. Other than PRS's taking of Asset 1 subject to the liability, X received no other consideration as part of a transfer and would not be deemed to have sold any portion of Asset 1 under §§ 1.707-3 and 1.707-5. X's adjusted tax basis in Asset 1 at the time of contribution is $0x. For AFS purposes, X is required to recognize gain equal to the excess of the nonrecourse liability on Asset 1 upon contribution, and its AFS basis in the property contributed and X's initial AFS basis in its investment in PRS is $5,000x. (ii) Analysis —(A) Proportionate deferred sale approach with application of paragraph (e) of this section. Even though X is not considered to have sold any portion of Asset 1 to PRS for which taxable gain would be required to be recognized for regular tax purposes under §§ 1.707-3 and 1.707-5 because the nonrecourse liability is a qualified liability, paragraph (e)(2) of this section applies. Paragraph (e)(2) of this section provides that section 752 and the exceptions in § 1.707-5 concerning liabilities assumed or taken subject to property by a partnership do not apply for purposes of determining the portion of Asset 1 deemed contributed or sold under paragraphs (c) and (f) of this section. Accordingly, for purposes of determining the amount of the gain or loss to be included in AFSI in the taxable year of transfer under paragraph (f) of this section and the amount to be deferred under paragraph (c) of this section, X calculates the amount of taxable gain that would be recognized on the transfer under §§ 1.1001-2(a)(1) and 1.707-3, without application of section 752 and § 1.707-5. (B) Determine X's proportionate amount of AFSI inclusion and deferred sale gain. Under § 1.1001-2(a)(1), X would have been treated as receiving consideration of $5,000x on the transfer of Asset 1 to PRS because of PRS's taking Asset 1 subject to the $5,000x nonrecourse liability. Applying § 1.707-3 to determine the portion of Asset 1 that is sold to PRS and the portion that is contributed under section 721(a), X would have been treated as having sold a portion of Asset 1 and recognized $5,000x of gain for regular tax purposes ($5,000x amount realized−$0x adjusted tax basis ($0x × $5,000x/$10,000x)). X also would have been considered to have contributed to PRS under section 721(a) $5,000x of the fair market value of Asset 1 with an adjusted tax basis of $0x. (C) Remaining analysis. The remaining analysis is the same as in paragraphs (h)(5)(iii)(A) through (C) of this section ( Example 5). (7) Example 7: Current distribution of section 168 property to partner —(i) Facts. Each of X and Y is a corporation and a partner in PRS. Each of X, Y and PRS uses the calendar year as its taxable year. On July 1, 2024, PRS transfers Asset 1 to X, which is not an asset contributed to PRS by either X or Y. The distribution is not in liquidation of any part of X's financial interest in PRS. At the time of the distribution, Asset 1, which is section 168 property, had a fair market value of $200,000x, an AFS basis of $120,000x, and a CAMT basis of $100,000x, and was being depreciated over a 5-year recovery period under the general depreciation system of section 168. For AFS purposes, PRS recognizes $80,000x of FSI on the distribution, which is calculated by subtracting the AFS basis of Asset 1 from the fair market value of Asset 1. At the time of the distribution, X had an AFS basis in its partnership investment of $125,000x, and a distributive share percentage of 40%, as determined under § 1.56A-5(e)(2). (ii) Analysis: Treatment of partnership-level gain. Under paragraph (d)(1)(i) of this section, no part of the $80,000x of FSI is included in PRS's modified FSI. Rather, under paragraph (d)(1)(ii) of this section, X and Y include their allocable portion (as determined under paragraph (d)(2)(i) of this section) of the deferred distribution gain (but redetermined using the CAMT basis of Asset 1) in their respective distributive share amounts over a period of 5 years (the applicable recovery period used by the partnership to depreciate the property for regular tax purposes), commencing on July 1, 2024. Accordingly, under paragraphs (d)(1)(ii) and (d)(2)(i) of this section, X and Y would include in their distributive share amounts in 2024 the sum of $4,000x and $6,000x, respectively (the $100,000x of deferred distribution gain (as redetermined using the CAMT basis of Property) multiplied by X's or Y's distributive share percentage (40% or 60%, respectively), divided by 60 months (the 5 year recovery period determined on a monthly basis), and further multiplied by 6 (the number of months, including partial months, remaining in PRS's taxable year following the distribution of Asset 1)). In each of 2025 through 2028, X and Y would include in their respective distributive share amounts the sums of $8,000x and $12,000x, respectively, and in 2029, the sums of $4,000x and $6,000x, respectively. (iii) Analysis: Treatment of partner-level gain. If, as a result of the distribution, X would be required to include $75,000x of gain in FSI (calculated by the $200,000x AFS value of Asset 1 over X's $125,000x AFS basis in its partnership investment), then, under paragraph (d)(2)(iii) of this section, X must redetermine the FSI amount using the CAMT basis it is partnership investment as of the last day of the taxable year under principles similar to § 1.731-1(a)(1)(ii) and include this amount in its AFSI . Under paragraph (d)(3)(i) of this section, X's initial CAMT basis in Asset 1 would be X's initial basis in the property for AFS purposes, determined immediately after the distribution. (8) Example 8: Acceleration of gain due to partnership dissolution —(i) Facts. The facts are the same as in paragraph (h)(7)(i) of this section ( Example 7 ), except that at the beginning of 2026, Partnership XY dissolves and liquidates. (ii) Analysis. Under paragraph (d)(1)(iii) of this section, PRS includes in X's and Y's distributive share amounts in 2026 the sums of $28,000x ($40,000x deferred distribution gain allocated to X−$12,000x previously included in X's distributive share amount in 2024 and 2025), and $42,000x (the $60,000x of the deferred distribution gain allocated to Y−$18,000x previously included in Y's distributive share amount in 2024 and 2025), respectively. Under paragraph (d)(3)(ii) of this section, X and Y would increase their CAMT bases in their partnership investments by the $28,000x and $42,000x, respectively, immediately prior to the dissolution and liquidation. (9) Example 9: Acceleration of gain due to liquidation of partner's interest— (i) Facts. The facts are the same as in paragraph (h)(7)(i) of this section ( Example 7 ), except that at the beginning of 2027, Y sells its partnership investment to Z, an unrelated corporation. (ii) Analysis. Under paragraph (d)(2)(ii) of this section, Y includes in its distributive share amount for 2027 the sum of $30,000x, the remaining amount of deferred distribution gain allocated to it under paragraph (d)(2)(i) of this section ($60,000x initial allocation−$6,000x previously included in its distributive share amount in 2024−$12,000x previously included in its distributive share amount in each of 2025 and 2026). Under paragraph (d)(3)(ii) of this section, Y would increase its CAMT basis immediately prior to its sale of its partnership investment to Z by the $30,000x of remaining deferred distribution gain required to be included in its AFSI under paragraph (d)(2)(ii) of this section. Under paragraph (d)(1)(ii) of this section, X would continue to include in its distributive share amount its proportionate amount of the deferred distribution gain allocated to it under paragraph (d)(2)(i) of this section. Accordingly, X would include $8,000x in its distributive share amount in 2027. (i) Applicability date. This section applies to taxable years ending after [DATE OF PUBLICATION OF FINAL RULE IN THE Federal Register ].