January 26, 2009

The Honorable Douglas H. Shulman

Commissioner of Internal Revenue

1111 Constitution Avenue, NW

Washington, DC 20044

Re: Comments on REG-100798-06, Related to Code Section 704(c)

Dear Commissioner Shulman:

The American Institute of Certified Public Accountants (AICPA) has reviewed the above-mentioned regulation project which provides that reg. section 1.704-3(a)(10) takes into account the tax liability of both direct partners and the indirect owners of those partners.  These proposed regulations were issued on May 16, 2008.

The scope of the regulations needs to be clarified.  Additional examples will be extremely helpful in understanding which transactions are subject to the regulations, in determining which related-party transactions are reasonable versus those that violate the anti-abuse rules of Subchapter K, and in pointing out violations involving indirect partners.  We believe that the regulations should be limited in application to indirect partners that are related to the look-through entities to prevent application to minority owners unlikely to be involved in abusive transactions.  A de minimis rule is suggested.  Additionally, clarification is needed to determine when a tax reduction is considered problematic, for example, do state tax reductions, temporary tax benefits, or the situation where the choice of 704(c) method is not the sole reason for the reduction trigger application of the regulations?  Finally, we request clarification as to IRS methodology on reallocation when it believes a 704(c) violation has occurred.

The AICPA appreciates the opportunity to comment on the proposed regulations. If you have any questions or would like to discuss our concerns, please contact Hughlene A. Burton, Chair of the Partnership Taxation Technical Resource Panel at  haburton@uncc.edu; and/or Marc A. Hyman, AICPA Technical Manager at  mhyman@aicpa.org.

Sincerely,

Alan R. Einhorn

Chair, Tax Executive Committee

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